As the financial crisis 0f 2008 ripped across the world, governments and central banks enacted numerous policies to try and limit the damage.  Interest rates were lowered to negligible levels, resulting in accusations that the ready availability of incredibly cheap credit was propping up firms that would ordinarily have gone under.

This army of so-called “zombie firms” has not really improved their productivity despite being propped up, which has in turn created a drag on the entire economy.  Are these accusations justified, however?  New research from the Bank of Finland suggests not.  Indeed, the analysis of Finnish firms finds that around a third of allegedly zombie firms were actually fast-growing companies, while the remaining two-thirds were able to recover from their zombie status and become healthy again.

Truly distressed

As such, the researchers argue that the label of “zombie firms” often mistakes firms that should be growing but who have entered into a temporary period of difficulty with those who are more permanently afflicted.  This has obvious implications for subsequent policy measures to support companies through such crises.

Zombie firms were first coined thus during the stagnation in the Japanese economy in the 1990s, with these firms exhibiting low productivity, minimal job creation, and generally acting as a drag on the economy.  It’s an accusation that reached the west in the wake of the 2008 financial crises, which was accompanied by declines in productivity across the OECD.

The data from Finland suggests that rather than representing unviable firms, many of those that have been labelled as zombies were simply in temporary difficulties, whether due to the nature of the market at the time or a restructuring they were going through.

“An examination of zombie demographics on Finnish firm-level data reveals that zombie-firms, as commonly defined in the literature, are often not truly distressed firms but rather companies with temporarily low revenues relative to interest payments,” the researchers explain. “We also show that the increase of zombie firms over the past 15 years has mainly been driven by cyclical factors, as opposed to a secular trend.”

What’s more, this trend was observed regardless of the company size, so applies not only to startups, who may be expected to have peaks and troughs, but also mature businesses on a steadier trajectory.

Creative destruction

Interestingly, however, the study did find evidence that even if firms are not truly deserving of their “zombie” status, they were using up resources and having a negative effect on the performance of other firms in their industry.  This suggests that simply getting rid of the zombies is unlikely to help because it’s less that zombie firms suck up resources as their presence in the market crowds out stronger firms.

While some of the firms with zombie status quickly got back on their feet, others seemed to linger on for much longer in this moribund state.  Indeed, half of zombie firms remained so for at least four years, which the researchers believe reflects inefficiencies or market failures in the economy, with policy needed to help such firms speed up their recovery.  These interventions don’t include subsidies, which were not found to aid the recovery of firms at all.

“Overall, it seems that government subsidies are not a decisive feature driving the recovery of weakly performing firms,” the researchers explain. “However, these results suggest that firms receiving subsidies have a lower death rate. This may manifest as longer zombie spells, if the subsidies do not pull the firms to recovery but only keep them alive as zombies. Thus, the existence of subsidies may provide one explanation to why zombie firms can survive over time”

The findings are important as the COVID-19 pandemic is almost certain to raise similar concerns around the best way to help companies through the recession we’re facing.  While it may be clear that some firms are not quite as moribund as they first appear, actions to support them out of their stupor may be somewhat harder to achieve.