Are weakly profitable firms suppressing economic growth?

Abstract

Unprofitable ‘zombie’ firms have been on the rise in Finland, both proportionately and in absolute terms, since the beginning of the 2000s. At most, they have accounted for approximately 10% of all labour and capital allocated within the corporate sector. Zombie firms can survive for years, but in the long term they must either revitalise and become profitable or exit the market. Keeping unprofitable firms on life support for extended periods of time can distort the efficiency of markets and is associated with a variety of risks. For one, the share of capital and labour allotted to zombie firms prevents these resources from being allocated more efficiently elsewhere, weakening operating conditions for profitable companies. This opportunity cost lowers productivity and weakens growth opportunities for the entire economy. Furthermore, zombie firms are generally highly leveraged and raise the risk of credit defaults and financial market disruptions. Identifying zombie firms is not entirely straightforward, however, as the classification is in itself heterogeneous and includes growing companies with weak current profitability who may, in the long term, eventually contribute to economic growth.