Zombification in SMEs

: evidence from Germany

Abstract

We demonstrate that within unlisted small and medium-sized enterprises (SMEs) in Germany, there is aninvestment and employment displacement caused by zombie firms. Based on firm-level data, we show that thesefirms exhibit significantly lower profitability and productivity compared to healthy firms, thereby pushing outmore productive capital from the market as they are artificially kept alive through subsidized credit. Between 2010and 2020, the proportion of SMEs classified as zombies for at least one year increased more than eightfold. Weprovide evidence that a higher proportion of zombie firms in a given sector leads to a decline in employmentgrowth of healthy firms, and that there is no significant difference in the relative costs for a zombie firm to servicetheir outstanding loans compared to a healthy firm. To prevent future welfare losses, it is necessary to implementmore effective policy measures aimed at reducing the incentives for self-liable entrepreneurs and banks to extendloans while promoting resolutions and restructuring processes.

Date of Award	5 Jul 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Eva Schliephake (Supervisor)