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Why do zombie firms seldom die or resurrect? The effect of government subsidies on the survival duration of China’s zombie firms

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  • Deng Ming

    (School of Economics, Xiamen University, Xiamen, China)

  • Wang Jinbo

    (School of Economics, Xiamen University, Xiamen 361005, China)

Abstract

One of the most important tasks in China’s supply-side structural reform is to effectively clean up zombie firms. Using industrial firm-level data in China from 1998 to 2007, we identified zombie firms in Chinese industrial sectors. Based on the identified zombie firms, we measured the survival duration of zombie firms and empirically studied the effect of fiscal subsidies on the survival duration of zombie firms by using survival analysis. Results revealed that fiscal subsidies significantly lengthened the survival duration of zombie firms. Specifically, fiscal subsidies not only reduced the possibility of zombie firms exiting the market, but more importantly, they reduced the possibility of zombie firms’ resurrection. Thus, fiscal subsidies do not contribute to the “death” or “resurrection” of zombie firms. These results are robust despite changing the identification method and the survival analysis method, and considering the endogeneity of fiscal subsidies. Our findings show that we should adhere to market-oriented mechanism in disposing zombie firms and cut off the channels that government transfuses to zombie firms by fiscal subsidies.

Suggested Citation

  • Deng Ming & Wang Jinbo, 2022. "Why do zombie firms seldom die or resurrect? The effect of government subsidies on the survival duration of China’s zombie firms," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 16(1), pages 212-228, January.
    • Handle: RePEc:bpj:econoa:v:16:y:2022:i:1:p:212-228:n:2
    DOI: 10.1515/econ-2022-0029
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