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Zombie Firms and the Crowding-Out of Private Investment in China

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  • Yuyaun Tan

    (National School of Development Peking University)

  • Yiping Huang

    (National School of Development Peking University)

  • Wing Thye Woo

    (Jeffrey Cheah Institute on Southeast Asia, Kuala Lumpur Institute of Population and Labor Economics,)

Abstract

From a data set of Chinese firms in the 2005–07 period, we find that government investment boosted the performance of zombie firms and crowded out the growth of private firms; we also found that the higher the concentration of state banks (and of state-owned enterprises), the more conducive is the environment for nurturing zombie firms. With the exit of zombie firms, (a) the industrial output growth rate would be higher by 2.12 percentage points, (b) the capital accumulation rate would be higher by 1.4 percentage points, (c) the employment growth rate would be higher by 0.84 percentage points, and (d) the rate total factor productivity growth would be higher by 1.06 percentage points. Our results support a radical change in the way that government investment has been carried out, and support comprehensive reform of the state sector, but they do not necessarily argue against government investment in large infrastructure projects and strategically-critical areas.

Suggested Citation

  • Yuyaun Tan & Yiping Huang & Wing Thye Woo, 2016. "Zombie Firms and the Crowding-Out of Private Investment in China," Asian Economic Papers, MIT Press, vol. 15(3), pages 32-55, Fall.
    • Handle: RePEc:tpr:asiaec:v:15:y:2016:i:3:p:32-55
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    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/ASEP_a_00474
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