The Crowding-out Effect Of Zombie Firms

In recent years,as economic development has entered a new normal,China’s economic has faced multiple challenges such as the slowdown of economic growth,the transformation of economic growth model,and the optimization of economic structure.The Economic new normal requires innovative ideas and methods of macroeconomic regulation,and fosters a lasting power for economic development.In this context,the central government has proposed supply-side structural reforms.Supply side reform requires resolving overcapacity,correcting distortion of factor allocation and optimizing efficiency of resource allocation.The disposal of zombie companies is the key to resolving overcapacity.A series of documents from require strengthening the cleaning up of zombie companies.Moreover,at the beginning of2020,a sudden COVID-19 brought unexpected impacts to the world.During the COVID-19,the production and operation of enterprises suffered multiple difficulties’,zombie enterprises are showing signs of recovery again.So what is zombie company and what is its impact on economic development and firm growth?Zombie companies refer to those companies with heavy debt burden,loss of viability,and need to rely on low interest bank loans or government subsidies to survival.Existing studies have found that banks’ incentives to control nonperforming loans,loose regulatory policies,local governments subsidy and protection,irregular bank competition,are all important reasons that promote the emergence and long-term existence of zombie companies.Companies maintain the state of "stiff but not dead",not only occupies a large number of scarce factor resources such as land,capital and labor,but also seriously affects the function of market mechanism,distorts the effective allocation of resources,and brings some negative effects on the production and operation of normal companies.At the same time,if zombie companies do not exit the market for a long time,they will break the regional market rules,worsen the regional business environment,endanger financial security,and bring long-term damage to economic development.Investment is impartment for companies to expand production,also a necessary way to adjust product structure,upgrade technology and enhance competitiveness.Company needs continuous credit support,and good business environment.Will zombie companies’ occupation of scarce resources and long-term impact on regional business environment crowd out the investment of local companies,and will companies set up more subsidiaries in other region to get rid of the influence of local zombie firms? From another perspective,Will local zombie companies hinder foreign companies from entering the local market? Will local zombie companies hinder foreign companies from entering the local market? These are the main problems studied in this article.The main contents and conclusions are as follows:(1)This paper empirically analyzes the crowding-out effect of zombie companies on the fixed asset investment of normal companies.I find that zombie companies crowd out normal corporate investments,and further research finds that the crowding-out effect mainly exists in non-state-owned,low tax contribution and light industry companies.Mechanism analysis shows that zombie companies’ crowding out effect is mainly due to occupying scarce financial resources,aggravating the misallocation of financial resources,increasing financing constraints,increasing financing cost and destroying fair competition environment.From the perspective of institutional environment,I find that the improvement of market-oriented environment,the reduction of government intervention,the improvement of market segmentation,the development of factor market and the increase of bank competition can alleviate zombie companies’ crowding out effect,which shows that the improvement of institutional environment plays crucial role in the development of companies.(2)The establishment of off-site subsidiary breaks the geographical restrictions,which can protect the subsidiary from the impact of local business environment.From the perspective of subsidiary,I find that zombie companies inhibit companies from setting up local subsidiaries,and firms set more off-site subsidiaries when there are more local zombie companies.Further research finds that the crowding-out effect is more pronounced in non-state-owned,innovative and the eastern region companies.This paper analyzes the mechanism from three perspectives and I find that under certain conditions for zombie companies,the greater the degree of external financing dependence,the higher the financing cost,and the greater the industry competition,the more the company will increase the offsite establishments(3)When zombie companies crowd out local companies’ investment,whether they will hinder foreign companies to enter into the local market,I use listed companies’ foreign subsidiaries to analyze the influence on cross regional development of companies.Empirical results show that zombie companies inhibit the entry of foreign companies into local market and hinder the cross regional operation of companies.Using data of subsidiaries,I find that zombie companies reduce the profits of subsidiaries,reduce business credit,increase financing costs and actual tax burden.The negative impact of zombie companies on the operation of subsidiaries also inhibits the re-investment of companies in areas with a high proportion of zombie companies.I also find that improvements of institutional environment alleviate the negative impact of zombie companies.This indicates that optimizing the institutional environment and promoting informal systems can alleviate the crowding out effect by zombie companies.(4)Finally,I analyze the crowding-out effect on FDI.I find that zombie companies crowded out FDI inflow.Further analysis shows that geographical advantages and the degree of opening will inhibit the crowding out effect,which indicates that foreign investment will take geographical location,foreign trade and other factors into account when choosing the location.I also find that market segmentation and political corruption will aggravate the crowding out of FDI by zombie companies,while strengthening intellectual property protection and improving trust environment will alleviate the crowding out effect of zombie companies,which indicates that the improvement of institutional environment has a significant mitigation effect on the crowding-out effect of zombie companies.The main innovations of this paper are as follows:(1)This paper expands the research on investment crowding out of zombie companies,and completes the framework.Tan et al.(2017)also analyzed the investment crowding out effect of zombie companies.This study not only complements the heterogeneity and mechanism,but also analyzes its mitigation effect on zombie companies from the perspective of institutional environment.And,this paper also jumps out of the category of fixed assets investment,and analyzes the crowding out effect of zombie companies on investment from the perspective of offsite subsidiaries,cross regional investment and FDI.(2)This paper expands the internal mechanism of zombie enterprises crowding out enterprise investment and the heterogeneity analysis.This paper finds that zombie companies’ crowding out effect is more obvious in non-state-owned,small tax contribution firms and light industries,which indicates that government intervention and protection affect the efficiency of resource allocation.Moreover,the analysis of internal mechanism strengthens the understanding of zombie enterprises crowding out investment.At the same time,zombie enterprises’ crowding out of normal enterprise subsidiaries is more obvious in private and hightech enterprises,which requires local governments to take effective measures to clean up local zombie enterprises in time,optimize regional resource allocation,and promote fair market competition.(3)This paper expands the research on the factors that affect the cross regional operation of enterprises.At present,clarifying the influencing factors of cross regional development of enterprises is the key to realize the domestic circulation.This paper finds that zombie companies hinder the entry of remote subsidiaries and have a significant negative impact on the operating performance of remote subsidiaries,which shows that zombie firms not only hinder the cross regional development of enterprises,but also crowd out the cross regional development of enterprises investment.This study provides a reference for clarifying the institutional barriers of factor flow,clearing up zombie companies and realizing cross regional resource allocation.(4)This paper proves that institutional economy is important in economic development and enterprise growth.Under the conditions of a transitional economy with Chinese characteristics,local governments will intervene local economy for the purposes of promotion and incentives,maintaining economic growth,stabilizing employment,and expanding tax revenues.Moreover,the cross-regional operations of domestic enterprises are facing high institutional obstacles,This paper finds that the improvement of the regional institutional environment can restrain zombie companies’ crowding out of normal corporate investment,alleviate the obstacles of cross-regional operations,and improve the crowding-out effect of zombie companies on FDI inflows.It shows that under current economic conditions,strengthening the construction of economic systems,reducing government intervention,developing market for products and factors,cultivating market intermediary organizations,improving the regional trust environment,and developing formal social networks will improve the regional business environment,promote and attract firm investment.