Focus
This paper analyses the macroeconomic implications of zombie firms in Asian emerging market economies (EMEs) in both the domestic and cross-border contexts. We use firm-bank linked data for 10 EMEs over 2005–21. To identify the cross-border spillover channels of Asian EME zombie firms for inflation and growth in advanced economies (AEs), we consider both the trade-weighted and cross-border lending-weighted exposures of the AEs to the Asian EME zombie firms.
Contribution
We provide the first evidence that zombie-induced disinflation transmits across borders through global value chain (GVC) linkages, by identifying zombie prevalence in GVC-connected economies. We also conduct a direct horse race between the trade and bank lending channels of international zombie transmission. In addition, we provide micro-level evidence on the asymmetric behaviour of domestic versus foreign banks in evergreening analysis in the domestic and cross-border contexts. Finally, we fill a gap in the zombie firm literature, which has mostly looked at AEs, by focusing on Asian EMEs central to GVCs.
Findings
First, we find that the number of zombie firms in Asian EMEs has increased significantly over 2005-21, sustained by evergreening by weak banks. Second, zombie prevalence domestically depresses firm performance, crowds out healthy firms and lowers inflation and GDP growth. These effects extend across borders: trade-weighted exposure to zombie firms in Asian EMEs significantly reduces inflation and growth in AEs, mainly through an intermediate goods import price channel. Third, while zombie exposure deteriorates domestic bank health, foreign banks are insulated. Also, bank lending-weighted exposure to Asian EME zombie firms has no macroeconomic effects in AEs whose banks lend to these firms.
Abstract
Using firm-bank linked data for 10 Asian emerging market economies (EMEs) over 2005–2021, we study the domestic and cross-border implications of zombie firms. We document three main findings. First, the number of zombie firms in emerging Asia has increased significantly over the past 15 years, sustained by evergreening practices from weak banks. Second, zombie prevalence domestically depresses firm performance, crowds out healthy firms, and depresses inflation and GDP growth. Third, the macroeconomic effects of zombie firms extend across borders: expo sure to zombie firms in Asian EMEs significantly reduces inflation and growth in advanced economies. These spillover effects operate mainly through global value chains (GVCs) and an intermediate goods import price channel, while cross-border bank linkages do not play any major role.
