The productivity slowdown: Attack of the zombie firms

WHY has economic growth been so sluggish in the developed world? The previous post showed that productivity in the global economy had been flat or falling in the last three years. And it suggested that the existence of "zombie" firms—uncompetitive survivors—might be one explanation.As it happened, the OECD published a new paper yesterday which showed that might indeed be the case. The paper concludes thatthe prevalence of, and resources sunk in, zombie firms have risen since the mid-2000s, which is significant given that recessions typically provide opportunities for restructuring and productivity-enhancing allocationand thata higher share of industry capital sunk in zombie firms tends to crowd out the growth—measured in terms of investment and employment—of the typical non-zombie firm. All in alla 3.5% rise in the share of zombie firms—roughly equivalent to that observed between 2005 and 2013 on average across the nine OECD countries in the sample—is associated with a 1.2% decline in the level of labour productivity across industries. So what is going on? The paper defines zombie firms as those aged ten years or older with an interest-coverage ratio (the ratio of operating income to interest expenses) of less than one in each of the preceding three years. In short, these firms depend on the kindness of their creditors. This may be down to the efforts of ...