This presentation by Müge Adalet McGowan, Senior Economist, Economics Department, OECD, was made during the discussion “Barriers to exit” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/bte.
4. • Evidence of:
– Rising productivity dispersion
– Declining efficiency of reallocation
– Declining business dynamism: creative
destruction, low churn (linked to competition)
Weak firms are an increasing
burden: what can policy do?
5. Average of MFPR (Wooldridge) across each 2-digit sector (log, 2001=0)
Productivity dispersion is rising
Source: Andrews, D. C. Criscuolo and P. Gal (2016), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a
Firm Level Perspective”, Brookings Institution Hutchins Center Working Paper No. 24.
Frontier
Frontier
Laggards Laggards
6. But productivity-enhancing
reallocation is declining
Difference in capital growth between high and low productivity firms (%pts)
5
6
7
8
9
10
11
12
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Spain Italy Other
7. -0.30
-0.25
-0.20
-0.15
-0.10
-0.05
0.00
0
1
2
3
4
5
6
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Share of zombie firms (LHS) Labour productivity relative to non-zombie firms (RHS)
% log points
Declining business dynamism
Firms aged ≥10 years with an interest coverage ratio<1 over 3 consecutive years
Unweighted average across selected OECD countries
8. • Evidence of:
– Rising productivity dispersion
– Declining efficiency of reallocation
– Declining business dynamism: creative destruction,
low churn (linked to competition)
• Policy conditions are conducive in some countries:
– Low interest rates + impaired banking sectors
– Crisis-induced government support
– Barriers to competition
– Weak insolvency regimes
Weak firms are an increasing
burden: what can policy do?
10. Insolvency reform can address three structural
sources of productivity weakness:
1. Reduce the capital sunk in zombie firms via:
a) Exit of zombie firms
b) Rehabilitation of weak firms thus implying lower social
costs to job churn than if only exit was envisaged
2. Reallocation of capital to more productive firms
3. Productivity growth of laggard firms via more
efficient technology diffusion
Insolvency reform can revive
productivity growth
11. Zombie firms survive due to bank
forbearance: NPL resolution is key
Source: D. Andrews and F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”,
OECD Economics Department Working Papers, No. 1433.
Average zombie share for each bin of bank health
Purged of country-industry-year fixed effects Weak banks
increase the
survival of zombie
of firms and distort
capital allocation
Healthy firms report
greater difficulty
accessing credit
when they operate
in sectors where
more capital is sunk
in zombie firms
12. 012
GBR PRT FRA AUT DEU GRC ESP SVN EST LTV
% Impact of reforms since 2010
Insolvency reform enhances the
effectiveness of NPL resolution
Source: D. Andrews and F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”,
OECD Economics Department Working Papers, No. 1433.
If bank health improves*, how much more would the zombie firm
share decline if barriers to restructuring were at the minimum level?
Improvements in bank
health translate into
larger reductions in the
zombie firm share when
insolvency regimes
promote restructuring
*Shock to bank health = 2 standard deviations
Insolvency reform can
reduce banks incentives
to engage in forbearance
13. 13
Entry-exit policy complementarities
and the MFP growth of laggard firms
Gain to laggard firm MFP growth from reducing administrative burden on start-
ups according to stringency of exit costs
Differential impact between industries with high and low reliance on external financing
-1
0
1
2
High exit barriers Low exit barriers
Gains from reducing administrative burden on startups by one standard deviation
%
When exit barriers are low, decreasing policy-induced entry barriers by one standard
deviation is associated with a 0.9% increase in laggard firm MFP growth in industries
with high firm turnover industries relative to other industries. When exit barriers are
high, the effects of reforming entry barriers on laggard firm MFP growth are negligible.
14. Technical background papers
1. Adalet McGowan, M. & D. Andrews (2018), “Design of Insolvency Regimes across
Countries”, OECD Economics Department Working Papers, No. 1504.
2. Andrews, D. & F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks
and Depressed Restructuring in Europe”, OECD Economics Department Working Papers,
No. 1433.
3. Adalet McGowan, M., D. Andrews & V. Millot (2017), "Insolvency Regimes, Technology
Diffusion and Productivity Growth: Evidence from Firms in OECD Countries", OECD
Economics Department Working Papers, No. 1425.
4. Adalet McGowan, M., D. Andrews & V. Millot (2017), “Insolvency regimes, zombie firms and
capital reallocation”, OECD Economics Department Working Papers, No. 1399.
5. Adalet McGowan, M., D. Andrews & V. Millot (2017), “The Walking Dead?: Zombie Firms
and Productivity Performance in OECD Countries”, OECD Economics Department Working
Papers, No. 1372.
6. Adalet McGowan, M. & D. Andrews (2016), “Insolvency Regimes And Productivity Growth: A
Framework For Analysis”, OECD Economics Department Working Papers, No. 1309.