Productivity growth is slowing in OECD countries, coupled with increased misallocation of resources. A recent strand of literature focuses on the role of non-viable firms "zombie firms" to explain these developments. Using a rich firm-level dataset for Portugal, we explore the role played by zombies in firm dynamics and the misallocation of labour and capital. We confirm the results on the high presence of zombie firms, which are significantly less productive than their healthy counterparts and drag down aggregate productivity. Higher zombie presence is associated with lower growth of viable firms, stifling intra-sectoral capital reallocation. Portugal has shown one of the largest reductions in barriers to exit and restructuring of all OECD countries and is therefore particularly suited for an assessment of the extensive margin effects of these policy changes. We show that a reduction in exit and restructuring barriers promotes a more effective exit channel and fosters the restructuring of the most productive zombies. The results highlight the role of public policy in addressing zombies' prevalence, fostering a more efficient resource allocation, and promoting productivity growth.
|Journal||INTERNATIONAL PRODUCTIVITY MONITOR|
|Publication status||Published - Jan 2020|