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How Zombie Firms Affect Markups ——Evidence from Chinese Industrial Firms
Pages: 131-146
Year: Issue:  6
Journal: Finance & Trade Economics

Keyword:  MarkupsZombie FirmsCost Increasing EffectInnovation Crowding-Out Effect;
Abstract: This paper, for the first time, integrates the negative externalities of zombie firms on non-zombie firms into a unified theoretical framework by extending the Melitz and Ottaviano(2008) model. It proposes two crucial channels, the "cost increasing effect" and the "innovation crowding-out effect" from the perspective of markups. On that basis, with the Annual Survey Data of Chinese Industrial Firms(ASIF) from 1998—2013, it uses modified CHK method to identify the zombie firms, and test their negative externalities. The empirical evidence shows that:(1) every 100% increase in zombie firms’ ratio will lead to non-zombie firms’ markups significantly decreasing by 3.43%;(2) research of the impact channel finds that the existence of zombie firms will reduce the non-zombie firms’ productivity, innovation input and output, which deteriorates their markups;(3) sub-sample regression shows that the negative externalities of zombie firms are larger in the western region, SOEs and capital-intensive industries. This paper deepens the economic explanation of the negative impact of zombie firms and provides theoretical support for the supply-side structural reform.
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