Recherche Carnets de chercheur Scott Wilbur

Scott Wilbur

The Political Economy of Zombie Firms



Zombie firms—unprofitable businesses that survive in the market through discounted interest rates and forbearance lending (Fukuda and Nakamura 2011; Imai 2016)—are generally considered an obstacle to Schumpeterian creative destruction and economic regeneration in post-crisis economies. Conventional wisdom is that firms with zombie status inhibit economic recovery not just by their own unproductivity, but also by reducing the potential profits of healthy firms, which have less earnings to invest and hire new employees and thus diminished ability to spur revitalization (Caballero, Hoshi, and Kashyap 2008).

First identified in the American savings and loan crisis (Kane 1987), zombie firms have been widely associated with the stagnant economic growth in Japan’s “lost decades” since the burst of an asset bubble in the early 1990s (Katz 2003; Kawai and Morgan 2013; Prestowitz 2015). After the 2008 global financial crisis, recessed economies around the world have looked to Japan as a cautionary tale about zombie firms’ threat to economic growth, and policymakers in places as varied as the European Commission, the United Kingdom, the United States and China have expressed the common desire to rid their economies of these troubled firms (Stothard 2013; Bank of England 2012, 29–31; Summers 2012, 72; Zhongguo Xinwen Wang 2015).

Extant scholarship on zombie firms primarily focuses on their economic effects (Ahearne and Shinada 2005; Hoshi 2006; Kwon, Narita, and Narita 2015; Tan, Huang, and Woo 2016). As an augmentation to this literature, my research takes a political economy approach and builds theory about political conditions that cause zombie firms to emerge in the first place. To develop knowledge about political causal mechanisms behind these firms, my research employs a mixed-methods strategy in case studies of zombie firms. I first use large-n, firm-level data with balance sheet information to assess the zombie firm ratio in individual cases, to identify time periods when these firms exist at a higher level in the economy and how long these firms tend to remain in zombie status. Based on these statistics, I subsequently use qualitative analysis to refine hypotheses about policy factors that enable zombie firms to occur in large quantities. In addition to using secondary sources and government and international organization reports, I rely on information I collect through interviews with bankers, corporate executives, politicians, government bureaucrats, lawyers, and economists.

Thus far I have investigated three cases of zombie firms in two national economies—Japan and China. In Japan, I have separately examined zombie firms among stock exchange-listed firms (“large firms”) and small and medium enterprises (“SME”) since the burst of the bubble in the early 1990s. Surprisingly, I have found that while zombie firms generally declined among large firms by the early 2000s, they remained a significant presence among SME throughout the 2000s and even into the early 2010s (Goto and Wilbur 2017). Moreover, it is possible that the Japanese government’s credit guarantee system for SME, which offered 100 percent loan guarantees to many small firms during this period, contributed to the high ratio of zombie SME.

To figure out why Japan’s credit guarantee system persisted for much of the 2000s in enabling minimally risky loans and possibly supporting zombie SME creation, I inspect the policymaking behind the system through the theoretical lens of drift. According to drift, decision-makers may not revise policies after new developments alter the social effects of the policies in ways that are known to at least some political actors, for reasons such as the separation of powers, supermajority requirements, limited public access to policymaking, and uncertainty about the effects of policy change (Hacker, Pierson, and Thelen 2015).

Generally consistent with the last two of these mechanisms of drift, evidence I have uncovered suggests that Japan’s credit guarantee system resisted change throughout much of the 2000s because of limited public involvement in the policymaking behind the system, despite widespread concern about problems in the system and relatively weak public support for SME assistance (Government Of Japan Cabinet Office n.d.). Additionally, bureaucrats themselves were reluctant to drastically revise the system, for fear of both weakening their own institutional power vis-à-vis other agency bureaucrats, and of drastically impacting weak SME dependent on the system. In this context, certain core characteristics of the credit guarantee system, including 100 percent credit guarantees for many SME, continued and likely contributed to the high level of zombie firms among Japanese SME. The continuation of these characteristics was further supported by Japanese regional banks, many of which struggled with risk assessment toward SME borrowers and preferred the safety-net provided by the system, especially at a time of regional economic stagnation.

Beyond the cases of large firms and SME in Japan since the 1990s, I have also explored the case of zombie firms in China in the period 1998-2015. While in recent years the Chinese economy has often been generally compared to post-bubble Japan (Orlik 2011; Hu 2015; Lewis, Mitchell, and Yang 2017), I have found that insofar as China has experienced zombie firms, their causal mechanisms do not appear to be the same as with Japan’s zombie firms during the lost decades. For one, data on nonperforming loans in Chinese financial institutions suggests that Chinese banks have not had a similar incentive to evergreen loans to distressed firms to disguise debt, which was a factor behind Japanese banks’ creation of zombie large firms during the 1990s. Furthermore, China’s credit guarantees for SME have existed on a much smaller scale than in Japan, meaning that they have lacked potential to generate zombie firms on a similar magnitude. Perhaps one area of resemblance has been the operation of bankruptcy law. With the notable exception of certain regions with more developed market economies, China has generally lacked a conducive framework for corporate restructuring through legal bankruptcy, a situation similar to Japan before bankruptcy law reform in the early 21st century.

Having performed initial analysis on political causes of zombie firms in these two national cases, I now intend to expand my study to additional economies since the 2008 global financial crisis so that I may further evaluate and refine theory about political causes of zombie firms. I am particularly interested in including European cases in my research going forward, since recent economics scholarship suggests that some European economies may have contained many zombie firms following the crisis (Acharya et al. 2017; McGowan, Andrews, and Millot 2017). Central bank officials from European countries like France have also anecdotally compared their economies to Japan in terms of having high corporate debt levels, which may indicate zombification in the corporate sector after the Eurozone crisis (Bird 2015), though other research suggests that the magnitude of the zombie problem in France has not been severe (Avouyi-Dovi et al. 2016).

My immediate research objectives at the Centre for French-Japanese Advanced Studies in Paris (EHESS-FFJ) include accessing firm-level data with balance sheet information to assess the zombie firm ratio in individual European cases, especially France and Italy, and establishing connections to potential interview subjects. I am excited to be a part of the community of scholars at the Centre and look forward to having many fruitful discussions about politics and productivity in Japan and Europe during my stay.


Acharya, Viral V., Tim Eisert, Christian Eufinger, and Christian W. Hirsch. 2017. “Whatever It Takes: The Real Effects of Unconventional Monetary Policy.” SAFE Working Paper 152: 1–67.

Ahearne, Alan, and Naoki Shinada. 2005. “Zombie Firms and Economic Stagnation in Japan.” International Economics and Economic Policy 2(4): 363–81.

Avouyi-Dovi, Sanvi et al. 2016. “Are Insolvent Firms Being Kept Afloat by Excessively Low Interest Rates?” Rue de la Banque 29: 1–4.

Bank of England. 2012. Financial Stability Report.

Bird, Mike. 2015. “France’s Zombie Economy Is Missing Out on Europe’s Recovery.” Business Insider.  (May 19, 2016).

Fukuda, Shin-ichi, and Jun‐ichi Nakamura. 2011. “Why Did ‘Zombie’ Firms Recover in Japan?” The World Economy 34(7): 1124–37.

Goto, Yasuo, and Scott Wilbur. 2017. “Efficiency Among Japanese SME: In the Context of Zombie Firm Hypothesis and Firm Size.” RIETI Discussion Paper Series 123: 1–32.

Government Of Japan Cabinet Office. “Kokumin Seikatsu Ni Kansuru Seronchosa [Public Opinion Poll on Public Life].” (October 28, 2017).

Hacker, Jacob, Paul Pierson, and Kathleen Thelen. 2015. “Drift and Conversion: Hidden Faces of Institutional Change.” In Advances in Comparative Historical Analysis, eds. James Mahoney and Kathleen Thelen. Cambridge: Cambridge University Press, 180–209.

Hoshi, Takeo. 2006. “Economics of the Living Dead.” Japanese Economic Review 57(1): 30–49.

Hu, Shuli. 2015. “Shuli Guancha: Diao Jiegou Xu Maizang "Jiangshi Qiye” [Shuli’s Observation: Structural Adjustment Requires Burying ‘Zombie Firms’].” Caixin. (January 28, 2017).

Imai, Kentaro. 2016. “A Panel Study of Zombie SMEs in Japan: Identification, Borrowing and Investment Behavior.” Journal of the Japanese and International Economies 39: 91–107.

Kane, Edward J. 1987. “Dangers of Capital Forbearance: The Case of the FSLIC and ‘Zombie’ S&Ls.” Contemporary Economic Policy 5(1): 77–83.

Katz, Richard. 2003. Japanese Phoenix: The Long Road to Economic Revival. Armonk: M.E. Sharpe.

Kawai, Masahiro, and Peter Morgan. 2013. “Banking Crises and ‘Japanization’: Origins and Implications.” ADBI Working Paper Series 430: 1–35.

Kwon, Hyeog Ug, Futoshi Narita, and Machiko Narita. 2015. “Resource Reallocation and Zombie Lending in Japan in the 1990s.” Review of Economic Dynamics 18(4): 709–32.

Lewis, Leo, Tom Mitchell, and Yuan Yang. 2017. “Is China’s Economy Turning Japanese?” Financial Times. (May 29, 2017).

McGowan, Müge Adalet, Dan Andrews, and Valentine Millot. 2017. “The Walking Dead? Zombie Firms and Productivity Performance in OECD Countries.” OECD Economics Department Working Papers 1372: 1–45.

Orlik, Tom. 2011. “China’s Lessons From Mexico and Japan.” Wall Street Journal. (June 5, 2016).

Prestowitz, Clyde V. 2015. Japan Restored: How Japan Can Reinvent Itself and Why This Is Important for America and the World. Tokyo: Tuttle Publishing.

Stothard, Michael. 2013. “Companies: The Rise of the Zombie.” Financial Times. (April 22, 2016).

Summers, Lawrence H. 2012. “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound.” Business Economics 49(2): 65–73.

Tan, Yuyan, Yiping Huang, and Wing Thye Woo. 2016. “Zombie Firms and the Crowding-Out of Private Investment in China.” Asian Economic Papers 15(3): 32–55.

Zhongguo Xinwen Wang. 2015. “Fagaiwei: Jiakuai Taotai Jiangshi Qiye Youxiao Huajie Guosheng Channeng [National Development and Reform Commission: Speed Up the Elimination of Zombie Firms to Effectively Resolve Excess Capacity].” Zhongguo Xinwen Wang. (January 28, 2017).