Government subsidies, enterprise operating efficiency, and “stiff but deathless” zombie firms

Abstract

We examine the effects of government subsidies on enterprise operating efficiency and the “stiff but deathless” characteristics of zombie firms. Previous research has explored the effects of subsidies on enterprise efficiency and these characteristics of zombie firms; however, the former has not reached a consistent conclusion, and the latter lacks empirical research. Using data from Chinese industrial firms over the period during 1998–2013, we empirically analyze the “stiff” and “deathless” characteristics by using the metrics of “profit” and “efficiency,” respectively, and explore the effect of subsidies on the efficiency and profitability of zombie and nonzombie enterprises, including their impact and mechanisms. We find that although subsidies generally improve an enterprise's operating efficiency by easing financing constraints and attracting more firms to operate locally, moral hazard measured as financial instability makes subsidies less effective in boosting efficiency and profits in zombie firms. These findings can help improve subsidy policies.