Why is it difficult for Chinese companies to operate across regions in China?—Evidence from zombie companies

Abstract

This paper aims to investigate whether zombie companies create entry barriers for non-local companies and hinder their cross-regional development. Based on Chinese listed companies' subsidiaries' distribution in each province, we find that there will be fewer off-site subsidiaries in the provinces with more zombies, indicating that they create entry barriers for non-local companies. Heterogeneity analysis shows that the entry barriers are more obvious in non-state-owned companies, innovative companies, and companies with strong financing constraints. We also find that the development of the institutional environment and informal institutions can alleviate the entry barriers. Furthermore, off-site subsidiaries operating in the province with more zombies have relatively poor operating performance and low competitive advantage compared with local companies, which may discourage parent companies from reinvesting. Our research enriches the research on zombie companies' negative impacts, provides explanations for Chinese companies' cross-regional development barriers, and also illustrates the importance of strengthening the institutional environment in attracting foreign investment.