Zombie firms and their congestion effects: exploration of industrial upgradation and innovation

Zombie firms have gained considerable attention due to their increasing global presence, particularly in emerging economies like India. Despite efforts to understand the effects of rising zombie firms on various aspects of the economy, there is still a need for a comprehensive study regarding their specific impact on healthy and viable firms. This study fills this gap by examining how the increasing share of zombie firms affects healthy firms’ industrial upgradation by impacting productivity, trade and innovation efforts. By utilising a standard panel data estimation strategy, the study examined the impact of zombie firms’ overall industrial efficiency in terms of zombie presence in export, import, and R&D within an industry. Using a sample of 10,090 Indian manufacturing firms, this paper demonstrates that an industry’s overall productivity declines with the increase in zombies’ participation in cross-border trade (i.e. imports and exports) and R&D activities. The findings of the study give insights into the congestion effect of zombie firms on healthy firms and have implications for international trade and robust policy intervention.