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Barriers to Exit – ADALET MCGOWAN – December 2019 OECD discussion

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This presentation by Müge Adalet McGowan, Senior Economist, Economics Department, OECD, was made during the discussion “Barriers to exit” held at the 132nd meeting of the OECD Competition Committee on 4 December 2019. More papers and presentations on the topic can be found at oe.cd/bte.

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Barriers to Exit – ADALET MCGOWAN – December 2019 OECD discussion

  1. 1. ZOMBIE FIRMS, BARRIERS TO EXIT AND PRODUCTIVITY Müge Adalet McGowan OECD Economics Department Barriers to Exit, OECD 4 December 2019
  2. 2. Aggregate productivity growth Market exit of non- viable firms Internal restructuring by viable firms More productive firms expand Strength of market selection Resource reallocation from exiting firms Efficient insolvency regimes Competitive pressures Product market regulations Public support schemes Financial regulation Fiscal distortions Stance of monetary policy Corporate governance Enviromental regulations Employment protection legislation Active labour market policies Financial development Housing market policies Intellectual property markets Size contingent policies Rule of law and judicial efficiency Inefficient exit policies lower productivity
  3. 3. Zombie firms on the rise
  4. 4. • Evidence of: – Rising productivity dispersion – Declining efficiency of reallocation – Declining business dynamism: creative destruction, low churn (linked to competition) Weak firms are an increasing burden: what can policy do?
  5. 5. Average of MFPR (Wooldridge) across each 2-digit sector (log, 2001=0) Productivity dispersion is rising Source: Andrews, D. C. Criscuolo and P. Gal (2016), “The Global Productivity Slowdown, Technology Divergence and Public Policy: a Firm Level Perspective”, Brookings Institution Hutchins Center Working Paper No. 24. Frontier Frontier Laggards Laggards
  6. 6. But productivity-enhancing reallocation is declining Difference in capital growth between high and low productivity firms (%pts) 5 6 7 8 9 10 11 12 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Spain Italy Other
  7. 7. -0.30 -0.25 -0.20 -0.15 -0.10 -0.05 0.00 0 1 2 3 4 5 6 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Share of zombie firms (LHS) Labour productivity relative to non-zombie firms (RHS) % log points Declining business dynamism Firms aged ≥10 years with an interest coverage ratio<1 over 3 consecutive years Unweighted average across selected OECD countries
  8. 8. • Evidence of: – Rising productivity dispersion – Declining efficiency of reallocation – Declining business dynamism: creative destruction, low churn (linked to competition) • Policy conditions are conducive in some countries: – Low interest rates + impaired banking sectors – Crisis-induced government support – Barriers to competition – Weak insolvency regimes Weak firms are an increasing burden: what can policy do?
  9. 9. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 GBR RUS FRA JPN USA CHE DNK CHL DEU ESP FIN IRL ISR SVN CRI NZL PRT AUT GRC SVK ITA KOR MEX AUS LVA POL TUR NOR SWE CAN LTU BEL CZE NLD HUN EST Personal costs to failed entrepreneurs Lack of prevention and streamlining Barriers to restructuring 2010 overall Much scope to improve the design of insolvency regimes Composite indicators of insolvency regimes, 2010 and 2016 Increasing in barriers to exit or restructuring
  10. 10. Insolvency reform can address three structural sources of productivity weakness: 1. Reduce the capital sunk in zombie firms via: a) Exit of zombie firms b) Rehabilitation of weak firms thus implying lower social costs to job churn than if only exit was envisaged 2. Reallocation of capital to more productive firms 3. Productivity growth of laggard firms via more efficient technology diffusion Insolvency reform can revive productivity growth
  11. 11. Zombie firms survive due to bank forbearance: NPL resolution is key Source: D. Andrews and F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”, OECD Economics Department Working Papers, No. 1433. Average zombie share for each bin of bank health Purged of country-industry-year fixed effects Weak banks increase the survival of zombie of firms and distort capital allocation Healthy firms report greater difficulty accessing credit when they operate in sectors where more capital is sunk in zombie firms
  12. 12. 012 GBR PRT FRA AUT DEU GRC ESP SVN EST LTV % Impact of reforms since 2010 Insolvency reform enhances the effectiveness of NPL resolution Source: D. Andrews and F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”, OECD Economics Department Working Papers, No. 1433. If bank health improves*, how much more would the zombie firm share decline if barriers to restructuring were at the minimum level? Improvements in bank health translate into larger reductions in the zombie firm share when insolvency regimes promote restructuring *Shock to bank health = 2 standard deviations Insolvency reform can reduce banks incentives to engage in forbearance
  13. 13. 13 Entry-exit policy complementarities and the MFP growth of laggard firms Gain to laggard firm MFP growth from reducing administrative burden on start- ups according to stringency of exit costs Differential impact between industries with high and low reliance on external financing -1 0 1 2 High exit barriers Low exit barriers Gains from reducing administrative burden on startups by one standard deviation % When exit barriers are low, decreasing policy-induced entry barriers by one standard deviation is associated with a 0.9% increase in laggard firm MFP growth in industries with high firm turnover industries relative to other industries. When exit barriers are high, the effects of reforming entry barriers on laggard firm MFP growth are negligible.
  14. 14. Technical background papers 1. Adalet McGowan, M. & D. Andrews (2018), “Design of Insolvency Regimes across Countries”, OECD Economics Department Working Papers, No. 1504. 2. Andrews, D. & F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”, OECD Economics Department Working Papers, No. 1433. 3. Adalet McGowan, M., D. Andrews & V. Millot (2017), "Insolvency Regimes, Technology Diffusion and Productivity Growth: Evidence from Firms in OECD Countries", OECD Economics Department Working Papers, No. 1425. 4. Adalet McGowan, M., D. Andrews & V. Millot (2017), “Insolvency regimes, zombie firms and capital reallocation”, OECD Economics Department Working Papers, No. 1399. 5. Adalet McGowan, M., D. Andrews & V. Millot (2017), “The Walking Dead?: Zombie Firms and Productivity Performance in OECD Countries”, OECD Economics Department Working Papers, No. 1372. 6. Adalet McGowan, M. & D. Andrews (2016), “Insolvency Regimes And Productivity Growth: A Framework For Analysis”, OECD Economics Department Working Papers, No. 1309.

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