Zombie Companies

Zombie firms are businesses that continue to operate despite being expected to go bankrupt, typically characterized by low profitability, high indebtedness, and low productivity. Although these firms are often unable to meet their interest obligations, they sustain operations through external funding sources such as bank loans or government support. Interest in zombie firms began in Japan in the 1990s, resurged during periods such as the 2008 global financial crisis and the COVID-19 pandemic, and similar debates have emerged in Türkiye especially during crisis periods.

The concept of zombie firms is defined based on various criteria. In studies conducted in Türkiye, these firms are identified as those that have had an interest coverage ratio (EBIT/financial expenses) below 1 for at least three consecutive years, have maintained negative equity over the same three-year period, and have been active for at least five years. This definition focuses on structural financial distress rather than temporary financial difficulties. Moreover, these firms continue to access credit from banks despite these adverse financial conditions.

Micro-level studies in Türkiye show that zombie firms exhibit distinct financial characteristics. These firms generally:

• Operate as continuously loss-making entities with no cash generation capacity.
• Have very high debt-to-equity ratios.
• Exhibit low investment rates and limited capacity to pursue new projects.
• Sustain persistent losses from their operations.
• Display higher zombie risk, typically among larger-sized firms.

When examining the top 1000 companies of the Istanbul Chamber of Industry, firms with zombie characteristics are most prominent in the textile, food, and mining sectors.

The presence of zombie firms in the market generates multidimensional effects on the economic structure, primarily affecting resource allocation efficiency, productivity, financial stability, and competition levels.

The allocation of economic resources to zombie firms prevents these resources from flowing to more productive firms. Credit obtained from the banking system is wasted in these low-profitability firms, and the mechanism of creative destruction becomes dysfunctional. This situation constrains the growth of efficient firms within the sector.

The inefficient use of production factors by zombie firms directly lowers sectoral average productivity. Empirical analyses in Türkiye have demonstrated that an increase in the share of zombie firms significantly reduces sectoral productivity measured in value added terms.

Zombie firms are burdened with debt levels that prevent them from allocating resources to innovation activities. Consequently, they distance themselves from R&D and technological investments, weakening the competitive position of innovative firms within the sector. This poses a serious threat, particularly in sectors requiring rapid transformation.

Zombie firms continue to access funding from the financial system despite being unable to repay their debts. This creates credit risk for the banking sector and increases the likelihood of systemic crises. The probability of loan defaults weakens bank balance sheets and restricts the capacity to extend new credit.

Zombie firms attract attention not only through their own performance but also through their impact on other firms in the sector. Their strategies of selling at low prices reduce profit margins of healthy firms. Simultaneously, by limiting access to finance, they hinder the growth of competitive firms.

The share of zombie firms in Türkiye peaked in 2020 due to the impact of the COVID-19 pandemic. The indiscriminate distribution of financial support during the pandemic increased the number of zombie firms. However, in subsequent years, economic recovery and tighter credit policies have led to a declining trend in this share.

By sector, zombie firm concentration is high in textiles, chemicals, food, and transportation, while it is relatively lower in capital-intensive sectors such as metal and machinery manufacturing.

Combating zombie firms presents policymakers with specific dilemmas. In particular, support measures aimed at preventing firm bankruptcies during economic crises may inadvertently prolong the survival of inefficient firms. In this context, recommended strategic approaches include:

• Establishing and effectively operating efficient bankruptcy mechanisms.
• Encouraging banks to adopt cautious credit policies toward zombie firms.
• Distributing support based on performance-driven, discriminatory criteria.

Zombie firms are structures that require careful attention not only due to their own poor performance but also because of the negative effects they generate on the overall functioning of the economy. Numerous empirical studies in Türkiye have shown that these firms reduce sectoral productivity, create negative externalities for healthy firms, and threaten the financial system. Therefore, effective policies to combat zombie firms must be designed and implemented to achieve long-term growth and productivity objectives.