Does Zombie Lending Impair Innovation?

Abstract

This paper documents that “zombie” lending impairs corporate innovation. It depresses patent applications and depletes the existing patent stock, particularly in high technology- and R&D-intensive sectors. Micro-level data from an innovation survey data administered by the European Commission shows that specifically service and process innovation as well as internal R&D spending is severely impacted by zombie lending. Our results highlights the externalities imposed on healthy firms through the misallocation of capital as it prevents both the exit of zombie and entry of healthy firms in affected industries and deflates material costs and total factor productivity dispersion. Importantly, we find depressed innovation activities in industries with neck-and-neck competition consistent with a decline in competition due to zombie lending.

Keywords: Zombie lending, innovation, competition, Europe, economic growth, post-crisis recovery

JEL Classification: E44, E58, G20