Does Zombie Lending Impair Innovation?

Abstract

This paper documents that reduced product market competition due to “zombie lending” reduces firms’ incentives to innovate. It depresses patent applications and depletes the existing patent stock, particularly in high technology- and R&D-intensive sectors. We find consistent results using micro-level data from an innovation survey that includes information on unpatented innovation activities. Our results are robust to an instrumental variable approach that addresses concerns that banks are weak because they are exposed to low-performing firms. The eects are concentrated in industries in which firms with a similar technology level compete, i.e., sectors in which reduced competition is predicted to adversely aect firms’ incentives to innovate. Our results highlight potential long-run externalities on productivity and innovation dynamics resulting from zombie lending.

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

JEL Classification: E44, E58, G20