Innovation and zombie firms: Empirical evidence from Italy

Zombie firms are businesses that cannot repay debt from current profits over an extended period and yet continue to operate and avoid failure. This article specifically investigates whether and under what circumstances the presence of zombies in an industry constitutes a barrier to the innovativeness of non-zombies in the same sector. Conceptually, non-zombie firms may face tougher access to finance and fiercer market competition when zombies are in business, and this could reduce their innovative efforts. By analysing matched patent-firm data from Bureau van Dijk ORBIS Intellectual Property on 426,130 Italian firms from 2012 to 2018, we find evidence in favour of this negative intra-industry spillover. Nonetheless, this general relationship is subject to various contingencies. Specifically, zombies are detrimental to healthy firms that (i) depend on external sources of finance, (ii) operate in highly competitive markets, (iii) are more exposed to the erosion of their market shares, and (iv) do not possess a pre-existing strong knowledge base. Our findings have relevant policy and managerial implications. • Zombie innovative firms are a distinct category of zombies. • Zombie firms negatively affect other firms' innovation. • Non-zombies face tougher access to finance and fiercer market competition. • Zombies' negative spillovers are contingent on sector and non-zombie characteristics.