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A zombie company is a firm that's uncompetitive to the point that it would have gone bankrupt if not for external intervention, usually by a government. Large firms that employ a significant number of workers or that play an important role in an economy can often push governments for help when they are burdened by debt.In some cases, a firm is "too big to fail" meaning that it plays too important a role in the economy of a nation to be allowed to fail. For example, if a nation has a single airline, the loss of that airline might cause profound economic and social impacts.Governments also may bailout companies simply because they employ a large number of people.
Zombie InvestorsIn many cases, a government that steps in to save a company structures the deal so that investors in the failed company are not rewarded. Generally speaking, rewarding investors with public money for investing in a uncompetitive business that has failed creates a moral hazard.Zombie RecoveryIn some cases, zombie companies regain their competitiveness. This is most likely when a government forces dramatic changes at the firm by completely replacing the executive management.
Zombie EconomyA nation that gets in the habit of bailing out uncompetitive firms either directly or indirectly through influence over banks, risks becoming uncompetitive at the national level. Zombie firms consume capital, labor and other resources such as electricity and tend to be unproductive. It is a normal function of an economy for companies to fail, when this doesn't happen a nation develops deep structural economic problems that take decades or longer to resolve.|
| Type | InvestingEconomics | | Definition | A company that receives a government bailout or other preferential treatment in order to keep it from failing. | | Risks | By definition, zombie companies are uncompetitive and represent an unproductive use of a nation's resources.In many cases, zombie companies generate overcapacity whereby companies waste resources by producing more than society needs as indicated by supply outstripping demand and falling prices. | | Too Big To Fail | In some cases, governments have no choice but to save a firm because they play a central role in the economy. Governments may structure such deals to wipe out investors and completely replace management in order to avoid continued failures driven by moral hazard. | | Related Concepts | Too Big To FailCompetitive AdvantageCompetitive ParityCreative DestructionOvercapacity |
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