The economic and social dilemma of zombie companies worldwide: institutional context and poverty impact analysis Open Access

Poverty is a pervasive societal challenge on a global scale and country-level context and business, as integral components of society, both have crucial roles to play in helping to alleviate the problem (Lawson-Lartego and Mathiassen, 2021; Medina-Muñoz and Medina-Muñoz, 2020). Indeed, the two are related: the strength of the business fabric depends to a large extent on country-level conditions, with public authorities often being responsible for creating favourable conditions. There has been broad discussion of how the political context in a country, its monetary policies and rules and its decision system (level of freedom) can have a significant impact on the generation of wealth there, its distribution and levels of poverty (Cervelló-Royo et al., 2023; Doran and Stratmann, 2020; García-Vélez and Núñez-Velázquez, 2023; Osinubi and Ojeyinka, 2024; Zaman et al., 2011). In this study, we analyse the potential effect of these factors on the destruction of companies, – unhealthy ones –, and whether this, in turn, affects social well-being. From a utilitarian perspective, even unhealthy companies can contribute to institutional well-being, as their existence may support societal welfare in the short term by maintaining employment and reducing poverty, despite their inefficiencies. This perspective, which prioritizes maximizing overall societal well-being, provides a pragmatic lens for understanding the broader consequences of institutional dynamics, such as zombification, and their potential exacerbation of income inequality. By focusing on outcomes, the utilitarian approach allows us to address systemic risks and analyse complex global data more effectively than alternative frameworks like deontology or virtue ethics.

There are more and more voices highlighting the role of companies in creating and maintaining the economic divide (Bapuji et al., 2020). Within a country’s economic system, companies are responsible for the creation of wealth and its distribution. At least, this is the case for healthy companies, but economies also contain unhealthy ones. These include companies in various states of distress, among them those identified as “zombie” companies. Traditional economic imperatives often dictate the necessity of purging financially untenable enterprises, but that perspective is limited. Have the social impact and influence on poverty of such actions been considered, and could they change this judgement?

Economic literature posits that zombie companies are unproductive, overly debt-ridden companies that hamper the growth of healthy companies and thus reduce productivity gains for the economy as a whole. There is no fully agreed definition since different authors propose different characteristics for classing companies as zombies (Ahearne and Shinada, 2005; Álvarez et al., 2023; Caballero et al., 2008; Hoshi, 2006; Mingarelli et al., 2022; Papworth, 2013; Schivardi et al., 2020; Storz et al., 2017). In any case, the concept of “zombie company” is related to a high degree of leverage (high need for borrowed funds) and little profitability. Such companies present a potentially significant threat to the overall economy, not only because of their imminent risk of bankruptcy but also due to the danger they impose on healthy companies: They may deprive healthy companies from financial funds that could otherwise be used more productively. This consumption of resources also may discourage entrepreneurship, as healthier new businesses do not have these resources at their disposal or do so at higher prices. These new firms could help create not only employment but also quality jobs. Despite the seriousness of this structural situation, these companies continue to survive and do business thanks generally to the renewal of credit granted by banks and to government support.

In recent decades, the zombie phenomenon has drawn significant research interest. Initial studies focused on Japan (Ahearne and Shinada, 2005; Caballero et al., 2008; Hoshi, 2006), later expanding to China and its influential environment (Ren et al., 2023; Shen et al., 2023). The issue is now recognized globally, with zombie firms among listed companies rising to around 7% by 2020 (Altman et al., 2024). Altman et al. (2024) highlight its uneven spread across the world’s 20 largest economies, prompting questions about the country-level factors driving this phenomenon. A global analysis can reveal the structural economic, political and monetary conditions that influence the emergence and persistence of zombie companies.

The phenomenon of zombie companies is not residual but is significant in size and requires careful consideration. The European Bank for Reconstruction and Development (2022) has warned that having zombie companies in a country is a serious problem that generates harmful spillovers for healthy firms, which see lower investment and revenue and higher cost. On this basis, it is argued that zombie companies are undesirable for the economy and mechanisms to prevent them, in one way or another, are being considered. This makes perfect sense from a purely economic view but the impact of zombie companies can extend beyond the economy and into the social sphere (Mashwani et al., 2024). Companies are sources of employment and zombie companies are no exception. The sudden disappearance of a substantial number of firms can have unintended consequences in the labour market and social sphere, which need to be assessed. Unemployment increases the risk of poverty (Gallie et al., 2003). Consequently, the existence of zombies could alleviate poverty in terms of reducing inequalities between the employed and the unemployed. The problem of zombie companies thus also has implications for society and, subsequently, for poverty.

Our study then goes on to explore the connection between country-level context, including economic, political and monetary aspects, on zombie companies and its effect on income inequality, understood as an aspect of poverty level. The sample studied here consists of 87,573 companies from 123 countries with negative equity over the three business years from 2019 to 2021. It is unprecedented in scope and gives a worldwide picture of the problem. It also identifies the country factors that determine the degree of zombification of an economy and the effects of zombification on poverty. The results indicate that zombies are not necessarily harmful from a social perspective, as they help reduce inequality in the distribution of income or wealth. Thus, we face an economic and social dilemma that affects government-regulatory decision-making on such companies.

The paper makes three contributions: firstly, the reality of zombie companies worldwide is addressed. Secondly, country-level factors are proposed to explain the level of zombie companies. And thirdly, it includes poverty in the form of inequality in the distribution of income or wealth as a relevant approach for understanding zombie theory.

The rest of the paper is organised as follows. Section 2 presents the theoretical framework of zombie companies. Section 3 sets out our hypothesis and its grounding in theory. The methodology is explained in Section 4, showing the adequacy of the data, the variables used and the econometric method. Section 5 addresses the results and in Section 6, they are discussed and the paper ends with some concluding remarks and bibliographical references.

The analysis of zombie firms can greatly differ if it is done from an economic or from a social perspective. The literature has extensively analysed from the first perspective – the economic harm of zombie firms – but not the second, namely, the possible impact on employment and poverty reduction. For the present analysis of the joint social and economic impact, the utilitarian perspective, which seeks to maximize collective welfare, is adopted. Often, the actors involved have conflicting interests and utilitarianism tries to balance them by evaluating the overall welfare generated.

Zombie companies have been a hidden problem for many years. It has taken a lot of time and effort to identify the problem, but as this was done the growth in research in recent years has been exponential. Concern about the situation, behaviour, evolution and potential economic impact of zombie companies is currently so great that it has extended beyond academia and the field of pure research and has drawn increased attention in policy circles. International institutions, which have described the situation, risk and uncertainties, include the International Monetary Fund, the Organization for Economic Co-operation and Development (OECD), the Bank for International Settlements and European institutions such as the European Central Bank and European Commission.

Research into zombie companies is still recent and it is not yet known exactly how many countries may be affected or to what extent. Japan was the first country identified as a zombie economy based on economic stagnation from the 1990s onwards (Hoshi, 2006; Caballero et al., 2008). Most recent research has focused on China (Cai et al., 2022; Chen, 2022; Qiao and Fei, 2022; Chao and Phillips, 2023). Japan and China are the leading countries in zombie company research for two reasons: the empirical evidence shows that the presence of zombies is significant and the results concerning the damage that zombies can cause to the economy and society are strong. Studies also exit on advanced economies (Banerjee and Hofmann, 2020; Jordà et al., 2022), on OECD countries (Adalet-McGowan et al., 2018) and specifically on European countries (Hallak et al., 2018; Bittner et al., 2021; Carreira et al., 2022; da Silva and Gonçalves, 2022; Blažková and Chmelíková, 2022), on North America (Favara et al., 2021; De la Garza, 2021; De la Garza et al., 2022) and on Australia (Beer et al., 2021). However, no study has integrated data globally and mapping the problem globally could reveal the geopolitical impact.

Although Hallak et al. (2018) note country differences, they do not analyse causes. Studies on the rise of zombie companies highlight internal and external factors, such as corporate governance (San-Jose et al., 2022) and external support from banks or governments. Other factors have also been analysed, including the point in the economic cycle (Adalet-McGowan et al., 2018; Borio, 2018; Urionabarrenetxea et al., 2016), the sector (Goto and Wilbur, 2019; Hoshi, 2006; Urionabarrenetxea et al., 2018), size (Hallak et al., 2018; Hoshi, 2006; Imai, 2016; Urionabarrenetxea et al., 2018), company age (Adalet-McGowan et al., 2018; Blažková and Dvouletý, 2020; Hallak et al., 2018) and location and whether or not companies are located within a metropolitan area (Blažková and Dvouletý, 2020; Hoshi, 2006). However, examination of the influence of institutional context on these factors is limited and country-level institutional factors remain underexplored.

Numerous studies have revealed that a country’s situation includes three aspects: economic, political and financial (Erb et al., 1996). The first step is to assess whether these aspects influence the formation of zombie companies in a country.

Once the effects of government tools on the zombification of companies in a country are known, it becomes necessary to learn their consequences so as to establish how governments should respond to zombie companies. Until now, the economic literature on zombie companies has argued that the problem is not only that such companies are unproductive but that they “can cause permanent harm to the economy as a whole” (Hoshi, 2006, p. 30) through contagion (Dai et al., 2021; Yu et al., 2021).

The explicit protection offered by public administration and banks to zombie companies “distorts competition in the rest of the economy” (Caballero et al., 2008, p. 1944) and leads to situations of unfair competition with non-zombie companies. Thus, zombie companies can lower prices or raise wages to higher levels than their competitors (Hoshi, 2006), as they will be artificially maintained, creating a situation of unfair competition.

Thus, the direct economic effects seem to be clearly harmful to a country’s economy (unfair competition, resource misallocation, contagion effect) and policymakers must establish corrective measures to limit the presence of zombie companies.

However, such companies exist and affect not only the economy but also the social sphere in the territories where they opérate:

• Companies are not only resource users but also generators of employment and wealth. Employment can play a significant role in determining economic inequality, at both individual and structural levels (Hutabarat et al., 2023). It is common for employment to be the most important factor in determining people’s incomes, so a lack of employment clearly contributes to income inequality in a society. A clear example is the COVID-19 pandemic, which brought with it an imminent threat of economic recession and a considerable increase in unemployment. Another example is the 2008 crisis, in which several sectors were deemed “too big to fall” and heavily subsidized despite their practical bankruptcy to save the jobs. In this context, it is worth noting that most policymakers opted to maintain employment through highly subsidized interest rates and government stimuli (Altman et al., 2024). Zombies going out of business could create a wave of unemployment that might destabilize the economy. Increased unemployment rates not only cause costs for individuals but also lead to increased government spending (unemployment subsidies need to be paid), higher poverty rates and lower purchasing power (Radovanovic and Haas, 2023). Chao and Phillips (2023) note that the cost of corporate bankruptcy in terms of employment could force local governments to help zombie companies survive. In fact, they demonstrate that “local governments are more likely to provide subsidies to large companies with the aim of developing local industrial chains, employment rates and social security and stability” (p. 12). Hoshi (2006) remarks “without jobs, young workers lose the opportunity to accumulate human capital through on-the-job training” (p. 30).

• Keeping workers employed also prevents the loss of acquired skills. Closing zombie firms would mean increasing the number of people unemployed, and given the inefficiencies of the labour market, some of them may be unemployed for long periods, resulting in a loss of knowledge and skills, which decreases their value as human capital. In contrast, continuous employment allows workers to continue to practice and hone their skills, which is key to future employability (Arulampalam et al., 2000). A study by Manzoni and Mooi-Reci (2020) shows that unemployment, especially prolonged unemployment, has long-term negative effects on individuals’ job opportunities. One of the key mechanisms behind this phenomenon is the loss or deterioration of skills. The skills of individuals who experience unemployment tend to become outdated, especially in sectors where technology and methods evolve rapidly.

• One of the indicators that a company is a zombie is that it is less productive than its non-zombie counterparts. This is because it generates less value from the resources that it consumes. Hallak et al. (2018) point out that zombie companies increase salaries so as to retain workforce. Collijs and De Busscher (2020) finds that personnel costs are higher in zombie companies than in non-zombie companies, but that difference is due to the fact that zombie companies have, on average, more employees. In any case, this generates lower shareholder returns. Zombie companies could be a way of transferring capital income to labour income. Capital income is usually distributed more unequally than any other forms of income (Ranaldi and Milanović, 2022).

• One way in which companies generate social wealth is by paying taxes. Due to negative or minimal profits, zombie companies often forgo corporate tax payments, but their employees contribute to the tax system through income tax levied on their salaries. Another tax is value added tax, which is a turnover tax that accrues with the sale of products. It is consumers who ultimately pay this tax. As long as companies continue to operate and sell their products, taxes will continue to accrue (Chang et al., 2021). So it is true that payments of direct taxes are reduced, as reported in the literature (Shen and Chen, 2017; Chang et al., 2021), but not the payment of total taxes. Tax payment is a way to reduce income inequality (Biswas et al., 2017).

Ultimately, through both employment and taxation, zombie companies affect social inequality.

Addressing poverty and inequality in a country is an individual problem, but it affects well-being and social stability in general. Analysis of a territory’s development requires a global approach; it is not possible to prioritize some groups over others or even to carry out an average analysis.

Utilitarianism, which seeks to increase welfare for as many people as possible, can help us understand how business decisions impact collective welfare. This theory evaluates the morality of actions according to their outcomes, with the purpose of increasing collective welfare or reducing collective suffering, as pointed out by Bentham (1789) and Mill (1861). In the application of the utilitarian perspective, both the short- and long-term effects of actions and decisions must be considered by weighing the benefits and harms that could be caused to different stakeholders. A decision, even if not ideal, could be the most appropriate one from the utilitarian point of view, as with the available information the action taken would benefit the greatest number of people. It is a relevant fact that decisions have not only short-term but also long-term consequences; it is precisely those negative future consequences that make us hold on to current realities and known consequences. This approach can be simple when the results are clear and in the same direction but it becomes complex when predicting future consequences or balancing conflicting interests. As Singer (1993) and Freeman (2000) have pointed out, applying utilitarianism is difficult, especially because of the evaluation of outcomes and the different ways of measuring them, when impacts occur at different times. Critics argue that utilitarianism can justify actions that harm some individuals under the argument that it benefits the majority (Mill, 1861), raising questions about fairness and justice.

The utilitarian perspective, particularly the act utilitarian approach, is ideal here as it evaluates actions based on immediate societal outcomes rather than rigid principles (Gustafson, 2013). This flexibility is crucial for analyzing “unhealthy” companies, which may still contribute to short-term welfare through employment and poverty reduction. Unlike deontology, with its focus on universal duties, or virtue ethics, centered on moral character, act utilitarianism offers a pragmatic framework to assess tangible outcomes in complex contexts. It also surpasses rule utilitarianism by addressing specific factors often overlooked by generalized rules (Harsanyi, 1985), enabling a dynamic, outcome-driven analysis that aligns with this study’s focus on societal well-being and mitigating risks like zombification.

For our case, supporting zombie companies may offer short-term relief by protecting jobs and reducing poverty, but it can also generate long-term inefficiencies that harm the economy. The challenge is to balance these opposite factors – economic efficiency, social stability and ethical responsibility – while recognizing that poverty and inequality are interconnected and require a comprehensive, holistic approach. This broader perspective should enable companies and policymakers to make decisions that benefit both the economy and society as a whole. Utilitarianism seeks to balance different interests by assessing overall welfare. In the case of closing down zombie firms, governments must allocate funds to compensate for the loss of wealth of the unemployed, which requires taxpayers to contribute funds through their taxes. The “artificial” preservation of zombie companies has a direct effect on employment – on the one hand, maintaining them, but on the other hand, hindering the creation of new jobs by healthy firms. “There is evidence that unemployment increases the risk of poverty and contributes to inequality” (Saunders, 2002, p. 507). The decision on a zombie firm therefore has an impact on the wealth of a country and on its level of poverty.

As stated by Lang and Lingnau (2015, p. 404), “poverty and inequality are inextricably linked. […] tackling poverty means tackling inequalities”. Changes in inequality could significantly influence the future of global poverty, affecting both the total number of people living in poverty and the financial costs required to eliminate it (Sumner, 2013).

Although there is debate in some circles about the distinction to be made between the concepts of “absolute” and “relative” poverty, i.e. the definition of the poverty line; the measure of well-being (objective vs subjective); or the time period to be considered for identifying poverty (static vs dynamic), we understand that all of these concepts are simply intended to describe and analyse different aspects of the same reality. The particularity of poverty indices lies in the fact that they are limited to measuring and evaluating the living conditions of those who are considered poor, i.e. people whose income or access to essential goods and services are below a defined threshold. This means that poverty indices ignore the situation of people who are not in this condition. This property distinguishes poverty indices from other kinds of normative indices, e.g. inequality. Inequality is not directly a measure of poverty, but it is closely related and can influence poverty levels, especially relative poverty.

Although there are different indices for measuring income inequality, most of the literature uses the Gini Index to capture it (Ballarino et al., 2012; Hutabarat et al., 2023; Verma and Giri, 2024). The Gini index, although not without its critics (Au, 2023; Manero, 2017; Osberg, 2017), is more sensitive to changes in middle-class incomes than to changes at the extremes, in which case the coefficient of variation, or the Atkinson Index, could be used. The choice of indicator should always depend on why one wants to analyse inequality (the size of the middle class, the absolute income of the poorest, the income share of the top 1% of the richest 1% to the poorest 1%, […]). In the zombie problem, the interest is in the middle values of the distribution, for which we believe Gini index to be the most appropriate indicator.

In summary, the zombie problem is both economic and global. This paper aims to analyse country-specific institutional factors – economic, political and monetary – driving zombie generation and their impact on income and wealth inequality. Using a utilitarian approach, we assess how decisions on zombie firms balance short-term benefits against long-term social equity and welfare.

Our hypotheses are set out according to the intended purpose of the paper.

On the one hand, we take the country as our unit of analysis because we consider that it should be national governments which take corrective measures, if they deem it necessary, to solve this problem. The analysis is based on the context in which decisions are made, so the viewpoint of the paper is the country level, with global policies as a point of discussion for improving the situations of countries, so that those improvements subsequently filter down to companies and finally individuals. As Adalet-McGowan et al. (2018) show, there are significant differences in the degree of zombification across countries. In particular, they analyse the top 15 OECD economies and link these differences to differences in legislative systems from one country to another. But we believe that the causes go beyond this, because countries with similar legal systems show notable differences. As Douglass North (1990) states, institutions establish the rules of the game in society and, in particular, determine the functioning of the economic system. Thus, understanding the institutional variables that apply in a country enables us to understand the behaviour of companies beyond the framework of legislation. Based on Erb et al. (1996), we argue that the economic (EconInst), political (PoliInst) and monetary (MonInst) dimensions of a country delimit the institutional context that explains the impact on the scale of unhealthy levels among companies there. We thus take these three aspects of a country as explanatory variables for the unhealthiness of the fabric of business (Zomb).

On the other hand, given that the literature to date has focused only on the economic impact of zombie companies, we open up our approach to the social sphere, analysing the impact of zombie companies on income inequality (Ineq).

H1 is based on the idea that national economic development depends on a favourable economic and legal context; business freedom follows that direction. Business freedom refers to the ability of individuals to start, operate and close a business without undue interference or restrictions from the government or other external entities. Under favourable conditions (business freedom), new companies can enter inefficient or highly indebted sectors, displacing unproductive companies. A high score for business freedom translates into an abundance of start-ups (Takeda, 2015). This process, known as “creative destruction”, helps allocate resources to their most efficient uses and fosters overall economic growth (Canare, 2018). The easier it is to create new businesses, the harder things should be for businesses that are not doing well. So an economic and legal context that encourages the creation and close-down of companies should be detrimental to the survival of inefficient zombie companies.

However, the damage caused by zombie companies is not only the risk that they themselves with go bankrupt but the place that they occupy in the market and the consumption of resources that other new healthy companies could use (Hoshi, 2006; Caballero et al., 2008). Existing zombie companies take away resources (financial, human and even market share), making it harder to enter the market. This could lessen the “creative destruction” process and even distort relationship between business freedom and zombie companies.

Assuming that the creative destruction process is effective, our first hypothesis is this:

H2 assumes that a country’s economic growth is completed by globalised markets. Governments must favour it and encourage interconnectivity and cooperation between economies. The liberalization of trade and the opening up of borders lead to an increase in competition among businesses. Li et al. (2021) show that in China the facilitation of global trade has prevented the formation of zombie companies. They state that if companies have more development opportunities and sources of profit, they are less likely to become zombies.

Numerous studies have shown that market imperfections are conducive to an increase in the number of zombie companies (Jaskowski, 2015). Promoting international trade and increasing trade fluctuations thus help improve the allocation of scarce economic resources, accelerating the removal of zombie companies. In well-functioning markets there will be an expulsion effect. Zombie companies will not be artificially aided but will be driven out of business by competition (Chen et al., 2017). Competition can put pressure on inefficient or unproductive companies, which can help expel or restructure non-viable businesses.

Nevertheless, a force is required to drive zombie companies out of a market. Access to global markets increases business opportunities and consequently reduces the need to expel less productive firms. “Healthy” competing firms operating in the domestic market are under less pressure to push out less productive zombie companies.

Assuming that there is an expulsion effect, H2 is as follows:

The stability of a country’s financial system is linked to the efficiency of its monetary policy and it completes the institutionalisation of a country. An efficient monetary policy favours economic stability and business conditions. From an economic perspective, monetary stability means meeting the basic monetary conditions for the efficient allocation of resources and the productive engagement of economic agents (Ivanović and Stanišić, 2017). Sufian and Habibullah (2011) also show that monetary freedom is positively related to bank efficiency levels. Both the greater strength of the business landscape and the banking system need to be sufficient if less efficient companies such as zombies are to be driven out. But, as argued above, the existence of favourable conditions is not enough in itself: actors are required to actively drive out zombie companies.

Another relationship also needs to be considered. Effective monetary policy implies controlled inflation rates. Acharya et al. (2020) find a negative correlation between inflation and zombie credit, i.e. low inflation environments could favour the development of zombie companies. Zombie credit enables some firms to avoid bankruptcy, so environments of monetary stability would be conducive to the emergence of zombie companies. The existence of zombie companies can generate excess production capacity in a country, pushing prices down. Low inflation is consistent with low interest rates, so there is a vicious circle: low interest rates lead to more zombie companies, which leads to production overcapacity, which leads to low inflation, which leads to low interest rates.

Assuming that countries are able to avoid this vicious circle, H3 is as follows:

The promotion of business freedom, political globalization and monetary freedom goes beyond economic goals, aiming to enhance societal welfare (Bennett, 2024; Blossfeld, 2003; De Soysa and Vadlamannati, 2023). Business freedom boosts dynamism, creating jobs and raising incomes, which helps reduce income inequality. Political globalization opens markets, encouraging competition, lowering prices and improving access to goods and services, particularly benefiting poorer groups while limiting wealth concentration. Effective monetary policies control prices and improve credit access, aiding disadvantaged populations. However, achieving these outcomes requires effective management, equitable redistribution mechanisms and complementary policies to protect the most vulnerable groups.

As shown in the previous section, institutional factors also influence the formation of zombie firms. So, institutional factors may have an indirect effect through their effect on zombie firms.

It is widely believed that zombie companies generate negative economic effects and should be closed down. However, there are at least two nuances that must be considered before a decision is made.

On one hand, Zhang et al. (2020) show that zombie companies have an excess of employees, so their survival has a positive impact on employment. The same authors also point out a paradox that arises with zombie companies: No one wants them to exist, but if they go under, the consequences could be disastrous. Governments may therefore have no interest in closing them down. On the other hand, it has been concluded that zombie companies rely on creditors, banks and governments (Caballero et al., 2008; Fukuda and Nakamura, 2011). Setting restrictive policies, increasing interest rates and contracting credit to eliminate zombie companies could lead to the bankruptcy of both zombie and non-zombie companies, with doubly troubling consequences in terms of employment (Michie, 2023).

Countries with weak entrepreneurship policies, i.e. those that lack a conducive context for entrepreneurship (“creative destruction of businesses”) (Michie, 2023), cannot afford to close zombie companies, as this will substantially harm employment and consequently workers’ incomes.

Closing firms down directly affects employment as it results in the dismissal of their workers. In general, there is a lack of efficiency in re-employment and the labour market is not perfect. Andrews et al. (2017) show that the probability of workers left unemployed by the close-down of a company being re-employed one year later ranges from 70% or more in Denmark and Switzerland to around 50% in Greece and Spain.

Ultimately, zombie companies have a positive effect on employment in terms of both the jobs they maintain and the jobs that would be destroyed if they were to close down (in terms of their own employees and those of their creditors).

Previous studies have concluded that increases in structural unemployment have negative impacts on income inequality (Cysne, 2009; Zandi et al., 2022). Thus, maintaining such firms “artificially” may have beneficial effects for lower social classes, positively influencing social inequalities and probably alleviating poverty. In some countries, this issue has already been addressed, and it has been noted precisely that “the market exit mechanism in China is not yet perfect, and a ‘sweeping approach’ to dispose of zombie companies will lead to a sudden increase in unemployment and waste of resources, which are not conducive to social stability” (Wu and Pan, 2022, p. 1080). Maintaining zombie companies can have beneficial effects in terms of mitigating poverty. The previous studies indicated have shown what an important role income inequality can play in reducing poverty (Bergstrom, 2022).

Thus, we posit a negative relationship between institutional factors and the zombification of each country, and a negative relationship between zombies and inequality. We therefore hypothesize that:

The sample population comprises all the countries in the world, though it is actually limited to 115 countries due to data availability issues. For the analysis, we use data from ORBIS (Bureau van Dijk’s flagship company database) to obtain the zombification level of countries. Those countries for which the number of companies shown in ORBIS was lower than 15 were excluded, because the data obtained were not considered representative of the country’s firms. To define zombie companies we use the Zombie Extreme approximation, i.e. negative equity over the past five years (2017–2022) [see Urionabarrenetxea et al. (2018) for an explanation]. All other information on indices is drawn from the World Bank.

The indices used in this study as proxies have been previously standardized and tested.

The relations are tested in two steps: in the first, the effects of economic, political and monetary contexts on a country’s zombieness level are tested; in the second, the effect of the latter on income inequality. The Business Freedom Index is used as an indicator of the institutional context and its links to entrepreneurial activities in several works (Campbell and Rogers, 2007; Gohmann et al., 2008). The Political Globalization Index is used to measure the degree of globalization of an economy (Osinubi and Ojeyinka, 2024; Vadlamannati, 2015) and the Monetary Freedom Index to provide insights on the stability of monetary policy, as in previous studies (Djebali, 2023; Ivanović and Stanišić, 2017).

Table 1 shows the explanatory variables, the literal names of the indices used as proxies, their explanations and the institution responsible for each index.

Firstly, we propose a univariate analysis to test the effect that institutional context has on the degree of zombification, according to H1, H2 and H3:

Zombieness of a country:

H1 → Zomb_i = α_0,1 + α_1,1 × EcoInst_i + u_i

H2 → Zomb_i = α_0,2 + α_1,2 × PoliInst_i + u_i

H3 → Zomb_i = α_0,3 + α_1,3 × MonInst_i + u_i

A mediation model is presented below. With Process Macro for SPSS, we examined the indirect effects derived from the zombification of an economy. Mediation effects were tested using bootstrapping data according to confidence intervals. The confidence intervals from 5,000 bootstrap replicates should not contain zero (0). Subsequently, the effects of the degree of zombification of a country’s economy and the institutional context on income inequality are analysed.

Income inequality:

H4a → Ineq_i = α_0,4a + α_1,4a × EcoInst_i + α_2,4a × Zomb_i + u_i

H4b → Ineq_i = α_0,4b + α_1.4b × PoliInst_i + α_2,4b × Zomb_i + u_i

H4c → Ineq_i = α_0,4c + α_1,4c × MonInst_i + α_2,4c × Zomb_i + u_i

This information is used to determine the mediating effect that the degree of zombification of a country’s economy has on the relationship between institutional context and income inequality. This would constitute the indirect effect. This added to the direct effect (the relationship between institutional context and income inequality) determines the total effect.

Finally, a joint model is proposed, in which all institutional factors are included and their direct and indirect impacts on wealth inequality in a country are taken into account. A multivariate regression was carried out to gauge the mediation effect of the zombification of the economy (the percentage of zombie companies) between the institutional context (measured via the Business Freedom Index, Political Globalization Index and the Monetary Freedom Index) and income inequality (the Gini Index).

Final explanatory model:

Firstly, we show the descriptive data and the correlation matrix (Table 2).

Zombification is far from being a residual problem in the world: it averages over 5% and is also geographically widespread. Taking the zombie problem as the core of our research, we have drawn up a map of the world that distinguishes between different levels of zombification (Figure 1).

Figure 1 shows some countries and regions with similar economic profiles that share the zombification problem. Emerging countries with high economic growth have a marked problem of zombie companies (Southeast Asian countries, China, India, South Africa, Russia, South Korea, etc.). Indeed, China is one of the countries that are showing the greatest concern about this problem and undoubtedly the one that is conducting the most research in this area. By contrast Japan, the country where the problem of zombie companies originated, has a very low percentage (at least of the most extreme zombies, which are companies with negative equity). Nor do the two major American economies (the USA and Canada) and the largest economies in Europe (Germany and Switzerland) show a zombification problem. The countries of eastern and southern Europe are mostly at intermediate levels, as are the countries of the Middle East and Australia.

What characterises countries with high levels of zombification? Table 3 shows the results of the comparative analysis of Model 1, which corresponds to H1, H2 and H3. The first three hypotheses seek to determine the effect of institutional context on zombies, i.e. to explain what country-level macroeconomic aspects could directly affect zombification.

We find that economic (EcoInst) (H1) and political (H2) aspects are statistically significant in this problem, but the monetary aspect (MonsInst) (H3) is not.

The Business Freedom and Political Globalization indices are relevant antecedents for predicting the percentage of zombies in a country. However, they do not reduce the zombification problem but rather increase it. We expected higher Business Freedom Index levels would mean lower levels of zombie companies, as this would indicate a “creative destruction” process that would encourage the entry of new, healthy businesses to the detriment of zombies. However, our results show that the opposite occurs, because the “creative destruction” process does not take place properly. As stated by Caballero et al. (2008) and Hoshi (2006), the problem of zombie companies is not only their own bankruptcy risk but the distortion that they cause in competition with healthy companies. Zombie companies occupy an important place in the market and use financial, human and other resources, thus making it more difficult for healthy companies to enter. The process of entry of new companies therefore does not take place. In this situation, the other force that could drive out zombie companies would be governments and banks, however, they also appear to be inclined to maintain existing companies beyond what is economically reasonable, regardless of whether those companies are efficient or not.

Something similar occurs with the second index: we also expected the Political Globalization Index to be negatively linked to the zombification problem, because promoting international trade would lead to an expulsion effect of zombie companies. Again, the results show that the opposite is true. The expulsion effect requires a “push” from healthy companies to expel companies from the market and this seems not to happen in many countries. Without an entrepreneurial business fabric to replace zombie companies, their survival is assured, and indeed favoured by a favourable economic and political context.

We expected Monetary Freedom to limit unhealthy companies, but find no significant link between the two aspects. Despite the apparent benefits of an efficient monetary policy in fostering economic stability and optimising resource allocation. Thus, while strong monetary conditions are essential for a robust economy, low interest rates are a breeding ground for the emergence of inefficient zombie companies. So that the two counteracting effects offset each other.

These results reveal a surprisingly nuanced link between institutional context and the healthiness of the business fabric.

Having analysed the country-level institutional factors involved in the zombification problem, we look the effect that this problem may have on social inequalities, measured by the Gini index. The model provides insight into the extent to which the existence of zombie companies increases social inequalities in a given institutional context. Table 4 shows this link.

As is seen, the economic institutional context is the only factor that has a significant direct effect on inequality, reducing it. However, the degree of zombification significantly reduces inequality; thus, taking into account that institutional factors (economic and political) have an effect on the degree of zombification, the indirect effect can be estimated. The indirect effect quantifies the effect in this case of the institutional variables (economic, political and monetary) on the variable, i.e. income inequality (measured through the Gini Index), through the mediating variable, i.e. the degree of zombification of the country. There is a significant effect on income inequality in countries due to the influence of business freedom but also due to the percentage of zombies. This effect is not only direct (as shown in Model 2) but also indirect. There is also a significant effect between the political institutional context and income inequality. So, although there is no direct relationship between these two variables, there is a mediated (indirect) relationship between them. Finally, there is no indirect relationship between the monetary institutional context and income inequality. Table 5 shows direct, indirect and total effects. As stated at the outset of this paper (H4) and partly confirmed by our results.

The joint results of the different models are shown in graphic form in Figure 2 and in Table 6.

The individual relationships tested in a univariate manner are confirmed in the multivariate model. In all, 17.2% of the variance of the Gini Index is explained by the combination of the institutional context and the impact of zombification. In other words, the economic institutional context has a direct impact on wealth equality in a country, which is reinforced by its impact on the maintenance of zombie firms. In the case of political globalization, although the effect is only indirect (through zombie firms), its impact is also favourable in reducing income inequality.

In short, institutional factors have a direct and an indirect impact, through the effect that these factors have on the degree of zombification of the economy, which leads to lower income inequality.

The presence of zombie companies has a significant impact not only in the economic field, as has already been widely analysed in the literature, but also in the social sphere. Our results show that higher percentages of zombie companies reduce social inequalities in terms of income. Zombie companies negatively influence economic aspects (Caballero et al., 2008), but we find here that zombie companies can also alleviate income imbalances and therefore help in some way to reduce poverty.

A favourable economic-legal context increases the degree of zombification of an economy but has a positive impact on income equality, both directly (by providing employment and income opportunities for citizens) and indirectly (when the entrepreneurial business fabric is not strong enough to replace zombie companies).

It is noteworthy that the degree of globalisation of a country affects income inequality not directly but indirectly, reducing that inequality through its effect on the increased % of zombie companies.

The quality of monetary policy has no direct or indirect effect on the social efficiency of a country. It is therefore not a tool that governments can use to improve income inequalities.

Under a utilitarian approach, in this paper we show the two aspects in regards to which companies should be analysed – from both the economic and social viewpoints – promoting the idea of profit as a means rather than an end (Zamagni, 2016) and both from an immediate perspective, and with a medium-term approach. Poverty is a pervasive societal challenge on a global scale, and as integral components of society corporations have a crucial role to play in helping to relieve poverty (Medina-Muñoz and Medina-Muñoz, 2020). The key point is the ability of zombie companies to sustain employment. They may not be able to generate new employment, as they are inefficient business, but they are capable of maintaining current labour levels in a country. This is one (though maybe not the best) way of naturally distributing value across society. These supports are well documented in the literature (Nurmi et al., 2020; Álvarez et al., 2023). Labour market dynamics surrounding zombie companies may thus help to assure a more equitable income distribution, reflected in lower Gini coefficients, by stabilizing employment and income levels.

From a labour perspective, the only way not to worsen social inequalities is to maintain employment, and in some cases, this means sustaining zombie companies, including certain public companies, which may not generate significant economic revenues but help preserve jobs. To do this, it is necessary to ensure the creation of new, healthy companies to take the place of zombies. If no new companies are founded it seems better to maintain the current ones, even if they are not very efficient. At least they maintain employment and the generation of wealth. In addition, the social harm caused by eliminating zombie companies would be increased by a contagion effect, i.e. the bankruptcy of these companies would have knock-on effects on their creditors, suppliers, customers, etc.

Utilitarianism, as proposed by Bentham (1789) and Mill (1861), provides a framework to evaluate business decisions by focusing on maximizing overall well-being. In the case of zombie companies, their existence is justified due to the preservation of jobs and reduction of inequality, thereby contributing to social stability despite economic inefficiencies. However, this positioning faces challenges in measuring long-term consequences and may justify harm to minority groups if it benefits the majority. Although zombie companies offer short-term social relief, they can also lead to long-term economic stagnation and hinder innovation. Governments must make their decisions with great care as they have not only economic but also social effects, which may be direct or may show up through other variables, such as the percentage of zombie companies, which can have unforeseen consequences. The impact of Business Freedom is more significant in poor countries than in rich countries, highlighting that governments may sustain zombie companies if there is no support for an entrepreneurial business fabric in countries where the income level is lower and economic needs are greater. Our findings do not reveal an easy solution, but they provide a global perspective that goes beyond just the economic impact of such companies. By incorporating the ethical implications of utilitarianism, we highlight the need to weigh short-term social benefits, such as job preservation, against long-term economic inefficiencies. This ethical approach emphasizes the importance of balancing immediate societal well-being with future economic sustainability, guiding more informed decision-making.

Research into the prevalence of zombie companies and their economic impact has increased rapidly in recent years. The literature to date shows the economic harm that zombie companies can cause, not only in terms of efficiency but also in the possible contagion of healthy companies. This problem is not confined to a few countries and there are significant differences between countries, so it could be associated with country-level institutional factors. Moreover, this issue is not solely economic in nature but could also have serious social consequences. Therefore, in this paper we analyse the social impact of zombie companies, taking into account country-level institutional factors that could lead to their emergence and proliferation. The social indicator used is the Gini Index and the institutional factors considered are economic, political and monetary aspects. All countries in the world for which the required data was available were analysed: 115 in total.

Our findings raise two important issues that go beyond the research carried out to date: firstly, the number of zombies is influenced not only by their own characteristics as companies but also by country-level economic and political aspects. Secondly, zombie companies are not harmful from the social perspective as they lead to a reduction in inequalities (Gini Index) and probably a shock of poverty alleviation.

Regarding the first issue, business freedom and political globalization, as proxies of economic and political country factors, are determinant in the number of zombie companies in a country. However, in both cases the link is found to be opposite to what we initially expected, as they increase the proportion of zombie companies in a country. A favourable institutional context does not suffice to expel zombie companies, as we initially hypothesized. There is also a need for healthy companies, be they existing companies or new ones, to displace them.

The main reason for the finding regarding the reduction of social inequalities seems to be that these companies maintain employment. The recommendation to eliminate zombies companies for economic reasons may be reasonable, but only when the economy is prepared to create new, healthy companies (new jobs) to take the place of those at zombies. In other words, the destruction of the zombies must be accompanied by the creation of healthy companies. For this process to be possible, a strong entrepreneurship fabric is needed; in this way, employment and the impact on poverty would be more protected.

All the findings invite a more global approach, where utilitarianism provides a guide on how to address the economic-social dilemma posed by zombie companies. Although in the short term they contribute to social welfare by preserving jobs and mitigating inequality, this temporary benefit must be carefully analysed from a perspective that considers both its moral implications and its long-term economic effects. The risk of perpetuating inefficiencies and economic stagnation highlights the need for an analysis that weighs immediate benefits against future consequences. This also reflects an inherent paradox: What initially seems positive for society may, over time, become an obstacle to economic development and social equity, requiring a balance between social stability and economic sustainability. This makes it extremely difficult for policymakers and regulatory authorities to make decisions about them. Our findings do not reveal an easy way for them to make these decisions, but at least we show a global perspective of the problem that does not consider their economic impact alone. It is shown that act-utilitarianism is the most effective approach to explaining the zombie process, difficult but pragmatic, focusing on immediate, context-specific outcomes over the rigidity of deontology, the focus on moral character in virtue ethics and the generalizations of rule utilitarianism.

The results can be understood through the lens of the paradox of interdependent relations in the field of social issues (Aram, 1989), where country-level and time-based conflicts emerge between interconnected economic and social aspects. Promoting social well-being, such as by reducing poverty, can sometimes conflict with long-term profitability, even though poverty, profit and ethics are inherently linked. Managing this paradox requires balancing short-term social gains with long-term economic impacts, recognizing that addressing one issue may unintentionally exacerbate another. This highlights the complex interplay between poverty, profit and ethics in business decisions.

Regarding future lines of research, firstly, there is a need to analyse aspects of poverty apart from income inequality. Secondly, the evolution of zombification must be analysed based on the trade-off between healthy and unhealthy companies. Thirdly, conducting a thorough analysis of the factors influencing the financing of zombie companies, with a particular focus on controlling for the effects of inflation and interest rates, might prove valuable. In addition, efforts must be made to demonstrate the link between the strength of the entrepreneurial fabric and the maintenance of zombie companies to confirm the “creative destruction” process.

The authors sincerely thank the reviewers, the editor, the European Business Ethics Network (EBEN), and especially the special journal editors for their valuable support and feedback.

This study has received funding from Euskal Herriko Unibertsitatea, GIU22/003 ECRI group and Fundación Emilio Soldevilla para la Investigación y el Desarrollo en Economía de la Empresa, Grant No. BOPV22.