▲ A 'For Lease' sign is posted on a storefront.
The Bank of Korea (BOK) released an analysis on June 15 suggesting that the timely exit of "zombie firms"—companies unable to cover their loan interest with operating profits—is essential to enhancing overall economic productivity and value-added.
Lee Gyeong-tae, a deputy director at the BOK, analyzed the status of companies transitioning into zombie firms, including both those subject to external audits and smaller firms that are not.
This study is distinguished from previous research by its inclusion of small, non-externally audited companies.
In this analysis, a zombie firm is defined as a company with an interest coverage ratio below 1 for three consecutive years or more, meaning its operating profit has failed to cover its loan interest for over three years.
The analysis confirmed a "congestion effect," where a higher concentration of zombie firms within a specific industry leads to a decline in the investment, employment, productivity, and profitability of healthy firms (non-zombie firms).
Specifically, for every 1 percentage point (p) increase in the share of zombie firms, the investment and employment growth rates of healthy firms in the same industry decreased by approximately 0.14 to 0.18 percentage points, with these effects lasting for two to three years.
The study found that small-scale, non-externally audited firms were relatively more susceptible to these negative impacts.
Lee also presented simulation results showing that the exit of zombie firms would increase total factor productivity (TFP) and value-added across the economy.
The simulation predicted that if 25% of zombie firms were to exit, TFP would rise by 0.20% and value-added by 0.35%.
However, it was also noted that approximately 0.3% of healthy firms could potentially become distressed due to the ripple effects through business relationships during this process.
Lee argued, "We must strengthen the institutional framework to ensure the timely exit of zombie firms that are difficult to normalize through restructuring."
He further emphasized, "In this process, supplementary policies must be prepared in advance to mitigate the negative impacts on healthy firms."
(Photo: Yonhap News)
※ Please note: This article was translated by AI and may contain errors.