Capital Misallocation and Innovation
40 Pages Posted: 5 Dec 2019 Last revised: 2 Nov 2020
Date Written: November 1, 2020
This paper documents that "zombie" lending by undercapitalized banks distorts competition and impedes corporate innovation. This misallocation of capital prevents both the exit of zombie and entry of healthy firms in affected industries adversely impacting output and competition. Worse, capital misallocation depresses patent applications, particularly in high technology- and R&D-intensive sectors, and industries with neck- and-neck competition. We strengthen our results using an IV approach to address reverse causality and innovation survey data from the European Commission. Overall, our results are consistent with externalities imposed on healthy firms through the misallocation of capital.
Keywords: innovation, capital misallocation, competition, zombie lending
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