Can Trade Facilitation Prevent the Formation of Zombie Firms? Evidence from the China Railway Express

• Author: Juncheng Li,Lu Yang,Jun Hu
• Date: 01 January 2021
• DOI: http://doi.org/10.1111/cwe.12366
• Published date: 01 January 2021

©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 130–151, Vol. 29, No. 1, 2021

130

*Juncheng Li, Assistant Research Fellow, Institute of Finance and Banking, Chinese Academy of Social

Sciences, China. Email: ljcifb@cass.org.cn; Jun Hu, Associate Professor, School of Management, Hainan

University, and Hainan Institute of Corporate Governance, China. Email: jnuhujun@163.com; Lu Yang

(corresponding author), Postgraduate Student, China Economics and Management Academy, Central

University of Finance and Economics, China. Email: yl70739804@163.com. The authors are grateful for the

support from the National Natural Science Foundation of China (No. 71902050).

Can Trade Facilitation Prevent the Formation of

Zombie Firms? Evidence from the China

Railway Express

Juncheng Li, Jun Hu, Lu Yang*

Abstract

Using data on f‌i rms listed on Chinese A-share markets from 2009 to 2017, this paper

applies the difference-in-difference model to test the effect of trade facilitation on

preventing the formation of zombie firms. We find that the China Railway Express

(CRE) significantly prevented the formation of such firms. Mechanism tests show:

(i) the CRE has accelerated the speed of sales, which increased the overseas sales

revenue of firms; (ii) the economies of scale and the capital accumulation effect

caused by the CRE can help increase firms’ solvency and development ability.

Heterogeneity analysis indicates that the effect of the CRE on preventing the

formation of zombie firms is mainly reflected in non-state-owned firms, firms in

highly competitive industries, and f‌i rms in the eastern region of China. W e suggest

that China should continue to promote trade facilitation by expanding the CRE and

strengthening the market’s dominant role in preventing the formation of zombie f‌i rms.

Di sadvantaged f‌i rms should seize the development opportunities brought by the CRE.

Key words: China Railway Express, difference-in-difference model, trade facilitation,

zombie f‌i rm

JEL codes: D22, D25, F6

I. Introduction

Th e concept of zombie f‌i rms was f‌i rst proposed by Edward J. Kane (1987) to refer to

abnormal f‌i rms that are insolvent, lifeless, and unable to survive without the support of

©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Trade Facilitation and Zombie Firms: Evidence from the China Railway Express 131

the government or credit institutions (Ahearne and Shinada, 2005). Such f‌i rms can lead

to capital market misallocation and disorderly market competition among industries

or regions, and give rise to problems for banks and the economy (Caballero et al.,

2008; Hoshi and Kashyap, 2010). This can further dramatically impair sustainable

economic development. As the pace of economic transformation accelerates, it is of

great importance to explore appropriate ways to prevent the formation of zombie f‌i rms

if China is to realize such development (Chen and Huang, 2017).

Ov er the past four decades, the Chinese government has implemented a series of

favorable policies for f‌i rms, which have contributed to China’s economic development

miracle. How ever, ex c essive reliance on the support of the government and credit

institutions will increase the likelihood of the formation of zombie firms. This has

attracted wide attention from researchers. The re have been many studies on the

identification, causes, and disposal of zombie firms in China (e.g. Chen and Huang,

2017), and the impact of zombie f‌i rms on resource allocation and economic development

has also been investigated. How ever, few have probed how to prevent their formation

in relation to f‌i rm governance (Jiang et al., 2012). For zombie f‌i rms, insuff‌i cient cash

f‌l ow and excessive reliance on credit subsidies are crucial problems. If f‌i rms have more

development opportunities and sources of prof‌i t, they are less likely to become zombie

f‌i rms.

The sources of profit growth for firms come from both the domestic and

foreign markets. Due to institutional obstruction and local protectionism, f‌i rms face

great difficulties in seeking profits in foreign markets. Against the background of

globalization, improving transportation infrastructure and promoting inter-country

connectivity should be priorities. The China Railway Express (CRE) provides a new

mode of international transportation that has greatly promoted trade facilitation and

cooperation between China and other countries. Fig ures 1 and 2 show the number

and growth rate of train departures and freight, respectively, of the CRE from 2011 to

2017.

This pa per considers the rail activity in 12 cities with weekly operations, to conduct

research on the effect of the CRE on preventing the formation of zombie f‌i rms. Detailed

information is presented in Table 1. All 12 cities in Table 1 are hub cities, and they play

an important role in running the CRE network.