Will Schumpeter catch COVID-19? Evidence from France

Concerns have emerged that public support to firms in the COVID-19 crisis has been too generous, reducing exit of unproductive firms and preventing Schumpeterian destructive creation. Using data on French firm failures in 2020, this column suggests that these concerns are, at this stage, unwarranted. Although the number of firms filing for bankruptcy was well below its normal level, the same factors that predicted firm failures in 2019 – primarily low productivity and debt – were at work in a similar way in 2020. Overall, the findings point to hibernation rather than zombification.

The COVID-19 crisis, a global shock ‘like no other’, has had dire consequences for several economic variables, including consumption, production, employment, trade, productivity, business and consumer confidence, and so on. However, one economic impact that was anticipated very early on (e.g. Gourinchas et al. 2020) has not materialised so far – namely, firm bankruptcies. Indeed, the number of bankruptcy filings has decreased significantly. As illustrated in Figure 1, the number of firms filing for bankruptcy in France, for example, is well below its normal level (-36% at the end of 2020 compared to 2019). Although international comparisons of bankruptcy filings are not easy, the UK and German situations appear similar. 

Figure 1 Cumulative number of firms filing for bankruptcy, 2008–2020

Note: At the end of 2020 the cumulative number of bankruptcy filings had reached 26,779, while at the end of 2019, the cumulative number of bankruptcy filings had reached 42,687. Source: BODACC data up to December 2020

The main explanation for this unexpected observation is that governments have provided ample liquidity and financial support to firms most affected by the pandemic. But have governments gone too far? Some concerns have emerged in the public debate that these policies may create ‘zombies’ by reducing the exit of non-productive firms (The Economist 2020, Financial Times 2020). If so, this may have dire consequences for productivity in the following years, as the exit of unproductive firms is a substantial contributor to aggregate productivity growth. Foster et al. (2001) find that entry and exit of plants accounted for around 25% of US manufacturing productivity growth over the period 1977–1992 and that the impact of net entry is probably larger in the services sector. This effect comes from exiting firms that are less productive and/or less innovative than both continuing and new firms (Syverson 2011). Furthermore, Adalet-McGowan et al. (2018) find that zombie firms reduce the growth of more productive firms and might also reduce entry. This further increases the potential burden of surviving low-productivity firms on aggregate productivity.   

The concern that public policies to support firms may impair the cleansing effect of the recession by saving unproductive firms from exit is therefore legitimate. But the opposite concern that productive firms may go bankrupt because of the COVID-19 crisis is also legitimate. The cleansing effect is based on the implicit assumption that markets efficiently select the most productive firms. However, several studies show that the probability of firm failure depends not only on their productivity but also on their access to credit. Barlevy (2002), for example, studies the consequences of credit frictions on resource allocation during recessions and shows that credit frictions can lead to the opposite of the cleansing effect during recessions. Laeven et al. (2020) argue that “the different nature of the crisis means that many firms that normally would be classified as zombie firms are in fact viable firms”. Gagnon (2020) also argues that the concern on zombies in the COVID-19 crisis is overblown.

In a recent paper (Cros at al. 2021), we examine whether there is early evidence that the selection process of firm bankruptcies is not only partially…