You play the bad guy: how foreign direct investment affects zombie firms in China

Kaibin Yuan, Tong Lin, Lisha Li, Xiaoxiao He and Yi Chen

Journal of the Asia Pacific Economy, 2026, vol. 31, issue 1, 276-300

Abstract: This paper investigates the impact of foreign direct investment (FDI) on zombie firms at both the macro and micro levels, revealing a significant negative effect on their prevalence at the city level. Our results show that FDI accelerates zombie firm exits as local governments cease subsidies, recognizing that foreign firms can sustain local economic growth. This result is robust to alternative methods of identifying zombies, alternative measures for FDI, and diverse regression methodologies. This shift is predicated on the recognition that foreign firms can sustain local economic growth. Consequently, financial constraints and profitability among zombie firms deteriorate significantly, while healthy firms remain unaffected. These results support the crowding-out effect but find no evidence for technology spillover, challenging some conventional expectations about the benefits of FDI. Our findings contribute to a nuanced understanding of FDI spillover effects and its role in the targeted disposal of non-viable firms.

Date: 2026
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DOI: 10.1080/13547860.2024.2424651

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