Declining business dynamism has been observed across many advanced economies, however its consequences have been less well studied. In this paper, we propose that declining business dynamism has led to a decrease in the financial constraints faced by firms. We use well established methods to identify financial constraints and then develop a new approach to measure the fraction of financially constrained firms. We find that the fraction has fallen over time and this is driven by rising firm age. Had business dynamism not declined, firms would be younger and more financially constrained.

The literature has found that interaction effects exist between capital and labour in the adjustment cost function of firms, but there is no consensus on whether these costs are positive or negative. Using a dynamic firm structural model where capital is broken up into buildings and machinery & equipment, this paper finds that part of this ambiguity can be directly tied to capital heterogeneity. Firms are found to enjoy negative costs between labour and machinery & equipment, and between labour and buildings, while they suffer from positive costs between buildings and machinery & equipment. When compared to a model with only capital and labour, the interaction cost is found to be positive, highlighting how neglecting capital heterogeneity can lead to a spurious result on its sign. I evaluate the importance of these interactions by simulating three shocks: an increase in uncertainty, an increase in the interest rate, and an increase in the wage rate. I uncover large differences in the steady state dynamics of each input that are directly attributable to the interaction effects in the adjustment cost function.

The literature shows that zombie firms can lower aggregate productivity, impede reallocation and constrain the growth of healthy firms. In Canada and other advanced economies, the share of zombie firms has been rising over the past few decades, with recent studies showing that the share in Canada could potentially be the highest in the world. However, these studies of the Canadian context are based only on publicly traded Canadian firms. This paper presents new evidence on zombification using Canadian-controlled private corporations and publicly traded firms. The paper finds that the zombie share among all firms is considerably lower and diverging in trend. However, a number of notable results show that zombies are increasingly showing up in the mining, quarrying, and oil and gas extraction sector; they are accounting for more resources over time; their performance and productivity are worsening; they are negatively impacting the productivity and growth of healthy firms; and they are increasingly lowering aggregate productivity by a sizable margin.

Did the COVID-19 pandemic zombify the economy? Commentators have pointed to the pandemic and related business support measures potentially fueling zombification. Using administrative data covering the universe of Canadian firms, we find a broad-based decline in the share of zombie firms across industries relative to pre-pandemic levels. Whereas business support measures kept firms alive and operating as non-zombie firms, the decline in the zombie firm share was caused by would-be zombie firms exiting, indicative of the pandemic’s cleansing effects. As a consequence, while aggregate labour productivity worsened in Canada over the pandemic, it was not driven by zombie firms.

The zombie firm literature has typically used datasets that under-represent small firms or include only listed firms. In this paper, we present new evidence on the zombie firm phenomenon using a confidential dataset that covers the entire population of Canadian firms. We find the majority of zombie firms have between 1-5 employees and that private zombie firms differ substantially from their listed counterparts. Nevertheless, zombification is worsening, where: zombie firms are increasingly in the commodity sector; are hoarding more resources; are declining in their performance and productivity; are hurting the productivity and growth of healthy firms; and are increasingly lowering aggregate productivity.