Are Zombie Companies in Mexico the same as in the rest of the World?
| Autor | Cardenas, Manuel Humberto De la Garza |
I Introduction
Zombie firms are organizations that continue to operate through subsidies or support in the form of continuous loans, overvalued projects, or concessions in interest payments (McGowan, Andrews, & Millot 2017b; Tan, Huang, & Woo, 2016). The support is given because bankruptcy involves social and economic costs; as a result, official institutions implement protectionist policies and survival actions to protect such firms and avoid these problems (Campa & Camacho, 2014). This means that zombie firms depend on other institutions because their activities, results, and actions are not sufficient to be able to do without support, thus entering a vicious cycle (Amato & Fantacci, 2016; Hoshi, 2006; Uchida et al., 2015).
The specialized literature is in an early stage of development. However, there are studies that focus on different countries of the European Union (Urionabarrenetxea, San-Jose, & Retolaza, 2016), Japan (Caballero, Hoshi, & Kashyap, 2008), China (Shen & Chen, 2017; Tan et al., 2016), Spain (Urionabarrenetxea, Garcia-Merino, San-Jose, & Retolaza, 2018), and different OECD members (McGowan et al., 2017b). The main contribution of these early works was in finding that zombie firms negatively affect the markets because they reduce the attractiveness of an industry by using financial and human resources that regular companies could use (Hoshi, 2006; McGowan et al., 2017b).
Until this point, the literature has focused on economic and financial aspects that give rise to zombie companies, finding that economic shocks encourage their proliferation (Caballero et al., 2008; Hoshi, 2006). It has also been found that a recurring way to support them is through benevolent products such as "evergreen loans" (subsequently known as "zombie loans"). An evergreen loan is a financial product that is continuously renewed by the financier (Uchida et al., 2015). It allows the firm to pay for the debt at lower-than-normal amounts (Broz & Ridzak, 2017).
Other authors have found that through specific actions such as improving production efficiency or the sale/modernization of obsolete fixed assets, zombie companies can improve their situation (Iwaisako, Fukuoka, & Kanou, 2013; Nakamura & Fukuda, 2013; Tan et al., 2016). The results have allowed the literature to focus on operational aspects. Urionabarrenetxea et al. (2016, 2018) found many organizations that persist with this problem regardless of economic crises, arguing that their actions and operations are an essential part of the zombie condition. McGowan et al. (2017a, 2017b) support this, demonstrating the existence of zombie firms in countries such as the United Kingdom, Germany, Austria, and France. There is no reference for economies with severe damage by macroeconomic events. Thus, it is necessary to analyze management aspects because they can complement the understanding of the zombie firms phenomenon.
Considering Latin America, this region represents an attractive environment for these studies. Business management is a complex issue (Maquieira, Preve, & Sarria-Allende, 2012) and is susceptible to international economic crises (Cabrera, Coronado, Rojas, & Romero-Meza, 2018). Mexico is a representative market that has been affected by the volatility of international markets and has suffered recent economic crises. Cabrera et al. (2018) show that the macroeconomic environment has a direct impact on the organizations listed on the Mexican Stock Exchange (BMV) and consider the BMV to be an environment where zombie firms can be found.
Historically speaking, the BMV is one of the most recent capital markets among the strongest economies in Latin America. Its creation and development were delayed due to different social, economic, and political factors that Mexico experienced (Moreno-Lazaro, 2015). Also, the BMV has been used abnormally by the State. The State has strongly intervened in it and used it as a financing channel for directing resources, generally to large inefficient firms or for privatizing organizations such as raw material extraction firms (the first companies registered on the BMV). These kinds of firms also received priority and favoritism when allocating financing (Moreno-Lazaro, 2015, 2017). However, as the interventions decreased, industrial companies began to join, and the launch of the BMV took place in the second half of the 20th century, which allowed it to function in a similar way to stock markets in the rest of the world (Moreno-Lazaro, 2015, 2017). The BMV has become one of the most efficient stock exchanges among emerging countries and ranks within the top 25 world stock markets (Cervantes, Montoya, & Cueto, 2014; Cetorelli & Peristiani, 2013).
Regarding business management, Mexico presents particularities such as the delay in the implementation of international practices (Kemme & Koleyni, 2017), protectionist policies towards investors (Juarez, Daza, & Gonzalez, 2015), and a high concentration of ownership (Fassler & Flores Vargas, 2016). These elements of business administration can influence zombie companies.
Finally, the review of the literature on zombie companies allowed for the identification of a gap in the literature to be addressed in this paper: strategic behavior and how it affects zombie companies. Even though strategic behavior is a central element in administrative sciences, the specialized literature on zombie companies has not studied it sufficiently. On the other hand, it is also pertinent to study industry characteristics, since this is a recurring element in the empirical antecedents. For these reasons, this paper aims to analyze the industry characteristics and the strategic behavior of companies that affect zombie companies. The main contribution of the research is the inclusion of the business strategy variable together with the characteristics of the industry to analyze their respective effects on zombie companies. This contributes to the specialized literature on zombie companies by adding the business strategy perspective that is common in management sciences, but which has not yet been used to study zombie companies. In addition, this research could provide the basis for the future use of new perspectives to study zombie companies.
This paper is structured in five sections starting with this introduction. Section 2 presents the theoretical framework that allows us to understand these companies. Section 3 explains the method used for the statistical analysis. The results are described in Section 4. Section 5 presents the discussion. In the final section, the conclusions are laid out.
2 theoretical Framework
2.1 Zombie firms
Caballero et al. (2008) defined zombie firms as organizations that receive a subsidy in their financing through interest payment exemptions or concessions. It is not necessarily because they have problems of liquidity or in their operations, however, that they can obtain benefits through this form of subsidy (Lee, 2017). This article uses the Caballero et al. (2008) criterion to identify zombie companies.
Other recurring characteristics are the short-term orientation of operations (Hoshi, 2006; Imai, 2016; Tan et al., 2016), misallocation of resources (Caballero et al., 2008), unproductive assets (Shen & Chen, 2017), and low productivity (Imai, 2016; McGowan et al., 2017b; Shen & Chen, 2017). Also, Hoshi (2006) and Urionabarrenetxea et al. (2016, 2018) showed that zombie companies tend to be large organizations with greater bargaining power and significant economic value, which is why creditors prefer to offer less strict conditions.
Another feature is that there are non-competitive or highly state-controlled industries, which favor the existence of these companies (Caballero et al., 2008). This characteristic is due to the sector favoring the permanence of stagnant companies by promoting their passivity instead of pressuring them to evolve to compete (Caballero et al., 2008; Fukuda & Nakamura, 2011; McGowan et al., 2017b).
Regarding the effects of zombie firms on the markets, Caballero et al. (2008), Fukuda and Nakamura (2011), and Hoshi (2006) mention that they restrict the competitiveness of an industry by avoiding a process of creative destruction and they compete for factors of production such as labor and capital, thus obstructing healthy organizations.
The literature shows that there are elements of a firm's industry and operational characteristics that lead to a zombie situation. For this reason, this paper uses the structure-conduct-performance (SCP) paradigm as an analytical framework to determine the industry characteristics and the strategic behavior that affect zombie firms.
The SCP paradigm defines companies as complex organisms, made up of a set of elements, mechanisms, and articulated intentions to achieve sustainable and viable operations (Miles, Snow, Meyer, & Coleman, 1978). Furthermore, organizations interact with others to carry out their activities; thus, behaviors aimed at adapting to their environment are influenced by the characteristics of the company and the industry (Hall & Saias, 1980; Miles et al., 1978).
However, a company's configuration is limited by its preferences and control over its resources and structure (Albertos & Kuo, 2018), which indicates that strategic behavior depends on the environmental perception and the own resources and capacities. The SCP paradigm analyzes the characteristics of an industry and the actions carried out by companies to understand organizations (Bain, 1968; Mason, 1939). Therefore, the behavior of companies and the industry in which they operate will be analyzed below.
2.2 Firm behavior
A firm's behavior is defined by "strategic choices" that are made based on the perceptions of the manager(s) (Caves, 1980; Miles et al., 1978). This behavior is strategic because it includes articulating policies, actions, and resources to achieve the established goals, objectives, and mission (Rumelt, Schendel, & Teece...
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