Performance of firms using COVID-19-related support policies: Ex-post evaluation

During the COVID-19 pandemic, governments in many countries implemented extensive measures to support firms. While such policies can be justified as emergency interventions, they may also keep inefficient zombie firms in operation and thereby weaken the cleansing effect of recessions. This study examines the medium-term performance of firms that utilized three major support measures during the COVID-19 crisis in Japan, where the prevalence of zombie firms has been cited as a contributing factor to prolonged economic stagnation. The results yield three main findings. First, although productivity among policy users improved from the levels observed immediately after the onset of the pandemic, it generally remained low even after the pandemic had subsided. Second, employment declined among firms that utilized any of the three support measures relative to firms that did not, and no clear signs of recovery were evident by FY2023. Third, less productive firms were more likely to exit during the pandemic. Moreover, firms that received financial assistance or the sustaining business subsidy exhibited a lower probability of surviving through FY2023, even after controlling for productivity. These findings suggest that the COVID-19 pandemic had a cleansing effect and that the effectiveness of these support measures in ensuring firm survival was limited. At the same time, there is no evidence that the support measures impeded the cleansing process through which less productive firms exited the market.