Government procurement and zombie firms' productivity: Evidence from China

Abstract The growing number of zombie firms has severely hampered economic growth in most countries, especially after the COVID‐19 pandemic when zombie firms increased dramatically. Improving the productivity of zombie firms has become a major concern around the world. This paper, using Chinese government procurement contract data and listed firm data, empirically investigates the relationship between government procurement and zombie firms' productivity. The research findings indicate that government procurement can improve zombie firms' productivity and narrow the production efficiency gap with non‐zombie firms. This impact is more pronounced for local and low‐level government clients. Our research further investigates the channels through which government procurement improves zombie firms' productivity. The results demonstrate that government procurement promotes productivity by enhancing technological innovation, improving sales performance, and increasing market supervision. Additionally, this study identifies that government procurement exhibits a spillover effect, which enhances the productivity of non‐zombie firms within the same city. These findings contribute significantly to bridging the existing knowledge gap regarding the impact of government procurement on the productivity of zombie firms. Furthermore, the results offer innovative strategies for policy makers to address the challenges posed by zombie firms.