In most advanced economies productivity growth has been hampered by barriers that allow zombie firms to survive. We examine the effectiveness of institutional reforms in Portugal that were aimed to improve efficiency in insolvency framework. Estimates show that reallocation barriers declined. The reforms appear to have larger and more effective results in zombie recovery than in exit. Firm size plays a major role in tackling zombie-entrenchment. The decline in barriers has also implied a lower distortion in the economy-wide selection process. The new setting seems to be more desirable than forcing zombie exit at all costs.

Increasing evidence shows that business dynamism has weakened in most developed economies. However, except for the US literature, most previous research has only portrayed the new century’s changes in firm dynamics. Instead, we focus on a longer period, 1986-2018, assembling an extensive longitudinal database with a time-consistent industry classification covering the population of Portuguese firms in the manufacturing and service sectors. The Bai-Perron estimate for unknown break dates in time series indicates two structural changes in industrial dynamics, one in its ascending wave (1993) and another in the declining phase (2003). Accordingly, our (HP) estimated trends show that, after an initial period of intense creative destruction, firm dynamics have become less turbulent since 2003, with lower entry, declined job reallocation, and decreased growth rates. Furthermore, survival and counterfactual firm-level regressions suggest that an otherwise-equal post-2003 start-up faced a significantly higher exit hazard than its pre-1993 counterpart (i.e., without any structural change). As a result, new and young companies have seen their share in aggregate employment and net job creation decline, notwithstanding the increasingly higher performance of young, high-growth firms. Lower labour and firm turnover suggest a weakened contribution of reallocation to productivity growth. On the other hand, decreased entry and the higher exit hazard have likely undermined the disruptive potential of transformative entrepreneurship