Australia-Japan Research Centre

Authors: Gee Hee Hong (IMF), Shinnosuke Kikuchi (MIT), Yukiko Saito (Specially Appointed Senior Fellow, RIETI)

During the initial phase of the COVID-19 shock, the increase in the total number of firm exits has been driven by the increase in voluntary firm exits, while the total number of bankruptcies and mergers has declined compared to the previous year. Voluntary exits happened mostly for the SMEs headed by older-age CEOs, who did not secure a business successor. An unintended consequence of voluntary firm exits, especially when the firm is profitable, is long-term losses to employment, investment and productivity. In this regard, as the state of the economy transits from the initial phase of acute shocks to a recovery phase, policy support should factor in the viability and solvency of firms. Unwilling exits of solvent firms should be prevented, as chronic support to insolvent firms could lead to a return of zombie firms and increased moral hazard. In addition, policy initiatives to help prevent voluntary exits of solvent firms should continue. Policies to support business succession—including raising awareness of the importance of this issue, incentivizing non-family succession, and helping to improve matching between firms and potential successors—should continue even during these difficult economic times.

Read the full article on the RIETI website.