Firm Quality and Industrial Dynamics: Insights on Zombie Firms, Regional Competition and Policy Support

Firms differ in their ability to survive, adapt, restructure, and upgrade over time. These differences are shaped not only by firm-specific characteristics, but also by the competitive, institutional, and infrastructural environments in which firms operate. This dissertation examines how such environments influence firm dynamics and, through them, the direction of structural change. The first two chapters focus on advanced economies, where concerns have emerged about weakened market selection, slowing productivity growth, and the persistence of weak-performing firms - namely, zombie firms. Chapter 1 investigates whether weaker competitive environments are associated with a higher diffusion of zombie firms. Using region-sector data for Italian manufacturing and non-financial services, it shows that lower firm entry and weaker innovative pressure are linked to a greater prevalence of zombie firms, suggesting that impaired market selection reflects not only financial distortions but also reduced competitive intensity. Chapter 2 then examines what happens after firms enter zombie status. Using firm-level data for eight European countries, it analyses whether zombie firms recover, exit, or remain trapped in distress, and identifies the recovery paths they follow. The results show that recovery is more common than exit, but also highly heterogeneous: market-driven recoveries are the most frequent yet the most fragile, whereas investment-based recoveries are associated with more durable outcomes. The third chapter turns to a developing-country context and studies the role of infrastructure in shaping the productivity of non-farm enterprises in Nigeria. Non-farm enterprises are small household enterprises, often informal and operating in low-barrier-to-entry activities, and are often recognised as drivers of poverty reduction, income diversification, and as a vehicle of structural change. Combining household-level panel data with georeferenced information on aid-financed projects, it shows that transportation, electrification, and improvements in financial access raise labour productivity, but with marked heterogeneity across rural and urban areas. Rural enterprises benefit mainly from interventions that expand access to transportation and electricity, while urban enterprises benefit more from financial-access projects. These findings suggest the relevance of place-based structural transformation depends not only on the emergence of non-farm activities, but also on the place-specific conditions that enable their upgrading. Taken together, the dissertation shows that firm quality is not solely a firm-level attribute, but the outcome of uneven structural conditions across places. By linking firm dynamics to competitive pressure, recovery capacity, and infrastructural support across different stages of development, the dissertation contributes to a more integrated understanding of industrial dynamics and structural change.