Exit and Entry Dynamics of UK Firms Following the Global Financial Crisis

Research by: Florian Gerth, Chad M. Briggs, & John Francis T. Diaz

Executive Summary

Gerth, Briggs, and Diaz (2025) analyze how firm entry and exit dynamics contributed to the United Kingdom’s prolonged productivity slowdown after the Global Financial Crisis (GFC). Using firm-level data from Companies House and the FAME database, they decompose total factor productivity (TFP) into within-firm, between-firm, entry, and exit effects. Their findings highlight that the primary driver of the productivity decline was the within effect, reflecting falling productivity among surviving firms. However, entry and exit patterns also played a critical role: high-productivity firms disproportionately exited the market, while new entrants tended to have below-average productivity and failed to catch up over time.

The paper shows that financial frictions during the GFC distorted normal “creative destruction” processes. Instead of reallocating resources from weak to strong firms, credit rationing and zombie lending enabled low-productivity, debt-heavy firms to survive, while more innovative and efficient firms were crowded out or forced to exit. Regression analysis confirmed that firms with stronger internal finance were more resilient, while those with higher debt-to-asset ratios paradoxically had better survival prospects due to continued bank forbearance. This misallocation of capital amplified the productivity slump and prolonged the UK’s economic stagnation.

Overall, the study warns that inefficient credit allocation undermines long-term growth and stresses the importance of evidence-based policymaking. Effective intervention should aim to restore healthy credit markets, prevent resource capture by zombie firms, and foster the growth of high-productivity entrants.

Five Main Points

1. Within-firm decline was the largest contributor to the UK’s post-crisis TFP slowdown, though entry and exit effects were also significant.
2. High-productivity firms exited, while low-productivity firms entered and survived, reversing the usual cleansing effect of recessions.
3. Credit constraints and zombie lending distorted competition by keeping indebted, unproductive firms alive while hindering efficient entrants.
4. Financial health mattered: firms with better internal finance were less likely to exit, while those with higher debt ratios paradoxically survived longer.
5. Policy implication: policy makers must help financial institutions to avoid misallocating resources to failing firms and instead promote efficient credit flows to support innovative, high-productivity enterprises.

Keywords: credit rationing, firm dynamics, Global Financial Crisis, total factor productivity, United Kingdom

To cite this article: Gerth, F., Briggs, C. M., & Diaz, J. F. T. (2025). Exit and entry dynamics of UK firms following the global financial crisis. Bulletin of Economic Research. https://doi.org/10.1111/boer.70008

To access the article: https://doi.org/10.1111/boer.70008

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