Government subsidy is a key factor for the formation of zombie firms in China. In this context, thispaper develops a new measure based on discretionary government subsidies to identify zombie firms. Using thisidentification criteria, we examine the impact of zombie firms on investment intensity and employment growth ofnormal firms. For a sample of Chinese enterprises between 2008 and 2016, the results show that the higher proportionof zombie firms in an industry, the lower investment intensity and slower employment growth of normal firms in thesame industry. It suggests that the main harm of zombie firms is to inhibit the development of normal firms.