A one-two punch to the economy: Climate vulnerability and corporate innovation strategies

Abstract

Using firm-level R&D and patent data for 88 countries, we find that country climate vulnerability is negatively related to firms’ R&D investment and innovation. The potential mechanisms include decreased responsiveness of R&D to investment opportunities, reduced incentives to innovate, lower private value of innovations, and stronger managerial career concerns. We further show that climate vulnerability is positively associated with the ratio of climate change mitigation technologies (CCMTs) and global collaborative patents in innovations and promotes international strategic alliances (e.g., research collaboration and licensing). Moreover, climate risk exposure through global supply chains and customer locations also relates to corporate innovation, and firm-level climate risk is negatively associated with innovation. Finally, using a difference-in-differences regression, we find that treated firms’ sensitivity of innovation to climate vulnerability increases after climate disasters. Our findings suggest a potential indirect effect of climate risk on the global economy through the reduction of corporate innovation activities.