Natural Disasters and Creative Destruction: Evidence from the Universe of Firms in China

Abstract

We investigate the “creative destruction” through the role of typhoon occurrence on existing firms’ innovation and firm creation for the universe of Chinese firms by utilizing novel administrative data. We find that typhoon occurrence during a firm’s early life reduces both patent quantity and quality in following years, which is not driven by the expectation of such natural disasters. The negative impact of typhoon occurrence is much stronger among firms with concentrated share ownership as well as single shareholder firms; therefore, insufficient risk-sharing is likely channeling the negative impact of typhoon occurrence. On the other hand, financial constraints do not have much explanatory power. Moreover, the typhoon-induced innovation decline increases the likelihood of firm death. Finally, in contrast with the impact of existing firms’ innovation and survival, typhoon occurrence in the previous year increases the total capital and employees of new firms and hence “creative destruction” happens.