In the Eye of the Storm Firms and Capital Destruction in India

Abstract

This paper examines the response of firms to capital destruction, using a new measure of firmexposure to tropical storms as a negative exogenous shock on firms' capital stock. Drawing on apanel of Indian manufacturing firms between 1995 and 2006, we establish that, depending on theirstrength, storms destroy up to 75.3% of the fixed assets of the median firm (in terms of itsproductivity and industry performance). We quantify the response of firm sales within and acrossindustries and find effects akin to Schumpeterian creative destruction, where surviving firms buildback better. Within an industry, the sales of less productive firms decrease disproportionatelymore, while across industries capital destruction leads to a shift in sales towards more performingindustries. This build-back better effect is driven by firms active in multiple industries and, to alarge extent, by shifts in the firm-level production mix within a firm's active set of industries.Finally, while there is no evidence that firms adjust by investing in new industry lines, firms tendto abandon production in industries that exhibit lower comparative advantage.

Keywords: Comparative advantage, Total factor productivity, Capital productivity, Natural disasters, Productivity, WP, graphic tag0, ISIC firm, single-establishment firm, tropical storm

JEL Classification: D22, D24, Q54, F11, E24, E23