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

Abstract

Using a sample of 60,028 firms from 88 countries during 1995-2019, we find that firm innovation is negatively related to country-level climate vulnerability. Possible channels include reduced responsiveness of R&D to investment opportunities, lower private value of innovation, managerial career concerns, and financing availability. Furthermore, climate vulnerability encourages international innovation collaboration and strategic partnerships (e.g., research collaboration, technology, and in-licensing). It also increases the proportion of climate change mitigation technologies while discouraging exploratory innovation. Moreover, supply chain climate risk affects innovation. The causal relationship between climate vulnerability and innovation is confirmed using the difference-in-differences and instrumental variable approaches.

Keywords: climate vulnerability; patents; innovation; R&D; climate risk; climate change

JEL Classification: F20; G32; G15; O31; Q55