Climate Change and Firm-Level Total Factor Productivity: Evidence from China

Abstract

Climate change profoundly impacts human survival and development, which also exacerbates the challenges faced by firms by increasing the frequency of extreme weather events. Based on the data of China A-share listed firms from 2009 to 2021, this paper aims to uncover the effect of climate change on firm-level total factor productivity (TFP). We find that climate change significantly reduces firm-level TFP. This conclusion is robust to a series of robustness tests. The mechanism analysis finds that climate change negatively affects firm-level TFP through the channels of increasing financing constraints, reducing investment in technological innovation, and accelerating brain drain. We further find that the impact of climate change on firm-level TFP is more pronounced in mature and labor-intensive firms, and firms in more market-oriented and environmentally regulated regions are less affected by climate change. Finally, the threshold effect analysis suggests that the negative impact of climate change on firm-level TFP diminishes as firm resilience increases. This paper provides new evidence for assessing the economic impact of climate change on micro-firms, as well as useful policy implications for combating climate change and promoting firm-level TFP.

Keywords: climate change, Total factor productivity, Firm resilience, Mechanism analysis, Threshold effect