Working Paper: NBER ID: w30452
Authors: Grace Weishi Gu; Galina Hale
Abstract: Climate-related risks have increased in recent decades, both in terms of the frequency of extreme weather events (physical risk) and implementation of climate-change mitigation policies (transition risk). This paper explores whether multinational firms react to such risks by altering their presence in countries that are more affected. We measure this by examining foreign direct investment (FDI) dynamics at different levels of aggregation as well as at firm level. We propose a theoretical framework for firm production location choice that explicitly incorporates transition and physical risks. The model predicts a reduction in FDI resulting from both physical and transition risks but an ambiguous interaction effect of these risks with emission productivity of the firm. In an extensive empirical analysis we find some support for model predictions, but overall we do not find consistent evidence for statistically significant effects of physical and transition risks on FDI. However, firm-level evidence suggests that firms that are more exposed to climate risks react more negatively to physical climate risk following Paris Climate Accord. We also find that FDI outflows following extreme weather events from affected countries are smaller for industries with higher emission productivity. Our theory and empirical results point to the importance of accounting for heterogeneity in emission productivity when analyzing effects of climate risks.
Keywords: climate risks; foreign direct investment; multinational firms; emission productivity
JEL Codes: F21; F23; F64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| physical and transition climate risks (Q54) | reduction in FDI (F23) |
| higher emission productivity (O44) | less FDI outflows following extreme weather events (F64) |
| climate-related disasters (Q54) | reduction in FDI (F23) |
| Paris Accord (F53) | change in FDI responsiveness to climate risks (F64) |