Climate Change and Corporate Innovation: Evidence from China

This paper examines the impact of climate change on corporate innovation. We use the regional drought to construct the climate scenario, choose the climate sensitive firms as research samples, and find that climate change has a significant impact on corporate innovation. The deterioration of regional drought will encourage firms to carry out innovative activities, which is called “environment-incentive effect”. This influence of the drought on firms’ innovations mainly comes from two factors: Firstly, the adverse impact of regional drought on firms’ operations has forced firms to engage in innovations. Secondly, the more forward-thinking management will be better able to capture the opportunities presented by climate change and improve corporate innovation. In addition, when the geographical dispersion of subsidiaries is low, the promoting effect of drought on innovations is more pronounced, which shows the regional feature of climate effect. This paper contributes to the study of corporate innovations from the perspective of climate change and emphasizes the importance of incorporating climate risk into policy assessment and firm decision-making process.