Balancing Survival and Development: How Climate Risk Can Promote Corporate Innovation Efficiency in China?

Abstract Previous literature presents conflicting views on the impact of climate risk on firm innovation. One perspective argues that climate risk increases cash holdings, reducing resources available for innovation. Conversely, another suggests that climate risk fosters creative destruction, creating new opportunities for innovation. This study reconciles these views by focusing on innovation efficiency, tested using 31 315 observations from 4530 Chinese A-share listed companies over 2007–22. Leveraging text analysis and machine learning to develop a climate risk indicator, we find that climate risk significantly enhances innovation efficiency by encouraging firms to better utilize existing resources. This effect is more pronounced in nonstate-owned and lower-performing firms. Additionally, we examine the moderating roles of organizational resilience and within-firm pay gaps. Results show that organizational resilience strengthens innovation efficiency under climate risk, while large pay gaps undermine it. These findings not only benefit Chinese firms but also offer valuable insights for businesses in emerging economies navigating climate change. Significance Statement The purpose of this study is to reconcile conflicting perspectives on how climate risk affects firm innovation by introducing innovation efficiency as a central measure. Through an analysis of 31 315 observations from Chinese A-share companies (2007–22), we reveal that climate risk significantly enhances innovation efficiency by enabling firms to better allocate existing resources. This effect is particularly pronounced in nonstate-owned and lower-performing firms. Additionally, organizational resilience strengthens innovation under climate risks, while large within-firm pay gaps hinder it. These findings matter because they highlight the importance of strategic resource management and internal corporate structures in fostering innovation during times of environmental uncertainty.