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

This paper investigates the relationship between country-level climate vulnerability and firm innovation using a sample of 60,028 firms from 88 countries during 1995-2019. Our analysis reveals a negative association between climate vulnerability and firm innovation, which can be attributed to several possible mechanisms such as decreased responsiveness of R&D to investment opportunities, reduced private value of innovation, lower incentives to innovate, managerial career concerns, and limited financing. The silver lining is that climate vulnerability promotes 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 risky innovation strategies. We also find that climate vulnerability through supply chains and customer locations impacts innovation. Our main results are supported by difference-in-differences and instrumental variable approaches. Overall, this study underscores that climate change poses challenges for firms to innovate but also encourages cross-border collaboration and sustainable innovation.