In the Eye of the Storm Firms and Capital Destruction in India

Martino Pelli, Jeanne Tschopp, Natalia Bezmaternykh and Kodjovi Eklou

No 2020/203, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the response of firms to capital destruction, using a new measure of firm exposure to tropical storms as a negative exogenous shock on firms’ capital stock. Drawing on a panel of Indian manufacturing firms between 1995 and 2006, we establish that, depending on their strength, storms destroy up to 75.3% of the fixed assets of the median firm (in terms of its productivity and industry performance). We quantify the response of firm sales within and across industries and find effects akin to Schumpeterian creative destruction, where surviving firms build back better. Within an industry, the sales of less productive firms decrease disproportionately more, while across industries capital destruction leads to a shift in sales towards more performing industries. This build-back better effect is driven by firms active in multiple industries and, to a large extent, by shifts in the firm-level production mix within a firm’s active set of industries. Finally, while there is no evidence that firms adjust by investing in new industry lines, firms tend to abandon production in industries that exhibit lower comparative advantage.

Keywords: WP; ISIC firm; single-establishment firm; tropical storm; firm-industry sales; industry line; intensity industry; industry-year FE; subscript f; ISIC industry; Comparative advantage; Total factor productivity; Capital productivity; Natural disasters; Productivity; Global; firms; capital; creative destruction; storms; Asia and Pacific (search for similar items in EconPapers)
Pages: 69
Date: 2020-09-25
New Economics Papers: this item is included in nep-bec, nep-dev, nep-eff and nep-sbm
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Related works:
Journal Article: In the eye of the storm: Firms and capital destruction in India (2023)
Working Paper: In the Eye of the Storm: Firms and Capital Destruction in India (2019)
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