Water stress and industrial firm productivity: Evidence from China

Xiaojun Yu (), Russell Smyth, Yao Yao () and Quanda Zhang ()
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Xiaojun Yu: School of Finance, Capital University of Economics and Business, Beijing, China.
Yao Yao: School of Economics and International Trade, Shanghai Lixin University of Accounting and Finance, Shanghai, China.
Quanda Zhang: Institute of Innovation, Science and Sustainability, Federation University Australia, Victoria, Australia & Department of Economics, Monash University, Victoria, Australia.

No 2024-20, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: We estimate the causal effect of climate change induced water stress on firm-level productivity in China. In contrast with most extant studies that have employed precipitation to proxy firm-level availability of water, we use local water runoff, which we argue is a more appropriate measure of water stress on firms. By matching a panel for half a million formal industrial firms with county-level data on water runoff, we find that shocks to local water runoff, defined as a standard deviation increase or decrease in local water runoff from its long-run average, exert asymmetric effects on firm productivity. A negative shock to water runoff reduces firm productivity by between 1.93 and 5.40 per cent, depending on the magnitude of the shock, while the effect of a positive shock to water runoff on firm productivity is insignificant. These results are robust to numerous sensitivity checks. We show that water runoff outperforms other proxies of water availability across different horserace specifications. We find that the main transmission mechanisms are the adverse effect of negative shocks to water runoff on constraining water inputs in production, disruptions to power generation and, to a lesser extent, higher financing cost. Our study sheds new light on how climate change can impede economic development.

Keywords: Water stress; water runoff; climate change; firm performance; panel model (search for similar items in EconPapers)
JEL-codes: L60 O44 O47 Q25 Q54 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-agr, nep-cna, nep-eff and nep-env
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