Climate Risks and FDI

Grace Weishi Gu and Galina Hale

No 30452, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Climate-related risks have increased in recent decades, both in terms of the frequency of extreme weather events (physical risk) and implementation of climate-change mitigation policies (transition risk). This paper explores whether multinational firms react to such risks by altering their presence in countries that are more affected. We measure this by examining foreign direct investment (FDI) dynamics at different levels of aggregation as well as at firm level. We propose a theoretical framework for firm production location choice that explicitly incorporates transition and physical risks. The model predicts a reduction in FDI resulting from both physical and transition risks but an ambiguous interaction effect of these risks with emission productivity of the firm. In an extensive empirical analysis we find some support for model predictions, but overall we do not find consistent evidence for statistically significant effects of physical and transition risks on FDI. However, firm-level evidence suggests that firms that are more exposed to climate risks react more negatively to physical climate risk following Paris Climate Accord. We also find that FDI outflows following extreme weather events from affected countries are smaller for industries with higher emission productivity. Our theory and empirical results point to the importance of accounting for heterogeneity in emission productivity when analyzing effects of climate risks.

JEL-codes: F21 F23 F64 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-ene, nep-env, nep-fdg and nep-int
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Citations: View citations in EconPapers (3)

Published as Grace Weishi Gu & Galina Hale, 2023. "Climate risks and FDI," Journal of International Economics, .
Published as Climate Risks and FDI , Grace Weishi Gu, Galina Hale. in NBER International Seminar on Macroeconomics 2022 , Forbes, Gourinchas, and Reis. 2023

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