Natural Disasters and Firm Selection: Heterogeneous Effects of Flooding Events on Manufacturing Sectors in Japan

Recently, natural disasters and extreme weather events have been occurring more frequently. This study examines how large floods affect the value of manufacturing product shipments and the number of facilities in the long run using municipality-level data in Japan. We considered the impacts of flooding depending on the size of the facilities and past flood experiences (leading to flood preparedness in advance). We found "build back better" dynamics, in which the value of manufacturing product shipments grew in cities affected by floods. We also found that large facilities increased, while small and mid-sized facilities decreased following floods. These results suggest two important mechanisms characterizing the damage and recovery processes of floods. First, large facilities were more resilient to flooding, while small and mid-sized facilities were more vulnerable to flooding. Economies of scale resulting from small facilities exit, and an increase in large facilities may increase the number of shipments of manufactured goods per facility. Experience with past floods did not affect the activities of large facilities. In frequently flooded cities, the activity levels of small and mid-sized facilities recovered to predisaster trends. In rarely flooded cities, a long-term decline was observed in the business activities of small and mid-sized facilities because they likely needed to revise their supply chains due to unexpected events. In addition, unexpected flooding had devastating effects on employment.