Growing bigger or becoming stronger: A response of downstream manufacturing firms to the coal price shock

Fluctuations in energy prices bring about broad implications for the welfare of microeconomic entities. This paper examines the impacts of coal price shock on the performance of downstream coal-dependent manufacturing firms using an exogenous price shock induced by China’s Cleaner Production Standard for the Coal Mining and Processing Industry (CPSC) in 2008. The findings reveal a significant increase in the revenues of manufacturing firms subjected to the rise of coal price. Mechanism analysis shows that incumbent firms primarily enhance their revenues by expanding market share and increasing production, rather than fostering innovation and raising prices. This implies growing bigger rather than becoming stronger might be the main strategy for manufacturing firms to cope with the coal price shock. Further analysis indicates that the increase in revenues nearly offset the increase in energy costs, resulting in no significant change in profits. Additionally, this study finds that manufacturing firms can also mitigate cost increases by adjusting their energy structures, but there is no evidence that advancements in energy-saving technologies achieve the same effect. Our findings highlight the various ways in which manufacturing firms respond to energy price shocks.