Disasters and Innovation: Firm-Level Evidence from China

When do natural and climate-driven disasters trigger firm innovation, and when do they hinder it? Using a novel panel linking geocoded disaster records to patent filings and financial accounts for 4,540 Chinese manufacturing firms over 1998-2007, we estimate staggered difference-in-differences models with Poisson fixed effects and show that the answer depends critically on internal financing capacity. Disaster exposure raises patenting by 18.6 percent (s.e. = 0.085) on average, and by 14.5 percent (s.e. = 0.079) conditional on firm-level output, employment, and asset tangibility. These aggregate effects mask sharp heterogeneity: large firms increase patenting by 26-30 percent, while state-owned enterprises (SOEs) and small private firms show no significant response. We trace this pattern directly to internal liquidity. High-cashflow firms drive the entire aggregate effect, while industrylevel financial dependence and state-bank exposure show no significant differentiation. Provincial credit availability amplifies the response for firms that already possess internal resources, but does not compensate for their absence. Disasters can trigger technological upgrading, but only among firms with the financial capacity to act on the opportunity