In the Eye of the Storm Firms and Capital Destruction in India

By Martino Pelli, Jeanne Tschopp, Natalia Bezmaternykh, Kodjovi M. Eklou

September 25, 2020

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Martino Pelli, Jeanne Tschopp, Natalia Bezmaternykh, and Kodjovi M. Eklou In the Eye of the Storm Firms and Capital Destruction in India, (USA: International Monetary Fund, 2020) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper examines the response of firms to capital destruction, using a new measure of firm exposure to tropical storms as a negative exogenous shock on firms’ capital stock. Drawing on a panel of Indian manufacturing firms between 1995 and 2006, we establish that, depending on their strength, storms destroy up to 75.3% of the fixed assets of the median firm (in terms of its productivity and industry performance). We quantify the response of firm sales within and across industries and find effects akin to Schumpeterian creative destruction, where surviving firms build back better. Within an industry, the sales of less productive firms decrease disproportionately more, while across industries capital destruction leads to a shift in sales towards more performing industries. This build-back better effect is driven by firms active in multiple industries and, to a large extent, by shifts in the firm-level production mix within a firm’s active set of industries. Finally, while there is no evidence that firms adjust by investing in new industry lines, firms tend to abandon production in industries that exhibit lower comparative advantage.

Subject: Capital productivity, Comparative advantage, Environment, International trade, Natural disasters, Production, Productivity, Total factor productivity

Keywords: Asia and Pacific, Capital, Capital productivity, Comparative advantage, Creative destruction, Firm-industry sales, Firms, Global, Industry line, Industry-year FE, Intensity industry, ISIC firm, ISIC industry, Natural disasters, Productivity, Single-establishment firm, Storms, Subscript f, Total factor productivity, Tropical storm, WP

Publication Details

Pages:

69
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/203
Stock No:

WPIEA2020203
ISBN:

9781513554488
ISSN:

1018-5941

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