How tropical storms destroy, rebuild firms
1 min read . Updated: 20 Feb 2020, 10:05 PM IST
PremiumTo measure firms’ exposure to storms, the study creates a storm index based on wind speeds and pincodes
Cyclone Fani hit the coast of Odisha in 2019, destroying lives and businesses. According to new research, many of these companies will struggle to recover. In the study, researchers Martino Pelli and others examine how companies respond to the capital destruction caused by external shocks such as hurricanes, cyclones and other tropical storms. The study analyses the sales and productivity of firms after a storm destroys capital. Specifically, the authors test whether unproductive companies exit the market after a storm and if those that survive adapt by investing more.
To measure firms’ exposure to storms, the study creates a storm index based on wind speeds and pincodes. This storm data is then matched with data on a set of 10,969 manufacturing firms between 1995 and 2006, extracted from the Centre for Monitoring Indian Economy (CMIE). Using estimates of firm productivity and economic growth (based on night lights data), coupled with the storm data, the authors construct estimates of how much businesses are affected by storms every year.
They find that for an average business, storms could destroy up to 43% of capital assets. For a quarter of storms, companies can see a 2.5% drop in sales. Within each industry, among firms which run operations from a single location, sales for the least productive firms are hit the hardest. As a result, these firms stop operating and exit the market following a storm. For firms operating from multiple locations, the authors find comparatively inefficient industries take a greater hit. Eventually, capital ends up being reallocated to the more efficient industries and this switch makes surviving firms rebuild better.
Also read: In the Eye of the Storm: Firms and Capital Destruction in India
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