Climate Change and Adaptation in Global Supply-Chain Networks
71 Pages Posted: 29 Oct 2019 Last revised: 22 Dec 2020
Date Written: October 25, 2019
This paper examines how firms adapt to climate-change risks resulting from their supply-chain networks. Combining a large sample of global supplier-customer relationships with granular data on local temperatures, floods, and climate projections, we first document that the occurrence of climate-related shocks at the locations of supplier firms has significant negative direct and indirect effects on the operating performance of suppliers and their customers. Second, we demonstrate that customers respond to changes in this exposure. When realized climate risks at supplier locations exceed ex-ante expectations, customers are 6 to 11% more likely to terminate existing supplier-relationships. Consistent with models of experience-based Bayesian updating, this effect increases with signal strength and repetition, cannot be explained by salient, transitory shocks, and is stronger for suppliers in competitive industries and weaker for closely integrated supply-chain relationships. Customers subsequently choose replacement suppliers with lower expected climate-risk exposure. Moreover, we find that both supplier termination and replacement decisions are insensitive to long-term climate projections - even when experienced and projected change diverge substantially. Our findings indicate that climate change related risks affect the formation of global production networks.
Keywords: Climate Change, Adaptation, Firm Performance, Production Networks
JEL Classification: Q54, G30, F64, Q51
Suggested Citation: Suggested Citation