RIETI Report March 2015

Natural Disasters, Natural Selection, and Firm Exit: Lessons from the Tohoku Earthquake

Four years have passed since the Tohoku Earthquake on March 11, 2011 and 20 years since the Kobe Earthquake on January 17, 1995 as we take a look at the effects of natural disasters on the economy. Natural disasters inflict serious damage and seemingly are negative for the economy as they deteriorate companies' production capacity, resulting in some companies being forced to close down. However, academic evidence has shown that natural disasters actually may promote growth as productivity is enhanced through creative destruction. In the March issue of the RIETI Report, we present the column "Natural disasters, natural selection, and firm exit: Lessons from the Tohoku earthquake" jointly written by Mizuho Research Institute Senior Economist Arito Ono and Kobe University Professor Hirofumi Uchida and published on the VoxEU website.

The authors look at the connection between natural disasters and corporate productivity and provide two reasons for it: (1) creative destruction, in which companies that survive is due to their updating of capital stock and adopting new technologies, and (2) natural selection of firms, whereby inefficient firms are eliminated. The authors then look at empirical data from the Tohoku Earthquake, which indicate that the earthquake neither promoted nor demoted the natural selection of firms, and also did not support a positive or negative impact on corporate productivity through the firms' exits. The authors also find that, counterintuitively, the probability of bankruptcy is lower in the affected area, which could be attributed to the huge amount of public aid given to the affected firms. Finally, they conclude that the exit of firms is closely intertwined with policy measures and the underlying economic conditions, and thus a broader and long-run perspective in examining their economic impact and the policy measures needed to deal with them is needed.

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Natural Disasters, Natural Selection, and Firm Exit: Lessons from the Tohoku Earthquake

ONO Arito Mizuho Research Institute

UCHIDA Hirofumi Kobe University

Natural disasters such as earthquakes, floods, typhoons, and hurricanes inflict serious damage and so seem to be bad for the economy. For firms, natural disasters destroy tangible assets such as buildings and equipment - as well as human capital - and thereby deteriorate their production capacity. These adverse impacts may sometimes be fatal to the firms and result in them being forced to close down.

But the academic evidence on the economic impact of natural disasters is mixed. As reviewed in surveys such as Noy and Vu (2010) and Loayza et al. (2012), the existing studies report that natural disasters may even promote growth. One possible mechanism behind this positive impact is the enhancement of the productivity of the economy's corporate sector - as reported in Skidmore and Toya (2002) and Crespo-Cuaresma et al (2008). But because these studies use aggregate data, they cannot answer why and how corporate productivity improves due to natural disasters. We thus need analyses that use micro-data to clarify the mechanisms through which natural disasters affect the productivity of an economy's corporate sector.

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