Temperature Effects on Firm Entry and Exit

This paper explores the impacts of temperature changes on the spatial distribution of industries, focusing on temperature effects on firm entry and exit. Using the information on all firms registered in China, we find a robust inverted U-shaped relationship between temperature and firm entry and a U-shaped relationship between temperature and firm exit. This indicates that extreme cold or hot temperatures reduce firm entry and increase firm exit. Cold-related effects are larger than heat-related effects. The temperature effects are greater for large and long-lived firms and differ across sectors. In response to extreme temperatures, firms may migrate across regions through inter-regional equity investments in creating new firms. The long-run projection shows that climate change may significantly reshape the spatial distribution of industries by increasing the agglomeration of firms in the cold regions and reducing the agglomeration of firms in the hot regions