Adapting to climate risks through cross-border investments: industrial vulnerability and smart city resilience

Abstract

Climate change entails potential risks for investors, and its effects on investment has spread beyond physical borders. This study investigates how multinational corporations (MNCs) incorporate climate risks into their decisions regarding foreign direct investments (FDIs). We nd that large differences in the climate risks of home and host cities discourages FDI by increasing cross-border adaptation costs. Such impacts are particularly pronounced among environmentally sensitive industries that are more exposed to climate risks.Further analysis reveals that city-based smartness factors mitigate the negative impacts of climate risk differences on FDI by reducing adaptation costs and engendering new business opportunities. This study provides new evidence on the profound effects of climate risks on FDI and how smart cities can increase their resilience to climate risks in the context of international business. regulatory practices. Thus, MNCs need to consider the adaptation costs, driven by the heterogeneous climate risks that inform different policies and regulations when investing abroad.MNCs are also exposed to new business opportunities that arise from global climate actions. Policies dedicated to mitigating climate change stimulate technological innovation, from which rms usually earn a monopolistic markup (Nesta et al. 2014). As long as climate risks are priced according to the policy instruments in a market, developing rm-speci c green advantages form the primary sources of rms' pro tability, growth, and business sustainability (Kolk and Pinkse 2008). Private sectors also join the campaign to save the planet through sustainable, responsible, and impact (SRI) investing in climate responsible rms that enable them to improve the access capital at a lower cost (Chava, 2014;Pástor, Stambaugh, & Taylor, 2021). Heterogeneous climate practices and preferences, which depend fundamentally on climate risk, increase the di culty for MNCs to identify climate-related opportunities abroad.How do MNCs incorporate city-level climate change risks into their FDI decisions to manage risks and exploit opportunities? To answer this question, we follow Buggle and Durante (2021) to measure climate risk in a city by the standard deviation of its monthly temperature over the past ten years. Such a measure captures the aggregate impact of interwind factors, such as public and private climate actions, urban development, technology advance and nature environment, on global warming. It saves us from addressing the omitted variable concerns and confounding factors when measuring climate risk indirectly with potential determinants of global warming. Moreover, as policy makers extrapolate policy effectiveness from observed temperature variations, adjust their perceptions of climate risk, and revise their actions accordingly, such a measure of climate risk inform MNCs of future regulatory changes. Interested in how MNCs respond to climate risk from the adaptation cost perspective, we focus on the difference between the climate risk in home and...