Hardship Breeds Creativity: Climate Threats and Corporate Innovation

ABSTRACT This study examines whether and how climate threats (droughts) affect the innovation activities of firms in food industries worldwide. We find that firms in countries with a less positive Palmer drought severity index (PDSI), that is, with more drought‐like conditions, file more drought‐related patents and that such patents receive more citations in the future. Such innovation activities are not found in industries unlikely to be affected by drought. The association between drought‐like conditions and innovation is stronger in countries with more human capital, better capital market development, and a national culture with a long‐term orientation. Finally, we provide suggestive evidence that corporate innovation activities can reduce the exposure of corporate profits to climate threats.