Temperatures, productivity, and firm competitiveness in developing countries: Evidence from Africa

A growing body of literature has established strong negative relationship between historical fluctuations in levels of temperature and aggregate economic performance (Dell et al., 2012; Burke et al., 2015). However, most of these studies are based on aggregate data and use a cross-country approach, providing no insights on mechanisms. While these studies suggest that temperatures affect output in sectors other than agriculture, they have not observed the effects on manufacturing and service sector firm performance. This paper uses firm-level data across multiple sectors of the economy to analyze the relationship between temperature changes and firm performance.

We answer this question using data from Côte d’Ivoire. First, we adapt a trade model with heterogeneous firms à la Melitz (2003) to analyze the impact of increased temperatures on firm revenues, profits, and exit productivity cutoff. Second, using a unique, detailed firm-level data set collected from the Registre des Entreprises, coupled with climate data from the National Aeronautics and Space Administration (NASA), we estimate total factor productivity (TFP) non-parametrically, using the most recent techniques in the field of industrial organization. Third, we empirically investigate whether and how temperatures affect firm productivity. Finally, we test key prediction from our model that increased temperatures decreases firm’s revenues, profits, and market survival rate.

In the empirical application we use the non-parametric methods developed by Gandhi et al. (2011) to estimate TFP. To identify the effects of temperatures on firms’ revenues, profits, and TFP, we exploit year-to-year variation in firms’ exposure to daily distribution of temperatures, constructed in a series of temperature bins.

We find a strong and statistically significant negative effect between temperatures and firms’ revenues, profits, and TFP. A one-standard-deviation rise in days with high average temperatures decreases firm’s revenues, profits, and TFP, respectively, by 14.83%, 21.71%, and 3.61%. For firms that can invest in climate mitigation technology, the effects of high temperatures on revenues are significantly reduced. To assess the potential mechanisms behind the observed effects of temperatures on TFP, we estimate the effects of temperatures on labor and capital productivity. We find no evidence that the observed effect of temperatures on TFP is solely explained by labor productivity, which suggests high temperatures affect capital productivity as well. The model also predicts increased temperatures reduces firm market survival rate as a result of higher production costs. We found that a one-standard-deviation rise in days with high average temperatures increases firm exit rate by 0.04%.