Climate effects on the diversification strategy of export firms: Evidence from China

economic risks and resilience among various stakeholders in the face of warming remains rela- tively poor. This gap in research constrains the formulation of effective adaptation strategies. This study addresses this deficiency, concentrating on the adaptation of Chinese export firms to the escalating frequency of extreme temperatures attributed to climate change, and discern- ing which firm types are more susceptible. Specifically, we examine the sensitivity of these firms’ diversification strategies to extreme temperature. Our findings aim to provide policy insights by elucidating the influence of extreme temperatures on the diversification strategies of export firms in the world’s foremost goods trading entity. Diversification is an important way for firms to expand their market presence [6]. Upon analyzing China’s export data from 2000 to 2016, we found that more than 80% of firms exported more than one product, which together accounted for 94% of total export value. Diversified firms show resilience in the market by maintaining the flexibility to expand in favorable conditions and by mitigating risk through diversified investments [7]. Conversely, in adverse conditions, firms can maintain profitability by strategically focusing resources on their most competitive core products [8,9]. Dynamic internal resource allocation, achieved by intro- ducing new products and discontinuing less profitable ones, enables effective responses to market fluctuations and unforeseen challenges. In the study, we integrate the temperature variable into a multi-product firm trade model.

Through theoretical analysis, we postulate a fundamental hypothesis of an inverted U-shaped relationship between temperature and the export product diversification of firms. Under- pinned by this hypothesis, we extend our methodology to employ a non-parametric economet- ric model. We leverage comprehensive Chinese customs export data, complemented by daily meteorological data. The principal findings of our empirical inquiry are delineated as follows: First, temperature has a significant inverted U-shaped relationship with export product diversification, with both positive and negative deviations from the optimal temperature reducing the diversity of exported products. The more extreme the temperature, the stronger the effect. For temperatures below -2˚C, each additional day results in a decrease of 0.22 in the number of exported product categories. Likewise, for each day with an average temperature exceeding 27˚C, there is a decrease of 0.09 in the number of exported product categories. Second, processing trade firms show lower adaptability to extreme temperatures than gen- eral trade firms, resulting in a greater reduction in the diversity of their export products. A mature financial market is conducive to improving the ability of local firms to adapt to extreme temperature variations, but an increase in the level of economic development does not seem to have the same effect. Firms located in developed cities tend to reduce the diversity of export products under extreme temperatures. However, increased energy consumption can

mitigate this negative impact. Finally, firms have not adapted to the local temperature norms, as those in hotter regions still experience greater negative impacts from high-temperature shocks. Third, temperature shocks primarily affect the diversification of exported products by influ- encing the entry and survival dynamics of products. Specifically, extreme temperatures lead to a significant reduction in the number of new and existing product categories. Finally, further examination of the influence of temperature reveals an inverted U-shaped relationship with the diversification of both export destinations and relationships (i.e. country-product pairs). However, the effects are asymmetric; low temperatures more robustly impact the diversifica- tion of export market destinations, while high temperatures more significantly affect export market relationships. The existing literature relate to our topic primarily investigates two aspects. Firstly, research on the determinants of firms’ diversification strategies. At the theoretical level, Melitz (2003) [10] introduces a foundational model for homogeneous single-product firms, which Bernard PLOS ONE Climate effects on the diversification strategy of export firms PLOS ONE | https://doi.org/10.1371/journal.pone.0308391 August 16, 2024 2 / 28 Competing interests: The authors have declared that no competing interests exist