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

which factors play a more crucial role in enhancing the climate adaptability of firms and how they operate. Conclusion Building on a theoretical framework, this study investigates the relationship between tempera- ture and firm diversification in the export market using China’s daily meteorological data and detailed customs export data from 2000 to 2016. Employing a non-parametric model, we iden- tify an inverted U-shaped relationship between temperature and export product diversifica- tion. In the analysis of climate adaptability, general trade firms demonstrate greater adaptability to extreme temperatures compared to processing trade firms. Firms located in cit- ies with developed financial markets also tend to exhibit stronger adaptability to extreme tem- peratures. However, a high degree of urban economic development does not necessarily enhance local firms’ adaptability to extreme temperatures. Energy consumption, on the other hand, can enhance the adaptive capacity of firms in developed regions. Lastly, the study observes that firms have not yet fully adapted to local climatic norms, especially in southern regions, which serve as important trade hubs and remain highly sensitive to heat shocks. A dynamic decomposition of firms’ export products reveals that extreme temperatures reduce the variety of export products primarily by decreasing the number of newly introduced and existing product categories. Moreover, the research discerns an inverted U-shaped relationship between temperature and the diversification of both firms’ export destinations and relationships.

The findings of this study yield significant policy implications for both corporate entities and governmental bodies. Initially, there is an imperative for the establishment of capacity- building initiatives focused on fortifying the resilience of firms, with a particular emphasis on processing trade firms. This could encompass educational programs and training modules on the assessment and management of climate-related risks. At the onset of 2024, China’s Minis- try of Commerce, in conjunction with other governmental departments, introduced a suite of 12 measures to enhance the development of processing trade, aiming to create a "Processing Trade 2.0" and accelerate the transition of firms from OEM (Original Equipment Manufactur- ing) to ODM (Original Design Manufacturing) and OBM (Original Brand Manufacturing). Processing trade firms should leverage these policy initiatives to gradually upgrade and trans- form, providing more competitive work environments and salaries for labor, focusing on green and sustainable development, and proactively investing in climate adaptability. This will enable them to achieve greater autonomy and strategic flexibility in international competition. Secondly, the government needs to accelerate the construction of climate-adaptive cities, particularly implementing high-temperature adaptation measures in southern cities. This ini- tiative should encourage the southern regions to invest more in infrastructure designed to withstand extreme heat and gradually increase fiscal expenditure on high-temperature adapta-

tion. It should also use financial mechanisms to incentivize firms to contribute to climate resil- ience. For example, Encouraging green finance initiatives can help direct capital towards sustainable practices and technologies. This could involve creating financial instruments that favor environmentally friendly investments. Policies should support R&D in climate-resilient technologies and practices. This could include public-private partnerships to innovate in areas such as energy efficiency, sustainable materials, and smart logistics. Lastly, cognizant of the inherently global dimensions of trade, international cooperation is essential to address climate change. Policies should support global initiatives aimed at reducing emissions and promoting climate adaptation. By considering these policy implications, gov- ernments can play a proactive role in helping their economies transition to a more climate- PLOS ONE Climate effects on the diversification strategy of export firms PLOS ONE | https://doi.org/10.1371/journal.pone.0308391 August 16, 2024 25 / 28