AERE@SEA - Extreme Heat and Directed Innovation

Abstract

Research on climate adaptation often measures whether—and how much—adaptation occurs, but rarely identifies the margins that deliver it. I show that firms adapt to extreme heat through directed innovation, providing the first empirical evidence outside agriculture. Linking ORBIS firm data with OECD REGPAT patent application data for nine EU countries (2000–2020), I find that extreme heat disproportionately harms labor-intensive firms, inducing shifts toward capital-intensive production and redirecting patenting toward labor-saving technologies in industries most exposed to labor-productivity shocks. Heat-induced, labor-saving innovation attenuates average heat-related productivity losses by 28% over the observed temperature changes from 2000 to 2020. These findings establish innovation as a key margin of climate adaptation.