Essays on Drought Impact: Firm and FDI in Low-Income Countries

Preface In an era shaped by the escalating impacts of global warming, one critical concern takes center stage – the increasing frequency and intensity of droughts, particularly in low-income countries. Within this challenging landscape, we investigate two distinct research projects, each shedding light on the multifaceted implications of droughts in low-income countries, with a specific focus on Ethiopia. This introductory section provides an overview of these cutting-edge investigations. Project 1: Drought Impact on Firms in Low-income Countries The first project examines the complex relationship between droughts and the performance of manufacturing firms in low-income countries, offering a fresh perspective on the challenges faced by Ethiopian enterprises. Leveraging a novel dataset collected on Ethiopian firms, this research examines how manufacturing firms respond to rainfall shocks. From the results, on average, firms operating in regions affected by droughts experience a notable decline in value-added growth and other key performance metrics, ranging up to 16%, in comparison to their counterparts in drought-affected areas. Furthermore, the research uncovers that the magnitude of this impact is disproportionately higher for larger firms. The empirical analysis also shows the long-term impact of droughts, as firms located in areas with higher drought risks exhibit diminished workforce sizes and reduced capital stock. Project 2: Historical Drought and FDI inflow The second project examines the long-term consequences of drought exposure on Foreign Direct Investment (FDI) inflows into Ethiopian communities. By exploiting variations in drought incidence across districts in Ethiopia, this research merges novel firm-level data with a nationally representative household survey spanning the years 2011 to 2015. Its primary goal is to shed light on the complex connection between past droughts and FDI inflows, specifically at the community level. The outcomes of this research project provided a new insight into a distinct aspect of drought’s impact. Communities residing in historically drought-affected areas exhibit a substantial reduction, up to 13%, in the likelihood of FDI arrivals compared to their unaffected counterparts. This study determines educational attainment as a pivotal mechanism through which past drought events affect the likelihood of FDI arrivals. In sum, these two research projects make notable contributions to the field by addressing different dimensions of the impact of droughts in low-income countries. The first project uniquely investigates both the direct and indirect consequences of droughts on the secondary sector, using granular enterprise census data and advanced estimating approaches. Whereas, the second project explores community-level effects of past droughts on FDI attraction, an often-overlooked dimension. Its focus on the complex connections between FDI inflow and community-level drought impacts, along with mediation analysis, distinguish it as a valuable addition to the literature. Together, these studies significantly advance our understanding of the complex relationship between environmental challenges, economic performance, and global investment trends, shedding light on both manufacturing firms and FDI inflow in the context of drought-prone regions.