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Tue June 14, 2011
Dr. Andres Ramirez, Bryant University - Natural Disasters and Economic Recovery
Albany, NY – In today's Academic Minute, Dr. Andres Ramirez of Bryant University examines how economies respond to earthquakes and other natural disasters.
Andres Ramirez is an assistant professor of finance at Bryant University where his research interests include international corporate finance, international corporate governance, natural disasters, and non-profit financial management. He holds a Ph. D. in international finance from the University of South Carolina.
Dr. Andres Ramirez - Natural Disasters and Economic Recovery
Though it is difficult to imagine anything positive arising from the devastation caused by intense earthquakes, the massive destruction caused by natural disasters can lead to innovation.
Such a statement may seem counterintuitive in the wake of the toll these disasters take. But in more than five years of research on the topic, my research partner and I find support for Schumpeter's 1942 theory of creative destruction.
Schumpeter hypothesized that a firm's relentless search for new markets, products and technologies resulted in constant innovation that destroyed some industries and players but at the same time created stronger ones. For Schumpeter, these changes were from within the system. We tested whether an external force such as an earthquake can provide firms opportunities for change. Doing so at this time could lower the cost of upgrading or adopting new technology, which would have a positive effect on firm value.
We analyzed the impact of 299 quakes on thousands of firms in 50 countries. What we found supports Schumpeter's hypothesis - but only in some instances.
First, we saw that that in general, companies will experience increases in market capitalizations even three years after a quake. Most importantly, however, our evidence supports the hypothesis of creative destruction only for businesses in less developed countries. In fact, we find that earthquakes destroy value for firms in the G8. We interpret these findings as a sign that innovation can be more profitable in poorer countries where the economies of scale of adopting new technologies are bigger. Disasters create value in poor countries. For rich countries however, a disaster is a disaster.