Impact of Natural Disaster on Corporate Innovation - Free Essay Sample

Introduction

Corporate innovation and disasters are topics that have been exhaustively studied. Innovation is an important inclusion in an organization's activities since it creates diversified products that customers have a penchant. However, risks in the corporate world are a normal occurrence. Even so, corporations are usually advised to implement risk management measures to curb unforeseen risks. Natural disasters are risks that can destabilize a company's activities since they come without warning, unlike other risks. However, natural disasters can spur a company to be more innovative in the future since it reduces a company to start from scratch. Many researchers and authors have proposed this notion. Nonetheless, this research study investigates the negative impact of natural disasters on corporate innovation, especially in the financial sector.

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Literature Review

Natural disasters are unforeseen and therefore are potentially major risks to a corporation’s activities and innovation. On the other hand, natural disasters grant corporations the opportunity to assess their innovative capabilities since the disasters destroy their activities by reducing them to scratch. With these assertions, this literature review explores the works of authors and their findings regarding natural disasters, innovations, and how they impact corporate innovations, particularly on companies' copyright and trademarks.

Natural Disasters

Natural disasters are a natural phenomenon that happens without prior notice. According to Miao and Popp (2014), natural disasters that impact corporate innovation are mainly droughts, heat waves, floods, and tropical cyclones because of their destructive strength. Many natural disasters are caused by climate change. Intergovernmental Panel Report on Climate Change provided a positive association between climate change and natural disasters. Moreover, the report advises policymakers to assimilate disaster risk reduction into their management efforts to adapt to climate change (Miao & Popp, 2014). The significance of science and technology for climate adaptation has gotten much attention in the world of internal policy; however, not much has been done in the research community. The researcher examines how hurricanes have heightened international financial flows to economically deprived countries (Miao & Popp, 2014). His conclusion finds that many hurricanes cause a significant increase in remittance to refugees of developing countries. Air pollution is sometimes viewed as a natural disaster that if fuelled by human-made activities. Gao et al., (2018) asserted that air pollution has been a major problem to the corporation, especially those that work in the financial analysis of forecasts. Their research was conducted in China, which is usually viewed as a country that produces much carbon to the environment.

Similarly, while researching the effects of banning smoking on corporate innovation, the researchers found that there was indeed a positive effect of limiting air pollution from smoking when smoke-free laws are implemented. Natural disasters such as earthquakes and sudden car accidents increase nicotine addiction and cigarette consumption. This happens when a person experiences post-traumatic stress disorder, which causes them to be dependent on nicotine.

To understand the far-reaching consequences of natural disasters, Roger (1983) proposed a theory referred to as Roger's Protection Motivation Theory. In theory, Roger proposed that individual behavior changes when an aspect of the environment is altered. His theory has been widely used by environmentalists to assess motivation and behavior concerning natural disasters. For instance, the effect of floods in the city of Cologne, Germany, was assessed. It was discovered that risk awareness and apparent adaptive capacity played a more significant role than socio-economic factors in elucidating individuals' adaption to the situation. Finally, we come back to the adaptation literature, a fast-growing subfield of contemporary natural disaster studies. The actual impact of a disaster falling on a community depends on the nature of the hazard and local people's adaptation measures or their adaptive capacity.

Innovation

Different authors have written and defined innovation in their own ways. Mao & Zhang (2016) assert that innovation is a significant driver of a firm's competitive spirit and productivity. However, the researcher also points out that it is a risky and long venture due to issues that affect it and, in this case, natural disasters. For the researchers, innovation essentially means producing products in large numbers and ensuring that those products are of high quality and loved by target customers. Managers who risk-take during or conduct CEO Vega during disasters are usually thought to be innovative (Bernile et al., 2014). However, those who do not usually fail to achieve the company's goals and objectives.

Having set the record straight about what is essentially natural disasters and corporate innovation, this section explores the impacts of natural disasters on corporate innovation (Brav et al., 2018). Of course, there are positive impacts of natural disasters on innovation since many authors have dealt with the topic exhaustively. One such impact is that it spurs innovation because it grants corporations the time to assess their production process. Spurring corporate innovation is the short-term impact of natural disasters; however, the long-term impacts of natural disasters on innovation usually result in unforeseen disadvantages. Firm riskiness and an increase in capital for developing new innovative products negatively affect natural disasters (Brav et al., 2018). When this happens, managers are usually left stranded with copyrights of which are often not useful at that particular time

Negative Impacts of Natural Disasters on Corporate Innovation

According to Klomp (2014), natural disasters have a negative impact on different components of the financial system, such as financial payments, markets, clearing systems, and settlements. It is well illustrated in the Basel Committee. In 2001, UNEP published financial banking initiatives in the wake of natural disasters (Klomp, 2014). The publication's main idea was that emerging trends in the intensity and frequency of severe natural catastrophes could threaten and stress banks to a certain point where; they become impaired or even solvent. This is majorly affecting the non-performing loans share, increasing the leverage, or via the occurrence of a bank track instantly after the disaster. Therefore, it is a fact which is well known that there is an outflow of private foreign capital after a disaster strikes as the hesitation about repayment increases in the future. It is also illustrated in the study that, during the last few decades, more than 10,000 natural disasters have occurred worldwide, affecting many people and causing over two trillion dollars in estimated damages (Klomp, 2014). Overall, corporate innovation is affected since an outflow of money and ideas occurs.

Consequently, a primary characteristic of a large-scale natural disaster is that it negatively impacts large parts of domestic financial sectors. Therefore, banks and other financial sectors manage these disasters, and banking supervisors, and regulators must ensure that resources are reserved adequately (Brav et al., 2018). Nevertheless, banks are uncertain when it comes to actual exposure to natural catastrophes. Additionally, banks are mostly affected by spillovers from inter-banking markets, and natural catastrophes directly impact them since they are highly connected because of the lending activities they do (Klomp, 2014). However, holding little capital reserves by banks tends to threaten lender solvency when a disaster occurs. Although, as banks and other financial institutions are naturally highly leveraged with low capital issues to asset rations, the aspect of holding excessive reserves tends to represent some opportunity costs for the lenders. Overall, natural disaster affects the internal environment of organizations which affects their internal plans and budgets.

Natural disasters may have a positive impact on corporate innovation on a short-term basis. However, on a long-term basis, the negative effects of corporate innovation are also witnessed. For instance, if a flood occurs in a given place, people and companies may attempt to increase their saving rates (Cortes & Strahan, 2014). This is where it is explored in the literature that natural disaster damages correlate positively with household saving rates. However, these positive impacts are only short-term, but with time they tend to pose a negative effect.

Additionally, using a model panel involving over 100 counties, it is reported that a contraction in the amount of credit supplied by financial banks to different private sectors in the aftermath of a natural disaster as banks become concerned with the repayment uncertainty in the future (Cortes & Strahan, 2014). Nevertheless, states with significantly developed credit markets tend to appear to be better and more robust and endure natural disasters. It is also illustrated that banks' lending activities reduce rapidly after a disaster, mostly in developing countries. For instance, some scholars have explored the impact of a volcano eruption in Ecuador on accessibility to loan and loan demands (Cortes & Strahan, 2014). This is where it is illustrated that due to volcanic activity, there is a significant increase in credit demand, but credit accessibility is restricted. As a result of this decrease in credit lending due to natural disasters, banks reduce the client firm's activity, affecting market innovation.

A natural disaster is also a type of systematic risk in corporate innovation using an approach for a microfinance institution. Therefore, following a natural disaster, these microfinance institutions' results illustrate a decrease in the capital ratio, loan origination, and equity. Consequently, by using a sample of microfinance institutions, different scholars conclude that when the number of people affected by natural disasters increases, there is always a significant drop in the capital ratio, which is thus a negative impact incorporate innovation (Klomp, 2014). Additionally, natural catastrophes such as floods increased the probability of a bank's default. Therefore, it is illustrated that meteorological and geographical disasters tend to minimize the distance to default because of their increased damage. Besides, the natural disaster impact depends on their scope and size, the financial regulation rigorousness and supervision, and the level of economic and financial development of a certain state (Cortes & Strahan, 2014).

Furthermore, according to the literature, different natural disasters are not equally divided; their impacts vary from one another (Klomp, 2014). Therefore, large-scale natural disasters have a severe impact on developing countries; other geographical disasters severely impact high-income countries. Therefore, this aspect widens the view that the impact of a particular natural disaster on financial sector fragility tends to differ among different counties and states based on the extent of economic development, which is thus related closely to financial development.