Floods reduce firm survival, sales; drive relocation
A Banque de France working paper finds that floods significantly reduce firm survival and sales by up to 8 percent over five years. Affected firms are also 4 percent more likely to relocate to safer areas.
Floods erode firm survival and sales
The study combines firm-level financial data and exact locations with administrative flood data in France from 2004 to 2024.
It focuses on companies with over €750,000 in annual sales.
Firms in flood-hit municipalities experience a 2 percent drop in survival rates and an 8 percent decline in sales, with these negative effects persisting for up to five years after the event.
Beyond survival and sales, the research also observes adverse impacts on the number of employees, staff costs, EBITDA, and investment.
These persistent negative effects are particularly pronounced for intense floods, defined as those lasting at least one week.
The analysis also confirms that firms located in 1-in-100 year floodplains are more severely affected, indicating stronger direct impacts compared to indirect disruptions.
The findings are robust across various alternative specifications and also hold for multi-establishment firms.
Relocation as an adaptation strategy
Floods trigger firm-level adaptation, with affected companies 4 percent more likely to relocate within five years.
This relocation primarily involves moving to other municipalities, often to areas with a lower flood risk, such as those at higher altitudes or with fewer past flood events.
However, the study reveals that firms tend to remain within their local labor and economic markets, often relocating nearby.
This proximity means that relocation does not significantly mitigate the negative effects on survival and sales, as the costs of moving may offset the benefits of avoiding future floods.
Indirect effects from floods in neighboring municipalities also contribute to decreased firm performance, though these impacts attenuate with distance.
Relocation: A partial solution
This research underscores the severe and lasting economic toll of floods on businesses, highlighting a critical vulnerability in local economies.
While firm relocation offers a form of adaptation, its effectiveness is limited by the tendency of firms to stay within their immediate economic sphere, thus remaining exposed to spillover effects.
Policymakers must therefore consider broader, complementary adaptation strategies beyond mere relocation to truly enhance firm resilience against increasing climate risks.