Natural Disasters and Creative Destruction: Evidence from Indonesian Firms

Abstract

This paper assesses the impact of earthquakes on firm performance in Indonesia. In particular, relying on yearly balance sheet data from a census of medium- to large-scale firms over 16 years, we show the presence of ``creative destruction'' in the aftermath of earthquakes, leading to market exit for the least productive firms, as well as to improving firm productivity among the remaining firms. We investigate heterogeneous responses to shocks to highlight the channels of such creative destruction. We distinguish between firm types by size, ownership, and capital intensity. In addition, we investigate the dynamics of market structure and competition caused by disaster shocks. Finally, we explore the role of political mechanisms---political connections and election years---for explaining the improvements in firm performance.