How do global value chains respond to climate change? A case study of Chinese manufacturing firms

This study investigates climate risk and its effects on global value chain (GVC) participation, with a focus on the impact of drought on the export value-added ratio (DVAR) of Chinese manufacturing firms. Using fixed effects (FE) and system GMM models, the main findings are: Drought significantly reduces manufacturing firms' DVAR, with the lagged dependent variable showing a strong persistence effect and an even greater impact in the second lag period. This impact varies based on the firm's location, the complexity of its value chain, and its ability to adapt to and mitigate climate change effects. Strategies such as improving operational efficiency, investing in sustainable technologies, and enhancing competitiveness in developed markets may help mitigate or reverse the adverse effects of climate change on these firms. Additionally, significant industry and regional differences are observed, with the Northeast, East, and South China regions being most severely affected by drought. Global innovation value chains and regional processing value chains are significantly negatively impacted, while labor-intensive value chains are affected only in the current period. These findings provide new insights into the economic impacts of climate change and offer a basis for policymakers to develop strategies that help firms adapt to and mitigate climate risks.