Drive or constrain? How high temperatures shape firm digitalization strategy

Using matched firm-level and daily meteorological data from China (2001–2020), we examine how sustained high-temperature exposure shapes firms’ digitalization strategy (DS). We develop a multi-period framework in which firms can continuously adjust their DS over time. High-temperature exposure may shape DS through two channels: a drive channel, by increasing the operating losses that digitalization can mitigate and thus raising its marginal return; and a constraint channel, by reducing the financial resources available for digitalization. Thus, the net effect of high temperatures on DS is theoretically ambiguous. Relative to the 12°C–15°C baseline, we find that high temperatures significantly reduce firms’ DS over medium- to long-run windows: a one-standard-deviation increase in cumulative exposure to temperatures above 30°C over a 9-year window (approximately 87.52 days) is associated with a 0.16-unit decline in DS (mean = 0.68). The negative effect attenuates for larger firms and under improved financing conditions, while substantial industry heterogeneity is observed. This article enriches the literature on climate adaptation, calls on managers to consider environmental factors in strategic decision-making, and provides empirical evidence for the consistency between long-run economic interests and ecological interests.