Do disaster-hit regions benefit when corporations pitch in on relief efforts? Or can they sometimes crowd-out more productive aid from traditional providers? Looking at a data set that includes more than 74,000 donations by over 34,000 corporations, Wharton management professors Michael Useem and Tyler Wry, and Luis Ballesteros of The George Washington University analyze where corporate contributions can — and cannot — help.
The economic losses from Hurricanes Harvey, Irma and Maria in August-October, 2017 are projected to be enormous, with one estimate of more than $200 billion. The California wildfires in October 2017 are expected to cost the U.S. economy $85 billion.
As California, Florida, Texas and other states undertake the prodigious task of recovery and restoration, how are they – and we – going to pay for it? Vast sums have been needed not only for immediate recovery, but also for the massive reconstruction of homes, hospitals, schools and pipelines.
As the 2011 earthquake and tsunami in Japan and 2012 Hurricane Sandy in the U.S. have informed us, the financial impact of natural disasters has become devastating for even the richest economies. From 1990 to 2015, the inflation-adjusted annual costs of hurricanes, floods and earthquakes worldwide have risen by 600% – to more than $300 billion – and the hurricanes and wildfires of 2017 will add to that.
Worse, traditional sources of disaster aid have not kept pace with the soaring costs of calamities, and insured losses typically pay for only a minority of the damage. For Hurricane Katrina, insurance covered just 46% of the destruction, and for Harvey, a comparable fraction may be expected.
“In the aftermath of the 2004 Indian Ocean tsunami … Coca-Cola converted its soft-drink production in Sri Lanka to bottling water and then used its own delivery trucks to distribute the bottles to stranded victims.”
Increasingly, businesses are being asked to make-up for the growing shortfall, and many have stepped forward. During the past 15 years, corporate aid has in fact become the fastest growing source of disaster relief globally. In some instances, business largesse has exceeded the contributions of all traditional responders including foreign governments, international agencies and charitable organizations combined.
In the aftermath of Chile’s magnitude-8.8 earthquake and tsunami in 2010, for example, 55% of all international aid came from corporations. Similarly, following Japan’s magnitude-9.0 earthquake and tsunami in 2011, business accounted for 68% of the foreign assistance.
With this trend evident in the U.S. as well – and we have seen many American companies pledging support for recovery from the calamities of 2017 – we are led to wonder whether or not disaster-hit regions truly benefit when corporations account for a greater overall share of relief aid.
Some critics have warned that corporate giving can sometimes crowd out more productive forms of aid from traditional providers, or that the primary beneficiaries are actually the givers themselves, with reputations burnished. Others have argued that is better for specialized agencies like the Federal Emergency Management Agency and the Red Cross to direct relief since they bring expertise in precisely that.
But a contrary line of argument suggests that business firms can do good along with doing well by virtue of their own presence in a disaster region. They are likely to have a more grounded understanding of the area’s crisis needs by virtue of hearing from their local managers and employees and from better appreciating which neighborhoods are most in need.
We have seen this work abroad. In the aftermath of the 2004 Indian Ocean magnitude-9.1 tsunami that killed more 200,000 and left millions without essentials, Coca-Cola converted its soft-drink production in Sri Lanka to bottling water and then used its own delivery trucks to distribute the bottles to stranded victims. Similarly, major mining companies in Chile reassigned their construction crews after the 2010 earthquake to rebuilding public schools where the government could not.
“Companies will do the most good by donating to areas where they have operations and when they can leverage their distinctive resources.”
We recently published a study of these competing arguments, drawing on evidence from every natural disaster and disaster-aid donation worldwide during the last 15 years. Our data set included more than 74,000 donations by over 34,000 corporations.
We found that when at least 44% of the disaster aid in the wake of a calamity came from locally present business firms, an afflicted country secured more than twice the level of international aid compared to a similarly afflicted nation with less business assistance. No crowding out.
We also discovered that a country’s recovery a decade later is notably greater for countries that receive at least a quarter of its disaster aid from locally active firms. On average, the Human Development Index – a U.N. metric of a country’s life expectancy, education level and per capita income – rose 92% more among countries with the greatest inward flow of business aid.
Returning to the question of paying for recovery from the 2017 hurricanes and wildfires, government will bear the greatest burden along with insurers and residents themselves. But we know that companies can also play a vital role, and that they will do the most good by donating to areas where they have operations and when they can leverage their distinctive resources.