Overheated Investment in Real Estate Inhibits Innovation：Verification and Analysis in China＇s Case

• Published in: 中国经济学人：英文版 2016 (5), p.111-123
• Main Author: 张杰 杨连星 新夫
• Format: Article
• Language: English
• Subjects: 中国; 区域创新; 房地产投资; 案例分析; 经济可持续发展; 过热; 金融系统; 验证
• ISSN: 1673-8837

Whether rapid real estate investment growth inhibits China＇s innovation is a critical question for China＇s economic sustainability. Based on China＇s provincial panel data and using land supply as an instrumental variable for real estate investment growth, we arrived at the following findings after effectively controlling endogenous factors that could lead to estimation errors. First of all, the faster real estate investment grows in a province, the lower the growth rates of innovation and R＆D spending and invention patent authorizations will be in the province, an indication that real estate directly inhibits innovation in China. Such inhibition is particularly pronounced in the industrial sectors. Secondly, in the context of rampant real estate investment, the biased loan maturity structure of China＇s financial system in favor of the real estate industry further inhibits innovation. This paper has verified the existence of the direct effect of real estate investment growth on regional innovation and its indirect effect on regional innovation through the biased long maturity structure of the financial system. The empirical findings of this paper provide practical policy implications for China to strike a balance between real estate development and an innovation-driven development strategy.