Housing price appreciation, investment opportunity, and firm innovation: Evidence from China

The impact of housing price appreciation on firm innovation may be negative. Housing price appreciation generates real estate investment opportunities with high returns, making manufacturing firms more likely to diversify into the real estate industry. With limited resources, once investing in real estate development, these firms will invest less in innovation. By examining manufacturing firms in China for the period 1999-2007, we provide evidence by finding that housing price appreciation negatively influenced manufacturing firms' innovation propensities. Additionally, we further explore the underlying mechanism by examining the likelihood of listed firms' diversification into the real estate industry, and how the diversification influenced their patenting. Consistent with the investment opportunity hypothesis, we find that (1) housing price appreciation stimulated firms to enter the real estate industry, and a firm's invention patenting was negatively influenced subsequent to its real estate diversification; (2) the negative effect was more pronounced where housing price growth rates were higher. (C) 2016 Elsevier Inc. All rights reserved.