Housing Boom And Firms' Innovation:Evidence From Manufacturing Firms

With the deepening of the housing reform, in1998the State Council of China issued the "Announcement on Further Deepening the Reform of the Urban Housing System and Speeding up Housing Construction". This announcement put a full cessation of the welfare housing distribution, which had lasted for40years in China. Since then, the demand for housing surged. The square meters of new construction sold in1998were110million, surged to560million in2008, with an annual growth rate of20%. This surging demand, along with other factors, resulted in a persistent increase in housing price during this period.This housing boom is characterized by a higher-than-average ROR in the real estate industry.The high return of real estate is attractive to capital. Recently, we can observe a lot of manufacturing firms involving in the real estate. It is a rational reaction to the high return of real estate that manufacturing firms engaging in this industry while reducing their innovation investment. However, the individual rationality does not imply the overall efficienty of resource allocation, especially regarding to the long-time economic growth. This paper investgate the impact of the housing boom on firm innovation by examing the scaled industrial firms in35major cities in China. In detail, we test the impact of housing boom on firms' innovation propensities and firms'entry to real estate separately. Then, we test the interaction effect of growth rate of housing price and firms'entry to real estate on the patent of listed firms.The thesis consists of six chapters, which are organized as follows.The first chapter is introduction, which brings forward the background and the questions. We also point out the contribution and the shortage of the thesis.Chapter two is literature review. We review and discuss the related literatures from three different dimensions. First, we review the researches about the effect of asset bubble on investment and economic growth. And then, we move to the studies of the relationship of real estate and economic growth. At last, we give a brief review of domestic studies, which focus on the housing price.In chapter three, we study the effect of housing boom on firms' innovation. The estimation result indicates that the housing boom has a negative effect on manufacturing firms'innovative propensities. Some time-variant unobserved regional factors may affect the result. We use dynamic GMM to solve the problem. The result from the dynamic GMM is consistent with the basic result. A further studies show that the negative effect is less influential in foreign firms or small-sized firms. The innovation propensities of private firms become sensitive to the change of housing price after a listed auction (zhaopaigua) is required by the Central Government for any urban land transfer in2004.In chapter four, we study the affect of housing boom on firms'entry to real estate. The results indicate that the manufacturing listed firms are more likely to engage in real estate in cities where housing price is surging. We use two-stage IV estimation to solve the endogenous problem. The results of IV estimation are consistent with the basic results. The profit driven hypothesis implies that firms with low ROA are more likely to engage in real estate. Meanwhile, in the year the stock market surging, the propensities of firms'entry to real estate decrease.In chapter five, we study the interactiong effect of firms'entry to real estate and housing price on the patent of the listed firms using patent data. Since the listed firms are not forced the disclosure their R&D information, the qualities of R&D information of different firms are varies. We use the patent as the measurement of innovation capacity. The selection of patent data is the difficulty of theis chapter and it is also the main contribution of the thesis. The estimation results show that the firms which have engaged in real estate are more sensitive to the change of housing price. So far, we provide and complete chain of evidence for the hypothesis that the housing bomm has negative effect on manufacturing firms' innovation.In chapter six, we summarize the main finding of the thesis. Possible extensions of the study are also discussed.A lot of literatures have studied the effect of housing boom on firms' investment decisions, both theoretically and empirically. Most of the studies are based on the hypothesis that housing boom increases the value of mortgage. Also, most of the studies focus on the physical investment. Little researches pay attension to the innovation. This thesis provides the evidence that the housing bomm has negative effect on firms' innovation for the first time. This thesis is an important complementary to the related literature. This is the main contribution of our study.Although the research about the R&D of listed firms has great academic value, the qualities of data measuring the listed firms'innovation capacity is poor. The other contribution of our study is that we find a convincible method to calculate the patent number of listed firms. Patent is and important measurement for firms' innovation capacity, which is commonly used in the related studies.There are some deficiencies and flaws in our study. For example, since data limited we can not observe the scale of the investment on real estate of the firm which has engaged in real estate. We only use the dummy variable whether the firm entry the real estate as the measurement of investment decision. Another interesting question is whether manufacturing firm would back to feed their original busisness after making profit from real estate. All these are worth further studies.