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

Zhang Jie , Yang Lianxing and Xin Fu 
Institute of China’s Economic Reform & Development, Renmin University of China, Beijing, China  
School of Economics, Renmin University of China  
Business School of Hohai University, Nanjing, China  
Abstract: 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.  
Keffeecytwords: real estate investment growth, innovation, loan maturity structure, inhibition  
JEL Classification Codes: E44, O32, L74  
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