Rising housing prices and foreign-invested enterprise inflows in Chinese cities: The role of urban innovation

Abstract

In the context of rapidly developing Chinese cities, I investigate the intricate relationship between rising housing prices and foreign-invested enterprise (FIE) inflows across 248 cities. Contrary to simplistic views that regard housing price hikes as merely detrimental, this study posits that they function as a double-edged sword, potentially enhancing urban innovation and thereby shaping FIE location decisions. By conducting empirical analysis based on panel data from 2000 to 2022 and a series of robustness checks, I find that a 1 % increase in housing prices leads to a 1.6 % increase in FIE inflows. Notably, there exist heterogeneities: technology- and capital-intensive FIEs exhibit positive elasticity to housing price growth, whereas labor-intensive FIEs show negative elasticity. These divergent effects become increasingly pronounced as cities’ development levels rise. To unravel the transmission mechanisms, my channel analysis reveals that rising housing prices drive urban innovation through spatial sorting of talent and innovative enterprises. This, in turn, serves as a magnet for FIEs. Specifically, in developed cities, this dynamic attracts technology- and capital-intensive FIEs, while simultaneously displacing labor-intensive FIEs to less developed regions. I also offer practical policy thresholds through threshold regression. Less developed cities aiming to attract labor-intensive FIEs should maintain housing prices below 7197 CNY/m². Conversely, developed cities seeking to draw technology- and capital-intensive FIEs can optimize innovation-related benefits when prices reach 18,674 CNY/m². Overall, my findings provide nuanced insights for regions to strike a balance between housing price regulation and formulating targeted policies to attract foreign investment, taking into account the heterogeneous nature of FIEs and urban development stages.