Cross Border Costs: Efficiency Losses of Manufacturing Firms Involved in Housing

The boom in China's real estate market in the past 20 years has attracted a large number of manufacturing firms to make real estate investments (REI), and it is unclear whether this behavior is conducive to the high-quality development of firms. This study theoretically elucidates the mechanism by which manufacturing firms' real estate investment behavior affects their factor efficiency and empirically examines it using data from listed Chinese manufacturing firms from 2007 to 2021. We find that real estate investment by manufacturing firms significantly inhibits firms' total factor productivity (TFP). The robustness of the findings is further confirmed by constructing a differences-in-differences (DID) model using a purchase restriction policy as an exogenous shock. Heterogeneity analysis shows that those more significantly negatively affected are technology- and labor-intensive non-state-owned firms, which are located in the central-eastern region of China and are in the growth or maturity stage. Exploring the mechanism of action reveals that firms' real estate investment behavior may reduce the level of firms' TFP by crowding out inputs in the research and development (R&D) sector and reducing organizational management effectiveness. This study provides new empirical evidence for identifying the impact of real estate investment on firms' TFP and deepens the understanding of firms' resource allocation effects.