How Real Estate Shocks Affect Manufacturing Value Chain Upgrading: Evidence from China

Contrary to the conventional viewpoint that “high housing price promotes industrial upgrading”, this study finds that increasingly high housing prices are a pivotal factor that obstructs industrial value chain upgrading. Based on city-level data, micro-level data for Chinese industrial enterprises, and data for listed Chinese enterprises, this study examines the impacts of urban housing prices on value chain upgrading. We find that soaring housing prices in China since 2004 stunted industrial value chain upgrading, as indicated by the value-added rate. When housing prices increase by 100%, the enterprise value-added rate decreases by 12.4%. Intermediary mechanism analysis shows that housing price increases lead to innovation input suppression effects and resource misallocation effects, which in turn obstruct industrial value chain upgrading. Further analysis demonstrates that the impacts of housing price increases on industrial value chain upgrading, presenting an inverted-U shape, are varied in terms of time and region. Enterprises’ value chain upgrading also showcases different degrees of sensitivity to housing price increases, due to their respective features. The conclusions of this study carry significant policy implications for the sound development of the real estate market and industrial upgrading in China, as well as in developing countries at large.