How does real estate investment affect industry hollowing out? Evidence from China

The crowding-out effect of real estate investment and the decline of the manufacturing industry are major challenges confronting China. We investigate the effects and mechanisms of manufacturing firms’ real estate investment on industry hollowing out. We found that manufacturing firms’ real estate investment has a significant positive impact on the hollowing out of the manufacturing industry. The crowding-out effect is larger in non-first-tier cities. Compared with state-owned enterprises, non-state-owned enterprises’ direct participation in real estate investment has a greater negative impact on the main business and TFP. The main mechanisms that are asset financialization, innovation suppressing and managerial myopia, which induce manufacturing firms to move from their main business and reduce TFP. Our study provides a new len and evidence for understanding the relationship between manufacturing firms’ real estate investment and industry hollowing out.