N°18-38: How Real Estate Booms Hurt Small Firms: Evidence on Investment Substitution

In geographically segmented credit markets, local real estate booms can deteriorate the funding conditions for small manufacturing firms and undermine their growth and competitiveness. Based on exogenous variations in the administrative land supply across 202 Chinese cities, we show that real estate price hikes caused by a restrictive land supply reduce bank credit to small firms, increase their borrowing costs, diminish their investment rate and compromise their output and productivity growth. Based on matched firm and product-level export data, we are able to discard local demand effects as an alternative explanations to the credit supply channel.