Relocating innovation within firms: The impact of real estate booms on innovation transfer

This paper examines how firms adjust internal innovation resources in response to negative shocks, focusing on the impact of surging real estate prices in headquarters cities on the transfer of innovation activities to subsidiaries. Using data on Chinese listed firms from 2007 to 2017, we construct a unique “patent–firm–city” matched database and employ an instrumental variable approach to address endogeneity. We find that higher real estate prices in headquarters cities significantly increase the relocation of innovation resources to subsidiaries in lower-cost cities. Two mechanisms drive this effect: the relocation of R&D financing and of R&D talent. Rising property prices intensify financing constraints, prompting firms to reallocate innovation-related capital, while higher housing costs crowd out skilled labor or raise operational expenses, encouraging talent transfers. Firms more dependent on external financing and with higher concentrations of skilled labor are especially sensitive. Heterogeneity analysis shows stronger effects for invention patents, non-state-owned enterprises, high-tech industries, and cities with weaker public service capacity. Finally, we assess the performance implications of such transfers. While innovation transfer mitigates the adverse impact of property prices on innovation quantity and sustains utility model patenting, it fails to offset the decline in invention patenting, indicating a shift toward less technologically sophisticated and original innovation. This study contributes to the literature on real estate markets and corporate innovation by offering a novel perspective on internal resource reallocation and providing a comprehensive analysis of how firms adjust innovation capital and talent under external pressures.