Riding the Tide of Urbanization: Corporate Investment in Bigger Cities

Abstract

Urbanization has powered China’s economic growth in recent decades. Local investment opportunities arise with profound social and economic impacts of rapid urban expansion. In this study, I explore the real effects of cities’ spatial expansion on corporate investment decisions and the economic consequences. I find that corporate investment expenditures are responsive to local investment opportunities changes catalyzed by urban expansion. This result is robust to the use of instrumental variable based on geographical characteristics. Leveraging the enriched investment environment, firms also improve their investment efficiency and experience increases in future sales, employment, and firm value. A channel analysis shows that urban expansion influences corporate investment decisions through supplying labor and promoting industry agglomeration. In addition, pursuing urban-expansion investment opportunities should be supported by strong and well-developed market institutions. Collectively, the evidence supports the narrative that firms can grab opportunities for growth when investment environment changes during urbanization.