The paradox of entrepreneurial cities: How business venturing inflates housing prices in China’s Silicon Valley

Abstract

<p>Promoting entrepreneurship has become a quintessential objective for cities aiming to achieve sustainable economic growth. However, a critical question remains unexamined: What extra costs do residents have to pay for living in an entrepreneurial city? We address this question by examining the impact of venture capital (VC)-backed entrepreneurship on housing prices in Hangzhou. VC investments not only offer financial support for high-growth startups but also boost market confidence for the locations where VC-backed startups are concentrated. From 2013 to 2019, a total of 3,101 Hangzhou-based startups secured VC investments, positioning the city as one of China's most entrepreneurial hubs. To address the endogeneity issue, we construct an instrument variable (IV) grounded in startups' alignment with government-prioritized strategic sectors and find that 1 % increase in the scale of startup clusters can inflate the price of proximate housing properties by 0.0434 %. Further, three mechanisms are identified behind this phenomenon, including increased housing demand, innovation-induced land premiums, and capital agglomeration effects. The key insight of our study is that, beyond creating economic gains, the clustering of VC-backed startups paradoxically inflates nearby housing prices, ringing an alarm for tech-led gentrification. This calls for policy interventions to balance innovation growth with housing affordability in entrepreneurial cities.<br></p>