Leveling the playing field: How intellectual property protection countervails foreign quality shocks

Abstract

Innovation is critical to firm long-term growth. The relationship between shocks and innovation has been a classic topic of discussion, but the impact of foreign quality shocks on domestic enterprise innovation has received relatively little attention. Utilizing a comprehensive dataset covering a wide array of firms across different Chinese cities from 2008 to 2013 and employing an instrumental variable two-stage least squares (IV-2SLS) method to overcome endogeneity concerns, this study examines the impact of foreign quality shocks on domestic firms' innovation levels and the moderating role of local intellectual property protection (IPP). The findings indicate that foreign quality shocks can dampen firm-level effective innovation. The mechanism analysis shows that this negative relationship occurs through competition-to-obsolete, technological spread, and price-cost margin effects. We also confirm the network effect through which foreign quality shocks originating from upstream, horizontal, and downstream sectors affect firm innovation differently. The heterogeneity analysis shows this negative innovation response varies across firms in different regions, with different vertical integration and market shares. We further find that stronger IPP significantly countervails this adverse effect. This moderating relationship varies across firm groups regarding productivity, ownership, and patent intensity. These findings necessitate implementing adaptive policy frameworks that strategically balance intellectual property reinforcement with vertically-tiered innovation incentives, transforming global quality competition into sustainable growth through collaborative ecosystem development and cross-sector resilience building.