Strengthening IPR Protection and Innovation

Though much of the theoretical economics literature have assumed a positive relationship between intellectual property rights (IPR) protection and innovation, there has been no empirical evidence that clearly supports such a relationship. In particular, this relationship may also depend on the measures of innovation. Exploiting the establishment of Chinese specialized IP courts across regions over time as a shock to the IPR protection, we empirically investigate how IPR protection impacts innovation. Measuring innovation by both input and output, we find that establishing an IP court reduces the number of patents filed by public firms located in the IP court's jurisdictional area by about 10%, while increasing those firms' R&D spending (scaled by firm assets) by 6%. These seemingly contradictory findings suggest that the relationship between strengthening IPR protection and firm innovation is a subtle one: it increases firms' incentives to innovate on one hand, while reducing their incentives to rely on the patent system to protect their innovation on the other hand. The finding that stronger IPR protection leads to a lower number of patents also points to a litigation cost channel in which firms reduce their patent filings concerning of the litigation risks brought by those patents. Overall, our findings suggest that IPR protection changes firms' innovation incentives and their interaction with the patent system.