Does Enforcement of Intellectual Property Rights Matter in China ...

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intellectual properties possible through patent infringement, imitation, etc., which reduces new product sales. Therefore, we expect better IP rights enforcement increases firms’ sales from new products (Hypothesis 4B). 3. Measures of IP Rights Enforcement, Provincial Characteristics, and Database Description In this section, we describe our two measures of provincial-level IP rights enforcement, provincial characteristics, and other controlling factors. In addition, we specify the data sources and present a preliminary description of the high tech firms in our sample. 3.1 Measures of provincial-level IP rights enforcement The provinces in China are under the same sets of national laws and regulations; however, local enforcement can vary a great deal. We measure provincial enforcement of IP rights in two ways. The first is the fraction of the IP infringement cases won by the plaintiffs (the IP owners) in the provincial courts. It directly measures the probability of winning by the IP owners in IP infringement cases, and thus is a good proxy for the enforcement of IP rights. We label it as “IPP1”. The second is the local authorities’ willingness to enforce IP rules. It is measured by the number of articles that advocate IP protection each year in the official newspaper published by the provincial Communist Party. This variable gauges the attitude towards IP enforcement by provincial officials. We label it as “IPP2”. To construct IPP1, we download and read the written judgment of 7,668 IP infringement cases filed in 28 provinces in 2001-2005 from the China Judicial Case Database, with the IP owners as the plaintiffs. The cases include patent right infringements, infringements of other companies’ technologies, commercial secret infringements, new plant infringements, and integrated circuit design infringements. We only consider high tech IP infringement, excluding trademark and 12
copyright infringement cases. We believe that the court judgments in high tech IP infringement cases are the most relevant to our study, since all our sample firms are high tech companies. We identify that a case is won by the plaintiff if the court orders the defendant to cease infringement, compensate the plaintiff for its loss due to the infringement, destroy the infringing products and equipments involved, and/or pay the legal cost of the lawsuit. The case is won by the defendant if the court dismisses the lawsuit of the plaintiff. Two possible scenarios may create bias in using the fraction of cases won by the plaintiffs as the measure of IP enforcement. One concern is that plaintiffs may initiate lawsuits with no merit. Given that there are substantial monetary costs in going to Chinese courts, it is highly unlikely that plaintiffs will initiate nuisance lawsuits with no merit and thus face no or low chance of winning. 7 Another deterrent for a firm to bring up a nuisance lawsuit is the adverse impact on its reputation, or “loss of face”. Given the large number of lawsuits, even if there were a handful of nuisance ones, it is reasonable to assume that they will not affect the measure in any meaningful way. In addition, there is no evidence to lead us to believe that the incidence of no-merit lawsuits should be systematically different across the provinces. The other argument is that better IP enforcement may lead to fewer lawsuits, which is not captured by the fraction of lawsuits won by plaintiff. However, the expectation of better enforcement in the courts means higher expected returns for the intellectual property owners to pursue the violators in courts. Indeed we find that provinces with a higher winning percentage for the IP owners actually have a greater number of IP lawsuits. Provincial Communist Party is a province’s highest administration. Its official newspaper is 7 Legal expenses for law suits between businesses are quite substantial in China. Losers of lawsuits pay 3%- 10% of the disputed amount for counsel fees, plus 0.2%-2.5% for brief fees. Winners pay even more: 10-20% of the disputed amount for counsel fees. 13
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Does Enforcement of Intellectual Property Rights Matter in China ...

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