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

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these designated zones because the annual survey is mandatory for all the qualified companies. The survey collects information on balance sheet, income statement, details of R&D spending, sources of R&D expenditures, R&D personnel composition, and R&D output such as new product sales. MOST collected the information to monitor the operation and development of high tech companies and to provide potential inputs to future policy making. This database has not been analyzed in academic studies. In comparison to those used by previous research involving China, our database has at least two notable features. First, the high tech companies in our sample are unlisted firms, and our database provides detailed information about each firm’s R&D expenditure, R&D personnel, and R&D output. This type of information is not normally required to be disclosed in the annual reports of publicly listed companies, and generally cannot be found for unlisted companies. Second, compared to the other Chinese database, the NBS (National Bureau of Statistics) which only tracks manufacturing firms, our database covers high tech companies in various industries. The top five industries in our sample are Computer & Communications (30%), Machinery (large and small) (30%), Drugs & Medical (8%), Chemical (8%), and Electrical & Electronic (5%). In addition, we hand-collect patent data from the State Intellectual Property Office of China (SIPO)’s patent website. We focus on the numbers of innovation patents obtained by a firm in a given year. 3.3 External financing of the sample firms To analyze the sources of external financing of high tech companies, we construct three variables. First, firm i is coded as having raised new debt in year t if the net increase of debt for firm i in year t exceeds 5% of its total assets at the end of year t. Consistent with previous studies (Hovakimian, Opler and Titman, 2001; De Haan and Hinloopen, 2003), the 5% cut-off point is used 16
to ensure that the analysis focuses on relatively substantial financing events. More than 47% of firmyear observations have raised new debt. Second, we analyze bank loan and informal financing separately. Since information on detailed debt structure is limited, we compute the informal financing ratio as the net increase of all debt in a given year minus the net change in bank loan and net change in trade credit, divided by the net increase of all debt. MOST dataset does not disclose the trade credit of individual firms, so we use instead, the median ratio of new trade credit to the net increase of all debt for the listed companies in the same industry-year, in the following calculation: Debt - Bank Loan Trade Credit Informal Financing Ratio -( ) Debt Debt same industry- year The classification of industry is from Industry Classification Standard by CSRC (China Securities Regulatory Commission). If net new total debt is less than the sum of new bank loan and new trade credit in a year, the informal financing ratio is negative, i.e., the firm repays previous borrowing from informal sources with new bank loans and new trade credit. If the sum of new bank loan and new trade credit is negative and net new total debt is positive, informal financing is the source of funds to pay back previous bank loan and trade credit. In this case, the informal financing ratio is larger than 1. Because the information on bank loan is available only in 2004 and 2005, this portion of the analysis is limited to these two years. We only calculate the informal financing ratio for the firms that raised new debt exceeding 5% of their total assets. We have 6,487 firm-year observations with informal financing ratios. As shown in Table 1 (Panel A), 28.5% of new debt comes from informal financing. The calculation only includes firms that raised new debt exceeding 5% of their total assets. Informal financing ratio in the total sample is about 12%. This number is higher than the average percentage 17
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