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

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percentage of IP infringement cases won by the plaintiffs) on the probability that a high tech company has access to new debt. Column 1 of Table 2 shows that IP rights enforcement significantly increases the probability of a firm having access to new debt. Moving from the lowest IPP1 province to the highest IPP1 province increases the probability of a high tech firm obtaining new debt by 7.9%, holding all other independent variables at their mean values. When other provincial characteristics are included in the regression (Column 2), the probability increases by 6.8%. All the firm-level control variables have the expected signs: having patents, higher R&D intensity, larger sales growth, and higher profitability (ROA) increase the probability of a firm obtaining new debt, while intangible to total assets ratio, leverage, and firm age have the opposite effect. Column 4 and 5 report the results from the probit analysis when IPP2 is used to measure IP enforcement. IPP2 has a significant and positive impact on the probability of acquiring new debt by firms. We are concerned that the observed impact of IP rights enforcement on access to external debt might be driven by omitted variables, or the financing may increase the demand of IP rights enforcement. To address the endogeneity problem, we employ the instrumental variable (IV) approach in a two-stage least square (2SLS) framework. A valid instrumental for IP rights enforcement needs to satisfy two conditions: it is correlated with the IP rights enforcement measures (the validity requirement), but it needs to be uncorrelated with the residual in the regression of access to external debt (the exclusion restriction). In choosing suitable instruments for IP rights enforcement, we go back in history to search for the origin of the notions of IP protection. One variable that is related to the respect for intellectual properties is whether a province had a British concession, which lasted from the late Qing dynasty to 22
the early years of the Republic. There are two reasons to choose this instrument: first, England is generally regarded as the country where copyright law (Stature of Anne, 1710) and patent law (Stature of Monopolies, 1623) were originated. Second, the British modeled the local administrative and legal systems in the concessions to that in England, and there was evidence of their involvement in IP protection in China and enforcement activity by the local Chinese officials, as early as 1902. 14 We also recognize the importance of the educational institutions in instilling Western values among Chinese people. This is especially true for colleges sponsored by Christian churches, since Christian value includes the respect for private properties, e.g., the Commandments in Exodus. Thus, we choose as our second instrument, the number of colleges in a province founded by Christian missionaries (they include American, British, Canadian, Norwegian, and South American, etc.) by 1920 (Stauffer, Wong and Tewksbury, 1922). Well-known examples include St. John’s University, founded by the American Episcopal Church, and Soochow University, founded by the American Methodist Missionaries. These two instruments help explain local IP rights enforcement, as exposure to Western institutions and Christian values may plant the seed of enforcing IP protection in these provinces. The instruments are obtained from information predating the modern period, about a hundred years 14 For example, in 1902, Article 7 of the “Amendment to the Anglo-Sino Trade and Navigation Treaty” stated: “England will protect Chinese merchants’ trademark, from imitation by British citizens. Thus, Chinese should accord the same protection to British merchants against violation by Chinese citizens.” In 1907, the British Counsel in Shanghai demanded the Chinese authority to prohibit Chinese merchants from violating British trademarks. In April of the same year, in response to repeated requests by British merchants and counsel, the local officials announced, “We find evidence of unscrupulous persons using British trade names for local tobacco products. They are instructed to post 1,000 notices admitting responsibility in counterfeiting the tobacco product. After this, repeated offenders will be severely punished, there will be no leniency.” (Source: The Anglo American Tobacco Company business activity in China, volume 2, China Publishing House, Beijing, 1983). 23
Page 1 and 2: Does Enforcement of Intellectual Pr
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Page 5 and 6: To test our hypotheses, we utilize
Page 7 and 8: and 2) British Settlement, a dummy
Page 9 and 10: These two factors suggest that it i
Page 11 and 12: when the roles of formal financing
Page 13 and 14: copyright infringement cases. We be
Page 15 and 16: oad region, there are substantial v
Page 17 and 18: to ensure that the analysis focuses
Page 19 and 20: To deal with outliers, we winsorize
Page 21: ights enforcement on financing, R&D
Page 25 and 26: the exclusion restriction criterion
Page 27 and 28: variables, are lagged by one year.
Page 29 and 30: with the hypothesis that strong IP
Page 31 and 32: References Allen, F., Qian, J., Qia
Page 33 and 34: Political Economy 106, 1113-1155. L
Page 35 and 36: Licensing fees Paid by Chinese Comp
Page 37 and 38: Table 2: The effect of IP rights en
Page 41 and 42: Christian Colleges 0.019 0.118 (14.
Page 45 and 46: Appendix 2: List of International C
Page 47: entrepreneurs in dealing with burea

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