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

the exclusion restriction criterion.
In Table 3, we examine the impact of IP rights enforcement on new external equity. In the
probit regressions, IPP2 has a negative and significant impact on the new external equity as
predicted, while the coefficient of IPP1 is insignificant or weak. In the IV regressions, however,
neither measure of IP rights enforcement is significant. Therefore, the support for Corollary 1 is
weak, at best.
Insert Table 3
4.1.2 Informal financing ratio
We now investigate the determinants of informal financing. To facilitate comparison, we use
the same specification as in Equation (1) to estimate the effects of IP rights enforcement on the ratio
of informal financing. The difference is that we now use linear regressions, since the dependent
variable is a continuous variable. The standard errors are robust to correction for heteroskedasticity
and within-province correlations.
Insert Table 4
Column 1 of Table 4 shows that IPP1 increases informal financing ratio, as predicted in
Hypothesis 2. A one-standard-deviation increase in IPP1 raises the informal financing ratio by 2.6
percentage points. Moving from lowest-IPP1 province to the highest-IPP1 province increases the
informal financing ratio by 13.8 percentage points, about half of the sample mean.
After controlling for the provincial-level characteristics, IPP1 still has a positive and
statistically significant effect on the proportion of informal financing in new debt (Column 2). The
development of banking system has a negative and significant effect on the informal financing ratio,
i.e., better banking development enables firms to rely less on the more expensive external finance.
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