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

Does Enforcement of Intellectual Property Rights Matter in China?
Evidence from Financing and Investment Choices in the High Tech Industry
1. Introduction
Allen, Qian and Qian (2005) raised the puzzle that “China’s legal and financial systems as
well as institutions are all underdeveloped, but its economy has been growing at a very fast rate.”
More specifically, it is a challenge to explain the high growth in R&D expenditure in China in spite
of its generally perceived weak protection of intellectual property (IP) rights. The growth of China’s
R&D expenditure ranked first among 40 OECD (Organization for Economic Co-operation and
Development) countries and selected non-member economies from 2002 to 2010, while its IP
protection is still considered very weak in comparison to other countries (Israel, 2006; Stratford,
2006; International Intellectual Property Association, 2007). 1 The China phenomenon has become
such an anomaly, as some cross-country studies are unable to obtain the expected positive relation
between IP protection and economic growth unless China is excluded from the sample (Gould and
Gruben, 1996). Does this lead to the inference that China is somehow different and IP protection
does not matter there? That is the question we address in this paper.
Effective protection of intellectual property rights depends both on the existence of IP laws and
the enforcement of the laws. 2
Although much has been written about the IP rules and laws (e.g.,
Gould and Gruben, 1996; Moser, 2005), there is little empirical evidence on the importance of their
enforcement. One reason is that studies of IP protection are generally performed at the country
1 We obtain the information from the OECD website, http://stats.oecd.org/Index.aspx and R&D Magazine:
http://www.rdmag.com/.
2 La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998) state that “a strong system of legal enforcement
could substitute for weak rules” (p.1140). The cross-country studies of La Porta et al. (2006) and Jackson and
Roe (2008) have documented the role of private and public enforcement of securities laws.
3