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

level. 3
Country-level analysis does not allow researchers to separate the confounding effect of the
existence of IP laws and the effectiveness of their enforcement. Rather than dealing with crosscountry
variations in IP laws, we focus on a single country, China. We analyze the impact of local
enforcement of IP laws on the financing of and investing in R&D by firms in provinces throughout
China. 4
To our knowledge, our paper is the first to investigate the relationship between provincial-level
enforcement of IP rights and firm-level financing of and investing in R&D. We do not treat China
as a single homogeneous entity. Rather we recognize that even though the applicable IP laws and
international treaties are the same for all provinces in China, there exist significant differences in the
local enforcement of the IP laws. Our approach of analyzing provincial variations parallels that of
Guiso, Sapienza and Zingales (2004) who study the difference in regional social capital in Italy, and
Benfratello, Schiantarelli, and Sembenelli (2008) who investigate the effect of local banking
development on firms’ innovative activities in Italy.
We propose that better enforcement of IP rights mitigates the problems associated with R&D:
risks of appropriation by competitors and information asymmetry. This leads to the empirically
testable hypotheses that better enforcement of IP rights helps generate more funds available to
finance R&D, more investment in R&D, and more output from R&D.
3 Comparisons are made on national intellectual property laws, but not the quality of their enforcement.
Existing empirical evidence suggests a positive effect of the extent of IP laws on GDP growth (Gould and
Gruben, 1996), direction of technical change (Moser, 2005), and foreign direct investment (Javorcik, 2004; Du
et al., 2008). The impact of intellectual property protection on the number of innovations and R&D investment
are also widely studied (e.g., Nordhaus, 1969; Sakakibara and Branstetter, 2001). However, most of the studies
are at country level.
4 The Office of the US Trade Representatives in its June 2006 review of intellectual property rights protection
in China switches its emphasis from country based assessment of China to developments at the provincial
level in China (Federal Register 43,969, June 16 2006; also see Yu, 2007).
4