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

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efore the courts with the IP owners as the plaintiffs. We compute IPP1 as the percentage of these cases ruled in favor of the plaintiffs. We expect that a better enforcement of intellectual property rights is manifested in the greater odds that the intellectual property owners will win their cases in courts. Chinese authorities often announce policy directives through the Communist Party’s official newspaper. The second measure of IP rights enforcement is the number of articles advocating IP protection published in the official newspaper of the provincial Communist Party, which represents the highest level of the provincial administration. Articles published in the official newspaper serve to convey policy guidelines to all levels of local governments. A greater number of articles related to IP protection transmit a stronger commitment to IP enforcement by the top provincial officials. While IPP1 reflects the enforcement effectiveness of courts, IPP2 monitors the attitude of the top provincial officials towards IP enforcement. One concern about the causal effect of IP rights enforcement on financing of and investing in R&D is that some unobserved provincial factors may contribute to both IP rights enforcement and financing of and investing in R&D, thus producing a potentially spurious relationship between IP enforcement and financing of and investing in R&D in the OLS regressions. The omitted variable bias is a common source of the endogeneity problem. Another source of the endogeneity problem is due to reverse causality: a greater level of financing and investment may increase the demand of IP protection. We utilize instrumental variable regressions to deal with the problem of endogeneity. To choose the right instruments, we go back to the pre-modern history of China and identify the influence of western ideology on the enforcement of IP rights. The two instruments are: 1) Christian Colleges, i.e., the number of colleges founded by Christian missionaries in the provinces by 1920, 6
and 2) British Settlement, a dummy variable that is one when a province had a concession or leased territory established by Great Britain during the late Qing Dynasty. 5 They are expected to be positively and significantly related to the two measures of IP rights enforcement, yet they are not likely to directly affect the financing and investment of firms in the 21 st century. The results from the partial F-tests verify that the two instruments are indeed strong instruments, and the overidentification tests suggest that they satisfy the exclusion restriction. We show high tech firms in provinces with better enforcement of IP rights enjoy greater access to external debt, invest more funding in R&D, and generate more patents and greater new product sales. Our results demonstrate that protection of IP rights matters even in China. Better IP rights enforcement helps to facilitate financing of and investing in R&D, and therefore stimulate economic growth. The rest of our paper proceeds as follows. Section 2 presents the testable empirical hypotheses. Section 3 describes the database of high tech companies, measures of provincial-level IP rights enforcement, and other control variables. Section 4 reports the empirical results of the effect of IP rights enforcement on external financing, R&D input, and R&D output. Section 5 concludes. 2. Intellectual Property Rights Enforcement and R&D Investment In this section, we describe IP rights enforcement in China, and discuss the risks of appropriation by competitors and the problem of information asymmetry. These issues could lead to under-provision of funding and under-investment in R&D. Finally, we develop hypotheses of how better IP rights enforcement may mitigate these problems. 5 The concession or leased territory of British was in Xiamen city in Fujian, Hankou city in Hubei, Jiujiang city in Jiangxi, Zhenjiang city in Jiangsu, Guangzhou city in Guangdong, Weihai in Shandong, Tianjin, and Shanghai. 7
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Page 5: To test our hypotheses, we utilize
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 and 22: ights enforcement on financing, R&D
Page 23 and 24: the early years of the Republic. Th
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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