Intellectual Property Protection and Firm Innovation: Evidence from a Natural Experiment in China

Abstract

It is widely argued whether the government should intervene in firms’ innovation activities and support firm innovation. We explore a recognition policy that honors cities with a title in intellectual property (IP) utilization, management, and protection under governments’ effort. The difference-in-difference regression with a matched sample indicates that the recognition of IP model cities increases firm innovation output and productivity. Different firms are funded by local governments and utilize financial support in different ways. High-tech firms receive many government subsidies, whereas non-high-tech ones receive substantial support in tax returns. High-tech firms invest in a huge amount of R&D expenditures, whereas non-high-tech firms benefit from a relaxed financial burden for increased loans. Therefore, the recognition effectively mobilizes local governments’ enthusiasm to participate in firm innovation through the inducement of political achievement and makes government funding support for firms’ innovation activities more efficient to win that title through this recognition.