Abstract
Pledging patents as loan collateral has increased in advanced countries with the growth of intangibles in the value of firms. Despite China's less sophisticated market in intangible capital, collateralization has also increased in China. Using evidence on city-level policies to encourage collateralization in the early 2000s, we find that government efforts to encourage the practice sparked much of China's increase in patent collateralization from 2002 to 2015. Bank lenders – a group more connected to the government than non-bank financial institutions – favored older, larger, private enterprises. The most effective policies provided direct financial support to firms and lending institutions. Policies worked best in cities where intellectual property rights were better protected. By adding value to patents, patent pledge policies induced firms to make more patent applications, potentially encouraging innovation. The impact of government policy on pledging patents as loan collateral reflects the state's continuing entrepreneurial role in capitalism with Chinese characteristics.
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