Start-ups’ Technological Invention and the Role of Enforcement Environment

Abstract

The patent institution offers incentives for start-ups to engage in inventive activities. Yet, patents are only probabilistic rights, raising the risk of litigation for start-ups. In high-tech industries, competitors often employ patent litigation to assert their intellectual property and challenge start-ups’ novel inventions. In this study, we focus on the institutional environment for patent enforcement and examine how the prevalence of patent adjudication influences start-ups’ technological inventions. We theorize that start-ups are likely to reduce their efforts in inventive activities in an environment with a high adjudication rate to avoid ruinous litigation costs and the risk of patent invalidation. We further posit that the negative impact of adjudication can be made more or less pronounced by other institutional features that affect start-ups’ perceived litigation risks and costs for their inventions. Using a sample of Chinese biopharmaceutical start-ups founded between 2008-2017, we find empirical support for our hypotheses.