Intellectual property protection and firm innovation capability

This study examines the causal effect of intellectual property rights (IPR) demonstration zones on firm innovation capability using a comprehensive panel dataset of 30,307 firm–year observations from Chinese listed companies spanning 2010–2023. Employing a difference-in-differences estimation strategy with two-way fixed effects, firms located in IPR demonstration zones exhibit significantly higher innovation output (measured by patent applications) compared with firms in nondesignated regions. Mechanism analysis reveals that research and development (R&D) investment is a critical mediating channel, whereas enhanced IP protection incentivizes firms to increase research expenditure, subsequently generating greater innovation output. Moderation analysis demonstrates that the provincial legal environment amplifies policy effectiveness, and firms in regions characterized by stronger legal institutions experience larger innovation gains from the IPR demonstration zone policy. Heterogeneity analyses uncover relevant boundary conditions, wherein the positive innovation effects are substantially stronger in regions with robust IP administrative enforcement and among non-state owned enterprises (non-SOEs), whereas SOEs exhibit no significant response to the policy. These findings advance our understanding of how localized IP protection policies influence firm practices in emerging economies and have significant implications for innovation policy design. Policymakers seeking to foster innovation-driven growth should simultaneously strengthen targeted IPR policies, incentivize firm level R&D investment, enhance broader legal and institutional frameworks, and implement strategically targeted policy responses across ownership structures and regional contexts.