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Do Stronger Patents Stimulate or Stifle Innovation? The Crucial Role of Financial Development

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  • Chu, Angus C.
  • Cozzi, Guido
  • Pan, Shiyuan
  • Zhang, Mengbo

Abstract

This study explores the effects of patent protection in a distance-to-frontier R&D-based growth model with financial frictions. We find that whether stronger patent protection stimulates or stifles innovation depends on credit constraints faced by R&D entrepreneurs. When credit constraints are non-binding (binding), strengthening patent protection stimulates (stifles) R&D. The overall effect of patent protection on innovation follows an inverted-U pattern. An excessively high level of patent protection prevents a country from converging to the world technology frontier. A higher level of financial development influences credit constraints through two channels: decreasing the interest-rate spread and increasing the default cost. Via the interest-spread (default-cost) channel, patent protection is more likely to have a negative (positive) effect on innovation under a higher level of financial development. We test these results using cross-country regressions and find supportive evidence for the interest-spread channel.

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  • Chu, Angus C. & Cozzi, Guido & Pan, Shiyuan & Zhang, Mengbo, 2016. "Do Stronger Patents Stimulate or Stifle Innovation? The Crucial Role of Financial Development," MPRA Paper 73630, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:73630
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    Cited by:

    1. Angus C. Chu, 2024. "Macroeconomic effects of intellectual property rights: an updated survey," Chapters, in: Walter G. Park (ed.), Handbook of Innovation and Intellectual Property Rights, chapter 2, pages 13-26, Edward Elgar Publishing.
    2. Furukawa, Yuichi & Lai, Tat-kei & Sato, Kenji, 2019. "Love of Novelty: A Source of Innovation-Based Growth... or Underdevelopment Traps?," MPRA Paper 92915, University Library of Munich, Germany.
    3. Lu, You-Xun, 2022. "Interactive effects of monetary policy and patent protection: The role of endogenous innovation size," Economic Modelling, Elsevier, vol. 113(C).
    4. Benczúr, Péter & Karagiannis, Stelios & Kvedaras, Virmantas, 2019. "Finance and economic growth: Financing structure and non-linear impact," Journal of Macroeconomics, Elsevier, vol. 62(C).
    5. Sadia Yasmin & Mohammad Ayaz & Muhammad Ather Ashraf, 2022. "Accelerating Industrial Output Growth through Islamic Bank Decomposed Financing Optimization in Malaysia," iRASD Journal of Economics, International Research Alliance for Sustainable Development (iRASD), vol. 4(4), pages 544-560, December.
    6. FURUKAWA Yuichi & Tat-kei LAI & SATO Kenji, 2018. "Novelty-Seeking Traits and Innovation," Discussion papers 18073, Research Institute of Economy, Trade and Industry (RIETI).
    7. Angus C. Chu, 2022. "Patent policy and economic growth: A survey," Manchester School, University of Manchester, vol. 90(2), pages 237-254, March.
    8. Furukawa, Yuichi & Lai, Tat-kei & Sato, Kenji, 2017. "Receptivity and Innovation," MPRA Paper 81536, University Library of Munich, Germany.
    9. Ater, Brandon & Hansen, Bowe, 2021. "Do the specific countries in which a multinational corporation operates affect its private loan contracts?," Journal of Multinational Financial Management, Elsevier, vol. 62(C).
    10. Rongxin Xu & Yibai Yang & Zhijie Zheng, 2024. "Intellectual property rights, taxation, and firms’ innovation: theory and evidence from China," Journal of Economics, Springer, vol. 142(1), pages 81-109, June.
    11. Huang, We-Chi & Chen, Ping-ho & Lai, Ching-Chong, 2016. "International R&D Funding and Patent Collateral in an R&D-Growth Model," MPRA Paper 74881, University Library of Munich, Germany.
    12. Huang, Wei-Chi & Lai, Ching-Chong & Chen, Ping-Ho, 2017. "International R&D funding and patent collateral in an R&D-based growth model," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 545-561.
    13. E. Richard Gold & Jean‐Frédéric Morin & Erica Shadeed, 2019. "Does intellectual property lead to economic growth? Insights from a novel IP dataset," Regulation & Governance, John Wiley & Sons, vol. 13(1), pages 107-124, March.

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    More about this item

    Keywords

    Patent protection; credit constraints; economic growth; convergence;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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