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

Chu, Angus C. and Cozzi, Guido and Fan, Haichao and Pan, Shiyuan and Zhang, Mengbo (2016): Do Stronger Patents Stimulate or Stifle Innovation? The Crucial Role of Financial Development. Forthcoming in: Journal of Money, Credit and Banking

Abstract

This study explores the effects of patent protection in an 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. By relaxing the credit constraints, financial development stimulates innovation. Furthermore, patent protection is more likely to have a positive effect on innovation under a higher level of financial development. We consider cross-country panel regressions and find supportive evidence for this result.

• Item Type: MPRA Paper
• Language: English
• Keywords: Patent protection, credit constraints, economic growth, convergence
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O34 - Intellectual Property and Intellectual Capital

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