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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

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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.

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