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

Chu, Angus C. and Cozzi, Guido and Pan, Shiyuan and Zhang, Mengbo (2016): Do Stronger Patents Stimulate or Stifle Innovation? The Crucial Role of Financial Development.

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. Through either channel, a higher level of financial development stimulates innovation, but the two channels of financial development interact with the effects of patent protection differently. 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 that patent protection and financial development have a negative interaction effect on innovation.

• 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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