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

Angus Chu, Guido Cozzi, Shiyuan Pan and Mengbo Zhang

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Patent protection; credit constraints; economic growth; convergence (search for similar items in EconPapers)
JEL-codes: E44 O31 O34 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-cse, nep-ent, nep-ino, nep-ipr, nep-mac, nep-sbm, nep-sog and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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https://mpra.ub.uni-muenchen.de/78988/1/MPRA_paper_78988.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/84803/1/MPRA_paper_84803.pdf revised version (application/pdf)
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https://mpra.ub.uni-muenchen.de/92488/1/MPRA_paper_92488.pdf revised version (application/pdf)

Related works:
Journal Article: Do Stronger Patents Stimulate or Stifle Innovation? The Crucial Role of Financial Development (2020)
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