Can intellectual property protection policy enhance enterprise innovation capability? Quasi-natural experimental study

Intellectual property (IP) protection policies are widely recognized as critical for stimulating innovation; however, their effectiveness in emerging economies remains contentious. The exact processes by which tailored IP protection policies affect firm-level innovation potential in developing countries remain vague, despite current literature examining the general impact of IP rights on innovation. This gap is particularly significant in light of China's rapid economic transformation and aggressive innovation goal. We leverage China's National IP Demonstration City initiative as a quasi-natural experiment to explore the causal effect of increased IP protection on enterprise innovation capability. Employing a difference-in-differences technique on a dataset of 20,471 firm-year observations from 2007 to 2021, we find that the program significantly increases firm innovation output. Our study shows that increased research and development investment, government subsidies, and the removal of financing barriers mediate this effect. Furthermore, the effects vary across regions and industries, with higher impacts observed in more developed areas and pollution-intensive sectors. These findings demonstrate that targeted IP protection laws can effectively stimulate innovation in emerging economies, providing policymakers with useful insights into developing nuanced strategies for fostering innovation-driven growth in various economic contexts.