Institutional Regime Shift in Intellectual Property Rights and Innovation Strategies of Firms in China

This study develops a conceptual framework to understand the differential impact of formal institutional regime shift in intellectual property rights on the patenting and innovation strategies of Chinese and Western firms operating in China. We argue that to the extent that Chinese firms have been deeply embedded in China’s informal institutions, they are less responsive to formal institutional changes than Western firms operating in China. Using the major China patent law reform of 2001 as an exogenous event, we find results consistent with our key arguments: With the strengthening of the previously weak (utility model) patent protection, Chinese firms are less likely to apply for such patents to safeguard their innovations than Western firms. However, this difference becomes less pronounced in regions with higher quality intellectual property rights and legal institutions that foster R&D and innovation, and when Western firms gain longer operational experience in China. This study advances our understanding of the intricate interaction between formal and informal institutions and specifically, how “stickiness” may arise in their substitutive relationship due to the embeddedness of firms in informal institutional environments. It also provides important implications for policy and innovation strategies for policymakers and firms in emerging economies.