The impact of patent infringement litigation decisions on firms' innovation performance in China.

ABSTRACT

The judiciary protects the value of innovation through remedies such as injunctions and damages when patent rights are infringed, adjusting the expected returns on future innovation activities for firms. Based on data from 1,062 Chinese firms involved in Patent Infringement Litigations (PILs), this study uses three-way fixed-effects Poisson panel regression models to examine the dynamic impacts of a PIL win-or-lose decision on breakthrough and incremental innovation performance for plaintiff and defendant firms. The study finds that plaintiff micro and small-sized enterprises (MSEs) can only engage in short-term breakthrough innovation after winning a PIL. Plaintiff medium and large-sized enterprises (MLEs) tend to adopt the patent defence strategy after winning, while losing a case positively impacts their breakthrough and incremental innovation. Defendant firms adopt the strategy from incremental innovation to breakthrough innovation after winning, while losing inhibits their innovation. The current Chinese patent system has an imbalance in incentivizing innovation for MSEs. Whether winning or losing, defendant MSEs participating in litigation significantly inhibit their innovation performance at different levels. This paper provides a multidimensional angle for studying the relationship between patent protection and corporate innovation.