Inter-Firm Patent Litigation and Innovation Competition

Abstract

Using novel inter-firm patent litigation data, we show a significant interplay between intellectual property rights’ boundaries and product market dynamics. Instrumenting a firm’s patent litigation propensity with the passage of China’s National Intellectual Property Strategy reform, we find that patent litigation reduces defendant firms’ innovation activity and fosters more exploitative innovations. The effects strengthen with product market overlap between litigants. We further find that patent litigation intensifies product market competition among close rivals and results in lower and more disperse innovation activities within industry, implying an industry structure where Schumpeterian effect of competition is more likely.

Keywords: Inter-Firm Patent Litigation, Intellectual Property Rights Boundary and Product Market Dynamics, Financial and Real Consequences of Patent Litigation, Innovation Activity, Innovation Strategy

JEL Classification: G30, K41, L24, O32, O34