Financing Innovation with Innovation: A Quantitative Analysis of Patent Collateral in China

37 Pages Posted: 21 Sep 2022 Last revised: 25 Apr 2024

See all articles by Zhiyuan Chen

Zhiyuan Chen

Renmin University of China - School of Business

Minjie Deng

Simon Fraser University, Department of Economics

Min Fang

University of Florida - Department of Economics

Date Written: September 4, 2022

Abstract

This paper documents that Chinese firms increasingly finance innovation using their innovation stock, measured as patents. Drawing on patent collateral data from both the US and China, we first show that (1) In China, the total number and share of patents pledged as collateral have been rising steadily, similar to the US facts documented in Mann (2018), (2) Chinese firms employ patents as collateral on a smaller scale and with a lower intensity than US firms, and (3) Chinese firms also increase innovation after adopting patent collateral as US firms. We then construct a heterogeneous firm general equilibrium model featuring idiosyncratic productivity risk, innovation capital investment, and borrowing constrained by patent collateral. The model emphasizes two barriers that hinder the use of patent collateral: high inspection costs and low liquidation values of patent assets. We parameterize the model to firm-level panel data in the US and China and find that both barriers are significantly more severe in China than in the US. Finally, counterfactual analyses show that the gains in innovation, output, and welfare from reducing the inspection costs in China to the US level are substantial, moreso than enhancing the liquidation value of patent assets.

Keywords: Patent collateral; innovation investment; financial frictions; firm dynamics;

JEL Classification: E22, G32, O31, O33

Suggested Citation

Chen, Zhiyuan and Deng, Minjie and Fang, Min, Financing Innovation with Innovation: A Quantitative Analysis of Patent Collateral in China (September 4, 2022). Available at SSRN: https://ssrn.com/abstract=4209562 or http://dx.doi.org/10.2139/ssrn.4209562

Zhiyuan Chen

Renmin University of China - School of Business ( email )

Mingde Business Building
No. 59, Zhongguancun Street
Beijing, 100872
China

Minjie Deng

Simon Fraser University, Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

HOME PAGE: http://www.minjiedeng.me/

Min Fang (Contact Author)

University of Florida - Department of Economics ( email )

224 Matherly Hall
Gainesville, FL 32606
United States

HOME PAGE: http://www.minfang.info

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