Intellectual Property Rights, Taxation, and Firms' Innovation: Theory and Evidence from China

Abstract

This study develops an R&D-based growth model with taxation to explore the heterogeneous effects of intellectual property rights (IPR) protection on innovation of firms with different tax rates. Our theoretical analysis shows that strengthening IPR stimulates innovation, and a higher tax rate dampens the positive effect of IPR. Moreover, we find supportive evidence for the theoretical result using firm-level data in China. Our empirical analysis shows that strengthening IPR is associated with less innovation by high-tax firms and more innovation by low-tax firms.

Keywords: Intellectual Property Rights; Taxation; Innovation; Economic Growth

JEL Classification: E62; H20; O30; O31