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The Determinants of Innovation : Patent Laws , Foreign Direct Investment and Economic Growth in China

China’s intellectual property rights regime provides formally for a measure of protection that is not always realised in practice. With the implementation of WTO-mandated measures in the coming years, China’s intellectual property regime will come under increasing pressure. Intellectual property rights are one form of property rights which are thought to promote innovation by protecting the investment of the entrepreneur. Innovation is thought to be fundamental to economic growth. China has grown well without clearly defined property rights, although the IPR regime is better defined than most but not well-established in practice. This paper explores whether the patent law system has generated innovation in the Chinese economy during the reform period. Although imperfect, it appears that the IPR system has produced a stock of patents and innovation, which are closely associated with variations in per capita GDP among China’s provinces. We also find that innovation can be explained by R&D expenditure, foreign direct investment, but not the number of science and technical personnel. R&D expenditure is found to be more important than foreign investment in generating innovation captured by patents, as is the level of human capital. We conclude that the patent laws in China have been associated with formally captured innovation that has accompanied economic growth despite the imperfections in the property rights system.