Patent Litigation, Patent Value and the Direction of Innovation: Evidence from China

This paper investigates the role of patent enforcement in the private value of patents valuation and firm patenting strategy. I take China as the institutional context and examine how its damage awards doctrine and patent remedy enhancement efforts impact the private value of patents and the direction of firm innovative activities. To estimate the private value of patent protection, I construct a finite-horizon stochastic dynamic model and recover key parameters of firms' patenting and litigation processes. The structural estimates and counterfactual simulations show that strengthening patent enforcement by promoting damage awards significantly boosts the private value of utility models- the type of patents that do not go through rigorous examination- while leaving the private value of invention patents- the type of patents that go through examination and protect more substantive inventions- almost unchanged. To explore the implications for firm strategy, I run a series of difference-in-differences analyses on a comprehensive sample of Chinese patenting firms. I find that firms with higher litigation exposure tend to patent more utility models when patent reform enhances damage awards. This tendency of filing more utility models is more pronounced among financially constrained firms. The