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Keywords: Property rights, firm innovation, place-based policy, transition economies
Abstract:
The paper shows that property rights and law enforcement foster innovation by protecting innovators from government expropriation. We exploit the staggered establishment of Special Economic Zones (SEZs) across over 2,000 counties in China, which offer firms inside SEZs stronger property rights protection against government expropriation compared to firms outside SEZs. Using a difference-in-difference approach, we provide firm-level evidence on the causal effect of property rights on innovation. Our findings indicate that firms inside SEZs experience 8%, 9%, and 4% higher total patenting, invention patenting, and new product sales, respectively. The effect is stronger for firms most vulnerable to government expropriation: high private ownership, medium-sized, and those operating in areas with high entertainment (bribery) expenses and local governments with high fiscal deficits. Law enforcement, proxied by regional legal expenditure and senior cadres disciplined, reinforces the impact of property rights on innovation. Our results remain robust when controlling for other SEZ benefits and sub-sample analyses. This novel evidence suggests that the legal environment fosters improved innovation outcomes.
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