Intellectual Property Rights and Innovation Incentives: Evidence from U.S. Sanctions

Abstract

This paper examines whether the strength of intellectual property rights (IPRs) protection affects innovation incentives. We use U.S. government restrictions on technology exports to foreign firms as shocks to the IPRs of the U.S. suppliers to sanctioned entities in foreign jurisdictions. We find that U.S. suppliers to the sanctioned entities (henceforth, treated firms) reduce research and development expenditure (R&D) by 20% following the imposition of sanctions on their customers. And, treated firms file 19% fewer patents but increase their reliance on trade secrecy post-sanctions. Our results are stronger when treated firms had closer ties (licensing arrangements, research collaborations) with sanctioned entities, and weaker when treated firms face greater technology competition from domestic rivals. Our results are concentrated in industries more reliant on patents for protecting IP. Finally, we find that post-treatment, treated firms reduce R&D-related job-postings and see an increased rate of departures of employees in R&D roles. Departing employees experience longer employment gaps and salary decreases, and take up jobs requiring fewer skills post-treatment. This paper contributes to the literature by showing that 1) IPRs enforcement affects innovation incentives, 2) firms switch from patenting to secrecy when the enforcement of IPRs weakens and 3) export restrictions incentivize foreign firms and their governments to expropriate the IP of U.S. firms.