Ownership Structure and Intellectual Property Strategy:
Patent Analysis in China (*)
Research Fellow: Yuan YUAN
The purpose of this study is to analyze the impact of shareholder structure on the innovation activities of firms byusing the patent database and industrial enterprises database of China. In particular, we focus on the role of state-owned
shareholders. The main results are as follows.
First, there is a tendency that the central state-owned firms and local state-owned companies produce new products.
However, we only observed the tendency of patent application and registration for central state-owned firms.
Second, regarding the effect of privatization on innovation, we find that firms that have been privatized to private
firms (hereafter: PPF), reduce patent application or registration and tend to produce new product. However, we do notfind any significant effect on firms that have been privatized to foreign companies (hereafter: PFF).
Third, our analysis shows that firms with high competitive pressures from foreign companies, export firms, debtlessfirms, firms with large market shares, firms with large asset size and elder firms have a tendency of application,registration and new products.
The results of this study suggest that in China, leading-edge innovation was driven by state-owned firms,
particularly state-owned firms which have strong supports from government, while new products that respond to market
needs are mostly developed by the private firms.

IIntroduction

Until now, China has been able to achieve highgrowth of its economy. However, without falling into themiddle-income country trap, there is a need forinnovation in order to maintain sustainable economic
growth. In recent years, as seen from the series of policiesof the Chinese government, China is attempting totransform into an innovative country from a low-cost
production base.
In this study, we analyze the activities of theinnovation of Chinese firms in terms of shareholder
composition by using firm-level financial data and patentdata. In particular, we focus on the role of state-owned
shareholders to reveal the reality of innovation activities
in China. The definition of innovation is "implementationof a new or significantly improved product (good orservice), or process, a new marketing method, or a neworganizational method in business….” (OECD, 2009, pp.
11-12). In this study, patent applications, patentregistration and the production of new products are used
as indicators of innovation.
So far, there is little accumulation of research on thepatent activity of Chinese firms, with most previous
research being study on innovation in relation toeconomic environment changes or shareholdercomposition. Based on the previous studies, this study
analyzes the innovation strategy of firms with different
compositions of shareholders. Especially, we focus on thedifferences between central state-owned firms and localstate-owned firms.
In addition to analyzing the differences between
state-owned firms and private firms, we also analyze thedifferent impacts of the local state-owned shareholders
and the central state-owned shareholders, and the impactsof the privatization on innovation activities. Moreover,
we classified firms into two types: PPF and PFF.
Furthermore, we not only focus the registration andapplication of patent activity, but also focus on theproduction of new products.
First, there is a tendency that central state-owned
firms and local state-owned firms produce new products.
However, we only observed the tendency of patentapplication and registration for central state-owned firms.
Second, regarding the effect of privatization oninnovation, we find that firms that have been privatized todomestic private firms reduce patent application orregistration and tend to new product production. However,
we do not find any significant effect on firms that havebeen acquired by foreign firms. Third, our analysis showsthat firms with high competitive pressures from foreign
firms, export firms, debtless firms, firms with large
market shares, firms with large asset size and elder firms
have a tendency of application, registration and newproducts.
The results of this study suggest that state-owned
firms, particularly state-owned firms that have strong
supports from government, do innovation activities
aggressively in present China.

(*) This is a summary of the report published under the 2014FY Industrial Property Research Promotion Project (2014FY-2016FY)
Entrusted by the Japan Patent Office.
●IIP Bulletin 2016 Vol.25

1 ●II Data Set
In the present study, we analyze the impact ofshareholders on firms’ innovation activities by using thepatent database and manufacturing firm database ofChina. Patent data were collected by the ChinaIntellectual Property Office (SIPO) and were sold byintellectual property publishers that are under theumbrella of the SIPO. The data is from 1985 to 2011, andwe only use the data on invention patents in this paper.
The manufacturing firm database for China is soldby GTA, Co., Ltd, and the period is 1998-2008. This
database has the basic financial information of all of the
manufacturing firms with more 50,000 RMB capitalstock. The number of firms has increased over the years,
recording the number of firms from 160,000 in 1998 tomore than 300,000 in 2007. It indicates that, together withthe economic growth, the amount of firms with more than
50,000 RMB capital stock increased. This database has
been used widely in the research field of the Chinese
economy.
In addition, the data of the central state-owned firms
was collected by hand from the homepage of each central

1state-owned firm.
In order to carry out the empirical analysis of thisstudy, we matched a name and year by using the patent
database and manufacturing firm database. About 30% offirms who filed a patent application can be matched(Figure 8). So, we think that using the matching data, weshould be able to capture some extent of the patentactivity of Chinese companies.

III Empirical ModelIn this paper, firstly, we analyze the characteristics ofinnovative firms in China in terms of patent applications,patent registration and the production of new products.
Then, we analyze how privatization has effects on theinnovative activities. In particular, we divide the sample
into a central state-owned firm group and localstate-owned firm group. In this section, the estimation
model and variables to be used for each analysis will bedescribed.

What Kind of Firms Like to Do Innovation?
We estimate the following three models to analyze the features of innovative firms.
Appilication

2,,,,,,,2,,,（1）Grant

2,,,,,,,2,,,（2）New

2,,,,,,,,,2,,

（3）

●2 ●
IIP Bulletin 2016 Vol.25

Here, i is the firm, t is the year, τ is the industry andθ represents the region (province). β, γ, φ and α arecoefficients and ε is the error term.
In this study, three indicators are used as dependent
variables. Application is a patent application dummy
variable (1 if a firm filed patent applications, 0 otherwise).
Grant is a patent registration dummy variable (1 if a firm
registered patents, 0 otherwise). New is a new products
dummy variable (1 if a firm produce new products, 0otherwise).
Comp is in the market share of foreign firms vis-à-visindustry; Comp2 is the square of the market share offoreign companies vis-à-vis industry; Centralstate is adummy of the central state-owned firms (1 if a firm iscentral state-owned firms, 0 otherwise); Localstate is the
local state-owned firms dummy (1 if a firm is a local
state-owned firm, 0 otherwise); Exportdummy is adummy of exports (1 if a firm export products, 0otherwise); Longdebt is long-term debt ratio (long-termdebt / total assets); Saleshare is the share of the sales of
the industry companies (sales / total industry-wide sales);Saleshare2 is the squared market share (sales /industry-wide sales); Lnast is the total assets of thecompanies that took the logarithm; Age is the firm age.

Pri_dome,

Besides the above variables, an industry dummy,
year dummy and regional dummy are also added to theestimation equation. Since whether or not to produce new
products is affected by the situation of innovation
activities in the previous fiscal year, we also add previousApplication in equation (3).
2The Effects of Privatization on Innovation
Since privatization is not chosen in a randommanner (for example, companies with originally low
innovation capability are likely to be privatized), theselection bias will occur when we estimate the effect ofprivatization on the innovation activities. Therefore, it isnecessary to use a propensity score matching method(propensity score matching).
In this study, first we estimate the probability ofbeing privatized, and then analyze the average treatment
effect of the privatization by Kernel matching and Calipermatching. Following Bai et al. (2009), Todo et al. (2014),
we use the following logit model (4) and (5) to obtain theprobability of being privatized.

,,2,,,,,,(4)Pri_foreign,,2,,,,,,,(5)
Here, i is the firm, t is the year, τ is the industry andθ represents region (province). β, γ, φ and α arecoefficients and ε is the error term.
Pri_dome is that a state-owned firm is privatized to adomestic private firm (1 if a stated-owned firm haschanged to domestic private firm, 0 otherwise).
Pri_foreign is that a state-owned firm is acquired bya foreign firm (1 if a stated-owned firm is acquired by aforeign firm, 0 otherwise).
Comp is in the market share of foreign firms
vis-à-vis industry; Profit is the revenue ratio (income /●IIP Bulletin 2016 Vol.25

total assets); Liquidity is the liquidity ratio ((current assets- current liabilities) / total assets) which shows theabundance of internal corporate funds. Exportdummy is adummy of exports (1 if a firm exports products, 0otherwise); Longdebt is long-term debt ratio (long-termdebt / total assets); Saleshare is the share of the sales of
the industry companies (sales / total industry-wide sales),and Saleshare2 is the squared sales share. Lnast is thetotal assets of the companies that took the logarithm. Sbjct
is the level of government that firms belonged to (centralgovernment,provincial
government,municipal
3 ●government, six of the classification, such as the county
government). Age is the firm age. In addition to the above
variables, an industry dummy, year dummy and province
dummy were also added to the estimation equation.
Since Heckman (1997) suggests that there is a needto match in the same labor market, in this study, wematch the sample in the same year and the same industry.
Furthermore, to eliminate time-invariant effects to obtain
more clearly the effects of privatization, we use
difference-in-difference (DID) PSM to estimate.
We compare the change of outcome variables fromt-1 to t, from t-1 to t+1 and from t-1 to t+2. Here,outcome variables are the number of patent applications,the number of patent registrations and the new productdummy (New).

IV Empirical Results
1

What Kind of Firms Like to Do Innovation?
First, let's look at the coefficients of competitive
pressure from foreign firms (Comp). The sign issignificantly positive for Application, Grant and New,
indicating that there is a positive effect of foreigncompetition on the firms’ innovative activities. Thereason is that if firms encounter the pressure ofcompetition from foreign firms in the industry, the firms
have a tendency of innovation activities. On the otherhand, the square of the competition by foreign firms(Comp2) was found to have significantly negative impact
on the three of the innovation index, indicating that if thecompetition from foreign firms exceeds a certain level,firms will not perform innovation activity. In a word, we
find in China, the effect of foreign firms’ competition isan inverted “U.” This result is consistent with Aghion etal. (2005) that analyzes US firms.
Next, let us take a look at each of the innovation
behaviors of the central state-owned firms and local
state-owned firms, which is the main focus in this study.
Centralstate has significantly positive impact on the three
innovation indexes. On the other hand, Localstate has anegative impact on patent application or patentregistration, and has a positive effect on new products. As
mentioned above, as many of the central state-owned
firms are important firms of key industries, they are
responsible for the state of technological development.
Therefore, they often participate in government-ledinnovation projects (for example the 863 plan or star fireplan). On the other hand, the major roles of the local
state-owned firms are tax payment and maintenance ofemployment. Hence, local state-owned firms tend toproduce new products rather than patent application andregistration.

The export dummy (Exportdummy) havesignificant positive impacts on three innovationindexes. In general, export firms can access●overseas markets easily and they tend to improvetheir products to meet the needs of foreign
markets. So, it is considered that there is atendency to carry out innovation activities inexport firms. This result is consistent with Aw etal. (2010) showing that export has positive effects
on innovation.
The long-term debt ratio (Longdebt) has
negative effects on three innovation indexes.
These estimated results indicate that it is difficult
to secure funds to carry out innovation whenfirms have a higher long-term debt ratio.
In addition, Saleshare has positive impacts
on the innovation activities, however Saleshare2has significantly negative impacts. This meansthat firms with a large sales share tend to innovate,
but when the sale share exceeds a certain level,firms will not be likely to innovate.
Schumpeter argues that companies with acertain large scale and market power tend toinnovate (Schumpeter hypothesis). Our estimatedresults show that Lnast has significantly positive
impact on the three innovation indexes. This
demonstrates the Schumpeter hypothesis in China.
We also find that, the higher the age of the firm,
the higher the tendency to perform innovation.
2The Effects of Privatization on Innovation
Panel A of Chart 24 shows the innovation changes inthe PFF. We do not find any significant changes on theinnovative activities in terms of the amount ofapplications, the amount of registrations and the dummyof new products.
Panel B of Chart 24 shows the changes in the PPF.
In the first and second years after privatization, it showsthat the number of patent applications and the number ofpatent registrations have decreased. On the other hand,
we find that firms tend to produce new products in thesecond and third year.
Based on these results, it can be considered as follows.
First, most of the firms that have been acquired byforeigners often play a role as the production plants offoreign firms. So, these firms are originally manufacturing
plants and they are not innovative firms. So, there is nochange in their innovative activities, even after it has beenacquired by foreign firms. However, it is considered that
there may be some changes that cannot be observed in thisstudy. For example, it is considered that there has been achange in the cost reduction and productivity.
Secondly, for PPF, after the privatization, they tend toimprove their profit. Therefore, they may stop patents thatwill not lead immediately to profits, and they are likely tocarry out new products that lead to immediate profits.
To confirm the robustness of the estimation results,
we also estimate DID PSM by using the Caliper (0.05)

4 ●IIP Bulletin 2016 Vol.25

matching method. The results are shown in Figure 25,
and the results are very similar to Figure 24.

V Conclusionand financial factors. Comparative Economic Studies,1-20.
OECD, Innovation in Firms: A microeconomic
perspective, OECD Publishing, 2009.

Intellectual property systems are a basic
infrastructure in order to maintain economic growth.
They not only affect China's sustainable growth, but also
foreign firms’ strategies on the Chinese market including
Japanese firms.
This study analyzes the innovation strategies offirms in China in terms of central state-owned firms, local
state-owned firms and privatization of state-owned firms.
Features of this study can be concluded as follows. First,
we merge two large-scale databases (patent database andChinese industrial firm database) to analyze the effects ofstate-owned share and privatization on innovation.
Second, this study analyzes state-owned firms by
dividing them into central state-owned firms and local
state-owned firms.
Our estimated results are as follows. First, there is atendency that the central state-owned firms and local
state-owned firms produce new products. However, weonly observed the tendency of patent application andregistration for central state-owned firms. Second,
regarding the effect of privatization on innovation, wefind that firms that have been privatized to domestic
private firms reduce patent application or registration andtend to produce new product. However, we do not findany significant effect on firms that have been acquired byforeign companies. Third, our analysis shows that firms
with high competitive pressures from foreign companies,
export firms, debtless firms, firms with large market share,firms with large asset size and elder firms, have atendency of application, registration and new productproduction.

References
Aghion, P., Bloom, N., Blundell, R., Griffith, R.,
Howitt, P., 2005. Competition and innovation: an inverted
U relationship. Quarterly Journal of Economics 20,701-728
Aw, B.Y., Roberts, M.J., Xu, D.Y., 2008. R&D
investments, exporting and the evolution of firm
productivity. American Economic Review 98, 451-456.
Bai, C., Lu, J., Tao, Z., 2009. How does privatization
work in China? Journal of Comparative Economics 37,453-470.
Heckman J.J., Ichimura H., Todd P., 1997. Matchingas an econometric evaluation estimator: Evidence fromevaluating a job training program. Review of Economic
Studies 64, 605-654.
Todo, Y., Inui, T., Yuan, Y., 2014. Effect ofprivatization on export through changes in productivity●IIP Bulletin 2016 Vol.25

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