Discussion Paper Series No.169
Intellectual Property Rights Protection and Imitation--- An empirical examination of Japanese FDI in China ---Kegang You

Kobe University

Seiichi Katayama

Kobe University

April

2005

Discussion papers are a series of manuscripts in their draft form.
They are not intended for circulation or distribution except as
indicated by the author. For that reason Discussion Papers may not bequoted, reproduced or distributed without the written consent of theauthor.

Intellectual Property Rights Protection and Imitation--- An empirical examination of Japanese FDI in China ---Kegang You 1
Seiichi Katayama2
2003/2 the first version
2005/3 the second version

Abstract
By using the data obtained from a questionnaire survey to the Japanese firms in
China this paper empirically examines the effects of the IPRs protection against
local illegal imitation. No evidence has been found in the test that the patent andtrademark registration, which constitutes a part of the whole IPRs protection
system, has protective effect. To the contrary the results suggest that the patent andtrademark registration system may play a role in facilitating local illegal imitationand may be mediate technology transfer/diffusion in China.
Keywords: IPR, Patent, Imitation, technology diffusion, FDI
JEL Classification: O34, O38

I Introduction
Since the end of 80’s, Intellectual Property Rights protection (IPRs) has become aprominent issue on the strategies of countries, especially in terms of foreign direct investment (FDI).

Later during 1994 to 1995, the introduction of TRIPs in GATT and the afterward WTO pushed thisworldwide IPRs protection to a high tide. Such a campaign on IPRs protection reflects the following

two features of the present market competition. First, the growing capacity of traditional

Corresponding author: Seiichi Katayama: Tel & Fax: #81-78-803-7012, E-mail: katayama@rieb.kobe-u.ac.jp
1
Faculty of Business Administration, Kobe University
2

Research Institute for Economics and Business Administration, Kobe University.

1manufactures in developing countries has forced developed countries to rely more heavily on theircomparative advantages in production of intellectual goods. Second, not only the cost of R&D isoften disproportionately higher than in the past, but the resulting innovation embodied in today’shigh-tech products has increasingly become more vulnerable to free-riding imitators.

Due to this kind of global pressure, strengthening IPRs protection in developing countries

has become an unavoidable tendency in order to attract more FDI, to access to better technologies

and ultimately to attain higher economic growth.

A straightforward reason why strengthening IPRs protection could raise FDI is expected as

its power on reducing local illegal imitation, consequently reduces a risk of FDI and ensures the

profits of investors.

And a preparation of such a TRIPS standardized system is made use of as (1) asymbol of improvement of FDI environment in developing countries; (2) a powerful card at the

WTO negotiation for both developed and developing countries. The campaign of IPRs protection has

been occurred over a decade, however the situation of illegal imitation in developing countries has

not improved considerably. For example, the Japanese Patent Office Annual Investigation Reporteron the issue of the infringement on Japanese firms’ IPRs shows that the situation is deteriorating year
after year3. This raises a question as to whether the IPRs protection in developing countries has theeffect of reducing the local illegal imitation or not. An analysis of this question would provide some3

Visit http://www.jpo.go.jp/index.html for further information.

2

useful policy implications for the IPRs protection in WTO. First, we can clarify the performance of

the IPRs protection in developing countries. Second, if the IPRs protection in those countries does

not perform effectively, it will help to construct an ideal architecture of IPR protection.

Consequently it will lead us to consider what a new mode of WTO negotiation, which contributes tothe world trade and FDI, should be.

To the authors’ knowledge, not many researches have been done in the past literatures.

There are some papers studying the relations among IPRs protection and FDI, trade and economic
growth, etc4. In spite of the intense debates concerning the relation between IPRs protection and FDI

since the Uruguay Round, no settled result has been found both empirically and theoretically andthose results, no matter what they are, may provide some kind of misapprehensions on this issue5. That is, although many of them argue that IPRs protection is effective for reducing illegal imitation,

the direct causality has not been demonstrated. Therefore, based on the result that IPRs may (or may

4

Chin & Grossman (1990) and Deardorff (1992) examine welfare effects of the extending IPRs protection from thedeveloped countries to developing countries. They find that in most of the cases strengthening IPRs protection indeveloping will lower the welfare level. Gould & Gruben (1996) examines empirically the role of IPRs protection ineconomic growth, utilizing cross-country data on patent protection, trade regime and country-specific characteristics.
Their evidence suggests that IPRs protection is a significant determinant of economic growth. Evidences from
Maskus & Penubarti (1995) show how IPRs protection is trade-related. And Vishwasrao (1994) shows that the lack of
IPRs in developing countries can affect the mode of technology transfer from the developed countries.
5
Among empirical studies, Ferrantino (1993), by using US’s FDI data, found that there is at most a weak association
between countries’ decisions to join IPRs protection agreements and their decision to pursue “ open” policies withregard to trade or FDI. Kondo (1995) found that there is no evidence supporting that FDI is affected by patent
protection, by using data on US. Outward FDI. However, Seyoum (1996), based on a study of 27 countries’ inflowsof FDI, showed that the level of IPRs protection is a strong determinant of inward FDI. And Lee & Mansfield (1996),
by using their random sampling data of 100 major U.S. firms in six manufacturing industries, found that the outward
FDIs of those 100 major U.S. manufactures are strongly related to the level of IPRs protection of host countries.
Among the theoretical studies, Helpman(1993) shows that strengthening IPRs in developing countries will lower the
inflow of FDI from these developed countries, by using a dynamic model. On the contrary, Lai(1998) shows the
opposite.

3not) boost FDI, we can not confidently assert that IPRs protection may (or may not) reduce illegal

imitation. Hence this paper is trying to provide some empirical evidence on the relation between

IPRs protection and illegal imitation.

Our procedure is based on a survey of the Japanese firms having direct investment in

China. China has become a largest FDI host country among all developing countries led by her

opening economic policy. Ever since then Japan has been ranked the second largest FDI sourcing

country to China among the OECD countries after the U.S.

Although China has legally established a series of IPRs protection systems (she is a memberof Paris Convention, WIPO), the present circumstances on IPRs protection policy in China isseverely criticized. For example, the above-mentioned Japanese Patent Office Annual Investigation

Report states that in 1999 about 27% of the total imitations of Japanese products in the world areobserved in China.

And now China has passed her first year as a member of WTO. Considering all

we focus on China for finding some empirical facts.

To investigate a possible relation between the IPRs protection and illegal imitation, twocontrol variables are selected. One is a five point scaled index marked by our survey respondents inevaluating the total condition of the IPRs protection system in China. The other is a dummy variablewith its value of 1 implying that the products of the firm of the survey respondent have been

patented or trademark-registered. By using this dummy variable, the effects of a certain part of the4total IPRs protection system in China can be verified. The reason of choosing it is obvious since,among a set of IPRs protection measures, the patent and trademark-registration system is expected tobe most effective. As a result, our test robustly shows an interesting fact that the patent andtrademark-registration system in China does not perform well. Therefore it is suspected that thesystem is facilitating local illegal imitation and could be mediating technology transfer/diffusion in

China. This result supports the Japanese firms’ perception, and suggests the necessity to reconsider

the better IPRs protection system. The relations among profit, IPRs protection and illegal imitation

are also examined in this paper.

The constructions of the paper are as follows. In section II we present some descriptive

data and a theoretical consideration for the empirical study of the effects of patent andtrademark-registration system to reduce local illegal imitation. The empirical results are shown insection III, and in section VI we study the relation among profits, imitation and IPRs protection.

Concluding remarks are stated in the final section.

II. Data and Estimation Issues
II-1 The data description
According to a data-base, which is provided by TOYOKEIZAI SHINPOSHA 6 , ofJapanese firms investing in China 2000 we randomly sampled 412 source firms and sent our

6

Toyokeizai Shinposha is a major data source bank in Japan which provides firm level data.
Visit http://www.toyokeizai.co.jp for further information about it.

5questionnaire to their presidents. The answering period was set from 15th July to the end of August,2001. Among them 98 answers have been returned and the reply rate is 23.8%. From those answers

we obtained their 228 subsidiaries’ data in 7 manufacturing industries: Glass, Fiber, Vehicle, Food,

Chemistry, Machine and Electronics. Among them 188 data are distributed in 13 cities that acceptedJapanese FDI. They are Peking, Shanghai, Tianjing, Shenyang, Dalian, Qindao, Suzhou, Guangzhou,

Shenzhen, Dongguan, Zhuhai, Xiamen and Fuzhou.

In the questionnaire we set a series of questions including the location, the category ofindustry, the investment share with their partners, the amount of investment and the number of yearsof the establishment of their subsidiaries, etc. Also we asked them whether products with the same

category of the products of their subsidiaries are imported to China from Japan or other countries;

and whether or not local firms are producing products with the same category of the products of theirsubsidiaries. Concerning the IPRs protection, we asked them whether or not the products of theirsubsidiaries have been illegally imitated by local firms, and whether or not there are imitatedproducts with the same category of the products of their subsidiaries imported to China from othercountries. Further we asked them whether the expected profits of their subsidiaries have beenrealized, and in the case when it has not been realized we asked them whether imitation is one of the

major factors to make their subsidiaries unprofitable. Further, we asked them whether the productsof their subsidiaries have been patented or registered for trademark. Finally we asked them to6evaluate the level of IPRs protection at the location of their subsidiaries by using a five point Ricard

Scale method, with the point 5 designates that the legal enforcement of IPRs protection in thatlocation is top ranked.

******* Table 1 and 2 are about here *********

Some of the data obtained from our questionnaire are shown in Table 1, and the meaningsof all elements in Table 1 are stated in Table 2. The Data in Table 1 provide some basic informationof the Japanese FDI in China in terms of IPRs protection. Firstly, the level of the IPRs protection in

China was marked on average at 2.60 point, which implies that the actual effectiveness of IPRs

protection in China is not good enough in comparison with China’s IPRs protection system as alegislatively complete architecture. Secondly, on average about 62% of the Japanese subsidiaries

answered that their products have been patented or registered for trademark. This means that theJapanese subsidiaries in China are relatively sensitive to the protection of their products. Thirdly,

Table 1 shows that on average nearly 30% of the products of the Japanese subsidiaries have been

imitated. The other information from Table 1 is that on average 57% of the products of Japanesesubsidiaries have their competitors in Japan, 36% of the products of Japanese subsidiaries have theircompetitors in other countries, and nearly 70% of the products of Japanese subsidiaries have theircompetitors in China. And on average about 47% Japanese subsidiaries have not realized their

expected profits.

7

******** Table 3 is about here ********
A correlation matrix for all elements in Table 1 shown in Table 3 suggests the direction of
our empirical study. That is, the correlation between patent and trademark-registration system andimitation tends to be positive, which is in contradiction to our normal expectation. In order to study
whether this positive correlation is economically meaningful, we go on to the following regression
tests.

II-2. A basic consideration for the empirical study
For the empirical study, we consider first some features of imitation. Among the existing

literatures, imitation is treated as a costless activity for simplicity. However, in the real world, it isconsidered to be a costly activity which is similar to R&D activity except that the aim is not todevelop new products but to imitate certain existing products. Here we follow Grossman andHelpman (1991)’s type of a formulation of product imitation function in which the imitation istreated as a type of innovation production function.

n s = f (n m , LI ) , ∂n s / ∂n m > 0, ∂n s / ∂LI > 0 .

In the equation (1), ns

is the number of fruit of imitation; nm(1)

represents the existing number ofMultinational Enterprises (MNE) goods which is considered as a proxy for the volume ofI

information available for imitation; and L

represents resources invested for the imitation8

activities.

It is expected that the IPRs protection could reduce the accessible number of MNE goods
for imitation. Let p denote the ratio of the number of MNE goods patented or trademark-registered tothe total number of whole MNE goods. Hence nm= h( p ) , ∂n m / ∂p < 0 .

The fruit of imitation is considered as a function of resources invested for information

which is affected by such basic factors as the spirit of law observance, legislation system andadministration of justice. We consider such factors as a notion of IPRs protection, and denotes thisaggregated evaluation of the broad IPRs protection as ω. And suppose that the higher ω is, themore reduction on the invested resources for imitation is realized. LI = g (ω ) , ∂LI / ∂ω < 0 .
Taking it into consideration that imitation is trade-related, we add trade variable T, and inorder to reflect how local productivities influence local imitation, we add a variable LP expressing

the local production information into the equation (1). Then the imitation production function can be

expressed as follows.

n s = f (ω , p, T , LP ) ,(2)

where ∂n / ∂ω < 0, ∂n / ∂p < 0, ∂n / ∂T > 0, ∂n / ∂LP > 0 are expected.
s

s

s

s

II-3. The specification and some issues for the estimation

9

By adding the subscripts representing each subsidiary of an industry in a certain city to thevariables in equation (2), we specify it into the structural equation (3) by which our Probit test is

conducted.

IMI jki = α 0 + α1 LEVELj + α 2 PATj + α 3TRAD1 j + α 4TRADE2 j + α 5 LOCALj+ β i CITYi + γ k INDk + e jik(3)

In the equation (3), IMI jki represents a dummy variable of a Japanese subsidiary j of industry

k in city i , with its value of 1 expresses that this subsidiary answered that her products have been
imitated and zero otherwise; LEVEL j represents the evaluation point of the IPRs protection of acertain city marked by subsidiary j ; PAT j represents a dummy variable of subsidiary j , with its

value of 1 means that this subsidiary reported that her products have been patented or registered for
trademark; TRAD1 j represents a dummy variable of subsidiary j , with its value of 1 means that

this subsidiary reported that some products with the same category of her product have been
imported to China from Japan, and zero otherwise ; TRAD 2 j represents a dummy variable ofsubsidiary j , with its value of 1 means that this subsidiary reported that some products with thesame category of her product have been imported to China from other countries, and zero otherwise ;LOCAL j represents a dummy variable of subsidiary j , with its value of 1 means that thissubsidiary reported that the local firms are producing products with the same category of her product,10and zero otherwise ; and CITYi is a city dummy and INDk is an industry dummy. The last twocontrol variables are added in order to observe some local and industrial characteristics.
The first issue of the estimation is errors in variable. In the equation (2) ω is an

exogenous variable for the proxy of legal system and law observance. When we apply the
LEVEL from the sampling data to this variable ω, it is strongly suspected that the dependent

variable IMI and the explanatory variable LEVEL are highly correlated. Because, when a sample
observes an imitation, the evaluation of the legal system and low observance, LEVEL, could be
identified to be low. Actually this suspicion is turned to be correct7.

Hence we delete LEVEL

as a control variable. And we regress PAT to IMI. However, as a second step we use the LEVEL
as an instrumental variable for PAT since LEVEL and PAT causes endogeneity bias in the sensethat the firm’s choice between patents or not depends on LEVEL. When we use the IV
estimation, we could avoid two problems8. One is an endogeneity bias arising from the variable
PAT which could be endogenous in the sense that firm chooses patents or not and, the other is
7 The vector of IMI consists of an element of the set [0, 1] and, that of IPRL consists of a positive integer of the set[1, 2, 3, 4, 5]. Both IMI and IPRL are in non parametric space in the sense that the two variables are not continuous
type. Hence we did not take a simple correlation coefficient of these variables. Instead we consider the alternative
way to check a probabilistic character of the distribution of these two variables. And we can identify that it is highly
probable that these two variables are drawn from different populations. This means that the population that replied to
be imitated and the population that replied not to be imitated are expected to be different. Accordingly the whole
populations of IPRL are considered to consist of two different groups of samples. This implies that IMI and IPRL arehighly correlated.
The statistical evidence is as follows. There are two sample distributions, A and B. A is a sample
distribution that consists of the evaluation points of the firms which answered being imitated. B is asample distribution of the points which answered not being imitated. We conducted two tests ofequivalence of means of the sample distribution A and B under equal and unequal variance. Under
unequal variance assumption A~N(2.42, 1.02) and B~N(2.83, 0.95) t=−2.51 and under equal varianceassumption A~N(2.42, 1.02) and B~N(2.83, 0.95) t= − 2.56. With 95% confidence level the null
hypothesis of equivalence of the sample means of A and B is declined.
8 See, for example, chapter 8 of Wooldridge (2002).

11

the simultaneous bias arising from IMI and PAT which means that either the former could be adependent variable of the latter or the vice versa. To avoid the simultaneous bias a possible
alternative IV for PAT is PAT(-j) which is constructed in such a way that each element is theratio of the other firms patented to the whole firms in the same industry and/or city.
To test the robustness of the correlation between IMI and PAT we conducted thesethree different estimations.

III. The Empirical Results on IPRS Protection and Imitation
The Probit test results are shown in Table 4. The coefficient of patent andtrademark-registration system shows a positive sign and is statistically significant, and this isconsistent with the correlation derived in Table 3. The result may be beyond our normal expectation.

One possible explanation of this result is that, the social recognition on patent andtrademark-registration system in China is so low that the system could not work effectively. Contrary

to a normal sense, the actual patent and trademark-registration system could be playing a role offacilitating local imitation and, as a result, there is technology transfer / diffusion through thechannel. Note that patent applicant is required to submit the appropriate technical details forregistering patent. A patented or trademark-registered product may be regarded as profitable, so it

could be targeted for imitation in an environment with the weak social recognition on IPRs. This isalso supported by the estimation result of the profitability and patent in the next section.

In this12

sense, a product with patent and trademark registration could be a fascinating target for imitation.

******** Table 4 is about here *******In the subset 2, we have an additional variable, trade with Japan to control international

effects. The result of the patent and trademark-registration system is the same as those in the subset

1.

In the subset 3, we also add another trade- related variable which is trade with othercountries than Japan. The result of the patent and trademark-registration system is also consistent

with what we obtained in the first two subsets. And the coefficient of the existence of trade flowfrom other countries is positive and statistically significant. However, in this case the coefficient oftrade from Japan tends not to be statistically significant. This implies that imitation is trade-related.

To avoid the possible correlation between the variables of trade flow from Japan and othercountries, in the subset 4 instead of using TRAD1 j and TRAD 2 j , we added a new dummy
variable, TRAD12 j , with its value of 1 means that this subsidiary answered that the products withthe same category of her product have been imported to China both from Japan and other countries,

and zero otherwise. As a result, the test of the subset 4 shows that the sign of the coefficients of thepatent and trademark-registration system is consistent with the result in the first three subsets.

On the subset 5, another control variable, local production, is added in order to test its

influences on local imitation. The result shows a positive sign on it, however it is not statistically13significant. The coefficients of other variables in this case are consistent with what we obtained in

the previous subsets.

In the subset 6, dummy variables of city and industry are added in the test, (Guangzhou,

Shenzhen, Dongguan and Zhuhai are integrated as one region of GU, and Xiamen and Fuzhou areintegrated as a single region of XF), and there could not be found any meaningful evidence on thesevariables. However, the results of the coefficients of other variables are also consistent with all weobtained in other subsets. This suggests that the difference among cities is not significant.
It should be noted that in the estimates with IV it turned out that two instruments LEVEL
and PAT(-j) were weak and hence it is not reported here.

VI. Profits, Imitation and IPRs Protection
It is often asserted that local illegal imitation is a major cause for MNEs to be unprofitable,

and IPRs protection will ensure MNFs to gain their expected profits. In this section we examine therelation among profitability, imitation and patents.

Our Probit test is conducted with the following equation.

UNPROFjki = λ0 + λ1 LEVELj + λ2 PAT j + λ3 IMI j + λ 4TRAD1 j + λ5TRADE2 j+ λ6 LOCALj + ωi CITYi + σ k INDk + u jik

(4)

14

In (4), UNPROF jki is a dummy variable of a subsidiary j of industry k in city i , with its valueof 1 means that this subsidiary answered that her expected profits have not been realized, and zerootherwise. The meanings of the other variables are the same as in equation (3).
The independent variables of trade, TRAD1 j and TRAD 2 j , and local production areadded in the test in order to control the relation between unprofitability and competition in themarket. Later in the test, an independent variable TRAD12 j , which represents the existence of tradeflows both from Japan and from other countries, will be substituting the independent variables of

TRAD1 j and TRAD 2 j . This is to avoid the possible correlation between the independent variablesof trade flows from Japan and trade flows from other countries.
In the estimation equation (4) the control variables LEVEL, PAT and IMI could cause

endogeneity bias. To avoid the endogeneity problem we conduct three different tests. Firstly, without
using IV, we simply regress PAT and IMI to the dependent variable UNPROF. Secondly, we use
LEVEL as an instrument for IMI. And thirdly, we use PAT(-j) as an instrument for PAT.
Because of the statistically significant correlation between LEVEL and IMI, we firstremove the dependent variable LEVEL in equation (4), and test the influence of patent and imitation

over firm’s profitability. The results are shown in Table 5.

******** Table 5 is about here ********The test of the subset 1 is a basic one. However, the coefficient of the independent variable15

of the patent and trademark-registration system is not statistically significant. In other words, there isno evidence from our data showing that the patent and trademark-registration system could have theeffects of ensuring the profits of firms.

In the test of subset 2, two control variables of trade flows from Japan and trade flows

from the other countries are added to investigate the influence of the intra-industry competition on

the profits of firms. And the results show that the coefficients of this variables are positive but notstatistically significant. Other results are consistent with what we observe in the subset 1.

In the subset 3, two independent variables of trade flows from Japan and other countries

and local production are added. As a result, the sign of the coefficient of trade flows from Japan andother countries is positive and statistically significant. This implies that foreign competition makes

firms unprofitable. The result also suggests that there is no significant relation between local

production and the profits of Japanese subsidiaries.

In subset 4, the dummy variables of both city and industry are added (Guangzhou,

Shenzhen, Dongguan and Zhuhai are integrated as one region of Gu, and Xiamen and Fuzhou areintegrated as on region of XF). Although there is no significant evidence for those dummy variables,

the results concerning IPRs (including patent and trademark-registration system) are also consistent

with the tests in previous subsets.
Then, we remove the independent variables of LEVEL j and PAT j in equation (7) to16

test the influence of the local imitation on the firm’s profits. The results are shown in Table 6.

****** Table 6 is about here ******In Table 6, it is clearly shown that in all four subsets of the tests there has no statisticallysignificant evidence suggesting that local imitation makes the firms unprofitable.
As stated in the last section both the LEVEL as an instrument for IMI and PAT(-j) as an
instrument for PAT are weak instruments. Therefore the results of IV estimate is not stated.

The results in this section show the following facts. Firstly, there is no statisticallysignificant evidence from the data showing that the patent and trademark-registration system, which

is a part of the IPRs protection system, has the effects of ensuring the profits of Japanese subsidiaries.

Secondly, the competition with the products imported from Japan and the other countries in the same

category of the Japanese subsidiaries might be a significant factor making those Japanesesubsidiaries unprofitable. Thirdly, there is no statistically significant evidence showing that the local

production of the same category of the products of Japanese subsidiaries could influence the profits

of those Japanese subsidiaries. This might suggest that the quality of local products has not yet

reached to the level of those of Japanese subsidiaries, thus the local products could not be a threat tothose products of Japanese subsidiaries.

V. Concluding remarks
In this paper we have studied the effect of IPRs protection system on local imitation and17

on the profitability of foreign subsidiaries by using the data obtained from our questionnaire on

Japanese FDI in China.

One of the empirical observations indicates that the patent and trademark-registration

system, which is a subsystem of the total IPRs protection system, does not necessarily work

effectively in China. To the contrary, our results robustly suggest that such subsystem as patent andtrademark registration could be providing a measure for local imitation and by this reason

facilitating technology transfer /diffusion. For a product to be patented the detailed production

information of the patented product is required to be open to the public. By utilizing those opened

information theimitators could successfully imitate the product with relatively little resources. And

at the same time the product registered for trademark is considered as a signal for profitability, andthus the risk of being imitated increases. The information becomes public after a fixed number ofyears when IPRs is rigorously enforced. However, the real situation is not so simple and it is a

diplomatic argument between developed and developing countries and TRIPS in WTO.

There are many studies whether IPRs is a major determinant of FDI as the footnotes 4 and5. From our empirical results there is no strong evidence to indicate that IPR is a significant

determinant of FDI. The results in Table (5.) indicate that patents and imitation do not affect the

profitability of the Chinese subsidiaries with a strong significance level. It is also suggested that not

IPRs but rather the other factor such as market competition could be a significant factor in terms of18

profitability of FDI. The overall results suggest that further research is necessary to investigate thelinks between FDI and IPRs.

Acknowledgement
We would like to thank for the comments by a referee, Jong Wha Lee, Gunther Schnabl, Eiichi
Tomiura, Henry Ursprung, David Weinstein, Xingyuan Zhang, Junsok Yang, Kar Yiu Wong andthe participants at the conferences of WTO and World Trade IV: Change in New Era atGerhard-Mercator University in 2002 and Korea and the World Economy, III at Sungkyunkwan
University in 2004. However the usual disclaimer applies.
This research is partly supported by the science fund of The International Center for the Study ofEast Asia Development, Kitakyushu (ICSEAD). The second author is grateful to the Ministry of
Science and Education the 2002 research and DAAD at University of Konstanz. The part of thisresearch was done while the second author was visiting at Columbia University, and he is grateful tothe hospitality.

References
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Ferrantino, 1993, “The Effects of Intellectual Property Rights on International Tradeand Investment”, Weltwirtschaftliches Archiv, Vol.129, 300-331.
Gould David M. and William C. Gruben, 1996, “The role of Intellectual Property Rights
in Economic Growth”, Journal of Development Economics, Vol.48, 323-350.
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Economic Journal, Vol.101. 1214-1229.
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Japanese Patent Office, 2000, "A Report on the Situation of Infringement on

19

Japanese Trademark, Design and Patent, year 2000."Lai Edwin L.-C, 1998, “International Intellectual Property Rights Protection and therate of Product innovation”, Journal of Development Economics, Vol.55, 133-153.
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20

Table 1. Data from our questionnaire
No

CITY

OBSER

IMI

IPRL

PATR

COMP1

COMP2

COMP3

PROF

1

PK

21

0.33333.05260.85710.66670.47620.71430.47622

SH75

0.21622.7246

0.61640.53330.29330.72000.41893GZ

110.54552.77780.63640.72730.54550.81820.54554SHZ

90.09522.75000.55560.33330.22220.66670.33335ZH

60.00002.66670.16670.1667

0.66670.83330.50006

DG

3

0.66672.00000.6667

0.66670.33330.66670.33337SZ

130.25003.08330.6154

0.53850.69230.92310.61548TJ

190.21053.00000.72220.36840.31580.52630.61119XM

10.00002.00001.00001.00000.00000.00000.000010FZ

40.50002.00000.66670.50000.25000.50000.750011QD

60.00003.25000.14290.50000.50000.83330.500012DL18

0.33332.53000.4706

0.38890.44440.77780.555613SHY

20.50002.00001.00001.00000.00001.00000.5000Sum

188
0.28082.60270.62440.56840.36460.69070.4723

Average

PK: Peking; SH: Shanghai; GZ: Guangzhou; SHZ: Shenzhen; ZH: Zhuhai; DG: Dongguan;
SZ: Suzhou; TJ: Tenjin; XM: Xiamen; FZ: Fuzhou; QD: Qindao; DL: Dalian; SHY: Shengyang.

21

Table 2. List of the meaning of each item in Table 1
IMI
The ratio of the number of subsidiaries in a certain location answered that their products havebeen experienced been imitated by local firms to the total number of subsidiaries in thislocation.
IPRL

The average points of the IPRs condition in a certain location marked by every subsidiaries inthis location with a scale of 5.

PATR

The ratio of the number of subsidiaries in a certain location answered that their products havebeen patented or trademark registered to the total number of subsidiaries in this location.

COMP1

The ratio of the number of subsidiaries in a certain location answered that the same products
have been imported to China from Japan to the total number of subsidiaries in this location.

COMP2

The ratio of the number of subsidiaries in a certain location answered that the same products
have been imported to China from other countries to the total number of subsidiaries in thislocation.

COMP3

The ratio of the number of subsidiaries in a certain location answered that the same products
have been produced by local firms to the total number of subsidiaries in this location.

PROF

The ratio of the number of subsidiaries in a certain location answered that their expected profits
have not been achieved to the total number of subsidiaries in this location.

22

Table 3. Correlation matrix of all items in Table 1
IMI

IPRL

PATR

COMP1

COMP2

COMP3

IMI

1

IPRL

-0.4361

1PATR

0.39904-0.4875

1COMP10.34551-0.4859

0.77185

1

COMP2-0.09390.67691-0.6767-0.5899

1

COMP3

0.262370.38488-0.3928-0.2490.51807

1

PROF

0.347070.30861-0.3087-0.4465

0.483070.587928

PROF

1

23

Table 4. Probit Estimate Results of Equation (3)Subset 4
Estimate
t-value-1.457-4.9070.847
3.526***

Subset 5
Estimate
t-value-1.689-5.1400.761
3.078***

Subset 6
Estimate
t-value-2.104-3.5770.803
3.008***

0.351

0.353
0.432

0.419
0.348

1.403*
1.266

PE
SH
GU
DA
TEN
XF
SHEN

0.461
0.261
0.731
0.736
0.306
1.144
0.515

0.970
0.627
1.608
1.470
0.548
1.370
0.526

GLASS
FIBER
VEH
FOOD
CHE
MACH

-0.081-0.137-0.347-0.3200.013
0.025-0.164-0.328-0.525-0.4580.038
0.700

Variable
Cons.
PAT
TRAD1
TRAD2
LOCAL
TRAD12

Subset 1
Estimate
t-value-1.150-5.7280.783
3.347***

Subset 2
Estimate
t-value-1.233-5.611
0.672
2.734***
0.287
1.308

Subset 3
Estimate
t-value-1.423-5.9310.755
2.965***
0.633
0.265
0.586
2.582**

1.441

1.443
1.870*

R2

0.062

0.066

0.098

0.070

0.086

0.141

Observations

179

177

177

179

179

178

Fraction of Correct
Predictions

0.726

0.723

0.723

0.726

0.726

0.775

*** significant at the level of 1%; ** significant at the level of 5%; * significant at level the level of 10%.

24

Variable
Cons.
PAT
IMI
TRAD1
TRAD2
LOCAL
TRAD12
PE
SH
GU
DA
TEN
XF
SHEN
SU
GLASS
FIBER
VEH
FOOD
CHE
MACH

Table 5. Probit Estimate Results of Equation (4)Subset 1
Subset 2
Subset 3
Estimate
t-value
Estimate
t-value
Estimate
t-value
0.032
0.197-0.104-0.581-0.277-1.0850.047
0.232-0.015-0.071-0.061-0.283-0.250-1.150-0.334-1.489-0.342-1.532
0.185
0.856
0.254
1.193
0.101
0.464
0.525
2.546***

Subset 4
Estimate
t-value
0.383
0.462-0.131-0.555-0.385-1.6310.370
0.344-0.689-0.808-0.819-0.489-0.357-0.929-0.929-0.416-0.662-0.464-0.013
1.038
0.129
0.184

R2

0.074

0.026

0.045

1.381
1.441
-0.866-1.076-1.044-0.599-0.433-0.804-0.804-0.499-1.414-1.344-0.028
1.463
0.399
0.532
0.106

Observations

179

177

179

178

Fraction of Correct
Predictions

0.536

0.605

0.603

0.612

*** Significant at the level of 1%, ** significant at the level of 5% ; * significant at level the level of 10%.

25

Table 6. Probit Estimate Results of Equation (4)Variable
Cons.
IMI
TRAD1
TRAD2
LOCAL
TRAD12
PE
SH
GU
DA
TEN
XF
SHEN
SU
GLASS
FIBER
VEH
FOOD
CHE
MACH

Subset 1
Estimate
t-value-0.173-1.194-0.282-1.300
0.206
1.037
0.238
1.160

Subset 2
Estimate
t-value-0.341-1.590-0.289-1.342

0.109
0.468

Subset 3
Estimate
t-value
0.073
0.136-0.289-1.3020.527
2.396**
0.101-0.101-0.022
0.229
0.275
0.065
0.032
0.510
-0.824-0.546-0.2350.391
0.178-0.0980.168-0.184-0.037
0.374
0.437
0.081
0.032
0.790
-1.900*-1.750*-0.5510.667
0.581-0.320Subset 4
Estimate
t-value-0.416-0.681-0.351-1.551

0.297
0.288
0.116
-0.038
0.026
0.286
0.366
0.197
-0.1110.436-0.680-0.427-0.004
0.567
0.203
0.032

R2

0.023

0.036

0.064

0.079

Observations

185

187

186

186

Fraction of Correct
Predictions

0.595

0.594

0.591

0.597

1.203
1.275
0.191
-0.069
0.044
0.465
0.580
0.242
-0.1080.672-1.474-1.304-0.008
0.940
0.642
0.098

** Significant at the level of 5% ; * significant at level the level of 10%.

26