Inter-Firm Patent Litigation and Innovation Competition

Using novel inter-firm patent litigation data, we show that defendant firms become financially constrained, reduce innovation activity, and shift toward exploitative innovation leveraging past experience and expertise. The exploitative innovation strategy reflects the patent race motives and hedging demand of defendant firms against future litigation. These real consequences of patent litigation are evident among firms in similar product markets, indicating significant interplay between intellectual property rights' boundaries and product market dynamics. We also find significant litigation risk spillover within industry. Using China's participation in the Trade-Related Aspects of Intellectual Property Rights Agreement as an instrument, we alleviate potential endogeneity concerns