Research Exemption and Pharmaceutical Innovation : Evidence from China

The patent laws of many countries have ''research exemption'' provisions that exempt certain research-related uses of proprietary materials from patent infringement. By limiting the rights of existing patent holders, such rules are meant to facilitate follow-on innovation and benefit latecomer firms, especially in the pharmaceutical industry. In this paper, we provide the first study of the impact of the research exemption, exploiting unique features of the institutional setting in China. Using firm-level data from 2007 to 2018 and a difference-in-differences (DID) strategy, we find that the research exemption in China leads to a large increase in firms' R&D inputs. However, there is no evidence that the research exemption leads to more patents or improved productivity on average. Further analysis reveals that it only causes an increase in patents for few firms with large market power. Overall, our findings highlight the importance of understanding the relationship between firms' innovation and imitation strategies for the design of innovation policies