Does litigation over the infringement of intellectual property rights hinder enterprise innovation? An empirical analysis of the Taiwan IC industry

This paper seeks to clarify the relationship between intellectual property right (IPR) infringement lawsuits and innovation by firms through an analysis of data from eighty-seven Taiwanese integrated circuit (IC) manufacturers in the period 2001-2006. The results show that the rapid growth in patent grant is positively related to the occurrence of patent infringement lawsuits, which implies that IPR infringement litigation strengthens firms' incentives to innovate. Patent holders adopt an "aggressive strategy" that makes use of the offensive function of patents to initiate lawsuits against alleged violators. The defendants then adopt a "regressive strategy" by building up "patent walls" to refute the charge and defend themselves. In addition, Taiwanese IC firms are more inclined to develop patents when they are defendants rather than when they are plaintiffs. This suggests that the defensive function of patents has a more profound impact than the offensive function for Taiwanese ICfirms. These firms do not possess the core technology needed in IC-related manufacturing processes, and they have in the past applied other firms' technology without obtaining legal licenses. In response to accusations of infringement, Taiwanese IC firms adopt a "regressive strategy, " encouraging their employees to develop patents which they then use to refute the charge of IPR infringement. In addition, it is found that stock-based bonuses are a better incentive for encouraging employees to develop patents for their firms.