LAUSR

Abstract We develop and test a model of heterogeneous firms to study how provincial-level enforcement of intellectual property rights affects Chinese firms’ decisions regarding exit from the market and entry into exporting, technology adoption through capital imports, and process innovation. In this setting the exit and export cutoff productivities differ from those in the standard environment, leading to a different sorting mechanism. The model also predicts that the highest-productivity firms will implement new technologies and innovate more after stronger enforcement. Empirical tests based on a comprehensive dataset of Chinese firms from 2000 to 2006 support the predictions regarding both the extensive and intensive margins of exports, technology adoption, and innovation.