Innovating like China: a theory of stage-dependent intellectual property rights

Inspired by the Chinese experience, we develop a Schumpeterian growth model of distance to frontier in which economic growth in the developing country is driven by domestic innovation as well as imitation and transfer of foreign technologies through foreign direct investment. We show that optimal IPR protection is stage-dependent. At an early stage of development, the country implements weak IPR protection to facilitate imitation. At a later stage of development, the country implements strong IPR protection to encourage domestic innovation. Finally, we provide empirical evidence that supports this theoretical finding.