Using novel hand-collected patent litigations data from 2000-2006, we show that patent litigations have significant financial and non-financial impacts on firms; defendant firms become financially constrained and reduce innovation activities and concomitantly shift
toward more exploitative and narrow-scoped innovations to reduce litigation risk. We further find that litigation effects spill over to other non-litigated firms in the industry. Product market overlap between defendants and plaintiffs exacerbates these financial and real consequences of patent litigation, implying a significant interplay between intellectual property rights boundaries and product market dynamics. Using China’s participation in Trade-Related Aspects of Intellectual Property Rights agreement (TRIPS) as an instrument, we show the robustness of our findings to firm-level omitted variables and reverse causality concerns. 

Keywords: Patent Litigation, Innovation Competition, Innovation Strategy, Exploitative Innovation, Corporate Venture Capital
JEL Classification: G23, G24, G34​