This paper evaluates the effects of patent protection on pharmaceutical innovations for 26 countries that established pharmaceutical patent laws during 1978–2002. Controlling for country characteristics through matched sampling techniques to establish two proper comparison sets among 92 sampled countries and through country-pair fixed-effects regressions, this study yields robust results. National patent protection alone does not stimulate domestic innovation, as estimated by changes in citation-weighted U.S. patent awards, domestic R&D, and pharmaceutical industry exports. However, domestic innovation accelerates in countries with higher levels of economic development, educational attainment, and economic freedom. Additionally, there appears to be an optimal level of intellectual property rights regulation above which further enhancement reduces innovative activities.

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