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Small Business Economics

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05-08-2022

The timing dilemma: understanding the determinants of innovative startups’ patent collateralization for loans

Authors: Xue Yang, Hao Zhang, Die Hu, Bingde Wu

Published in: Small Business Economics | Issue 1/2023

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Abstract

The expanding practice of accepting patents as collateral for loans has increasingly caught academic attention and the value of a patent has been verified as an important determinant. In this paper, we focus on validity and uncertainty in the context of innovative startups’ patent pledge valuation, arguing that their interplay poses a timing dilemma to lenders. Our empirical tests utilized a database of Chinese innovative startups and their patents for the period 2008–2015. Using patent age as a proxy for time, our findings demonstrate that timing dynamically influences the collateralization potential of a patent. The results also suggest that lenders can use information cues from third parties, such as venture capital backing from the market and high-tech certification from the government, to cope with this timing dilemma, however in different ways. Thus, we advance existing literature on startups’ debt financing by expanding the range of patent collateralization determinants to include dynamic multilevel factors.

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According to the average exchange rate of RMB against the US dollar in 2020 released by the National Bureau of Statistics of China.

In most countries, including China, only granted patents can be used as loan collateral.

The interviews were conducted on November 27, 2019. The interviewees were participants in the 3rd Tianfu Intellectual Property Summit, which was sponsored by the Sichuan Intellectual Property Service Promotion Center. They were employees of Chinese banks, such as China Minsheng Bank, the Agricultural Bank of China, and the Industrial and Commercial Bank of China.

Specifically, high-tech enterprise certification is annually implemented by the Chinese Ministry of Science and Technology.

In 1996, the CNIPA issued its first experimental administration regulation: “The Temporary Rules for Recording Contracts of Patent Collateralization in China.” On November 15, 2021, the latest formal administration regulation “The Rules for Recording Contracts of Patent Collateralization in China” was issued by the CNIPA.

In China, there are three types of patents: invention, utility model, and design. Due to the technological importance of inventions, according to the administration regulations, only the invention patent can be pledged as collateral. Therefore, we only focus on invention patents in this paper. Unless specified otherwise, all patents considered in this study are inventions.

Some patents were licensed or traded after becoming invalid.

The control variables were calculated based on this dataset.

This dependent variable is coded as 1 if a patent had been pledged by the end of 2015, and 0 if not.

This variable is calculated by the length of time from the application year to invalid year or 2015.

In Table 2, only No. of backward citations is significant (p < 0.1). However, compared with its result of the t-test on group differences based on the full sample (p = 0.000), the significance has been greatly reduced.

According to “The Rules for Recording Contracts of Patent Collateralization in China,” only granted patents can be used as collateral for loans in China. Thus, we set the observation years in our panel dataset starting from each patent’s grant year to analyze the role of information cues in the probability of a patent pledge occurring during the possible period of time.

In our regression model, the standard error is clustered at the firm level (i.e., patent owners) since patents belonging to the same firm tend to be correlated. For instance, a patent owner may pledge multiple patents simultaneously to obtain more bank loans. Moreover, a firm’s pledging of a certain patent might reduce the probability of using its other patents as collateral because the financial demands of this firm have been met.

The windows represent 0, 1, 2, 3, 4, 5, 6, and 7–10 years after a patent is granted. Because these time window dummies are exhaustive and mutually exclusive, we cannot separately estimate the impact of the patent age on the pledge hazard rate. Instead, we focus on the changes occurring overtime.

Some of the results are not reported here due to space limitations and are available from the authors upon request.

Since this study compares the differences in patents within and between firms, we use the random effect in our logistic regression, which is also supported by the Hausman test.

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Title: The timing dilemma: understanding the determinants of innovative startups’ patent collateralization for loans
Authors: Xue Yang
Hao Zhang
Die Hu
Bingde Wu
Publication date: 05-08-2022
Publisher: Springer US
Published in: Small Business Economics / Issue 1/2023
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-022-00645-2

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