Effect of free trade area policy on innovation capability in the service industry

Dong, Qi; Bilan, Yu iy
A icle
E ec o ee ade a ea policy on inno a ion capabili y in
he se ice indus y
Am i ea u Economic Jou nal
P o ided in Coope a ion wi h:
The Bucha es Uni e si y o Economic S udies
Sugges ed Ci a ion: Dong, Qi; Bilan, Yu iy (2024) : E ec o ee ade a ea policy on inno a ion
capabili y in he se ice indus y, Am i ea u Economic Jou nal, ISSN 2247-9104, The Bucha es
Uni e si y o Economic S udies, Bucha es , Vol. 26, Iss. 66, pp. 589-611,
h ps://doi.o g/10.24818/EA/2024/66/589
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Economic In e e ences
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Vol. 26 • No. 66 • May 2024 589
EFFECT OF FREE TRADE AREA POLICY ON INNOVATION CAPABILITY
IN THE SERVICE INDUSTRY
Qi Dong1 and Yu iy Bilan2
1)Yang ze Uni e si y, Jingzhou, China
2)Vy au as Magnus Uni e si y, Kaunas, Li huania
Please ci e his a icle as:
Dong, Q. and Bilan, Y., 2024. E ec o F ee T ade A ea
Policy on Inno a ion Capabili y in he Se ice Indus y.
Am i ea u Economic, 26(66), pp. 589-611.
DOI: h ps://doi.o g/10.24818/EA/2024/66/589
A icle His o y
Recei ed: 29 Augus 2023
Re ised: 23 Feb ua y 2024
Accep ed: 28 Ma ch 2024
Abs ac
China has g adually es ablished pilo ee ade zones and implemen ed ce ain speci ic
policies o i s en e p ises o deepen he economic sys em e o m and expand he deg ee o
ma ke opening o he ou side wo ld. The es ablishmen o a F ee T ade A ea exe s spillo e
e ec s and posi i e in luences on impo and expo ade, syne gis ic egional de elopmen ,
and he abili y o inno a e o en e p ises. Howe e , in e ms o policy, i s ole in en e p ise
inno a ion has no been explo ed. To explo e he in luence pa h o F ee T ade A ea Policy
on he inno a ion abili y o se ice indus y companies, using he da a o A-sha e lis ed
companies in Shanghai and Shenzhen in he Guangdong F ee T ade A ea egion om 2010
o 2021 and he Reg ession Discon inui y model, he mic o mechanisms (in ellec ual
p ope y p o ec ion, equi y incen i es, and go e nmen subsidies) o he impac o he F ee
T ade A ea Policy on he inno a ion capabili y o se ice indus y companies we e analysed.
The esul s show ha : (1) In ellec ual p ope y igh s (IPR) p o ec ion and he inno a ion
abili y o se ice indus y companies exhibi a U-shaped ela ionship. Wi h he inc ease in
IPR p o ec ion, he inno a ion abili y o se ice indus y companies i s dec eases and hen
inc eases. (2) Expanded equi y incen i e le el in e nal gap inc eases he esea ch and
de elopmen (R&D) expendi u es, bu educes he inno a ion capaci y o se ice indus y
companies. (3) Go e nmen subsidies con ey signals o inno a ion ecogni ion o he ma ke ,
educe he business isks o se ice indus y companies, and encou age imp o emen s in
inno a ion capabili y. The conclusions p o ide a heo e ical basis and mul i-dimensional
ideas o se ice indus y companies o imp o e hei inno a ion capabili y. In addi ion, an
empi ical basis and e e ence is p o ided o he go e nmen adminis a ion o he F ee T ade
 Co esponding au ho , Qi Dong – e-mail: 523014@yang zeu.edu.cn
This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons
A ibu ion License, which pe mi s un es ic ed use, dis ibu ion, and ep oduc ion in
any medium, p o ided he o iginal wo k is p ope ly ci ed. © 2024 The Au ho (s).
AE
E ec o F ee T ade A ea Policy on Inno a ion Capabili y
in he Se ice Indus y
590 Am i ea u Economic
A ea o e alua e he e ec i eness o policy implemen a ion, op imise he policy s uc u e,
imp o e he policy sys em, and p omo e F ee T ade A ea Policy.
Keywo ds: F ee T ade A ea Policy, se ice indus y companies, en e p ise inno a ion
capabili y, Reg ession Discon inui y
JEL Classi ica ion: M21, D21, H71
In oduc ion
The cons uc ion o a F ee T ade A ea is China’s ini ia i e o adap o he backg ound o ade
globalisa ion. Implemen ing a p oac i e “B inging-in and going-ou s a egy”, which deepens
he in e nal ins i u ional e o m o a majo ini ia i e, is an impo an s ep no only in China’s
economic ans o ma ion and ade s uc u e imp o emen , bu also in p omo ing in es men
libe alisa ion and acili a ion, o adap o he end o economic globalisa ion objec i e
equi emen s. F om he es ablishmen o he Shanghai F ee T ade A ea in Sep embe 2013 o
Sep embe 2020, China has o med “1 (Shanghai) + 3 (Guangdong, Tianjin, Fujian) + 7
(Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, Shanxi) + 1 (Hainan) + 6 (Shandong,
Jiangsu, Guangxi, Hebei, Yunnan, Heilongjiang) + 3 (Beijing, Hunan, Anhui)” 21 p o inces
and 69 zones o F ee T ade A eas in a geese o ma ion. F om he coas o he inland, om he
no heas o he sou hwes , hese F ee T ade A eas a e loca ed in a ious impo an economic
egions o China, basically co e ing he majo economic sec o s.
Thus, a new pa e n o all- ound and high-le el egional opening up wi h “no gap along he
coas , ocus on he mainland, and ull g ow h” is coo dina ed wi h he eas and wes , land and
sea o se e di e en economic zones. Du ing he de elopmen o he F ee T ade A ea, he
adop ion o be e policies can minimise mo e ma ke en y ba ie s, s eamline he nega i e
lis , p omo e ade libe alisa ion and acili a ion, a ac mo e in es men s, and enhance
in e na ional ade exchanges. Thus, s eng hening ins i u ional inno a ion, explo ing new
pa hs and me hods o do e ail high-s anda d ules, pilo ing do e ailing wi h in e na ional
high-s anda d economic and ade ules, and p omo ing high-le el sys em-based opening
ha e become he co e elemen s o F ee T ade A ea cons uc ion.
The se ice indus y is an impo an pa o China’s all-a ound opening o he ou side wo ld.
Howe e , China’s o e all o eign ade pa e n shows a de ici , caused by ade in se ices
ha emains a weak poin . While China’s ade in goods can usually each ens o illions o
dolla s, he ade in se ices is usually only a ew illion. Se ices impo and expo accoun
o less han 20% o China’s o al impo and expo , and he gap is ela i ely ob ious
compa ed wi h de eloped coun ies in he wo ld. In 2022, China Beijing In e na ional Fai
o T ade in Se ices, China announced i s commi men o b idge he “digi al gap” and
p omo e he digi alisa ion o ade in se ices in line wi h he de elopmen end o
digi alisa ion, ne wo king and in elligence. China in ends o expand i s special se ice expo
base and de elop new business models and modes o se ices ade. In his ega d,
in es iga ing he e ec o he implemen a ion o China's F ee T ade A ea Policy on he
de elopmen o se ice indus y companies p esen s conside able signi icance.
Comp ehensi e esea ch has been ca ied ou on he e ec s o F ee T ade A ea Policy and
en e p ise inno a ion capabili y. The es ablishmen o a F ee T ade A ea has e ec i ely
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Vol. 26 • No. 66 • May 2024 591
ac i a ed ma ke playe s and p omo ed he ee low o capi al, ma e ials, alen s, and o he
esou ces in and a ound he egion, he eby signi ican ly inc easing he a e o economic
g ow h (Wang and Liu, 2017; Liu and Wang, 2018; Li and Li, 2019). Se e al schola s also
belie e ha he es ablishmen o a F ee T ade A ea has an insigni ican d i ing e ec on
egional economic de elopmen , he policy e ec is no ully eleased, and he p omo ion
e ec is lagging (Song e al., 2019). The es ablishmen o a F ee T ade A ea conside s i s
ype and numbe . F ee T ade A eas may s i e o educe ade ba ie s, lowe he h eshold
o ma ke access, o p omo e ade eedom and acili a ion (Ye, 2018). The in e nal ac o s
in luencing en e p ise inno a ion capabili y include o ganisa ional le el, co po a e
go e nance, manage ial pe cep ion, and employee mo i a ion, whe eas he ex e nal ac o s
include inno a ion ne wo k, esou ce in eg a ion, and s a egic o ien a ion. Fo example,
inc easing i m age and size can de i e o ganisa ional ine ia, and s uc u ed p ac ices can
bind he abili y o sel -adjus in co-e olu ion wi h he en i onmen (Ha man and F eeman,
1984). Equali y incen i e mi iga es agency cos s, aligns manage ial and sha eholde in e es s,
and a ca aly ic e ec on i m inno a ion (Tian and Meng, 2018; Zhao and Lin, 2019).
Co po a e inno a ion is d i en by a combina ion o in e nal and ex e nal d i e s, whe e
in e nal i ms need o abso b knowledge and ex e nal i ms need o imi a e and lea n new
knowledge (Albo -Mo an e al., 2018). The deg ee o he e ogenei y in en e p ise inno a ion
capabili y p omo es i s dynamic e ec s wi h i m pe o mance (Schilke, 2014). Fi ms wi h
ins i u ional suppo end o de elop be e (Back e al., 2014). S eng hening legal p o ec ion
and policies can p omo e co po a e inno a ion, such as hose o in ellec ual p ope y igh s
(IPR), which include angible o in angible i m asse s. Go e nmen suppo can also p omo e
i ms’ R&D in es men and imp o e hei inno a ion pe o mance (Chen and Zhou, 2021).
In summa y, mos o he s udies on F ee T ade A ea Policy ha e been ca ied ou om he
mac o-supply pe spec i e, including i s e ec s, while less a en ion has been paid o he
mic o aspec s o en e p ises om he policy demand pe spec i e. En e p ises a e bo h policy
demande s and bene icia ies, and empi ical e idence based on he mic o-pe spec i e can
p o ide ideas o policy s uc u e op imisa ion and imp o emen en ichmen . Thus, his s udy
u he conside s he ollowing ques ions: Wha a e he policies ela ed o en e p ise
inno a ion capabili y in he F ee T ade A ea Policy sys em, gi en ha policy suppo has a
signi ican impac on he enhancemen o en e p ise inno a ion capabili y? Wha a e he
pa hs h ough which hese policies ac on he en e p ise inno a ion capabili y? How does he
F ee T ade A ea Policy a ec se ice indus y companies, which a e unique in hei
assessmen o inno a ion capabili ies? To answe he abo e ques ions, we used da a o
Shanghai and Shenzhen A-sha e lis ed se ice indus y companies in he Guangdong F ee
T ade A ea o China om 2010 o 2021 as he esea ch sample. This s udy examines he
impac mechanism o policies such as in ellec ual p ope y p o ec ion, equi y incen i e, and
go e nmen subsidy on en e p ise inno a ion capabili y in he F ee T ade A ea Policy sys em.
The di e en e ec s o each policy a e also analysed, including he inc ease o in ellec ual
p ope y p o ec ion, widening gap o equi y incen i e le el, and signalling go e nmen
subsidies on en e p ise inno a ion capabili y. Fu he mo e, new u ili y and appea ance
pa en s a di e en le els o pa en applica ions a e subdi ided and he deg ee o p omo ion
o F ee T ade A ea Policy on di e en ypes o pa en applica ions by sample is analysed.
In compa ison wi h exis ing s udies, his s udy has mo e e iden ma ginal con ibu ions. Fi s ,
we in eg a e he p ope y igh s sys em, o al compensa ion, and signalling heo ies o build
a esea ch amewo k and en ich he heo y o co po a e inno a ion. Second, he s uc u e o
F ee T ade A ea Policy is di ided in o h ee aspec s: in ellec ual p ope y p o ec ion, equi y
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incen i e, and go e nmen subsidies, which p o ide new ideas o unde s anding he F ee
T ade A ea Policy sys em and s uc u e. Meanwhile, analysis o he mechanism o se ice
indus y companies' inno a ion abili y h ough he F ee T ade A ea Policy sys em p o ides
he heo e ical basis and mul i-dimensional ideas o se ice indus y companies o imp o e
hei inno a ion abili y. In addi ion, empi ical basis and e e ence ideas a e p o ided o F ee
T ade A ea go e nmen managemen depa men s o e alua e he e ec i eness o policy
implemen a ion, op imise policy s uc u e, imp o e policy sys em, and p omo e he F ee
T ade A ea Policy.
The es o his s udy is s uc u ed as ollows: Sec ion 1 is a li e a u e e iew and p esen s he
esea ch hypo hesis. Sec ion 2 is he esea ch design, which p esen s he da a selec ion and
a iable desc ip ions, ini ial da a p ocessing, ollowed by he model se ing and desc ip ion.
Sec ion 3 is he analysis o he empi ical esul s and obus ness es , while Sec ion 4 discusses
he indings o his s udy. The las sec ion is ela ed o he conclusions.
1. Theo e ical analysis and hypo hesis de elopmen
1.1. Spillo e mechanism o in ellec ual p ope y p o ec ion
A ela i ely weak in ellec ual p ope y p o ec ion acili a es inno a ion. Imi a ing ex e nal
knowledge allows companies o sa e on he inno a ion cos . Tha is, knowledge ex e nali ies
educe cos s while echnological imi a ion mo i a es i ms o inno a e (An onelli and
Colombelli, 2017). Companies wi h weak in ellec ual p ope y p o ec ion a e p one o “ ee
ide s.” When i ms ga he in en i onmen s whe e in ellec ual p ope y p o ec ion is weak,
hey “ca pool” wi h o he co po a e inno a ions (Ben al and Fixle , 1988). By compa ison, a
s ong in ellec ual p ope y p o ec ion educes he deg ee o ma ke compe i ion and e en
c ea es monopolies, he eby educing knowledge and echnology spillo e s while enhancing
in es men s in inno a ion (Li, 2020). The eason is ha when he inno a o is imi a ed, hei
p o i weakens, and hus hey inc ease hei in es men . This scena io also c ea es a game,
whe e ma ke compe i i eness is ins ead enhanced in he case o weak in ellec ual p ope y
p o ec ion. S eng hening in ellec ual p ope y p o ec ion, educing ex e nal spillo e s o
knowledge, and gene a ing excessi e monopoly powe may inhibi u he inno a ion ma ke
compe i ion, which in u n educes co po a e inno a ion pe o mance.
S ong in ellec ual p ope y p o ec ion p omo es inno a ion in ou main pa hs: Fi s , he
le el o in ellec ual p ope y p o ec ion a ec s he in ensi y o i ms’ R&D in es men ; ha
is, when he le el o p o ec ion is low, i ms cu back on R&D in es men , and, con e sely,
a s ong in ellec ual p ope y p o ec ion p omo es i ms R&D in es men s, which in u n
p omo es inno a ion (Boswo h and Roge s, 2001). Inno a o s u ilise in ellec ual p ope y
p o ec ion mechanisms o ob ain app op ia e e u ns om hei in es men s by gaining unds,
and in ellec ual p ope y is an impo an mechanism o p o ec his i m asse (Aloini e al.,
2017; Sha ell and Van, 2001). S eng hening in ellec ual p ope y p o ec ion hus s imula es
inno a ion by ensu ing a e u n on i ms’ R&D in es men s (Siege and W igh , 2007).
Second, IPR p omo es inno a ion by p o ec ing he in en o ’s exclusi e igh s, he i m’s
monopoly posi ion, and ma ke p o i s. An en i onmen o low le els o in ellec ual p ope y
p o ec ion can c ea e ba ie s o inno a ion by allowing imi a o s o quickly en e he ma ke ,
and hus coun e ei s can e ode he p o i ma gins o inno a o s (Zhao, 2006). Thi d,
in ellec ual p ope y p o ec ion educes in o ma ion asymme y and p omo es inno a ion.
Fo companies, R&D is a necessa y pa h o p o i abili y and g ow h and is cha ac e ised by

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Vol. 26 • No. 66 • May 2024 593
high and long- e m isks. Inno a ion ac i i ies con ibu e o in o ma ion unce ain y abou
he u u e alue o a i m’s asse s, and highly p o ec ed in ellec ual p ope y educes
in o ma ion ambigui y and asymme y wi hin and ou side he i m, which he eby inc eases
in ma ke alue (Huang e al., 2020). Fou h, in ellec ual p ope y p o ec ion can acili a e
he g ow h o s a ups and p o ide inno a o s wi h he oppo uni y o es ablish a base in he
indus y (G aham and Sichelman, 2016).
In conclusion, when in ellec ual p ope y p o ec ion is weak, i ms bene i mo e om
knowledge and echnology spillo e s. The ma ke compe i ion inc eases as simila p oduc s
appea o lood he ma ke . Inno a o s in es mo e in inno a ion o ea o being o e aken
by imi a o s, hus educing hei own p o i s (Jeng and Pak, 2016). As in ellec ual p ope y
p o ec ion inc eases, co po a e inno a ion e o s may dec ease. Wi h he u he inc ease in
in ellec ual p ope y p o ec ion, in ellec ual p ope y p o ec ion p omo es co po a e
inno a ion in es men , p o ec s in es men monopoly en s and p o i s, and educes
in o ma ion asymme y. This scena io ees up ime o companies o es ablish hei indus y
base and again s imula es hei independen inno a ion d i e. Based on he abo e analysis,
he ollowing hypo hesis was p oposed.
Hypo hesis 1: in ellec ual p ope y p o ec ion and se ice indus y companies’ inno a ion
abili y show a U-shaped ela ionship. As he s eng h o in ellec ual p ope y p o ec ion
inc eases, se ice indus y companies’ inno a ion abili y i s dec eases and hen inc eases.
1.2. In e nal compensa ion mechanism o equi y incen i e
The long- e m and isky na u e o co po a e inno a ion in ol es mo i a ing employees o
wo k ha d and o commi o ele an long- e m company ac i i ies. An equi y incen i e is a
compensa ion con ac ha g an s ela i ely app op ia e equi y o co e employees, gi ing
hem he powe o dis ibu e he esidual ea nings o he company and e ec i ely enhancing
he sense o equali y and na owing hei income gap wi h execu i es (Zhang e al., 2020).
Unlike equi y incen i es, whe e mone a y compensa ion e lec s hie a chical and posi ion
gaps, incen i e ea nings ely on he u u e p ices o he unde lying s ock and he numbe o
equi y g an s. In addi ion, execu i es and employees a e aligned in e ms o equi y incen i es
(Banke e al., 2011). Employees can only be ewa ded wi h equi y incen i es by wo king
ha d and imp o ing he long- e m pe o mance o he en e p ise. This long- e m incen i e
ool e lec s he ai ness o an imp o ed compensa ion s uc u e.
The a ge s o equi y incen i es a e di ided in o execu i es and non-execu i es ha a e
mainly conside ed as co e employees. I hese co e employees do no ecei e he same ewa d
o he same e o , hen he le el o equi y incen i e shows a la ge in e nal gap. In his case,
he co e employees can su e om psychological shock and ha e a nega i e e ec on
co po a e inno a ion (Pan e al., 2020). Execu i es ha e decision-making au ho i y o e
esou ce alloca ion in he i m and a e incen i ised o inc ease R&D expendi u es o achie e
high e u ns, al hough he abili y o R&D expendi u es o gene a e inno a i e ou pu s and
e u ns depends on he co e employees (Yin e al., 2021). Hence, he execu i es in he i m
domina e he inpu aspec o inno a ion, while he co e employees domina e he ou pu aspec .
The co e employees a e he eal pe o me s and pa icipan s in inno a ion asks, mas e ing
he co e business o he company, and exe ing hei expe ise. These co e employees
comp ise he mos impo an d i ing o ce in inc easing he i m alue (Vuksano ić e al.,
2022). The e o e, when equi y incen i es ha e la ge in e nal gaps, co e employees may eel
ha hey a e no being ewa ded o hei e o s. The e ec o equi y incen i es weakens,
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hus educing he mo i a ion o inno a e (Xu e al., 2019). On his basis, he ollowing
hypo hesis was p oposed.
Hypo hesis 2: Expanding he in e nal gap in he equi y incen i es o he se ice indus y
companies can inc ease hei R&D expendi u es bu educes hei inno a ion capabili y.
1.3. Risk a e sion mechanism o go e nmen g an s
Gillingham and Sweeney’s (2010) heo y o ma ke ailu e s a es ha he social bene i s o a
i m’s R&D ac i i ies can be much g ea e han he bene i s o R&D due o i s spillo e
e ec s. This end is exace ba ed i he i m has a good public image. Howe e , R&D
ac i i ies a e usually cha ac e ised by long, i e e sible, and isky cycles, which inhibi he
impulse and idea o co po a e inno a ion. In his case, i he go e nmen can p o ide a ce ain
amoun o inancial suppo , such as subsidies, hen a new impe us may be gained o
co po a e inno a ion. The e o e, go e nmen subsidies a e an impo an means o egula ing
ma ke ailu es (Wins on, 2007). Based on he esou ce-based iew, he in low o go e nmen
esou ces can compensa e o he sho age o i ms' own inno a ion esou ces, and
go e nmen subsidies can also p o ide i ms wi h elie om hei inancial cons ain s and
allow hem o elax h ough cash low (Mani, 2002). Based on signaling heo y, a go e nmen
ha p o ides la ge-scale subsidies and suppo o an indus y sends a signal o he ou side
wo ld; ha is, such indus y is highly ecognised by he go e nmen and is he u u e di ec ion
o de elopmen , which b ings a capi al in low om inancial ins i u ions and in es men
en e p ises and balances he in o ma ion asymme y be ween en e p ises and in es o s (Yang
e al., 2019). On his basis, he ollowing hypo hesis was p oposed.
Hypo hesis 3: Go e nmen subsidies send inno a ion ecogni ion signals o he ma ke ,
educe he business isks o se ice indus y companies, and p omo e inno a ion capabili y.
2. Me hodology
2.1. Reg ession model selec ion
Conside ing he ad an ages and disad an ages o he Reg ession Discon inui y model, and
e e ing o Lee and Lemieux (2010), we p esen he ollowing cons uc :
ibaii
k
k
k
ki WBAWDDexexy

  ln)()(
(1)
whe e
i
y
deno es he numbe o pa en applica ions o pa en s g an ed by se ice indus y
companies, which is loga i hmically no malised. The indica o s o en e p ise inno a ion
capabili y na u ally exhibi a le -skewed dis ibu ion, and mos o he companies’ obse ed
alues a e clus e ed in 0–5 pa en s, o which he dependen a iable is loga i hmically
no malised. The his og am, which can be p esen ed la e , shows ha he le bias o he
a iables is g ea ly imp o ed. In Eq. (1),
x
is he g ouped a iable, he alue o he annual
da a om 2000–2021, which is
x
=1 o 2000 and
x
=22 o 2021.
e
ep esen s he ime when
he F ee T ade A ea Policy was implemen ed.
i
D
akes he alue o 1 when
ex
bu 0
when
ex
. In he eg ession equa ion, he pa ame e

, o F ee T ade A ea Policy on he
inno a ion capaci y o se ice indus y companies, mus be es ima ed and he esul is he
disposal e ec .
a
W
and
b
W
indica e ha he a ious con ol a iables a e added o he model
in linea and loga i hmic pa e ns, espec i ely. The Reg ession Discon inui y me hod is used
Economic In e e ences
AE
Vol. 26 • No. 66 • May 2024 595
o ob ain consis en and unbiased es ima es wi hou using con ol a iables when pe o ming
model es ing. Howe e , con ol a iables a e necessa y in he obus ness es o model
op imisa ion. Conside ing he long ime span o he da a used, in addi ion o he F ee T ade
A ea, exogenous shocks a ec he inno a ion capaci y o se ice indus y companies. As
such, he Reg ession Discon inui y o he ele an e en s mus be es ima ed o mee he
obus ness equi emen s.
2.2. Da a
2.2.1. Sample da a selec ion
The en e p ise da a we e ob ained om he WIND, CSMAR, S a e In ellec ual P ope y
O ice, and China Na ional Ins i u es da abases. A-sha e lis ed companies in Shanghai and
Shenzhen in he Guangdong F ee T ade A ea egion we e used as he sample. In he selec ion
o he s udy pe iod, 2010 is chosen as he s a ing obse a ion yea and he da a om 2010–
2021 a e used as he sample o eg ession analysis. Wi hin his ime in e al, he inno a ion
le el and in e na ionalisa ion o Chinese F ee T ade A ea en e p ises a e in a ela i ely s able
g ow h end, which p o ides a sui able obse a ion window and pe iod o he s udy. In
e ms o o he ac o s a ec ing he inno a ion capabili y o se ice en e p ises, hei inpu is
also la gely a ec ed by ele an majo e en s, such as he egional policy es ic ions on
o eign in es men and he ou b eak o he new Co ona i us disease in 2020. Du ing he
empi ical eg ession analysis, ade-o s need o be made wi h espec o he ex e nal
en i onmen o he i m and he da a a ailabili y. The selec ion o en e p ises includes he
ollowing c i e ia: non-consecu i e loss-making in he pas i e yea s; non-ST en e p ises
lis ed o h ee yea s o mo e; companies wi h incomple e a iables ha canno be comple ed
and ha e been delis ed a e excluded; and hose wi h oo many missing alues o key
indica o s. As such, he inal sample comp ises 12,353 obse a ions om 856 lis ed
companies. The da a collec ion includes in e na ional ope a ions, inancial indica o s, and
co po a e go e nance om companies in he CSMAR (China S ock Ma ke & Accoun ing
Resea ch Da abase). The da abases ela ed o he inno a ion capaci y o se ice indus y
companies a e de i ed om he S a e In ellec ual P ope y O ice, and he missing alues o
pa en s a e ob ained by manual sea ch o he da abase o he Chinese Ins i u e o Science.
The calcula ion and colla ion o he alues a e ca ied ou by using Excel and S a a so wa e.
2.2.2. Sample da a ange
F ee T ade A ea lis ed indus ies include p o essional and echnical se ices, In e ne and
ela ed se ices, wa ehousing, accommoda ion, insu ance, public acili ies managemen ,
o he inancial se ices, ag icul u e, o es y, animal husband y and ishe y se ices, heal h,
business se ices, adio, ele ision, ilm and ideo eco ding p oduc ion, eal es a e,
educa ion, cul u e and a s, educa ion, indus y, spo s and en e ainmen goods
manu ac u ing, news and publishing, wa e anspo a ion, elecommunica ions, adio and
ele ision and sa elli e ansmission se ices, science and echnology p omo ion and
applica ion se ices, leasing, ex iles, ex iles, clo hing, appa el, ai anspo , loading and
unloading and anspo agency, compu e , communica ions and o he elec onic equipmen ,
money inancial se ices, capi al ma ke se ices, so wa e and in o ma ion echnology
se ices, oad anspo , pos al se ices, ail oad anspo a ion, e ail ade, and ca e ing.
AE
E ec o F ee T ade A ea Policy on Inno a ion Capabili y
in he Se ice Indus y
596 Am i ea u Economic
2.3 Va iable de ini ion and measu emen
The explana o y a iables a e he numbe o pa en applica ions and o pa en s g an ed. In
exis ing s udies, he explana o y a iables such as he inno a i eness capabili y o a
co po a ion ypically use he company R&D expenses, he numbe o pa en applica ions, he
numbe o ci ed pa en applica ions, he numbe o pa en s, and he numbe o ci ed pa en s.
R&D is highly co ela ed wi h he company labou cos s and he indus y, and he inpu and
ou pu o inno a ion capabili ies has a la ge gap. Possibly, he numbe o pa en applica ions
ci ed has no ye been no iced and iden i ied by o he companies gi en he sho ime o hei
a ailabili y. The numbe o pa en applica ions is he esul o en e p ises’ subjec i e
ini ia i es. On he one hand, o p o ec hei inno a ion achie emen s, en e p ises p o ec hei
igh s and in e es s by applying o pa en s. On he o he hand, compa ed o he g an ing o
pa en s, pa en applica ions e lec he imelie inno a ion ac i i ies and hei ini ial
inno a ion in es men . The in e nal dynamics o co po a e inno a ion a e a ec ed by he ac
ha pa en applica ions a e subjec o e iew by di e en le els o egula o y and
examina ion bodies.
Fu he mo e, he na u e o he pa en is u he examined. Acco ding o he classi ica ion o
pa en na u e, pa en s a e classi ied in o wo ca ego ies: u ili y and design inno a ion. These
ca ego ies a e used as he explana o y a iables in u he analysis, and he numbe o u ili y
model pa en s be e e lec s he inno a ion abili y o en e p ises and b ings hem a s onge
compe i i e ad an age in he ma ke .
The co e explana o y a iables include in ellec ual p ope y p o ec ion, equi y incen i e, and
go e nmen subsidies.
The in ellec ual p ope y p o ec ion is measu ed using he numbe o in ellec ual p ope y
li iga ion cases. This pape measu es he in ensi y o in ellec ual p ope y p o ec ion by
mul iplying he en o cemen in ensi y on he basis o a uni o m GP index (Han and Li, 2005;
Shi and Gu, 2013). The GP Index is an in e na ionally accep ed index o he s eng h o IPR
legisla ion. China’s GP Index inc eased om 2.51 in 1984, when he Pa en Law was
es ablished, o 4.52 in 2010. The GP Index has emained unchanged a 4.52 du ing he
subsequen pe iod o 2010-2017, as he Pa en Law has no been e ised. When measu ing
he in ensi y o IPR en o cemen , we e e o he p ac ice o exis ing s udies and implemen
he measu emen om ou pe spec i es: he in ensi y o in ellec ual p ope y en o cemen ,
he le el o judicial p o ec ion, in ellec ual p ope y p o ec ion awa eness, and he le el o
economic de elopmen . Among hese ou , he s eng h o in ellec ual p ope y en o cemen
is measu ed by he cumula i e case comple ion a e; he le el o judicial p o ec ion is
measu ed by he p opo ion o he numbe o lawye s o he o al popula ion o he coun y
(10,000 people); he awa eness o in ellec ual p ope y p o ec ion is measu ed by he numbe
o pa en applica ions ecei ed di ided by he o al popula ion o he coun y (10,000 people);
and he le el o economic de elopmen is measu ed by he g ow h a e o he g oss domes ic
p oduc (GDP). The abo e s udy assesses he s eng h o in ellec ual p ope y p o ec ion om
he mac o le el and he le el o in ellec ual p ope y p o ec ion o se ice indus y companies
om he mic o le el. Meanwhile, he numbe o in ellec ual p ope y li iga ion cases e lec s
he cu en s a us o in ellec ual p ope y p o ec ion o en e p ises.
The equi y incen i e adop s he in e nal gap o i s le els as he measu emen index. As
s ipula ed in he “Managemen Measu es o Equi y Incen i e o Lis ed Companies,”
incen i e a ge s can include di ec o s, senio managemen , co e echnical pe sonnel, o co e
Economic In e e ences
AE
Vol. 26 • No. 66 • May 2024 603
conside ed. The eg ession esul s show ha he inclusion o con ol a iables o he choice
o a 2nd-o de exp ession s ill e lec he alid p edic ion o he model.
3.3. Fu he analysis
The di e en le els o pa en applica ions a e u he subdi ided in o new u ili y and design
pa en s. A new u ili y pa en e e s o a new echnical solu ion o he shape, cons uc ion, o
combina ion he eo o a p oduc ha is sui able o p ac ical use. In compa ison o in en ion
pa en s, u ili y pa en s a e less in en i e and inno a i e bu can s ill be used as a way o
measu e he le el o co po a e inno a ion. Ano he ype o pa en applica ion is o design,
which, acco ding o he Pa en Law, e e s o a new look ha is aes he ically pleasing and
sui able o indus ial applica ion based on he shape o pa e n o a p oduc o a combina ion
he eo , as well as he combina ion o colou and shape o pa e n. Fo u ili y and design
pa en applica ions, he same me hod o Reg ession Discon inui y is used o es ima ion. The
esul s o u ili y pa en applica ions a e consis en wi h hose o gene al pa en applica ions;
ha is, he es ablishmen o he F ee T ade A ea Policy has a posi i e e ec on u ili y pa en
applica ions bu shows no simila e ec on design applica ions. (Table no. 6)
Table no. 6. Coe icien esul s o Reg ession Discon inui y D o pa ame e
es ima ion (new u ili y pa en /design pa en )
New U ili y Pa en
Design Pa en
X-e
288.55*
(10.043)
212.64**
(14.032)
317.36**
(11.043)
258.94**
(15.042)
D*(X-e)
1923.42***
(19.071)
1524.56**
(24.061)
1452.67*
(17.051)
1242.98***
(26.041)
INT2
0.251*
(0.052)
0.198*
(0.031)
0.299
(0.033)
0.211
(0.031)
INC
-0.361**
(0.033)
-0.311*
(0.033)
-0.288*
(0.022)
-0.300
(0.022)
SUB
0.401*
(0.038)
0.377*
(0.043)
0.367
(0.033)
0.299
(0.012)
GPR
——
42.121**
(0.061)
——
30.177
(0.052)
ROA
——
-191.001*
(0.070)
——
-156.471*
(0.061)
ART
——
0.211*
(0.052)
——
0.233
(0.062)
TAT
——
0.301*
(0.063)
——
0.255*
(0.052)
EPS
——
0.281*
(0.069)
——
0.311
(0.029)
PSC
——
0.190*
(0.041)
——
0.188*
(0.031)
NAPS
——
0.204**
(0.051)
——
0.155
(0.041)
Yea
——
0.013**
(0.010)
——
0.020*
(0.012)
_2
R
0.811
0.601
0.741
0.599
F
299.911
166.633
211.111
199.658
No e: * indica es a 10% signi icance le el, ** indica es a 5% signi icance le el, and *** indica es a 1%
signi icance le el. Da a in pa en heses a e s anda d de ia ions.

AE
E ec o F ee T ade A ea Policy on Inno a ion Capabili y
in he Se ice Indus y
604 Am i ea u Economic
3.4. Robus ness es s
The i s obus ness es is non-pa ame ic. Fo he ime poin e=5, he d command o S a a
13 is applied o he non-pa ame ic es , which equi es he selec ion o di e en bandwid hs
and ke nel unc ions o he Reg ession Discon inui y. Acco ding o he c i e ion, di e en
bandwid hs h a e selec ed such ha h = 0.5, 0.75, 1.25, 1.5. Tha is, he ke nel unc ions a e
es ima ed o he op imal bandwid hs o 1/2,3/4,3/4,3/2 o he size dis ibu ion. Based on he
de e mina ion o he disposi ion e ec , a simila conclusion is ob ained by choosing di e en
hype pa ame e s such ha he poin can be conside ed as an impo an jump. (Table no. 7)
Table no. 7. Resul s o coe icien s o Reg ession Discon inui y D
o choosing di e en bandwid hs
Bandwid h size
T iangula Co e
Co e Ma ix
0.5h
1824.991**
(20.087)
1420.213***
(19.097)
0.75h
1882.320***
(23.078)
1939.131*
(18.086)
1.25h
1570.923*
(10.081)
1899.023***
(9.081)
1.5h
1223.403***
(12.066)
1287.145*
(15.076)
No e: * indica es a 10% signi icance le el, ** indica es a 5% signi icance le el, and *** indica es a 1%
signi icance le el.
Mo eo e , o ensu e he alidi y o he Reg ession Discon inui y, he con inui y o each
con ol a iable a he b eakpoin is examined in he obus ness es . Acco ding o he d
command in S a a, each con ol a iable is con inuous a e=5. Table no. 8 shows he esul s,
whe e he con ol a iables main ain con inuous con inui y a he b eakpoin s, bu none a e
obse ed a e=5.
Table no. 8. Pa ame e es ima es o con ol a iables a e=5
B
S d
Sig
GPR
0.139
0.041
0.580
ROA
0.020
0.012
0.893
ART
-0.209
0.033
0.125
TAT
0.508
0.042
0.380
EPS
0.020
0.001
0.481
PSC
0.412
0.091
0.460
NAPS
0.302
0.240
0.542
Yea
0.110
0.173
0.182
4. Discussion
All he empi ical esul s in his s udy suppo he p oposed hypo heses. In he con ex o
China's igo ous cons uc ion o ee ade pilo zones, ins i u ional inno a ion b ings policy
di idends, while in ellec ual p ope y p o ec ion, equi y incen i es, and go e nmen
subsidies ha e posi i e e ec s on he inno a ion ou pu o se ice indus y companies. The
policy di idend is b ough by he sys em inno a ion.
Economic In e e ences
AE
Vol. 26 • No. 66 • May 2024 605
Fi s , Table no. 5 epo s he eg ession esul s o he e ec o in ellec ual p ope y p o ec ion
on en e p ise inno a ion capabili y. The le el e m o in ellec ual p ope y p o ec ion has a
signi ican nega i e e ec while i s squa ed e m has a signi ican posi i e e ec on pa en
applica ions and g an s, which e i ies Hypo hesis 1 ha in ellec ual p ope y p o ec ion has
a U-shaped ela ionship wi h en e p ise inno a ion capabili y. When in ellec ual p ope y
p o ec ion is weak, i ms bene i mo e om knowledge and echnology spillo e s. Due o he
eme gence o compe ing p oduc s looding he ma ke , ma ke compe i i eness inc eases,
and inno a o s in es mo e in R&D due o he ea o being o e aken by imi a o s and
educing hei p o i s (Jeng and Pak, 2016). As in ellec ual p ope y p o ec ion s eng hens,
co po a e inno a ion e o s a e likely o decline. Howe e , he u he inc ease o in ellec ual
p ope y p o ec ion p omo es co po a e inno a ion in es men , p o ec s in es men
monopoly en s and p o i s, educes in o ma ion asymme y, ees up he indus y base o
i ms o build, and again s imula es en e p ises o inno a e (Li, 2020).
Second, Models 1-5 in able no. 5 epo a signi ican nega i e e ec o he in a-equi y
incen i e le el gap wi h en e p ise inno a ion capabili y. As he le el o equi y incen i es o
execu i es becomes highe han ha o co e employees, he co po a e R&D expendi u e in
he yea a e he implemen a ion o he equi y incen i e also inc eases. Howe e , he numbe
o co po a e pa en applica ions in he one and wo yea s a e he implemen a ion o he
equi y incen i e dec eases, suppo ing Hypo hesis 2 ha he inc ease in he in e nal gap in
he le el o equi y incen i es inc eases co po a e R&D expendi u e, bu educes co po a e
inno a ion ou pu (Pan e al., 2020). Co e employees a e he eal implemen e s and di ec
pa icipan s in inno a ion p og ams, and may eel un ai ly ewa ded when he le el o equi y
incen i e has a la ge in e nal gap. The ole o equi y incen i e weakens, he eby educing
hei mo i a ion o inno a e (Vuksano ić e al., 2022).
Thi d, go e nmen subsidies in Table no. 5 ha e a signi ican posi i e e ec on bo h pa en
applica ions and g an s, suppo ing Hypo hesis 3. Tha is, go e nmen subsidies send
inno a ion ecogni ion signals o he ma ke , educe he business isk o se ice indus y
companies, p omo e inno a ion capabili y, and co po a e inno a ion pe o mance has a
s ong dependence on R&D unds. Go e nmen subsidies can hus s imula e he inno a ion
en husiasm o companies (Yang e al., 2019).
Fou h, he coe icien s o pa en applica ions and g an s a e u he analysed. Fo pa en
applica ions, he coe icien shows ha he e ec o F ee T ade A ea implemen a ion is
posi i ely signi ican , and he numbe o pa en applica ions by i ms shows a clea jump a
he end o 2015. Howe e , o pa en g an s, he coe icien is insigni ican , indica ing ha
he policy e ec o he F ee T ade A ea is no e ec i e and may ha e a ce ain lag (Song and
Guo, 2019).
Fi h, he di e en le els o pa en applica ions a e u he subdi ided in o new u ili y and
design pa en s. The esul s o u ili y pa en applica ions a e consis en wi h hose o gene al
pa en applica ions. Tha is, he es ablishmen o he F ee T ade A ea Policy has a posi i e
e ec on u ili y pa en applica ions (Albo -Mo an e al., 2018), bu shows no simila e ec
on design applica ions (Schilke, 2014).
AE
E ec o F ee T ade A ea Policy on Inno a ion Capabili y
in he Se ice Indus y
606 Am i ea u Economic
Conclusion and insigh s
Main indings
This s udy adop s seconda y da a o i m dimension, combined wi h panel da a o se ice
indus y companies lis ed in Shanghai and Shenzhen A-sha es in he Guangdong F ee T ade
A ea. A pa ame ic Reg ession Discon inui y model is used o analyse he mechanism o
in luence o policies such as F ee T ade A ea in ellec ual p ope y p o ec ion, equi y
incen i es, and go e nmen subsidies on he inno a ion capabili y o se ice indus y
companies. The main conclusions ob ained in his s udy a e as ollows: Fi s , in ellec ual
p ope y p o ec ion and he inno a ion capabili y o se ice indus y companies show a U-
shaped ela ionship; as he s eng h o in ellec ual p ope y p o ec ion inc eases, he
inno a ion capabili y o se ice indus y companies i s dec eases and hen inc eases.
Second, expanding he gap wi hin he le el o equi y incen i es inc eases he R&D
expendi u es bu educes he inno a ion capaci y o se ice indus y companies. Thi d,
go e nmen subsidies send inno a ion ecogni ion signals o he ma ke , educe he business
isks o se ice indus y companies, and p omo e inno a ion capaci y. Mo eo e , he F ee
T ade A ea Policy a ec s he inno a ion o se ice indus y companies in e ms o hei
pa en applica ions, wi h a signi ican inc ease be o e and a e he policy implemen a ion.
Mo eo e , in di e en pa en dimensions, he F ee T ade A ea Policy signi ican ly a ec s
he numbe o u ili y model pa en s, bu shows no simila e ec on he numbe o design
pa en s.
Managemen insigh s
The indings imply he need o he ollowing:
 S eng hen in ellec ual p ope y p o ec ion, u he imp o e and e ise in ellec ual
p ope y p o ec ion- ela ed laws and egula ions, and imp o e he applicabili y o legisla ion;
imp o e he unc ions o in ellec ual p ope y legisla ion, judicial, and adminis a i e
p o ec ion, and hei a icula ion mechanisms; clea ly de ine p ope y igh s, p o ec he
in ellec ual p ope y igh s o F ee T ade A ea en e p ises, and gi e ull play o he incen i e
e ec o p ope y igh s on en e p ises; adop new-age in o ma ion echnology o ealise he
e ec i e connec ion o isola ed in o ma ion such as pa en s, adema ks, and ade o open
up in ellec ual p ope y in o ma ion silos, and imp o e he e iciency o se ice indus y
companies in ca ying ou IPR ansac ions.
 P omo e equi y incen i e policy; accele a e he imp o emen o he pe o mance
alloca ion sys em ha encou ages inno a ion and c ea i i y o alen s; c ea e a sys em ha
encou ages he pa icipa ion o in ellec ual p ope y p oduc ion ac o s such as knowledge,
pa en s, echnology, and managemen in he dis ibu ion o mo i a e alen s o inno a e;
u ilise he le e age o inancial policies o imp o e he F ee T ade A ea “go e nmen -
o ien ed ewa ds, he main uni ewa ds, supplemen al social ewa ds” alen ewa d sys em,
he o ma ion o alen selec ion c i e ia and ewa ds, and he dis ibu ion o inno a ion
incen i es o alen .
 Op imise he s uc u e o inancial suppo ; Es ablish a sc eening and selec ion
mechanism o a ge en e p ises wi h subs an i e inno a ion as he main ocus and o e all
inno a ion as a supplemen , hen p ecisely suppo R&D unds o ease he p essu e on
Economic In e e ences
AE
Vol. 26 • No. 66 • May 2024 607
en e p ises and achie e high-quali y inno a ion ou pu ; Pe ec he ax policy sys em o he
GSP o suppo co po a e inno a ion and app op ia ely inc ease he ax incen i es o egions
wi h low ma ke iza ion. The comp ehensi e use o “p e-suppo ” and “pos -subsidy” means
op imising he combina ion o policy ins umen s.
 A he co po a e le el, sha es o equi y in e es s a e g an ed o incen i e ecipien s in
he o m o a con ac o p omo e hei posi i e alue om he pe spec i e o p ope y igh s.
Thus, he pu pose o enhancing he i m alue and imp o ing he go e nance s uc u e can
be achie ed, and he eby e lec he cha ac e is ics o F ee T ade A ea equi y incen i e.
Resea ch sho comings and p ospec s
This pape e eals he in luence mechanism be ween he F ee T ade A ea Policy and he
inno a ion capabili y o se ice indus y companies, bu se e al ques ions emain o be
sol ed. Fi s , he s ong p omo ion o China’s F ee T ade A ea occu ed in 2015, and he
policy e ec in e al is ela i ely sho , which may cause bias in he es ima ion esul s.
Second, he selec ion o Guangdong, a ep esen a i e egion, as he sample o he empi ical
s udy is app op ia e o he se ice indus y, al hough co po a e inno a ion in o he indus ies
is igno ed. Thi d, he cons uc ion o he F ee T ade A ea i sel has an enhancing e ec on
he ou pu le el o co po a e inno a ion, pe haps no only limi ed o in ellec ual p ope y
p o ec ion, equi y incen i e, and go e nmen subsidies, bu also o a s ong ela ionship wi h
he na u e and size o en e p ises. Fo example, he abo e e ec di e s be ween s a e-owned
and non-s a e-owned. The lack o an analysis o p ope y igh s and en e p ise size in his
s udy may p o ide a di ec ion o u u e esea ch.
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