Abstract:    Since its reform and opening up, China has achieved 42 years of rapid growth, with an average annual GDP growth of 9.44 per cent, as against 3.22 of the world average over the same period. However, this economic development mode, driven mainly by traditional factors such as labor force, capital and land, does not bring about a year-on-year improvement in the quality of economic development. At the new stage of development, it is urgent to accelerate the transformation of old growth drivers with new ones, foster new momentum of economic development, and establish innovation as the core of economic development. In order to stimulate the innovation vitality of enterprises, the Chinese government has implemented the construction policies for intellectual property demonstration cities (IPDCs) since 2012, and has continuously expanded the scope of demonstration cities. 
    In the field of economic theory, there has been controversies over whether intellectual property protection can increase enterprise innovation investment and truly play an effective role in ‘protecting innovation’. The underlying reason for the controversy is that intellectual property protection has a ‘double-edged sword’ effect on enterprise innovation. On the one hand, intellectual property protection can effectively reduce the possibility of stolen new technology and the sinking cost of innovation investment, increase the enterprise technology exclusive, improve enterprise innovation output, and thus play an important role in enterprise innovation activities; on the other hand, intellectual property protection will not only directly increase enterprise imitation cost, but also hinder the diffusion of new technology, and even protect monopoly, thus inhibiting on enterprise innovation activities. Can intellectual property protection really ‘protect innovation’ in the context of China? This is precisely the central concern of this paper. 
    Specifically, this paper took the IPDCs construction policy as a quasi-natural experiment, based on the data of A-share listed companies in China from 2007 to 2019, and using the difference-in-differences (DID) model to investigate the impact of intellectual property protection on enterprise innovation investment. We found that the IPDCs construction policy has significantly increased the enterprise innovation investment. This finding was obtained from a series of tests, such as the parallel trend test, the PSM-DID test, instrumental variable (IV) estimation, and so on. The mechanism analysis showed that the channels for the IPDCs construction policy to increase enterprise innovation investment are as follows: strengthening the judicial protection and administrative protection behavior of local governments, and alleviating the financing constraints faced by enterprises. The results of the heterogeneity analysis showed that, compared to the state-owned enterprises, for the enterprises with lower intellectual property dependence and the enterprises in traditional sectors, the IPDCs construction policy played a greater role in promoting the innovation investment of non-state-owned enterprises, enterprises with high intellectual property dependence, and enterprises in high-tech industries. Further research has found that the fiscal pressure faced by local governments will play a negative role in regulating the relationship between the IPDCs construction policy and enterprise innovation investment. 

The marginal contributions of this paper are mainly in two aspects: First, in terms of measurement of intellectual property protection, this paper applies the IPDCs construction policy to portray the level of intellectual property protection at the city level, which can effectively overcome the measurement error of intellectual property protection and the potential endogeneity problems. Second, this paper not only confirms the positive externality role of intellectual property protection in promoting enterprise innovation investment, but also further reveals its internal mechanism. 

     In conclusion, this paper not only provided the latest empirical evidence for the assertion that ‘protecting intellectual property is protecting innovation’, but also provided a reference for further promotion of intellectual property protection and innovation incentives in China. 

Key words:  intellectual property demonstration city, investment in enterprise innovation, intellectual property protection, financial constraint, difference-in-differences (DID) method