Licensing‐in fosters rapid invention! the effect of the grant‐back clause and technological unfamiliarity

Drawing on contractual economics and innovation management, licensing‐in is hypothesized to accelerate licensees' invention process. Studying a matched dataset of licensees and non‐licensees, licensees are shown to be faster at inventing, but the effect is negated if the license includes a grant‐back clause, shifting incentives from licensee to licensor. Also, the effect is significantly reduced if the licensee is unfamiliar with the licensed technology. The effect of the grant‐back clause is offset if the licensee is unfamiliar with the licensed technology, suggesting that the licensee retains the incentives to invent under these circumstances. Copyright © 2012 John Wiley & Sons, Ltd.     

The Licensing of Market Development Rights within Technology Alliances: A Shareholder Value Perspective*

Technology alliances create market development rights that are shared between partners in an alliance relative to codeveloped product technology. Alliance partners will often manage the shared market development rights in a cooperative manner by forming an agreement in which one partner (i.e., the licensor) licenses its market development rights to the other partner in the alliance (i.e., the licensee). The real options and bargaining power literatures provide opposing recommendations regarding whether a licensor creates greater shareholder value by licensing its market development rights to the licensee on a more or less restrictive basis. Empirical analysis of technology alliance contracts reveals that the restrictiveness by which a licensor should license its market development rights to a licensee depends on the licensee's strategic marketing emphasis. Specifically, a licensee will create greater value by following a more restrictive distribution strategy when its partner's marketing strategy emphasizes value creation. Alternatively, a licensee will create greater value when its partner's marketing strategy emphasizes value appropriation by following a less restrictive distribution strategy. From a theoretical perspective, the paper's findings provide early evidence regarding the contribution of marketing strategy toward value creation in technology alliances and help resolve the differing expectations offered by the real options and bargaining power literatures. Managerially, the paper identifies an alliance partner's strategic marketing emphasis as a hitherto unrecognized factor determining when managers should follow a more or less restrictive distribution strategy when licensing marketing development rights within technology alliances.     

Strategic alliance contracts: dimensions and determinants of contractual complexity

In contrast to prior studies examining strategic alliances as discrete governance structures (e.g., alliances vs. M&A, equity vs. non‐equity agreements), we investigate their particular contractual features. The analysis examines the dimensionality of the contractual complexity construct and investigates the determinants of firms' adoption of various contractual provisions. We find two underlying dimensions of contractual complexity, based upon the enforcement and coordination functions of different contractual provisions. The evidence reveals that firms' usage of particular contractual provisions is a function of asset specificity as well as whether the alliance's duration is pre‐specified or open‐ended. The findings also speak to the debate surrounding the roles of prior ties and trust for alliance governance. Firms that have collaborated with each other in the past are not less likely to negotiate enforcement provisions; rather, repeat collaborators are less likely to adopt contractual provisions that are informational in nature and are geared to the coordination of the alliance. Copyright © 2007 John Wiley & Sons, Ltd.     

The Structure of Licensing Contracts

Industrial organization theory has explored several issues related to licensing, but empirical analyses are extremely rare. We amass a new and detailed dataset on licensing contracts, and use it to present some simple 'facts' concerning licensing behavior. Our analysis reveals robust cross-industries differences in several contractual features, such as exclusivity, cross-licensing, ex-ante versus ex-post technology transfers, and licensing to related versus unrelated parties. We offer an interpretation of these facts based on cross-industry variation in the strength of intellectual property rights.     

Dynamic capabilities as antecedents of the scope of related diversification: the case of small firm accountancy practices

We propose that differences in the scope of related diversification in firms can be accounted for by differences in their dynamic capabilities. In order to test this, we analyze 254 Norwegian small firm accountancy practices' possession of key dynamic capabilities including the heterogeneity of their human capital, their internal development routines, and their alliances with complementary service providers. We also analyze the influence of strategic choice, in terms of the positioning of the practice and its underlying strategic intent. While we observe no clear effects for these two latter factors, we find that dynamic capabilities have a distinct impact on the scope of services. Copyright © 2008 John Wiley & Sons, Ltd.     

Licensing Strategies in the Presence of Patent Thickets

Many key industries (e.g., biomedical, pharmaceuticals, telecommunications, and information technologies) are characterized by cumulative innovations, where the introduction of a new product or service often requires many complementary technologies. When these technologies are protected by intellectual property rights owned by many firms, patent thickets exist, which researchers have argued may hinder the development of cumulative innovations. Specifically, patent thickets may lead to excessive royalty burdens for potential licensees, which is called “royalty stacking,” and if such costs are passed on to consumers, prices of products based on cumulative technologies will be driven up, dubbed as “double marginalization.” The literature, however, does not address these issues under different forms of licensing contracts. This article develops a game‐theoretic model where a downstream firm seeks to license N patents that read on its product from upstream firms. It discusses a variety of licensing forms widely used in practice and attempts to discover whether royalty stacking and double marginalization occur under these forms of licenses. It also studies the impact of bargaining power between parties. It is found that when patent ownership becomes more fragmented, neither royalty stacking nor double marginalization occurs under profit‐based royalty, fixed fee, and hybrid licenses. Such problems occur only under pure quantity‐based or pure revenue‐based royalty licenses when the downstream firm's bargaining power is low. It is also shown that no matter how fragmented the ownership structure of patent is, hybrid licenses consisting of a fixed fee and a quantity‐ or revenue‐based royalty rate lead to the same market outcomes as a fully integrated firm that owns all the patents and the downstream market. This article has interesting implications for both research and practice. First, the results show that even under the same patent ownership structure, different forms of licenses lead to quite different market outcomes. Therefore, it is suggested that firms and policy makers pay more attention to contractual forms of licenses when trying to minimize the negative impact of patent thickets. Second, the extant literature has largely assumed that quantity‐based royalties are used, where double marginalization is the most severe. In practice, revenue‐based royalties are most common, under which double marginalization is much milder. Third, the results show that patent pools can be most effective in mitigating royalty stacking and double marginalization when quantity‐based or revenue‐based royalties are the sole or primary payment form, especially when downstream firms have low bargaining power.     

The effectiveness of contractual and trust‐based governance in strategic alliances under behavioral and environmental uncertainty

Research summary: We examine the interplay of behavioral and environmental uncertainty in shaping the effectiveness of two key governance mechanisms used by strategic alliances: contractual and trust‐based governance. We develop and test hypotheses, using a meta‐analytic dataset encompassing over 15,000 strategic alliances across 82 independent samples. We find that contractual governance works best under low to moderate levels of behavioral uncertainty and moderate to high levels of environmental uncertainty, while it is detrimental to alliance performance when both types of uncertainty are low or high. Trust‐based governance is most effective at high levels of behavioral uncertainty and low levels of environmental uncertainty. It suffers a large loss of usefulness at high behavioral uncertainty as environmental uncertainty increases. Managerial summary: Strategic alliances allow firms to gain greater efficiency and create value. Yet, many such alliances fail because they are not able to deal with the twin challenges posed by behavioral and environmental uncertainty. Findings from our meta‐analysis imply that under conditions of high behavioral uncertainty and low‐to‐moderate levels of environmental uncertainty, the use of trust‐based governance alongside contractual governance might enhance the latter's effectiveness. The combined effectiveness of contractual and trust‐based governance under high levels of both behavioral and environmental uncertainty is not obvious. When both behavioral and environmental uncertainty are high, contractual governance hurts alliance performance while trust‐based governance does not function at its best either. Under these conditions, it might be better for firms to turn to hierarchy or vertical integration. Copyright © 2015 John Wiley & Sons, Ltd.     

Predicting and measuring alliance performance: a multidimensional analysis

The strategic alliance literature demonstrates that alliances create value for the partners, but also that many alliances fall short of expectations. This study addresses the complex issue of alliance performance. We follow 100 contractual alliances over a 5-year period, and study their performance in terms of abrupt termination, short-term performance, and long-term performance. The results indicate that alliances that are considered strategically important are less likely to be abruptly terminated. We also find that newly established alliances have a higher termination rate than older alliances. Short-term performance is primarily affected by access to complementary and strategically important resources, whereas long-term performance is related to specific investments in human capital combined with the partners' ability to develop and expand alliance activities over time. Copyright © 2007 John Wiley & Sons, Ltd.     

Managerial perceptions of technology licensing as an alternative to internal R&D in new product development: an empirical investigation

Increasingly, companies are using the licensing approach to acquire external technology as an alternative to internal new product development. However, the licensing literature presents lists of benefits and costs without identifying either their relative importance or the underlying dimensions. This article presents the results of a survey of Australian licensee firms designed to fill this gap in the literature. The results show that the major reason for licensing relates more to the immediate need to gain competitive advantage than the relative low cost advantage of technology licensing or having access to future technology. The major impediments to licensing are the entry and exit costs and the loss of decision-making autonomy resulting from licensor-imposed restrictions. Further, only two factors, perceived search costs and low cost market entry advantage of licensing appear to vary among the industries studied. Future research and managerial implications of the results are discussed.     

When do strategic alliances inhibit innovation by firms? Evidence from patent pools in the global optical disc industry

Research and development (R&D) consortia are specialized strategic alliances that shape the direction and scope of firm innovation activities. Little research exists on the performance consequences of participating in R&D consortia. We study the effect of patent pools, a unique form of R&D consortia, on firm performance in innovation. While prior research on alliances generally implies that patent pools enhance firm innovation, our study finds the opposite. Analyzing data on systemic innovation in the global optical disc industry, we find that patent pool formation substantially and significantly decreases both the quantity and quality of patents subsequently generated by licensors and licensees relative to the patenting activity of nonparticipants. Our empirical findings suggest that patent pools actually inhibit, rather than enhance, systemic innovation by participating firms. Copyright © 2011 John Wiley & Sons, Ltd.     

Building product diversification through contractual R&D agreements

Firms engage in contractual R&D agreements for several reasons, including product innovation motives, firm performance goals, and technological diversification. This article demonstrates that firms also might enter into external collaborations to penetrate new markets. This study therefore explores both the effects and the strategic risks of contractual R&D agreements and their related knowledge structures for a firm's capacity to diversify into new markets. Drawing on a novel panel data set obtained from 102 Fortune high‐tech firms, the authors demonstrate that strategic alliances enable knowledge‐integrated firms to penetrate new businesses; however, these organizations should be cautious about engaging in licensing‐in agreements, which have negative effects on product diversification.     

Screening and signalling for technology licensing: a comparison

This article studies, in an adverse selection set‐up, how a patentee licenses a new technology in a two‐period context where the licensee has private information on its marginal cost of production. Two different ways of licensing are considered: the patentee offers, in the first period, either a menu of contracts that screens the different types of licensee or a single contract that obliges the licensee to signal its true type. Of these two contracts, the better for the patentee depends on the probability of the innovation gives rise to a low marginal cost and the difference between the high and low cost. Findings explain, to some degree, the variety of licensing contracts observed in practice (some including only a fixed fee, and others including both a royalty and a fixed fee). This variety may be rationalised by the use of different devices (signalling or screening) aimed at alleviating the effects of opportunism. A welfare comparison of the two means for extracting hidden information from the licensee is also made.     

The Licensing of Barbers in the USA

Barbering is one of the earliest professions to be licensed in the USA. This article discusses the origins of barber licensing, as well as its current status and scope, and then estimates the effects that such licensing has had on barbers' earnings. To estimate these effects we use micro‐level data from the 2000 US Census along with several measures of the strictness of state licensing of barbers. Our results suggest that certain licensing provisions may have increased barber earnings by between 11 and 22 per cent. The magnitude of our estimates is somewhat higher than those found in studies examining the effects of licensing in similar professions.     

Product innovation through coopetition in alliances: Singular or plural governance?

This study researches how firms can improve their product innovation in coopetition alliances through alliance governance. Our survey-based study of 372 vertical alliances in the medical device industry contributes to a clarification of prior studies' contrasting findings on product innovation when coopetition is present in alliances. Our results show that the singular use of relational governance improves product innovativeness in vertical alliances that experience growing levels of coopetition. In contrast, the singular use of transactional governance reduces product innovativeness with growing coopetition. When firms apply both relational and transactional governance as plural governance, vertical coopetition alliances get access to new ways to improve their product innovativeness.     

Procedural fairness and interfirm cooperation in strategic alliances

This study applies the justice theory to address interpartner cooperation in strategic alliances. It emphasizes how procedural fairness as perceived by boundary spanners in these alliances influences cooperation outcomes. We theorize that procedural fairness improves cooperation results through enhancing relational value and curtailing relational risk in an environment characterized by both economic and social exchange. Our path analysis suggests that procedural fairness has a direct effect on operational outcome, but an indirect effect on financial outcome via increased trust driven by fairness. Procedural fairness contributes more to performance outcomes when strategic alliances are equity joint ventures than if they are contractual agreements. Theoretical and managerial implications arising from the findings are highlighted. Copyright © 2007 John Wiley & Sons, Ltd.     

Grantbacks,territorial restraints,and innovation

We analyse the effect of grantback clauses in licensing contracts. While competition authorities fear that grantback clauses might decrease the licensee's ex post incentives to innovate, a standard defence is that grantback clauses are required for the patent-owner to agree to license its technology in the first place. We examine the validity of this “but for” defence and the equilibrium effect of grantback clauses on the innovation incentives of the licensee for both non-severable and severable innovations, which roughly correspond to infringing and non-infringing innovations. We show that grantback clauses do not increase the patent-holder's incentives to license when non-severable innovations are at stake but they do when severable innovations are concerned – suggesting that the “but for” defence might be valid for severable innovations but not for non-severable ones, in direct contradiction to regulation in some jurisdictions. Moreover we show that, for severable innovations, grantback clauses can increase the range of parameters for which follow-on innovation by the licensee occurs. Our work extends the large literature on sequential innovation to an environment where information diffuses through licensing rather than through the mere act of patenting. In this different informational set up we show that Green and Scotchmer (1995)’s conclusion that the initial innovator should have a patent of infinite breadth no longer holds.     

R&D and technology purchase through licence agreements: complementary strategies and complementary assets

This paper reports on a major UK-wide investigation into the role of inward technology licensing and in-house R&D as alternative and complementary strategies in new product and process development.The role of licensing in the technology strategy of the firm can be viewed as the 'buy' in the context of 'make or buy' technology decisions. Such technology purchases may be made for a number of reasons including insufficient in-house resources or gaps in R&D provision stemming from small scale, risk, low investment in research or diversification away from existing research competencies. However, technology markets might have substantial information imperfections and transaction costs. The tasks of finding a technology provider, transferring the technology inwards and absorbing it into commercially successful new products and processes, can inhibit the use of licensing agreements for technology acquisition.
This research, using a sample of 128 manufacturing companies (including both licensees and non-licensees), examines some key propositions around the use of technology licensing. Data was collected on technology strategies, complementary assets, internal organisation and market structure. Analysis of the data suggests that strategies of 'buy and make' are complements rather than alternatives, and that extensive use of licensing requires substantial complementary assets to be in place. The nature of product-market positioning was found to be a significant driver of technology strategy, with firms that pursue product differentiation being the most likely to license. Whilst a priori it might be expected that internal organisation would influence technology strategy, this study was only able to provide weak support for this.     

Licensing Essential Patents: The Non‐Discriminatory Commitment and Hold‐Up

Licensors of patents essential to a standard are often required to license on reasonable and non‐discriminatory (RAND) terms. Using a model with owners of essential patents and licensees who invest into standard‐conforming technologies, this paper demonstrates that the non‐discriminatory commitment alleviates the hold‐up problem. Moreover, it improves consumer and social welfare, and promotes upstream innovation as licensing revenue is increased. In an extended model with each licensor independently choosing whether to make the commitment, all licensors voluntarily commit in the unique equilibrium.     

The Effects of Knowledge Depth and Scope on the Relationship between R&D Alliances and New Product Development

In this study, we extend the new product development (NPD) literature that proposes that firms' knowledge depth, defined as the reuse of well understood technical knowledge, and scope, defined as the use of newly acquired technical knowledge, and new knowledge accessed from R&D alliances all positively impact NPD. Building on the knowledge‐based view of the firm, we posit that the impact of firms' R&D alliances is limited when their internal knowledge depth and scope are adequate for NPD needs. We suggest that although firms form R&D alliances to gain the right to access external knowledge of R&D alliance partners, they are not obligated to invest in resources to integrate external knowledge from R&D alliances. We propose that they wait to see if their internal knowledge depth and scope prove sufficient for NPD. If the external knowledge proves to be unnecessary, firms choose not to invest the resources required to integrate this knowledge with their internal knowledge. Alternatively, we suggest an increased impact of R&D alliances on NPD when firms are more limited in their internal knowledge depth and scope. We propose that when knowledge depth and scope prove insufficient, firms make the additional investments required to integrate external knowledge from R&D alliances with their internal knowledge stock. This reasoning is consistent with real options theory as it has been applied in alliance research, where strategic alliances are characterized as real options. We find support for our hypotheses using panel data of 738 firm year observations for 143 U.S. biopharmaceutical firms operating in 2007. Our study contributes to the NPD literature and suggests new directions for future research.     

Investigating the Influence of Technology Inflows on Technology Outflows in Open Innovation Processes: A Longitudinal Analysis

The open innovation (OI) paradigm emphasizes the importance of integrating inbound and outbound flows of technology to increase a firm's innovation performance. While the synergies between technology inflows and outflows have been discussed in conceptual OI articles, the majority of empirical studies have typically focused on either the inward or the outward dimension of OI. According to recent reviews of OI literature, there is a need for further research that takes an integrated perspective on this topic and studies the combination of the inbound and outbound dimensions of OI. This paper follows these calls by focusing on technology licensing as the main contractual form for OI, and by investigating the relationship between technology in‐licensing and out‐licensing activities at the firm level of analysis. In particular, this paper argues that technology in‐licensing positively influences the volume of technology out‐licensing through two mechanisms. The first—resource‐based—occurs because in‐licensing investments expand and enrich the firm's technology base, thus increasing its value and, as a result, creating more opportunities for out‐licensing. The second—capabilities‐based—occurs because, due to commonalities between technology in‐licensing and out‐licensing in terms of performed tasks and required skills, repeated execution of in‐licensing transactions contributes to the development of higher out‐licensing capabilities and, as a result, increase out‐licensing volume. These arguments are tested using a panel dataset of 837 Spanish manufacturing firms over the period 1998–2007. Consistent with the predictions, the empirical analysis shows that higher investments in in‐licensing and more extensive in‐licensing experience lead to superior volumes of technology out‐licensing. These results contribute to research on OI and licensing, by empirically showing the existence of positive interactions between technology inflows and outflows and of synergies in the development of absorptive and desorptive capacities.