Exclusive Licensing in a Sequence of Innovations

In this paper, I examine the issues involved with sequential licensing of innovations. In particular, a model is developed in which the granting of an exclusive license has the potential to distort future industrial structure. Subsequent licensing negotiations are then affected by the initial exclusivity, giving the initial licensee more leverage in bidding. This dynamic effect gives firms strategic incentives to take exclusive licenses, even when, in a one-shot market, such licenses would not be optimal. Appropriate antitrust rules in the context of sequential innovations are then discussed.     

Outsourcing and Competition Policy

We analyze optimal competition policy by a Competition Agency (CA) in a model with two countries, North and South, were a final good is produced by Northern oligopolistic firms using an input that can either be produced within the firm (vertical integration) or outsourced to Southern oligopolistic producers with lower labor costs (outsourcing). In the case where the final good is only consumed in the North, a CA in the South would optimally appropriate outsourcing rents through restrictions on the degree of competition among domestic firms. If the final good is consumed in both countries, we find that optimal competition policy in the South is marginally affected by the share of Southern consumption, leaving relatively important incentives to engage in rent-shifting. For a high enough share of Southern consumption, however, the interaction between the Northern and Southern CA is shown to be of the Prisoner’s Dilemma type, whereby the Nash equilibrium is Pareto-suboptimal and mutual cooperation on competition policy is globally desirable.     

There will be exports and licensing: The effects of patent rights and innovation on firm sales

Previous work has focused on how intellectual property rights affect inward technology transfer. This paper is among the first to study whether patent rights contribute to outward technology transfers. Patent protection can affect the ability of firms to be sources of technology through its effects on innovation and commercialization. Using micro data, this paper finds that patent rights and innovation are positively associated with the exporting and licensing of firms, controlling for other determinants of technological capacity, although the effect is not symmetric across firms in all countries. Patent rights have a strong impact on the export and licensing activities of firms in developed countries, and only on the licensing activities of firms in developing countries. Moreover, transfers of technology develop sequentially – namely, exporting before licensing – due to the differing sunk costs of each type of entry. The results have implications for how innovation policies and activities contribute to the outward orientation of firms.     

Motivations and risks in international licensing: a review and implications for licensing to transitional and emerging economies

In the light of changes in technology and today’s global business environment, recent contributions in the literature regarding international licensing, particularly the reasons, risks, and management of licensing are reviewed. The main reasons that firms choose licensing over other methods of international market entry are examined, and the risks associated with licensing are synthesized and updated, along with perspectives on managing those risks. Finally, areas are suggested for further inquiry that may help to enrich this field of study. Throughout, particular attention is paid to the issues of international licensing that affect emerging and transitional economies, particularly from the perspective of small firms.     

Product business, foreign direct investment, and licensing: Examining their relationships in international technology exploitation

In the past, most industrial firms focused on internally exploiting technological knowledge in their own products. By contrast, external technology exploitation through out-licensing was primarily an entry mode into foreign markets or into product markets for which a firm had limited complementary assets. Outward technology transfer was mainly regarded as a substitute for foreign direct investment and for a firm's internal product business. The recent trend towards active licensing questions this traditional role of international licensing. To overcome the focus on market entry in prior research, we analyze the motives for technology licensing. On this basis, we use data from 152 firms to test six hypotheses relating product diversification, technological diversification, and foreign direct investment to the extent of technology out-licensing, considering technological turbulence as a moderator. The results provide support for a capability-based understanding of technology licensing, and they may lead us to fundamentally rethink traditional assumptions on the relation between product marketing, foreign direct investment, and licensing.     

University revenues from technology transfer: Licensing fees vs. equity positions

This paper analyzes the financial return of universities' taking equity in their spin-off companies, and the prevailing attitudes toward taking equity. The reasons for taking equity include: the flexibility it gives licensing managers in structuring deals, the possibility that the university will still hold something of value if their technology is replaced, and, the reduced time required to generate revenue compared to a traditional license. A traditional license is preferred when the technology is not suitable for a spin-off company, or when the technology is one of the rare jackpot licenses that bring in millions of dollars every year.The financial reward of taking equity was determined by comparing the value of equity sold in public spin-off companies to the return on an average license. A traditional license consists of a license issue fee between $10,000 and $250,000 and an annual royalty on sales. In 1996 the average annual income from a traditional license was $63,832. The average value of equity sold in 16 university spin-off companies is $1,384,242. If one assumes that half the spin-offs fail before they go public, the average value of equity is $692,121. This is more than 10 times the average annual income from a traditional license, and is significantly higher than the amount usually received as a license issue fee.The high average value of equity depends on the presence of a few million-dollar equity sales. If those sales are excluded, the average value of equity is $139,722, which is within the range that can be received as a license issue fee. There is a high correlation between million-dollar equity sales and the amount of venture capital spending in the region. The million-dollar sales in this study all occurred in the top 11 states in the country in terms of venture capital spending in 1997.From a financial viewpoint it makes sense for licensing managers to take equity in their start-up companies. Our data show that even if none of the start-ups produces a million-dollar equity sale, the financial return of equity will be within the range normally received as a license issue fee. Taking equity leaves the door open for the occasional jackpot, which will bring in significantly more money than a standard license. When combined with a strong program of traditional licensing, taking equity in start-up companies maximizes the financial return that universities realize from their intellectual property.     

Vertical differentiation in oligopoly and license fees when outside innovator can enter the market: Two‐step auction

When an outside innovating firm has a technology to produce a higher quality good than the good produced at present, it can sell licenses of its technology to incumbent firms, or enter the market and at the same time sell licenses, or enter the market without license. We examine the definitions of license fee in such a situation in an oligopoly with three firms under vertical product differentiation, one outside innovating firm and two incumbent firms, considering threat by entry of the innovating firm using a two‐step auction. We show that in the case of uniform distribution of consumers' taste parameter and zero cost when the quality improvement (the difference between the quality of the high‐quality good and the quality of the low‐quality good) is small (or large), the two‐step auction is (or is not) credible, and license to two firms without entry strategy (or entry without license strategy) is optimal depending on credibility of the two‐step auction.     

Organizing for external technology exploitation in diversified firms

Besides applying technology in their own products, industrial firms increasingly exploit their technologies externally, for example through out-licensing. Earlier studies cannot explain the discrepancies between a few pioneering firms in active technology licensing and the managerial difficulties of many others. In diversified firms, diverging interests of the corporate and business unit level in the keep-or-sell decision constitute a central barrier to active licensing. Therefore, this article examines two essential dimensions of designing the corporate/business unit interface in diversified firms: the centralization of the activities on the corporate level and the alignment between the organizational levels. The study tests three hypotheses regarding the interaction and consequences of these organizational dimensions with data from 152 firms. Consistent with the hypotheses, the data provide support for the benefits from medium levels of corporate centralization and corporate/business unit alignment. The results have implications for technology exploitation, open innovation, markets for technology, and corporate strategy.     

Tax incentives… or subsidies for business R&D?

We study whether firms’ actual use of R&D subsidies and tax incentives is correlated with financing constraints -internal and external- and appropriability difficulties and investigate whether both tools are substitutes. We compare the use of both policies by SMEs and by large firms and find significant differences both across instruments and across firm size. For SMEs, financing constraints are negatively correlated with the use of tax of credits, while they are positively associated with the likelihood of receiving a subsidy. The use of legal methods to protect intellectual property is positively correlated with the probability of using tax incentives, but not with the use of subsidies. For large firms external financing constraints are correlated with instrument use, but results regarding appropriability are ambiguous. Our findings suggest that (1) direct funding and tax credits are not perfect substitutes in terms of their ability to reach firms experiencing barriers associated to market failures; (2) one size may not fit all in innovation policy when the type or intensity of market failure differs across firm size, and (3) subsidies may be better suited than tax credits to encourage firms, especially young knowledge-based firms, to start doing R&D.     

License and Entry Strategies for an Outside Innovator Under Duopoly with Combination of Royalty and Fixed Fee

We consider a choice of options for an innovating firm to enter the market with or without licensing its new cost-reducing technology to an incumbent firm using a combination of royalty and fixed license fee, or to license its technology without entry. When the innovating firm licenses its technology to the incumbent firm without entry, the optimal royalty rate for the innovating firm is zero. When the innovating firm enters the market with a license, its optimal royalty rate is positive. In that case if cost functions are concave, the optimal royalty rate is one such that the incumbent firm drops out of the market with negative fixed fee, and license without entry strategy and entry with license strategy are optimal; if cost functions are strictly convex, there is an internal solution of positive optimal royalty rate with positive or negative fixed fee and entry with license strategy is optimal.     

Quid pro quo and the enforcement of intellectual property rights protection: A bargaining approach

This article models a North–South negotiation where the North provides a quid pro quo in exchange for the strengthening of the enforcement of intellectual property rights (IPR) protection in the South. We show that when Northern and Southern firms compete on quantity in the Southern market, the South's optimal choice is either complete protection or complete violation, irrespective of different levels of IPR protection being available. We show this to depend on the Southern government's valuation of the quid pro quo and the Northern firm's level of technology.     

Dynamic analysis of innovation and international transfer of technology through licensing

This paper develops a quality-ladder type dynamic general equilibrium model with endogenous innovation and technology licensing as a major source of international technology transfer in developing countries. Examining the dynamic characteristics of the model fully, we explore the short- and long-run effects of both an improvement in the probability of reaching a licensing agreement with a given effort and an increase in the license fee rate. The model shows that the former promotes innovation and technology transfers in both the long and short run, while the latter discourages them.     

Technological acquisition and investment: lessons from recent indian experience

Most of the existing studies on investment functions ignore the role of technology acquisition in influencing investment decisions. This study argues that technology acquisition will decisively influence investment behavior, modernization, and expansion plans of firms. However, capability of the firms to acquire technology differs considerably. Following the Schumpeterian paradigm, we maintain that the entrepreneur's decision to invest and expand would depend on the technological opportunities available. The main role of the entrepreneur in the Schumpeterian framework is to exploit an invention or new technology in introducing new processes and products. The policy regime in India prior to 1985 did not permit the firms to take advantage of technological opportunities created abroad in introducing new technologies and expanding their capital base. The reforms introduced since 1985, for the first time, permitted the Indian firms to expand their product range, introduce new technologies, and increase their capacities without obtaining prior official sanction.This study, therefore, examines the role of technology acquisition in influencing investment decisions of private corporate firms in the aftermath of Indian economic reforms introduced in 1985. Using pooled cross-section data for 1987-88 to 1989-90 on a sample of 325 large corporate firms from seven industries, the present study examines the interfirm differences in investment behavior. The focus is on the impact of the first phase of economic reforms introduced in India post-1985. The model specified in the study postulates that acquisition of new technology made possible by economic reforms brings down costs and boosts demand. This increases the profit rate for firms using new technology. Technology acquisition per se takes place through technology imports via licensing or arms-length purchase of technology through the market, intrafirm transfer of technology by way of foreign direct investments, and direct import of capital goods embodying new technology. The process is facilitated by R&D expenditures.Empirical tests of the model carried out for each industry separately indicate that interfirm differences in the investment rate at the firm level are due to a number of factors. Opportunities to import machinery and license technology through arms-length purchase of technology influence the investment rate positively as these expenditures promote acquisition of technology. In other words, a government policy aimed at discouraging technology imports would also deter the growth of firms. Government policy before 1985 did hinder technology imports. This was partly to protect indigenous technology and partly to conserve foreign exchange. The results of the study further show that in-house R&D expenditures promote capacity expansion. This is despite the fact that most sample firms had small R&D budgets. Firms with R&D units are better placed to locate new technology and adapt it to suit Indian market conditions. This facilitates exploitation of technological opportunity leading to expansion of capital stock. However, the ability of a firm to exploit technological opportunities depended, to a considerable extent, on the age of its plants and machinery. This is because firms with older machinery and plants find the switch to new technology more difficult as most of their equipment and machinery are not suitable for modernization. The results of the study show that firms with machinery of recent vintage modernize and expand their capital base, using new technology, since it is easier for them to make the change.These empirical results have several policy implications for decision-makers in both the public and private sectors. The policymakers can draw inferences about the positive impact of the economic reforms on the capacity expansion and growth of firms. This, perhaps, provides a justification for taking the reform process to its logical end. Because economic reforms facilitate technology acquisition and capacity expansion, decision-makers ought to initiate the reform process in other spheres where it is yet to commence. Furthermore, modernization of plant and machinery and technology acquisition are a continuous process. The cost of modernizing a plant with dated machinery will be very high as older, outdated machinery is not compatible with the current vintage. An upgrade, therefore, is difficult if not impossible. Interruption of a technological upgrade due to changes in government policy ranging from total ban on technology imports to liberal import policy would enhance the cost of technology acquisition. The empirical results also indicate that even modest R&D activities facilitate the identification, location, and importation of relevant technology. Thus, firms with in-house R&D units grew faster. In countries like India, vigorous encouragement of R&D ought to be on the policy agenda of both corporate and government policy framers.Though our sample deals with Indian firms, it has relevance for other countries, because in most countries higher growth rates are being registered in industries that have been experiencing rapid technological development with better technological opportunities. Further, in a given country, firms that went in for acquisition of new technology invested more.     

Environmental Policy,North-South Trade and FDI

We analyze trade between two countries, called the North and the South. There is one firm in each country and production costs are lower in the South. To serve foreign markets firms may export or engage in FDI. Both countries set tariffs on imported goods. We find that the implementation of an environmental policy by the South may affect the location decision of the Southern firm. When only the North sets an environmental tax, firms engage in FDI if the difference in costs between the two countries is low, otherwise the South exports and the Northern firm engages in FDI. If the South also sets an environmental tax, this does not restrict FDI by Northern firm, encourages FDI by the domestic firm, reduces its environmental damage and increases joint welfare. Finally, in equilibrium the South decides to implement an environmental policy and both firms engage in FDI.     

Uncovering Barriers to Complex Incremental Product Innovation in Small and Medium‐Sized Financial Services Firms*

Developing new products is of the highest importance for the survival of firms. This not only refers to really new products, but firms also need to invest in modifying their existing products. Small and medium‐sized companies are no exception to this rule. The present study focuses on the innovative activities of small and medium‐sized financial service companies and aims to answer how small and medium‐sized financial services firms organize their product innovation processes and what the main barriers during these innovative attempts are. Data from 30 financial small and medium‐sized enterprises were collected to address these issues. The data showed that the firms in our study experience problems in terms of resources, project‐based working, incentives, and information technology, despite the fact that the innovative efforts are aimed at modifying existing services. Although these issues may not be totally unexpected, the results from this study do point at some interesting distinctions with the previous literature. Furthermore, it is suggested that the impact of the barriers may be of lower importance than is often assumed in the innovation literature.     

Small firms and the merger mania

Empirical research has found an average or even superior performance of small firms. This seems to be at variance with the secular concentration process and the recurrent merger waves. This paper tries to integrate size and merger research. Higher profitability of small firms is explained by their incentive structure and shorter decision lags but also by lower wages and higher individual risk (premia). Their faster growth in the eighties was, in addition, fostered by diversification of demand, miniaturization of technology, and a need for flexibility under uncertainty. The merger wave on the other hand does not necessarily prove that large firms are superior. Managers and shareholders may be seduced by stockmarket optimism, a sizeable industry of banks, agents and lawyers have their own interests in mergers, mergers may be important in declining markets and for the acquisition of technology. On average, mergers do not improve efficiency, profits or internal growth. Small and large firms serve different purposes. Performance depends on the market, incentives and technology. The establishment, growth and closure of small firms as well as mergers are attempts to find the optimal organization for utility maximization in a world of severe uncertainty and diverse needs.     

The missing link between awareness and use in the uptake of pro-internationalization incentives

We investigate the process by which firms become participants in official programmes of public support designed to promote outward internationalization. This study builds on previous research that has established the distinct factors associated with firms’ awareness and use of public support measures. These earlier studies have also shown that deficiencies within programmes manifest in low participation rates. However, scholars have not extended this reasoning to focus on the underlying processes involved, and have paid little attention to the steps through which firms elect to use public support, and how support operates upon, and within, the firm. In particular, the link between awareness of public incentives towards internationalization and the use of these incentives has been overlooked. General failure to understand this link is a potential source of policy inefficiency, reducing the effectiveness of those public programmes that employ incentives. We pose three research questions to examine the concept of such a link: (1) Do firms select public incentives that compensate for a lack of resources or capabilities in their possession? (2) Do firms react primarily to internal or external exigencies, for example, internal financial constraints or, rather, are they responding to unfolding circumstances, such as the more demanding market conditions experienced on internationalization? And (3) do firms use public support to “externalize” the increased risk to which they are exposed as internationalization proceeds, and thereby protect their external activities and investments from loss?The process that firms go through to apply for any type of public support is normally two-staged. Firms first become aware of incentives and then decide whether or not to use them. This process can be handled empirically using a Heckman Selection Model, which we apply to explore our research questions using survey data collected from a sample of Portuguese firms. We find that the greater are the internal limitations of these firms with respect to resources and capabilities and the more demanding are the conditions in which internationalization takes place, then the greater is the use made of public support. We find that awareness of the availability of support is promoted by firms’ in-house resources and capabilities and, at the same time, is positively associated with more demanding conditions of internationalization. The use of public support appears to be associated with the opportunity cost to the firm of public incentives, and with the increased risk inherent with internationalization. These results point to the existence of important sources of inefficiency within the process of application for policy measures, particularly with respect to the link between awareness and use. The use of public support is inversely associated with the opportunity cost to the firm of the resources deployed to apply for public incentives and, for firms with greater resources and capabilities, associated positively with the increased inherent risk of internationalization. We find evidence that it is the firms with greater resources and capabilities that predominate in the application for public incentives, allowing us to infer from the data that the typical recipient pursues more risky modes of entry, or selects locations with higher levels of risk, because of the availability of public support. These results point to the possible existence of important sources of inefficiency within the process of application for policy measures, particularly with respect to the link between awareness and use. This behaviour is quite distinct from the search for return on commercial investments and, therefore, is indicative of the possibility of social loss within this public policy intervention.     

Does external technology acquisition determine export performance? Evidence from Chinese manufacturing firms

Although technology profile has been one of the key determinants of firms’ export performance in the international business literature, most research has focused on only the role of internal technology efforts rather than the role of external technology. This study thus aims to extend our understanding of the determinants of export performance by examining the impact of the inter-organizational dimension of innovation strategy to export performance, which has been ignored in the prevailing “strategy tripod” perspective of exporting research. This study is based on a sample of 141 Chinese indigenous manufacturing firms that engaged in inward technology licensing between 2000 and 2003. The empirical results indicate that external technology acquisitions positively influence Chinese firms’ export performance. Moreover the exporting performance of using external technology varies depending on the their sources (domestic and foreign). The exporting firms that acquired technology from foreign countries outperformed those relied on domestically developed technology.     

Regulating the entry of multinational enterprises: Models and practices

This paper examines the policies adopted by host governments to regulate the entry of multinational enterprises (MNEs). The conflict between host governments and MNEs over the choice of entry strategies is demonstrated. The theoretical underpinnings of host governments’ regulations on MNEs’ entry are provided and the restrictive policies adopted by host governments are assessed. In general, prohibiting an MNE to sign a licensing agreement with its own partially owned subsidiary generates a higher level of national welfare. If the size of the host market is large enough to support several efficient plants, encouraging MNEs to license their technologies to several local firms will also increase national welfare.     

Technology transfer in Mexico: Past patterns and new problems related to the North American free trade agreement

As the Mexican economy prepares to transition from a relatively closed and protected market to a regionally integrated free market which is part of the proposed North American Free Trade Agreement (NAFTA), a change in its technology licensing environment will be needed to enable Mexican companies to compete for technology with firms from the other member countries of the NAFTA. This study identifies the national sources which have provided Mexico with technology and the Mexican industrial sectors which have been able to attract this technology in the 1980s. It further evaluates the current licensing environments in Canada, Mexico, and the U.S.A. as well as in the Latin American Integration Association (LAIA). The study provides recommendations for changes to the Mexican licensing environment and proposes strategies for attracting technology to Mexican industry under the changed conditions which would be introduced by the NAFTA. © 1993 John Wiley & Sons, Inc.