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...ignore much their patented technologies, which could be licensed or profitably sold (British Technology Group 1998). The inefficiency of the market for technology is caused by a number of impediments. Arrow (1962) argues that preventing knowledge from being appropriated is the major obstacle to the efficient market for technology. Once an idea is disclosed to a potential buyer, it is possible for that buyer to use the information without paying for it. As a result, a potential licensor is reluctant to disclose the core of a technology, and this leads to a typical market failure. Studies on contracts and transaction costs have elaborated on the causes and effects of moral hazard and asymmetric information in exchanging knowledge through arm's length transactions. These problems make the underlying contracts incomplete (Caves, 1996; Hart, 1995; Menard, 1996; Salanie, 2002). On the other hand, evolutionary economics (Nelson and Winter, 1982) and management theory have given a lot of attention to the organizational aspects of the innovation process, showing that often the requisite capabilities and routines are difficult to exchange through the market (Teece, 1977). Cognitive limitations in the transfer of technology to another context require extensive adaptations and costs (Arora and Gambardella 1994).
Even so, markets for technology have become increasingly important in recent decades, especially in technology-intensive industries, as increasing competition through globalization, accelerating rates of technological change, and outsourcing and collaboration have become pervasive. For instance, a recent study by Anand and Khanna (2000) reports that licensing accounts for about 20% to 33% of all inter-firm alliances (depending on the sector) in high-tech sectors such as chemicals, biotechnology, software, computers, and electrical and nonelectrical machinery. Thompson Financial's SDC database used in this paper lists more than 10,000 publicly announced licensing agreements during the 1990s.
What factors affect technology holders' incentives to license? Are there differences in licensing activities across firms, industries, and technologies? What causes such differences? How do firms' operational, organizational, and primary industry characteristics affect business managers' decision-making on technology licensing? The author addresses such questions.
This paper studies the validity of the factors that might affect the incentives of companies to license out their technology. Empirical analysis is provided with the help of a unique panel data set describing licensing arrangements in publicly traded companies in the United States. Specifically, we explore inter-sectoral differences and similarities in the determinants of licensing across three high-technology industry clusters: information and communication technology (ICT), biotechnology, and advanced materials. (1)
Theoretical Perspectives
A company's incentive to sell its technology to prospective competitors is driven by two principal effects on the profits: the revenue effect and the rent dissipation effect (competition effect) (Arora, et al. 2001). The revenue effect is driven by the profits that will accrue to the licensor in the form of licensing payments (i.e., a fixed licensing fee or royalty) by licensees. The licensor firm essentially increases its aggregate market share of products produced with its own technology by adding a licensee who pays licensing payments. On the other hand, licensing generates a negative rent dissipation effect on the profits of the licensor, arising from the profit erosion caused by increased competition from the licensees. Technology licensing may represent current opportunities to enter into new market and to service new customers (Mitchell and Singh, 1992). Companies that cannot innovate may be able to produce products and compete with the licensor if they receive the rights to use the technology. The trade-off between these two opposite effects determines the technology owner's licensing behavior.
Transaction costs theory provides another perspective on licensing. Transaction costs refer to the negotiating, monitoring, and enforcement costs accruing to participants in a deal. According to transaction costs theory (Williamson, 1979), terms and types of alliances depend on the level of uncertainty and opportunism surrounding...
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