Licensee technological potential and exclusive rights in international licensing: A multilevel model

Abstract

Granting of exclusive rights is an important consideration for firms using licensing as a mode of entry into foreign markets, as exclusive contracts reduce licensors' flexibility in a given market during the term of the agreement. By granting exclusivity to a licensee with greater technological potential, the exchange partners can increase the potential transactional value of the licensing agreement. At the same time, a licensee with strong technological potential will increase the threat of transactional hazards due to underinvestment and rent appropriation. In this paper, we develop and empirically test a model that evaluates the balancing of transactional value and transaction costs in exclusive licensing. In particular, we identify the conditions under which exclusive contracts are likely to be granted to foreign licensees with strong technological potential. Empirical results from a multilevel model, based on 375 international licensing agreements of US firms in high-technology industries during 1995-2008, show that licensees with a stronger technological potential are more likely to be granted exclusive rights in countries with strong intellectual property rights protection, and in industries with a high rate of technological change; but are less likely to be granted exclusive rights when there is a high degree of overlap between licensor and licensee products.

Does stronger patent protection increase export variety? Evidence from US product-level data

“…This research builds on the extensive literature examining firm participation in international business system (e.g., Bernard & Jensen, 2004;Das, Roberts, & Tybout, 2007) and contributes to the discussion concerning the role of IPR protection in business strategy (Aulakh, Jiang, & Li, 2013;Coeurderoy & Murray, 2008;Hagedoorn, Cloodt, & Van Kranenburg, 2005;Wang, Hong, Kafouros, & Wright, 2012). Weak IPRs pose the threat to multinational firms of rent appropriation and so influence the behavior and multinational strategies of US firms.…”

Signals and international alliance formation: The roles of affiliations and international activities

“…To the extent that firms do not address these problems through signaling or some other means, they can hinder the formation of international alliances and the benefits they may bring to collaborators. As another illustration, significant research using transaction cost economics, internalization theory, and the OLI paradigm has considered knowledge appropriation and other ex post exchange hazards surrounding a focal firm's proprietary resources as it expands overseas, and these hazards increase the importance of certain remedies (e.g., formal and relational governance mechanisms) (e.g., Aulakh, Jiang, & Li, 2013;Beamish & Lupton, 2009;Brouthers & Hennart, 2007;Buckley & Casson, 1976;Caves, 1996;Dunning, 1995;Gatignon & Anderson, 1988;Hennart, 1989;Zhou & Xu, 2012). We complement this research by highlighting adverse selection as an ex ante hazard that can surround the intangible resources of prospective collaborators and by suggesting that signals can ameliorate this problem and facilitate the formation of cross-border collaborations.…”

Diaspora Ownership and Technological Licensing by Emerging Market Firms

“…there is local within-industry R&D effort homogeneity). In the context of technology licensing, firms' R&D investments are an important direct signal of commitment to high product quality, and thus, of the attractiveness of the firm as a licensing partner (Aulakh, Jiang, & Li, 2013;Jiang et al, 2007;Kim & Vonortas, 2006). If the potential licensees' R&D efforts are markedly different, licensors might impose a minimum R&D investment in order to reduce the pool of potential licensees, and allow their better evaluation (Basdeo, Smith, Grimm, Rindova, & Derfus, 2006).…”