Licensing

by

Ram Mudambi, Thomas J. Hannigan

• LAST REVIEWED: 01 March 2023
• LAST MODIFIED: 28 January 2013
• DOI: 10.1093/obo/9780199846740-0036

Introduction

At a basic level, a license is consent on the part of the firm to allow another firm to use proprietary assets. The assets referred to are those that are protected by some form of intellectual property (IP) filing, such as a patent or trademark. For example, a pharmaceutical company with a patented drug may license it to another firm, thus permitting that firm to produce the drug under a specified set of conditions. Somewhat more complex is a definition that sees the transfer of technology from one firm to another (the licensor to the licensee). Technology transfer via licensing sees the licensor being paid by the licensee in a one-time lump-sum fee, royalties, or some combination thereof. As innovations are commercialized, the appropriability regime serves to support and protect the consequent temporary monopoly. The appropriability regime is the extent to which the legal and institutional environment protects innovative knowledge from theft and imitation. Because the contract is the binding commitment, there is a transaction cost element that underpins licensing. Intellectual property is intangible and sometimes hard to define. When revealed, it can be easily copied. Therefore, there are costs involved in protecting IP throughout the transaction between buyer and seller. Licensing may occur through spot transactions on technology markets, but more typically it is structured as an arms-length contract; both arrangements involve relatively little day-to-day control over the usage of the IP. The two main areas in which licensing appears (and is studied) are market entry, and the market for technology. Licensing as a mode of entry occurs when a firm looks to expand into distant (often foreign) markets, typically working with a local partner. The multinational corporation (MNC), which is a business organization with assets and operations in two or more countries, is the firm that will likely consider licensing as a mode of foreign market entry. In this context, entry is typically analyzed as a part of a suite of choices that include sales agents (exporting), joint ventures, and foreign direct investment. Licensing may also serve as a technology strategy, as firms may out-license their own knowledge, or they may in-license the knowledge of others. For example, a pharmaceutical firm may discover a drug, but license it out to another firm instead of producing it. The nature of the technology and the tacitness of the knowledge itself are likely to dictate individual strategies.

Journals

Academic publications that focus on licensing tend to be from the fields of business and economics, and they include most of the latest research. Given the close connection of their contents and subject matter, business journals often cite economics journals. In the case of licensing as an international strategy, journals that focus on international business are active in this stream. In the case of licensing as a technology strategy, journals that focus on technology and innovation management are the major sources. The RAND Journal of Economics is a general economics journal and looks at the underlying incentives that drive licensing. The Academy of Management Journal and Strategic Management Journal have a general management focus but often publish articles involving knowledge transfer and licensing. The Journal of International Business Studies applies an international business lens to business issues, and licensing is often considered from the standpoint of market entry and alliances. Research Policy is an innovation and technology research journal, and tends to examine licensing as a knowledge transfer issue.

• Academy of Management Journal.

  One of the leading journals in the field of management, with the goal to “publish empirical research that tests, extends, or builds management theory and contributes to management practice.” Published every two months. A general-focus journal, but it occasionally prints articles on knowledge transfer and licensing.

• Journal of International Business Studies.

  JIBS is the official journal of the Academy of International Business, and concerns itself with the development and practice of theory in business issues with an international focus. Nine issues are published in each annual volume. Market entry and alliances are common points of focus for this journal.

• RAND Journal of Economics.

  A general economics journal with an interest in industrial organization and microeconomics more generally. Published quarterly by the RAND Corporation. Many of the works examining the economic underpinnings of licensing can be found here.

• Research Policy.

  A journal focused on the development and practice of theory that focuses on innovation, technology and research. Ten issues are published in each annual volume. Much of the work on licensing as a technology strategy appears in this journal.

• Strategic Management Journal.

  One of the leading journals in the field of management, concerned with the development and practice of theory from all areas of strategic management. Publishes thirteen issues per year. A general-focus journal, but occasionally prints articles on knowledge transfer and licensing.