I Never Promised you a Rose Garden: An Analysis of the Rent Dissipation and Revenue Effect in Technology Licensing

I Never Promised you a Rose Garden: An Analysis of the Rent Dissipation and Revenue Effect in Technology Licensing Solon de Lucas Moreira Copenhagen Business School ? INO Year of enrolment: 2011, expected final date: 2013 Email: sm.ino@cbs.dk Over the last two decades licensing has experienced an unprecedented growth. Nowadays, these agreements represent one of the most important and fast growing methods of interfirm arrangements related to commercialization and diffusion of new technologies (Anand and Khanna, 2000). Surveys conducted by Gambardella (2005), Robbins (2008) and Pluvia Zuniga & Guellec (2009) show that among the main motivations for companies to license-out technologies is the revenue that it generates. That is, the present value of the fixed fee and/or the royalties that the licensee has to pay to the licensor (Arora and Fosfuri, 2003). However, firms may also experience negative effects from licensing-out their technologies. More specifically, the rent dissipation effect has been described as potential reduction of the licensor? s market share or price cost margin as a result of the additional competition in the product market (Fosfuri, 2006). Accordingly, prior studies indicate that the decision to license a technology is grounded on the interplay between the revenue and rent dissipation, with licensors seeking to increase the revenue and decrease the negative changes on market share caused by licensing-out technologies to potential competitors (Arora & Fosfuri, 2003). In this paper we develop a model to explain how the degree to which a licensed technology is related to licensor? s core technology affects the rent dissipation effect and the way that licensors try to secure a fixed remuneration condition in licensing contracts. Previous research has indicated that the closer a licensed technology to licensors core technological activities, the higher will be the commercial value and lower the uncertainty attached to it (Choi, 2002). Furthermore, we build on Gambardella and Gitarrana (2011) proposition that market structure conditions are an important determinant of the decision to license-out, and include in our analysis the level of technological fragmentation between licensor and licensee as critical moderator for the relationship between core technologies and rent dissipation and revenue effect. We test our hypotheses using a sample of 169 licensors involved in licensing contracts within US pharmaceutical industry during the period of 1984 ? 2004. We use supplemental data from COMPUSTAT and the United States Patent and Trademark Office USPTO to obtain specific characteristics of licensors, licensees and the licensed technology. A Major strength of our dataset regards the fine-grained information that we could obtain from the licensing contracts which allowed us to combine three different data sources. We used two econometric models to assess our hypotheses. First, a logit model was applied to predict the likelihood that a licensing contract will include a minimum royalty fee clause. We consider that the presence of this clause represents a stronger case in terms of remuneration structure within the licensing contract. According to our hypotheses, licensors will be more likely to evoke, and licensees to accept, this clause as a way to secure monetary compensations independently on how the licensee will be able to exploit the licensed technology. Second, we used a fixed effect model to predict the relative changes in licensor? s market share in the product market. The results offered robust support to most of our hypotheses.