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The Choice of Forms in Licensing Agreements:
Case Study of the Petrochemical Industry
Research Fellow: Tomoyuki Shimbo

When a company enters a market, it is necessary to acquire manufacturing technology. When
importing manufacturing technology, sometimes the joint venture form is selected, as well as
simply license agreements. In actuality, many JVs between licensor and licensee have been
established in the petrochemical industry.
From the perspectives of JV functions, knowledge-based theory considers that a JV possessesorganizing principles that codify knowledge and mechanisms to promote knowledge transfers,
while transaction-cost theory considers that a JV includes mechanisms to control theopportunistic behavior of partners. Consequently, this research focuses upon the petrochemicalindustry and examines factors that influence the choice of form of a licensing agreement byperforming a case study and quantitative analyses, and explains why a JV is selected. The results
being, that a JV is selected, not to promote knowledge transfers between partners, but to control
the opportunistic behavior of licensor and licensee.

bounded rationality and cost of informationgathering and specifying terms andconditions. Parties involved may take actionthat prioritizes their own benefit, while
sacrificing the benefits of other, i.e.,
opportunistic behavior (Williamson, 1975,1985).
Licensingagreements
involveasymmetric information regarding behaviorof the parties. A licensor may later find abetter partner and so deliver less know-how
to the original licensee than described in thecontract, and, possibilities exist for licensees
using transferred technology beyond thecontractual scope (Oxley, 1997). The
backgroundliesinthe
potentiallycompetitive relationship between the parties,
since licensing is executed between firms
with related technologies. Licensors may
hesitate to provide expertise, while licensees
try to assimilate technology as much as
possible to develop better technology of theirown. These issues are generally argued
regarding alliances. It is important to obtain
more capability from partners, while
avoiding leakage of one’s own capabilities inan alliance (Hamel et al., 1989).
A licensee’s purpose for licensing is tocover insufficient management resources or1

Introduction
Alliances with another firm areimportant for a firm due to limited
management resources and lack of capability.
Various matters, such as research anddevelopment, procurement of raw materials
and components, production, and marketing,can be subjects of an alliance. This analysis
focuses on licensing agreements. There are
twotypes
oflicensing
agreements:
licensing-in and licensing-out. The former
agreement provides technology that wasdeveloped by one firm to another firm in
exchange for royalties. The latter issometimes used to avoid patent infringement,
but its main purpose is to import anotherfirm’s technology and to industrialize it.
Considerable research of licensing has been
conducted, but this analysis focuses ontechnology imports from the perspective ofacquiring
management resourcesandcapabilities.
When a firm imports technology fromanother, potentialities for opportunism andabsorptitive
capacity
areespeciallyimportant. First, opportunism will bereviewed. For example, a transaction
contract may be incomplete due to individual1

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industry is that licensing data are plentiful.
Unlike machinery manufacturing, a primaryfeatureof
petrochemicals
isevery
manufactured product is based on one
technology,
demonstrating
aclearproduct-technology relationship.
Another reason is that contracts may be
incomplete due to high uncertainty over theextent of petrochemical technology and theenvironment during the 1950s and 1960s,
and the resulting high potential ofopportunism. Since petrochemicals expanded
in Europe and the U.S. prior to World War II,
Japan had problems overcoming insufficienttechnology due breaks with Europe and theUS. Japan’s reaction to such unfavorable
circumstances is interesting.
This analysis focuses on the last half ofthe 1960s until the first half of the 1980s, andreviews potential for opportunism or
absorptive capacity to influence selection offorms of licensing with a case study andeconometric analysis.

capabilities, so it is essential to assimilate
thelicensor’s
technology.
Effective
acquisition and use of technology requires
licensees not only to control licensor
opportunism, but also internally develop
capacity to assimilate technology (absorptivecapacity) (Cohen and Levinthal, 1990). In
short, firms must accumulate absorptive
capacity while avoiding potential licensor
opportunism to use licensing effectively.
On the other hand, when a firm imports
technology, it may use a joint venture (“JV”)
together with licensing agreements, andmany occur in the petrochemical industry.
Theories explaining JV are knowledge-based
theoryandtransaction
costtheory.
Knowledge-based approaches (Kogut andZander, 1992; Conner and Prahalad, 1996)
purport JVs have mechanisms to promoteknowledgetransfer;transaction
costapproaches (Pisano, 1989 and Oxley, 1997)
advocate JVs involve mechanisms to control
opportunism. A partner’s high potential for
opportunism, or the licensee’s poor absorptive
capacity, support using a JV. Selecting theform of licensing (a contractual agreement
alone, or, establishing a joint venture), is an
essential decision.
Furthermore, licensing agreements areimportant for not only firm strategy but
technology diffusion. Technology trading
involves issues of common goods, andasymmetrical information. Patents respondto such issues by granting inventors property
rights for disclosure, incentives for utilizing
technology, and disseminating the invention(Goto, 1993). Analyses have focused on
patent effectiveness, i.e., the appropriatibityof innovations by patent; analysis oftechnology dissemination via licensing is also
required.
Technology
imports
involveconcerns over opportunism and absorptive
capacity,
and
their
impactsondecision-making and performance deserve
more focus. Such a statistical analysis islacking, especially in Japan.
This analysis focuses on the Japanesepetrochemical industry, performing empiricalanalysis of licensing forms. A reason which
this analysis focuses on petrochemical

2

Theoretical background
Section 2 of Chapter 1 focuses on fourfactors: 1) the possibility of opportunisticbehavior; 2) alliance skill; 3) absorptivecapacity; and 4) the JV, and explains why
these are important for licensing agreements.
The first factor is the possibility ofopportunistic behavior. When negotiating alicense agreement, the following possibilities
exist based on asymmetric information aboutother party, or based on the competitive
relationship: licensors may provide lessknow-how than described in the contract
after a licensor finds a better partner, or, thelicensee may use transferred technology
beyond the contractual scope (Oxley, 1997).
Opportunistic behavior is consideredrelated to the number of potential licensors.
If potential licensors are few, because ofdifficulties of changing partners, incentives
for licensor’s opportunism increases.
The second factor is alliance skill.
Alliances have coordination issues due tocompetitive relationships, different partner
goals, asymmetric information, and differing
management practices (Doz & Hamel, 1998;
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summarized. Zeon initially imported andindustrialized PVC technology from Goodrichand entered the related field of synthetic
resins stemming from development of theimported technology. In the 1960s, Zeondeveloped the GPA process for VCM
technology due to the necessity of material
conversion,
thendevelopedandindustrialized butadiene technology (GPBprocess) using the fundamentals of GPA,
since butadiene was costly (raw material ofsynthetic rubber). This experience also
resulted in development of IR technology(GPI process).
The relationship of the Zeon case and thefour theoretical causes for concern mentioned
in Chapter 1, section 2 may be summarized.
The first is the possibility of opportunisticbehavior. Goodrich, the licensor, emphasized
controlling its expertise and selected JV as
the licensing form; it was concerned about
technology leakage to other firms at theestablishment of Zeon’s related firm,
Furukawa
Chemical.
Thesefacts
demonstrate that JV is useful from theperspective of controlling licensee behavior,that controlling transferred technology isdifficult, and that licensee opportunism
existspotentially.
Conversely,Zeon
successfully industrialized the imported
technology in a relatively short time.
Goodrich’s
potentialfor
opportunistic
behavior uncertain, but it is believed that
Zeon received sufficient technical direction
due to the JV form.
The second aspect is alliance skill. Zeonchose Goodrich and accepted capital
participation to import technology. Runningroyalty reductions were also negotiatedsuccessfully, demonstrating effective use of
the licensing agreement. Zeon realized PVC
royalty reductions in the second contract
negotiations in 1960, and the first synthetic
resin negotiations in 1964. Their negotiation
skills became one key for achievement,
making effective use of them in the Goodrich
licensing agreements.
The third aspect is absorptive capacity.
Zeon established a central research center in1959 and poured effort into improvement ofSampson, 2005). A firm with plentiful
alliance experience has had many learning
opportunities
andaccumulatedthemanagement
skill
for
performing
agreement-related
procedures,
partner
selection, effective agreement preparationand enforcement, all to successfully control
opportunism.
The third factor is absorptive capacity. It
is important for licensees to absorb
technology and overcome the original
purpose of licensing, i.e., insufficientmanagement
resources
orcapability.
Consequently, licensees must accumulate
capacity to assimilate technology (absorptivecapacity)
andimproveitduringimplementation (Cohen & Levinthal, 1990).
Absorptive capacity is related to thelicensee’s opportunistic behavior. A licensee
with high absorptive capacity understands
the technology’s broader applications, andincreases possibilities of technology use
beyond contractual scope.
And High
absorptive capacity enables licensees toimprovetransferredtechnologies
too,
although this is not opportunism.
The fourth factor is a joint venture. JVs
involve organizing principles that codify
implicit knowledge, a knowledge-substitutionand a flexibility effect, and promoteknowledge transfers (Kogut & Zander, 1992;
Conner & Prahaland, 1996). JV provisions ofcapital sharing, dispatch of directors, vetorights, etc., improve incentives and facilitatecontrol of opportunism (Pisano, 1989; Oxley,1997). Consequently, high potentials foropportunism or poor absorptive capacity
contribute to selection of a JV.

3

Licensingagreements
inthepetrochemical industry
In Chapter II, section 1, petrochemicalindustry technology imports are reviewed,and in section 2, the case of Nippon Zeon isexamined. Results of the Nihon Zeon casestudy are reviewed here.
Nippon Zeon Co., Ltd. (“Zeon”) and its
petrochemicalbusiness
involvemanysuggestions
regardingtechnology
importation. First, Zeon’s history is briefly
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absorptive capacity all influence the selectionof an alliance form.
The following hypotheses of potential
licensor opportunism, alliance experience,
and absorptive capacity are examined.

imported technology, developing its own
technology and processes, while receiving
technology transfers from Goodrich. The
results facilitated entry into synthetic rubber
and the GPA, GPB, and GPI processes.
Effects of the JV indicate JVs promoteknowledge transfer and control opportunism.
Issues regarding decision-making flexibility
and the corporate actions of Zeon were quite
restricted by Goodrich when the relationshipended. JVs involve operational issues as wellas other characteristics mentioned.

Hypothesis 1-1:

JV is not selected if a greater number ofpotential licensors exist, because thepossibility of a licensor’s opportunistic
behavior becomes lower.
Hypothesis 1-2:

As the number of potential licensors
increases, JV will not be selected since thepossibility of a licensor’s opportunistic
behavior is low, when the number of firmsthat executed exclusivity agreements isexcluded.

4

The choice of forms in licensing
agreements
In Chapter III, various data arequantitatively analyzed (licensing agreement,manufacturing plants, patents, and firm)from perspectives of each licensing form.
Japanese firms entering product markets
must select either internally developing
manufacturing technology or importing it.
Importing technology may entail JV together
withlicensingagreements.
Inthepetrochemical industry, many JVs between
licensor and licensee have been established.
Regarding JV functions, mechanisms
promote knowledge transfer and control ofopportunistic behavior. Chapter II, section 2
reviews the case of Zeon as a specific JV
example illustrating that control oftransferred technology and expertise aredifficult, the potential for opportunism exists,
and JV is useful to an extent for controlling alicensee.
In Chapter III, possibilities of licensor
opportunism, alliance skill, and absorptive
capacity are reviewed statistically for
influence over choice of licensing form inorder to clarify reasons for utilizing a JV.
In case studies, analyses of technology
alliance forms have been performed against
the recent rising concern that opposesalliances, and the necessity of highinvestments in R&D (Pisano, 1989; Oxley,1997; Arora & Fosfuri, 2000; Sampson, 2004a,2004b), an also have examined in what cases
the JV was selected. Studies revealed thenumber of potential partners, alliance
content complexity, alliance experience, andHypothesis 2:

JV is not selected as a firm’s experience withalliances increases since the firm can easily
control a partner’s opportunistic behavior.
Hypothesis 3-1:

JV is selected as a Japanese firm’s absorptive
capacity increases, since a JV facilitates
absorption of a licensor’s technology.
Hypothesis 3-2:

JV is not selected as partner-specificabsorptive capacity of a Japanese firm
increases, since JV becomes less needed toabsorb a licensor’s technology.
Hypothesis 3-3:

JV is selected as the absorptive capacity
increases of a Japanese firm, since thepossibility increases of the Japanese firm toapply imported technology from the licensor
outside the scope of the agreement or todevelop improved technologies.
The following points became evident aspredicted. First, agreements are selected (JVis not selected) as the number of licensors
increases after firms selecting exclusivity
agreements are eliminated, and not as thesimple number of potential licensors
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analysis. In the results of this analysis, thefollowing two points are illustrated.
First, licensing agreements include thepossibility of a licensee’s opportunistic
behavior according to the case study.
Goodrich, a licensor, emphasized control of
their expertise, and selected JV as the form oflicensing agreement. Goodrich was also
concerned over technology leakage to otherfirms during the establishment of Furukawa
Chemical Industries. These points indicatethat it is difficult to control imported
technology and expertise, that opportunistic
behavior of a licensee exists potentially, andthat JV is effective from the perspective ofcontrolling a licensee’s behavior.
Second,quantitative
analysisdemonstrated that the possibility ofopportunistic behavior of a licensor andlicensee might have an impact on the choiceof licensing agreement forms. Regarding thefunctions of JV, it is believed that JV has
mechanisms to promote knowledge transfers
and to control opportunistic behavior. The
results of quantitative analysis, however,indicated that a JV is used to control
opportunistic behavior, and not for promoting
knowledge transfers.
Some further issues should be considered.
First, the case study did not demonstrate thepossibility of the licensor’s opportunisticbehavior. Quantitative analysis indicatedthat possibility; such behavior does influence
the choice of form for licensing agreements. Itis, however, still necessary to prove this withactual case data. To explain this possibility, it
is necessary to review cases of a licensor
having experience with industrialization andsufficient expertise, while a licensee fails toindustrialize the technology or requires along period in order to implement
industrialization.
A second issue is whether a joint venture
truly does not promote knowledge transfer. It
was indicated that JV mechanisms topromote knowledge transfer have no impact
at the time of a licensing agreement.
However, once a licensing agreement isnegotiated, more knowledge may betransferred from licensor to licensee within aincreases. The results demonstrate that thenumber of licensors after eliminatingexclusivity agreements more accurately
represents the possibility of a licensor’s
opportunistic behavior, the possibility for alicensor to engage in opportunistic behavior
decreases as the number of such licensors
increases, and thus, an alliance form with
only an agreement is selected.
Second, regarding experience withalliances, the results indicate that experienceof Japanese firms does not have any effect on
the choice of form for licensing agreements,
while alliance experiences of foreign firms
increase the percentage of selecting JV. Such
results are based on the fact that allianceexperiences of Japanese firm contain the two
factors of accumulation of alliance skill andtechnology leakages to other firms, while
alliance experience of foreign firms containthe former factor only.
Finally, the results indicate that thenumber of employees partially has a negative
effect on the choice of utilizing a JV, while
technological similarity has a positive effect.
If partner-specific absorptive capacity
increases, it becomes easier to absorb alicensor’s technology. The possibility exists
for a licensee to use imported technology froma licensor outside the contract scope, butmuch more than that, the possibility todevelop improved technology increases.
Therefore, these results suggest that alicensor selects JV in order to control suchlicensee behavior. Thus, the analysis resultsof the number of potential licensors andabsorptive capacity indicate that JV is used,
not for promoting knowledge transfers, but
for controlling a partner’s opportunisticbehavior.

5Conclusion and further issues
In this analysis, the possibility ofopportunistic behavior, skills of forming
alliances, and absorptive capacity in the
petrochemical industry were focused upon,and how those factors influence the choice ofa licensing agreement form have beenreviewed by case study and quantitative
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license pair that establishes a JV than a pairwithout a JV. The relationship between JV
and knowledge transfer needs to be analyzed
both at the time of negotiating a licensing
agreement, and during the subsequent
period.
Third, an issue concerning the effect ofalliance skill remains. In the quantitative
analysis, experience with alliances was used
as a proxy. However, this parameter contains
not only the factor of alliance skill, but also
the factor of technology leakage to another
firm, therefore these results did not reveal
any significant effect. Meanwhile, the resultof the case study indicates that allianceskillfulness is important when negotiating areduction of royalties. These effects need tobe analyzed in greater detail.
Fourth, an analysis of a firm’s
performance should be included. For example,
Asahi
Kasei
importedacrylonitrile
technology from SOHIO (Standard Oil
Company of Ohio) in a nearly instantaneous
process and has maintained the top
production capacity share since 1971. In thismanner, absorptive capacity of a firm may
influence the firm’s performance as well as
the selection of licensing agreement form.
Thus, analyzing these factors may enable
demonstrating the importance of possibilitiesof opportunistic behavior and absorptive
capacity from the perspective of corporate
strategy.

6IIP Bulletin 2007