Article

Licensing

Ram Mudambi and Thomas J. Hannigan

in Management

ISBN: 9780199846740
Published online January 2013 | | DOI: http://dx.doi.org/10.1093/obo/9780199846740-0036
Licensing

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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.

Article.  8135 words. 

Subjects: Business and Management

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