Profiting from licensing: The role of patent protection and commercialization capabilities

Technology transactions, such as licensing and R&D based alliances, have been growing rapidly in recent years. Even as technology licensing has grown, so has patenting. Both trends foreshadow possibly profound changes in firms’ strategy. In this paper, we develop a simple structural model in which both patenting and licensing are jointly determined by factors such as patent effectiveness, the presence and strength of commercialization capabilities and their complementarity with R&D activity, and industry and technology characteristics, such as the nature of knowledge and the degree of technological competition. We estimate the model using the 1994 Carnegie Mellon survey on industrial R&D, which provides detailed information on the patenting and licensing activities of manufacturing firms in the U.S. A key feature of the model is that it naturally implies that the impact of patent effectiveness on licensing behavior will be conditioned by commercialization capabilities. We find that increases in patent effectiveness increase both patenting and licensing propensity. Conditional on patenting, increases in patent effectiveness decreases licensing propensity. However, higher patent effectiveness elicits much larger increases in licensing from firms lacking commercialization capability or characterized by a lower degree of complementarities between the R&D and marketing or production functions.