Managing Licensing in a Market for Technology

Ashish Arora, Andrea Fosfuri, Thomas Rønde

    Research output: Contribution to journalJournal articleResearchpeer-review

    Abstract

    Technology licensing is an important means for companies to extract more value from their intellectual assets. We build a model that helps understand how licensing activity should be organized within large corporations. More specifically, we compare decentralization—where the business unit using the technology makes licensing decisions—to centralized licensing. The business unit has superior information about licensing opportunities but may not have the appropriate incentives because its rewards depend on product market performance. If licensing is decentralized, the business unit forgoes valuable licensing opportunities because the rewards for licensing are (optimally) weaker than those for product market profits. This distortion is stronger when production-based incentives, especially private benefits, of business unit managers are more powerful, making centralization more attractive. Surprisingly, we find that interdependency across business units may result in more, not less, decentralization. Furthermore, even though centralization results in less information, centralized licensing deals are larger. Our model conforms to the existing evidence that reports heterogeneity across firms in both licensing propensity and organization of licensing.
    Technology licensing is an important means for companies to extract more value from their intellectual assets. We build a model that helps understand how licensing activity should be organized within large corporations. More specifically, we compare decentralization—where the business unit using the technology makes licensing decisions—to centralized licensing. The business unit has superior information about licensing opportunities but may not have the appropriate incentives because its rewards depend on product market performance. If licensing is decentralized, the business unit forgoes valuable licensing opportunities because the rewards for licensing are (optimally) weaker than those for product market profits. This distortion is stronger when production-based incentives, especially private benefits, of business unit managers are more powerful, making centralization more attractive. Surprisingly, we find that interdependency across business units may result in more, not less, decentralization. Furthermore, even though centralization results in less information, centralized licensing deals are larger. Our model conforms to the existing evidence that reports heterogeneity across firms in both licensing propensity and organization of licensing.
    LanguageEnglish
    JournalManagement Science
    Volume59
    Issue number5
    Pages1092-1106
    ISSN0025-1909
    DOIs
    StatePublished - May 2013

    Keywords

      Cite this

      Arora, Ashish ; Fosfuri, Andrea ; Rønde, Thomas. / Managing Licensing in a Market for Technology. In: Management Science. 2013 ; Vol. 59, No. 5. pp. 1092-1106
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      Arora, A, Fosfuri, A & Rønde, T 2013, 'Managing Licensing in a Market for Technology' Management Science, vol. 59, no. 5, pp. 1092-1106. DOI: 10.1287/mnsc.1120.1628

      Managing Licensing in a Market for Technology. / Arora, Ashish ; Fosfuri, Andrea ; Rønde, Thomas.

      In: Management Science, Vol. 59, No. 5, 05.2013, p. 1092-1106.

      Research output: Contribution to journalJournal articleResearchpeer-review

      TY - JOUR

      T1 - Managing Licensing in a Market for Technology

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      AU - Fosfuri,Andrea

      AU - Rønde,Thomas

      PY - 2013/5

      Y1 - 2013/5

      N2 - Technology licensing is an important means for companies to extract more value from their intellectual assets. We build a model that helps understand how licensing activity should be organized within large corporations. More specifically, we compare decentralization—where the business unit using the technology makes licensing decisions—to centralized licensing. The business unit has superior information about licensing opportunities but may not have the appropriate incentives because its rewards depend on product market performance. If licensing is decentralized, the business unit forgoes valuable licensing opportunities because the rewards for licensing are (optimally) weaker than those for product market profits. This distortion is stronger when production-based incentives, especially private benefits, of business unit managers are more powerful, making centralization more attractive. Surprisingly, we find that interdependency across business units may result in more, not less, decentralization. Furthermore, even though centralization results in less information, centralized licensing deals are larger. Our model conforms to the existing evidence that reports heterogeneity across firms in both licensing propensity and organization of licensing.

      AB - Technology licensing is an important means for companies to extract more value from their intellectual assets. We build a model that helps understand how licensing activity should be organized within large corporations. More specifically, we compare decentralization—where the business unit using the technology makes licensing decisions—to centralized licensing. The business unit has superior information about licensing opportunities but may not have the appropriate incentives because its rewards depend on product market performance. If licensing is decentralized, the business unit forgoes valuable licensing opportunities because the rewards for licensing are (optimally) weaker than those for product market profits. This distortion is stronger when production-based incentives, especially private benefits, of business unit managers are more powerful, making centralization more attractive. Surprisingly, we find that interdependency across business units may result in more, not less, decentralization. Furthermore, even though centralization results in less information, centralized licensing deals are larger. Our model conforms to the existing evidence that reports heterogeneity across firms in both licensing propensity and organization of licensing.

      KW - Centralization

      KW - Markets for technology

      KW - Strategic organization design

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      M3 - Journal article

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      Arora A, Fosfuri A, Rønde T. Managing Licensing in a Market for Technology. Management Science. 2013 May;59(5):1092-1106. Available from, DOI: 10.1287/mnsc.1120.1628