Patent Protection, Complementary Assets, and Firms’ Incentives for Technology Licensing

This paper analyzes the relationship between technology licensing and the effectiveness of patent protection. Using the 1994 Carnegie Mellon survey on industrial research and development (R&D) in the United States, we develop and test a simple structural model in which the patenting and licensing decisions are jointly determined. We find that increases in the effectiveness of patent protection increases licensing propensity, but only when the firm lacks specialized complementary assets required to commercialize new technologies. In contrast, for firms with specialized complementary assets, increases in patent effectiveness increase patenting propensity but reduce the propensity to license. We present systematic cross-industry empirical support for the proposition that intellectual property protection is a key determinant of the vertical boundaries of the firm and the market for technology but that its impact is mediated by a firm’s ownership of specialized complementary assets.