Contracting is essential for learning

Firms are said to be able to enhance their innovativeness through technology partnering. Technology partnering, however, can take on many shapes and sizes. No two partnerships are alike. A new publication by Toke Reichstein and colleagues provides empirical evidence indicating that contracting is an important factor for securing the right conditions for mutual learning. Introducing the terms “Thin” and “Thick” contracts to the technology licensing literature allow a more fine grained understanding on how to reap the maximum learning benefits of technology licensing. Thick contracts contains clauses that secures a commitment by parties to assist each other for assimilating and integrating the licensed knowledge into their own technological assets while thin contracts tend to be more arms length contracts. The extend to which these clauses are associated with learning depends on how well the partner knows the licensed technology.

This article introduces the distinction between thin and thick contracts to the investigation of licensing-in as a mechanism for technological learning. Thick contracts include a clause specifying that the licensors are obligated to assist the licensees in assimilating and integrating the technology. Drawing on a sample of 133 licensees and an equal number of matched nonlicensees, we present empirical evidence that thick contracts propel the licensees’ likelihood of introducing new inventions. It is also found that thick contracts act as a substitute for licensees’ absorptive capacity. Licensees that are more familiar with the licensed technology are in less need of assistance from the licensors to assimilate and integrate the knowledge. However, this substitution effect is neutralized once the hurdle of invention has been overcome, meaning that the licensees have succeeded to ignite the invention process, suggesting the exploitation of the learning curve, triggered by their mutual understanding.

Publication: Leone, M. I., Reichstein, T., Boccardelli, P. and Magnusson, M. (2015), License to learn: an investigation into thin and thick licensing contracts. R&D Management. doi: 10.1111/radm.12187

The Price of a Patent License

Toke Reichstein has an article in Journal of Industrial and Business Economics on patent licensing specifically focusing on the remuneration structure of license agreements. The question is whether flexibility of the contract and the market and technological uncertainty associated with the contract impacts the negotiated price expressed by upfront fee.

As patent licensing has become the prime driver of technology trade, understanding the rationales behind a properly-defined payment structure of the agreements is essential. Specifically, among the other remuneration components, upfront fees are critical in license negotiations since they imply a significant initial investment by the licensee and represent a source of liquidity for the licensor. We investigate how contractual flexibility, market uncertainty and technical uncertainty shape upfront fees from the licensee’s perspective. Upfront fees are shown to be positively associated with contractual flexibility and market uncertainty, while technical uncertainty is positively associated with upfront fees only if the license warrants contractual flexibility to the licensee. Licensees therefore do not necessarily see uncertainty as a negative attribute of a patent license, but rather as a potential value, above all if in presence of contractual flexibility.