The cost of integrating external technologies: Supply and demand drivers of value creation in the markets for technology

A classic decision faced by technology suppliers and buyers is whether to compete in the product markets or cooperate through licensing. We address this question by examining an important, demand-side barrier to licensing -- the buyers’ cost of integrating a licensed technology. We argue that this cost can be affected by suppliers’ knowledge-transfer capabilities, buyers’ absorptive capacity, and the cospecialization between R&D and downstream activities in the buyers’ industries. Following this argument and a stylized bargaining model, we hypothesize that the supplier’s knowledge-transfer capability stimulates licensing. Moreover, the importance of this capability increases when licensing to industries where potential buyers have weak absorptive capacity or R&D and downstream activities are cospecialized. We find support for our hypotheses using a panel dataset of small “serial innovators.”