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 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 when complementary assets required to bring new technologies to market are absent or unimportant. In contrast, for firms better positioned to bring new technologies to market, increases in patent effectiveness increases patenting propensity but reduces the propensity to license. We thus present systematic cross-industry empirical support for the proposition that the intellectual property system is a key determinant of the vertical boundaries of the firm and the market for technology.

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