Inventions under Siege? The Impact of Technology Competition on Licensing

In recent years, the view on patents as an instrument for firms to appropriate the returns from inventive activities has shifted towards a more explicit consideration of a patent's strategic importance. In fact, firms have increasingly contributed to and been confronted with a patent landscape characterized by numerous but marginal inventions, overlapping claims and multiple patent ownerships for complementary technologies, as well as by patent fences of substitute technologies owned by a single firm or a group of firms. Existing literature suggests that both the fragmentation of ownership and the threat of a firm's patent applications being blocked by other patents lead to increased patenting and in-licensing activity in order to mitigate potential hold-up by opportunistic patentees owning critical patents. In this paper, we argue that firms facing a high chance of being blocked by technology competitors engage both in in- and out-licensing of technology. This suggests that the blocking threat favors investment in patent licenses rather than in pure in-house research and development (R&D) for some firms while it increases licensing revenues of firms owning blocking patents. The relationship should be particularly pronounced in complex technologies as these exhibit a higher density of patent thickets compared to discrete technologies. We construct a novel measure that captures the threat of being blocked if a firm files an average patent application conditional on its technology portfolio. Based on a comprehensive dataset of more than 400 manufacturing firms from Germany, our results largely confirm the research hypotheses. Distinguishing the effect of the blocking threat for firms in discrete and complex industries (i.e., product technologies characterized as complex contain a large number of patentable elements while product technologies characterized as discrete consist of relatively few patentable elements), we find that the likelihood of being blocked only affects the licensing activities of firms in complex industries, while there is no effect of blocking on licensing for firms operating in discrete industries. This result is in line with the argument that licensing can mitigate hold-up problems in technology markets. In addition, we take account of the potential feedback effects of licensing on internal R&D investments of the firm and find that these are endogenous.

Grimpe, Christoph and Katrin Hussinger (2009), Inventions under Siege? The Impact of Technology Competition on Licensing, ZEW Discussion Paper No. 09-039, Mannheim, published in: Best Paper Proceedings.