funda12 Flashcards
(21 cards)
What are appropriability regimes in innovation?
Appropriability regimes are environmental factors, excluding firm and market structure, that determine an innovator’s ability to capture profits from an innovation.
What are the key dimensions of appropriability regimes?
these determine appropriability
Legal Instruments:
Patents, copyrights, trademarks, and trade secrets.
Nature of Technology:
Product vs. process innovations.(tangible and identifiable vs harder to protect)
Tacit vs. codified knowledge. (difficult to articulate vs well documented)
How does the nature of technology affect appropriability?
Product Innovations are easier to protect (e.g., smartphones).
Process Innovations are harder to protect (e.g., manufacturing methods).
Tacit Knowledge is harder to imitate, offering natural protection.
Codified Knowledge is easier to replicate, requiring stronger legal protection.
What role do strong IPRs play in innovation?
Strong Intellectual Property Rights (IPRs) protect innovations by increasing appropriability and sustaining the innovator’s competitive advantage, making it harder for competitors to replicate or use the innovation without permission.
What are the two types of complementary assets?
Generic Assets: Easily acquired in the market; widely applicable (e.g., fuel additives).
Specialized Assets: Co-developed with the innovation; harder to replicate (e.g., EVs and charging stations).
What is the Teece Model’s approach to innovation strategies?
If the innovator has critical complementary assets: proceed with internal development.
If the technology is excludable: use aggressive IP strategies or partnerships.
If non-excludable: act quickly and secretly or consider spinning out the innovation.
What are Markets for Technology?
Markets for Technology refer to transactions in which the focus is on the trade of intellectual property (IP) or knowledge rather than physical products. This includes patents, know-how, designs, blueprints, and other forms of non-patented knowledge.
Key Points:
Example: Selling a patent for a drug molecule instead of selling the drug itself, or acquiring a startup for its technology instead of its product line.
Nature of Transactions:
These transactions are typically arm’s length, meaning that the buyer and seller don’t have direct relationships and the exchange is often anonymous.
The transaction involves an exchange of IP for monetary payment (cash, royalties, or fees).
Pharma Industry Example:
In the pharmaceutical sector (1989-2004), many new drugs had more than 50% of their patents held by firms other than the commercializing company, showing the importance of IP and technology trade in drug development.
Advantages of Markets for Technology:
Specialization: Firms can focus on their core areas of expertise, leading to higher efficiency and returns.
Division of Labor: By sharing and trading technology, firms can avoid duplicating R&D efforts and enter markets more easily.
What Are the Complexities in Technology Transactions?
Challenges:
Market Thickness:
In a thick market (many buyers and sellers), transactions tend to be efficient, and prices reflect supply and demand. In a thin market (few buyers and sellers), inefficiencies and price distortion can occur.
Asymmetric Information:
Opportunism: One party may take advantage of the other due to a knowledge gap.
Adverse Selection: The buyer or seller may have hidden information, making it difficult to make an informed decision.
Moral Hazard: A situation where one party may take risks or act in ways that are detrimental to the other, knowing that they won’t bear the full consequences.
Uncertainty:
Symmetric Uncertainty: Even if both parties face the same level of uncertainty, their subjective valuations of the technology may differ, complicating the transaction process.
Licensing in Technology Transactions:
Types of Licensing Agreements:
Exclusive vs Non-exclusive Licenses: Determines whether the licensee has exclusive rights or shares rights with others.
Cross-licenses: Agreements where firms exchange IP rights with each other.
Payment Models: Payments for licensing can be made via fixed fees, royalties, or milestones, depending on the agreement.
These complexities make technology transactions more intricate than simple product sales and require careful negotiation to ensure that both parties benefit fairly.
What are the differences between fixed fees and royalties in licensing deals, and when should each be used?
Fixed Fees:
A fixed fee is a one-time payment or lump sum that the licensee (Pfizer) pays to the licensor (BioNTech) for the rights to use the technology.
It is often paid upfront or upon reaching specific milestones (e.g., regulatory approval, production stage).
The fee is not contingent on sales or future performance, providing immediate liquidity to the licensor.
Example: In April 2020, Pfizer made an upfront payment of $185 million to BioNTech for the COVID-19 vaccine collaboration.
Royalties:
Royalties are ongoing payments based on the commercial success of the licensed product. The licensor (BioNTech) receives a percentage of the licensee’s (Pfizer’s) sales.
This aligns the interests of both parties, as BioNTech benefits from Pfizer’s market success.
Royalties help address moral hazard issues: By using royalties, BioNTech has an incentive to share more tacit knowledge with Pfizer to ensure the vaccine’s success.
Why is it beneficial for companies like BioNTech and Pfizer to combine fixed fees and royalties in their licensing deals?
Combining Fixed Fees and Royalties provides a balanced approach to managing value uncertainty and incentive alignment:
Fixed Fees offer immediate cash flow to BioNTech, which is crucial for covering the costs of development and operational expenses.
Royalties incentivize both parties to collaborate and ensure the product’s market success. Pfizer benefits from commercializing the vaccine, while BioNTech is rewarded based on future sales.
Addresses Information Asymmetries:
Adverse Selection: If BioNTech knows the technology is highly effective, but Pfizer is unsure, royalties act as a signal of technology value, making Pfizer more likely to pay for future success.
Moral Hazard: If BioNTech is paid a fixed fee, it might not be motivated to transfer tacit knowledge. With royalties, BioNTech is fully incentivized to share its proprietary knowledge to ensure Pfizer’s success.
Example from Pfizer and BioNTech Deal:
Upfront Payment: $185 million (including equity investment).
Future Milestone Payments: Up to $563 million, bringing the total deal value to $748 million.
This deal combines fixed fees (for immediate compensation) and royalties (for long-term rewards), ensuring aligned incentives and shared risks.
What motivates firms to “license out” their innovations?
Small Firms Without Complementary Assets:
Licensing is a way for small firms to profit from their innovations without the resources needed for commercialization.
It allows them to focus on core strengths like R&D.
Underutilization of Innovation:
Firms that do not fully exploit their technology across all product or geographic markets can license out to generate additional revenue.
Licensing within their own markets can also be strategic, e.g., forming alliances or restricting competitor growth.
Examples:
Licensing a drug molecule to a large pharmaceutical company for manufacturing and marketing.
Why do firms “license in” technology?
Cost and Time Efficiency:
Licensing is typically cheaper and faster than developing similar technology internally.
Useful when catching up with competitors or meeting market demands.
Competitive Advantage:
Exclusive licensing agreements prevent competitors from accessing the same technology, offering a strategic edge.
Flexibility:
Licensing provides an option to exploit technology without committing resources to full-scale internal development.
Example:
A firm licensing battery technology to integrate it into electric vehicles instead of developing a proprietary solution.
What challenges do firms face when deciding to “license in”?
Knowledge Silos:
R&D units understand the technology’s potential but may not see the business benefits.
Business Development (BD) units focus on market benefits but may lack technical expertise.
Decision-Making Challenges:
If BD decides: Technology compatibility or integration might be overlooked.
If R&D decides: External technologies may be dismissed due to the “Not Invented Here” syndrome or fear of jeopardizing internal R&D programs.
Alignment and Incentives:
Proper incentives must align the priorities of R&D and BD units to ensure informed and strategic decisions.
Example:
A software firm hesitating to license an AI model because its R&D team worries it might overshadow their in-house project.
What is the main research question? Why should large firms license their technology?
The research question is: what factors influence the rate of technology licensing, particularly for large firms? Large firms license to:
○Generate revenue from technological investments.
○Access markets they can’t reach on their own.
○Establish their technology as a market standard.
○Gain revenue and mitigate profit loss due to competition in the technology market.
Why does the rate of licensing increase with the number of potential licensors?
Multiple technology holders create competition, making licensing a strategic necessity. If one firm refuses, potential licensees will get the technology from another source.
○ Competition reduces the importance of the profit dissipation effect, encouraging licensing.
○ However, this relationship has an inverted-U shape because too much competition among licensors reduces their bargaining power and revenue
What is product differentiation, and why does the rate of licensing decrease with greater differentiation? What is the assumption behind this logic?
Product differentiation means that products are not perfect substitutes; price elasticities of demand are not infinite.
○The paper assumes that product differentiation is technology-specific rather than firm-specific, meaning firms using the same tech produce identical products.
○When products are highly differentiated due to technology, licensors have less incentive to license because the profit dissipation effect is large (they are effectively monopolists in their niche)
How is a curvilinear relationship tested in the empirical exercise?
A squared term of the number of potential licensors is added to the regression model. * A positive coefficient for the linear term and a negative coefficient for the squared term confirm an inverted-U shaped relationship between the rate of technology licensing and the number of potential licensors
What is the revenue effect in licensing, and what factors influence it?
Definition: The net present value of the income a licensor earns from licensing payments (e.g., fixed fees, royalties).
Factors Influencing Revenue Effect:
Value of the technology.
Bargaining power of the licensor.
Transaction costs associated with licensing.
Example: Dow’s vice-president highlighted that licensing and using the technology could generate additional cash.
What is the profit dissipation effect, and how does it impact licensors?
Definition: The reduction in a licensor’s profits due to increased competition from licensing.
Mechanism: Licensing introduces competitors, reducing market share and prices.
Example: Shell avoids licensing its main chemical products (e.g., epoxy, polyketones) to prevent competition threatening its market dominance.
How do the revenue and profit dissipation effects influence licensing decisions?
Scenario: A monopolist earns 110 without licensing.
Licensing to one firm introduces competition:
LicensorProfit
=
50
(
ownshare
)
+
0.8
×
50
(
royalties
)
=
90
LicensorProfit=50(ownshare)+0.8×50(royalties)=90
Without licensing: Profit = 110.
Conclusion: The monopolist avoids licensing since the profit dissipation effect outweighs the revenue effect.
In competitive technology markets, licensing may occur as licensors face profit dissipation regardless
How does market differentiation affect licensing decisions and profit dissipation?
Homogeneous Markets:
Licensing increases competition significantly, causing profit dissipation (e.g., undifferentiated chemicals).
Differentiated Markets:
Niche products experience reduced profit dissipation since licensors maintain competitive advantages.
Empirical Study Example: Chemintell (1980–1997) analyzed licensing behavior in large chemical firms across 139 products, using negative binomial regression to understand factors driving licensing deals.
