Patent and Knowhow Licensing in Japan

Author Name NISHIMURA Junichi  (RIETI Research Assistant / Hitotsubashi University) /OKADA Yosuke  (Hitotsubashi University)
Creation Date/NO. February 2011 11-J-012
Research Project The Structural Characteristics of Research and Development by Japanese Companies, and Issues for the Future
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Over the past two decades, utilizing markets for technology through licensing and other outsourcing arrangements has emerged as a key to organizing innovative activity. We examine how the rent dissipation effect affects patent and knowhow licensing, controlling organizational capabilities such as firm size, vertical integration, exports, and diversity. A licensor's profit varies and the incentives to license change depending on the rent dissipation effect, which erodes a licensor's profit due to intensifying competition that results from a licensee's entry into the licensor's market. Firms faced with severe competition are marginally exposed to a small rent dissipation effect when licensing their technologies out to rivals, and they can obtain large royalty revenues through such licensing because there are many potential licensees. Using panel data on about ten thousand Japanese firms for the period 1995-2007, we show that the rent dissipation effect facilitates licensing not only between Japanese firms but also between Japanese and foreign firms.