Competition, Technology Licensing-in, and Innovation

Abstract

Although the relationship between competition and firm innovation has long been of scholarly interest, prior research has predominantly considered changes in internal research and development (R&D) as a strategic response to competitors’ actions. In this study, we focus on one of the most important and commonly observed contractual mechanisms used to acquire external technologies: technology licensing. Surprisingly, licensing has been mostly overlooked by prior studies examining the effect of competition on firms’ allocation of R&D. We take into account the unique properties of licensing and systematically link them to the demands arising from the competitive pressure caused by rivals’ launches of new products. Furthermore, we discuss how licensing-in decisions ultimately shape a firm’s subsequent innovation in areas where they are threatened by competitors and how such innovation depends on the cumulative R&D investments inside the organization into which licensed knowledge is added. We test our theoretical model through a longitudinal design that tracks the licensing-in and innovation outcomes of firms in the global biopharmaceutical industry. Accounting for the endogenous selection of firms into licensing, our findings illustrate that licensing-in is motivated by competitive pressures. We also find that licensing-in increases a firm’s capacity to innovate in areas where competitors have exerted pressure, particularly in the presence of cumulative R&D investments. In so doing, the paper anchors technology licensing as a key organizational action that helps increase our understanding of the important relationship between competition and innovation.