Chapter 2: Managing Risks in Cross-Border Licensing Alliances: Interdependence, Contract Structure, and Knowledge Transfer

Cross-border licensing alliances involve giving the right to use a firm’s know-how to a licensee for a fixed time period, and the licensee replicates the licensor’s entire commercialization process in a contractually defined geographical market. In addition to granting the licensee rights to use patents and blue prints of the licensor, the agreements also include assistance in accessing tacit know-how of the licensor. Licensing agreements create unique challenges for knowledge transfer because of the constant trade-offs between economic payoffs and interpartner risks. In this chapter, we examine the determinants of knowledge transfer in the context of cross-border licensing relationships. We theorize that incentive alignment and cooperation motives of participating firms to effectively reduce interpartner risks and exchange knowledge in licensing relationships emerge from structural attributes related to the extent and asymmetry of interdependence and the nature of exclusivity rights negotiated in the contract. Empirical results, based on a sample of international licensing relationships of U.S. Fortune 500 firms, show heterogeneity in knowledge transfer due to licensor-licensee interdependence arising from two sources: relationship specific assets and jointly determined outcomes. Contract structure of the licensing agreement conditions these effects. While the specific asset interdependence plays a stronger role in knowledge transfer in relationships involving exclusive contracts, outcome interdependence has a greater impact in nonexclusive relationships. Furthermore, we find that the association between managerial knowledge transfer and licensee performance is conditioned by the technological and competitive environment of the foreign market as well as the type of market where the technology is licensed.