Licensee technological potential and exclusive rights in international licensing: A multilevel model

Granting of exclusive rights is an important consideration for firms using licensing as a mode of entry into foreign markets, as exclusive contracts reduce licensors' flexibility in a given market during the term of the agreement. By granting exclusivity to a licensee with greater technological potential, the exchange partners can increase the potential transactional value of the licensing agreement. At the same time, a licensee with strong technological potential will increase the threat of transactional hazards due to underinvestment and rent appropriation. In this paper, we develop and empirically test a model that evaluates the balancing of transactional value and transaction costs in exclusive licensing. In particular, we identify the conditions under which exclusive contracts are likely to be granted to foreign licensees with strong technological potential. Empirical results from a multilevel model, based on 375 international licensing agreements of US firms in high-technology industries during 1995-2008, show that licensees with a stronger technological potential are more likely to be granted exclusive rights in countries with strong intellectual property rights protection, and in industries with a high rate of technological change; but are less likely to be granted exclusive rights when there is a high degree of overlap between licensor and licensee products.