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Most companies fear competition from a rival’s product innovations and the risk of falling behind their industry’s technological frontier. Firms affected by such competitive pressure usually react by trying to strengthen their R&D capabilities and close the gap between their and their rival’s technologies as quickly as possible. But how exactly can firms catch up? Our research shows that rather than innovating from scratch in house or partnering with others in strategic alliances, the most effective solution may be to buy access to an already existing technology and incorporate it into your R&D.

When we studied how 206 publicly listed biopharmaceutical firms reacted to their rivals’ new product launches, we saw firms approaching catch-up R&D in three different ways. Some relied solely on internal development, while others drew on external knowledge by entering into strategic alliances and collaborating with outside partners. Other companies used technology licensing. Of these three strategies, we found that that the latter was most effective in allowing firms to generate innovation in areas in which they had been attacked and close the R&D gap competitors had created. The effect was particularly salient in technological domains in which firms had significant investments and commitments. Put differently, when existing investments were at stake, licensing was the best way for firms to preserve their competitive position.

Licensing and Innovation in the Biopharmaceutical Industry

Our study examined how licensing has been an important knowledge-sourcing tool in the biopharmaceutical space over the last decade. This industry has experienced rapid technological change grounded in the form of new research tools such as immunoassay, gene sequencing, and high throughput screening, as well as new therapies such as monoclonal antibodies, stem cells, and oligonucleotides. The industry is also highly competitive, as firms continuously move new therapeutic treatments towards regulatory approval. As a result, they face an increasing need to update and upgrade their R&D capabilities if they are to sustain the development of their pipeline and continually bring new drugs to market.

We found that licensing gives firms the ability to more quickly adjust to this shifting competitive landscape. The 206 firms we sampled engaged in more than 4,500 licensing transactions over a period of 15 years (1989-2004). We observed that licensing intensified after competitors launched products in therapeutic areas where our focal firms where actively pursuing R&D activities. For example, in 2003 and 2004 there was a spike in licensing deals related to monoclonal antibodies following Abbott’s successful development and launch of Humira, a monoclonal antibody targeting rheumatoid arthritis. Many of Abbott’s direct competitors, such as Genzyme and Boehringer Ingelheim, then licensed in monoclonal antibody technologies for rheumatoid arthritis, while competitors like AstraZeneca and Pfizer licensed the technology to develop new therapies in autoimmune diseases in general. Licensing deals related to monoclonal antibodies increased by more than 25%.

Our study also focused on the innovation outcomes of licensing activities. We examined firms’ abilities to channel the knowledge sourced through licensing towards areas in which they faced competition. We found that this strategy was used primarily to ensure that a firm’s portfolio of technologies remained competitive and current, allowing them to gear their R&D efforts to match competitors’ moves (i.e., a type of problemistic search). In particular, we found that, following a licensing, firms increase their number of new patents in specific areas threatened by rivals (such as autoimmune diseases). We did not observe the same effect for alliances, which suggests that this strategy should not be the first choice for a firm wanted to beef up its R&D to catch up to a rival with new technologies.

Why Licensing Works

Licensing has three major characteristics that make it particularly useful:

  • Coordination. In technology licensing, the licensor (firm selling the technology) agrees to unilaterally transfer know-how and intellectual property (IP) related to a technology to the licensee (firm buying the technology). A licensing contract represents a commercial transaction in which one firm sells and the other buys a technology. Compared to strategic alliances, this significantly reduces the need for coordination between the firms involved.
  • Focus. Licensees can determine the type and characteristics of the technology they wish to acquire before entering a deal.  Firms can define the specific gaps or deficiencies in their R&D technology relative to competitors, which makes licensing particularly appropriate those who are attempting to react to competitors’ moves.
  • Speed. With licensing, firms can promptly tap into and use ready-made external R&D solutions. This approach saves not only time but also the resources that would otherwise have to be committed to the trial-and-error process of developing solutions from scratch. Research shows that firms can reduce innovation time by an up to 19% if technology licensing is used as an input to their R&D.

When to Choose Licensing 

While we found that licensing is particularly relevant when firms want to compete with their rivals heads-on, we also found that it is much less effective when firms are exploring new technological avenues to shield themselves from rival pressures. This indicates that companies are not likely to choose licensing when they want to move into novel or relatively unexplored areas of R&D.

There are also risks in the use of technology licensing. For example, once firms regularly license new technologies, they may become overly reliant on knowledge generated externally, which can weaken their ability to innovate internally. So it should be used more parsimoniously by firms trying to build internal R&D capacity in strategic technological fields.

When competitors develop new technologies, it can destabilize the industry landscape. Managers must carefully assess the alternatives on which they rely to adjust their firm’s R&D. Our research suggests that licensing might be the best way to directly and quickly respond to rivals’ innovations and remain competitive.

What is licensing in technology?

In technology licensing, the licensor (firm selling the technology) agrees to unilaterally transfer know-how and intellectual property (IP) related to a technology to the licensee (firm buying the technology).

Why is licensing likely to be an attractive technology strategy?

It enables a company to enter a new market very quickly. Additionally, financial and legal risks are minimised when technology licensing is used.

Why companies seek to license technology instead of bringing it to market themselves?

By licensing your technology to established companies, you take advantage of their market knowledge, their distribution channels and production capabilities. This allows your product to achieve great scale much faster than if you had to start operations and build connections with customers from scratch.