Understanding why some patents get licensed…while others do not

Technology licensing is an activity where the owner of a patent (the licensor) allows another party (the licensee) the rights to use, adapt and commercialize that patent in exchange for compensation. It is undoubtedly a growing and increasingly important innovation activity with reports that annual global revenues for technology licensing exceed $200 billion (Alvarex and López, 2015).

Despite this considerable market for patented technologies, many patents remain unlicensed. It is believed that the overall market for patents could be 70% larger, as many licensors wish to license their technologies but are unable to secure a buyer (licensee) (Gambardella, Giuri and Luzzi, 2007).

Understanding why some patents get licensed while others do not is the focus of a new study that myself and Karen Ruckman have just had accepted for publication in the journal Industrial and Corporate Change.

The traditional approach to studying this question involves focusing on characteristics that reflect the quality of the patent. That is, how do qualities of the patent itself impact its chances of being licensed. We follow and build on this prior research in two important ways.

In addition to patent characteristics, we also examine how the characteristics of the licensor impact its ability to be identified and selected by a licensee. Specifically, we look at the effect of four patent characteristics and eight licensor characteristics.

The second major way our study advances previous research on patent licensing likelihood is the method we used. To accurately examine the effect of both patent and licensor characteristics, we first started with a set of biopharmaceutical patents that were licensed and for each of these we identified a set of alternate patents that could have been licensed but were not. To do this, we used topic modeling to analyse the description of a licensed patent and then identify remarkably similar patents that were not licensed. This provides a new and sophisticated way of controlling for alternative patents while also allowing us to analyse how the characteristics of a licensor and its patent contribute to the likelihood of a licensing agreement being reached.

The results of our study indicate that patents owned by licensors that are strong in technological prestige, experience at licensing, and combined technological depth and breadth have a greater chance at being chosen by licensees. In Table 1, we define these licensor characteristics and outline how they help a licensor’s patent to be chosen for a licensing agreement.

With the benefits of open innovation increasingly being reported (Bogers et al, 2016), companies will likely continue to intensify their technology licensing activities. Consequently, a better understanding of why a particular patent is licensed over other technologically similar patents has important implications for both scholars and managers of innovation. Specifically, our findings suggest that there are three areas scholars and managers’ should pay more attention to, so as to better understand and manage licensing-out success:

The halo effect. Building and maintaining licensor prestige is a source of licensing-out advantage for licensors. This is because licensees are not just making licensing decisions based on quality of the patented technology, but also on the reputation of and technological fit with the licensor. Prestige makes a licensor more visible to licensees. It is also makes licensors more legitimate and attractive to licensees. The more prestigious a licensor is, the more likely licensees will view the licensor’s patent and technological claims as being credible.

Experience matters. Experience at licensing enhances a licensor’s ability to license-out. This is because experience allows licensors to accumulate the specific knowledge, people, and routines required to find and do deals with licensees, while also increasing their ability to be known to and selected by potential licensees.

Organizational learning enhances licensing likelihood. A licensor’s technological depth and breadth balance the knowledge processes for technology transfer transactions and reduce the negative effects of the individual depth and breadth qualities. These two qualities combined act as an attractive signal to prospective licensees that a licensor possesses the efficient ability to convey and transmit technical ideas.

The research reported in this posting set out to understand why some patents get licensed while many others do not. The fundamental conclusion is that beyond the technological motivation to license-in a patent and the quality of the patent, there are firm-level qualities that can distinguish a licensor from others and these can influence the likelihood that a particular patent will be licensed. At a minimum this incorporation of firm-level status and learning effects allude to the importance of sociological mechanisms on licensing probability.

This blog post is based on research in the following articles:

Why do some patents get licensed while others do not? by K Ruckman and I McCarthy in Industrial and Corporate Change

The open innovation research landscape: established perspectives and emerging themes across different levels of analysis, by M Bogers et al. in Industry and Innovation