Issue 1 – Special Issue on Innovation Economics

Volume 23 JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY
Spring 2014

Committee Composition and Networking in Standard Setting: The Case of Wireless Telecommunications

Talia Bar and Aija Leiponen
We examine factors behind firms' decisions to contribute to open standard setting. Our study highlights a novel explanation: firms seek to improve their positions in an interfirm cooperation network. In the wireless telecommunications standard-setting organization we study, firms develop new technical specifications in small committees. Our panel data analyses demonstrate that interorganizational network connections influence firms' decisions to support committees. Additionally, firms are more likely to support committees when they are technologically distant from the firm that initiated the committee. We argue that standard setting presents opportunities for information exchange and for accessing complementary R&D assets through the cooperation network.

Payments and Participation: The Incentives to Join Cooperative Standard Setting Efforts

Anne Layne-Farrar, Gerard Llobet, and Jorge Padilla
Formal, cooperative standard setting continues to grow in importance for the global economy. And as standards become more pervasive, the stakes rise for all participants. It is not surprising then that many standards are covered by intellectual property rights, that battles over the licensing of those rights have reached a fevered pitch in several industries, and that competition agencies around the globe are seriously weighing whether and how to intervene in the standard setting process. One suggestion for such an intervention is the imposition of a licensing cap, referred to as the incremental value rule. We evaluate this proposal and find that even in contexts where this rule is efficient from an ex-post point of view, it induces important distortions in the decisions of firms to innovate and participate in standard setting organizations (SSO). Such a rule reduces the R&D investment that a firm makes in relevant technologies and lowers the probability that it will join the SSO. We characterize a variation of the incremental value rule for defining fair, reasonable, and nondiscriminatory that accounts for both investment and participation incentives.

Ex-Ante Agreements in Standard Setting and Patent-Pool Formation

Gastón Llanes and Joaquín Poblete
We present a model of standard setting and patent-pool formation. We study the effects of alternative standard-setting and pool-formation rules on technology choice, prices, and welfare. We find three main results. First, we show that allowing patent pools may reduce welfare when standards are negotiated and patent pools need to be ex post incentive compatible. Second, we show that ranking combinations of standard-setting and pool-formation rules in welfare terms when patent pools need to be ex post incentive compatible is not possible. Third, we show that allowing firms to sign ex ante agreements regarding pool participation dominates—in terms of welfare—any other policy rule. This policy does not require the standard-setting organization to have information on patent ownership, the terms of license agreements, or the value added of patents.

Complementary Patents and Market Structure

Klaus M. Schmidt
Many high technology goods are based on standards that require several essential patents owned by different IP holders. This gives rise to a complements and a double mark-up problem. We compare the welfare effects of two different business strategies dealing with these problems. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to nonintegration. Horizontal integration of IP holders (patent pool, pass through) solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, whereas a horizontally integrated firm always benefits from entry and innovation.

Timing of Discovery and the Division of Profit with Complementary Innovations

Annalisa Biagi and Vincenzo Denicolò
We analyze the optimal division of profit with complementary innovations. Even if each innovation can be achieved independently of the others, we identify circumstances in which the research should be conducted sequentially, targeting one innovation after another in a prespecified order. We then consider the implementation of this solution in a market equilibrium with specialized research firms. Firms are involved in a war of attrition, where each has an incentive to wait for the others to successfully complete their R&D projects before investing. To speed up innovation, the optimal policy must reward early innovators more generously than late ones.

Appropriability and Incentives with Complementary Innovations

Massimo D’Antoni and Maria Alessandra Rossi
This paper analyzes the effects on incentives to invest in the development of complementary innovations within research and development (R&D) collaborations of two alternative appropriability regimes: an “openness regime” whereby parties make an ex ante commitment to reciprocal access to each other's R&D outputs and an “exclusion regime” whereby no such commitment is made. We consider a model with efficient bargaining ex ante in which firms do not compete in the final market. Assuming that the complementary innovations constitute a common input and that agents make complementary investments in its private exploitation, we find that, when complementarities are sufficiently strong, a commitment to openness may provide greater incentives than an exclusion regime. The theoretical framework may be applied to interpret Open Source Software licenses, intellectual property rights licensing arrangements within research joint ventures and royalty stacking issues. From a public policy standpoint, the paper allows to identify conditions under which the openness regime may be an appropriate choice to elicit further development of publicly funded technologies.

Behind the Scenes: Sources of Complementarity in R&D

Marco Ceccagnoli, Matthew J. Higgins, and Vincenzo Palermo
Management consultants increasingly recommend that internal R&D be outsourced; however, little is known about the substitution or complementarity between internal and external R&D. Through structural estimation of a flexible innovation production function we provide a deeper understanding of firm-level drivers of complementarity between these two types of investments. Our analysis is based on a unique panel data set on the R&D and in-licensing expenditures of pharmaceutical firms. Our results suggest that internal R&D and in-licensing are neither complements nor substitutes. We find that the degree of complementarity is enhanced for firms with stronger absorptive capacity, economies of scope, and licensing experience.

Optimal Technology Sharing Strategies in Dynamic Games of R&D

Nisvan Erkal and Deborah Minehart
A question central to R&D policy making is the impact of competition on cooperation. This paper builds a theoretical foundation for the dynamics of knowledge sharing in private industry. We model an uncertain research process and ask how the incentives to license intermediate steps to rivals change over time as the research project approaches maturity. Such a dynamic approach allows us to analyze the interaction between how close the firms are to product market competition and how intense that competition is. We uncover a basic dynamic of sharing such that firms are less likely to share as they approach the product market. This dynamic is driven by a trade-off between three effects: the rivalry effect, the duplication effect and the speed effect. We show that this dynamic can be reversed when duopoly profits are sufficiently low or when the firms have asymmetric research capabilities. We also explore the implications of the model for patent policy, and compare policies targeting early research outcomes with policies targeting late research outcomes.

Strategic Alliances: Trading Ownership for Capabilities

Carolin Haeussler and Matthew J. Higgins
Increases in alliance activity between research-intensive firms and incumbents is puzzling because it is challenging to contract upon highly uncertain R&D activities. Our paper extends prior research by exploring the relationship between firm capabilities and gains from trading ownership rights. This link is important because the allocation of ownership rights has been shown to influence alliance outcomes. Using data based on a survey of biotechnology firms, we find that both current and future capabilities provide strong explanatory power for understanding firm valuation of ownership rights. These ownership rights are ultimately allocated across firms in order to maximize their gains from trade.

What are the Channels for Technology Sourcing? Panel Data Evidence from German Companies

Dietmar Harhoff, Elisabeth Mueller, and John Van Reenen
Innovation processes within corporations increasingly tap into international technology sources, yet little is known about the relative contribution of different types of innovation channels. We investigate the effectiveness of different types of international technology sourcing activities using survey information on German companies complemented with information from the European Patent Office. German firms with inventors based in the United States disproportionately benefit from R&D knowledge located in the United States. The positive influence on total factor productivity is larger if the research of the inventors results in coapplications of patents with US companies. Moreover, research cooperation with American suppliers also enables German firms to better tap into US R&D, but cooperation with customers and competitors does not appear to aid technology sourcing. The results suggest that the “brain drain” to the United States can have upsides for corporations tapping into American know-how.