When does inward technology licensing facilitate firms' NPD performance? A contingency perspective

Highlights

• We investigate when inward technology licensing can facilitate a licensee firm's NPD with a contingency framework.

• We distinguish two categories of contingency factors that are internal and external to firms.

• We use a longitudinal database on Chinese firms' technological licensing, analyzing a sample of 141 Chinese firms.

• We find the positive relationship between ITL and NPD performance of licensee firms is moderated by the contingency factors.

• We contribute to literatures on NPD, open innovation and technology catch-up of firms in emerging economies.

Abstract

Many firms find inward technology licensing (ITL), as a means to access external technological knowledge, an effective and relatively inexpensive way for new product development (NPD). However, although the literature has suggested some advantages and disadvantages of ITL with respect to NPD, the relationship between ITL and licensee firms' subsequent NPD performance has not yet been found convincingly evident. Sharing with many other likeminded scholars and practitioners, we believe that the dynamics between external knowledge, internal capability, external environment, and firm performance should be investigated through a contingency perspective. Thus, this study posits that a firm's propensity to develop new products through ITL is contingent upon two categories of contingency factors that are internal and external to firms. Using a dataset containing information about Chinese firms' licensing activities, we find support for our hypotheses: the positive relationship between ITL and NPD performance of a licensee firm is moderated by firms' absolute and relative absorptive capacity and the knowledge endowment in the region where the licensee firm operates.

Introduction

In the past, most industrial firms focused on developing new products internally, relying on their own technologies (Chandler and Hikino, 1990, Clark et al., 1987, Edwards, 2008, Lambe and Spekman, 1997, McNally et al., 2011, Reid and Reid, 1988, Wind and Mahajan, 1988). In recent years, many firms have started actively optimizing the value of external technological resources for new product development (NPD) (Chesbrough, 2003, Frishammar et al., 2012). Among others, inward technology licensing (ITL) is one of the viable means for firms' to develop new products (Atuahene-Gima and Patterson, 1993, Lowe and Crawford, 1983, Mu and Di Benedetto, 2012, Leone and Reichstein, 2012). The drivers of licensing external technologies for NPD include, for example, the potential avoidance of increasing internal NPD costs, speed to market, potential uncertainty reduction, and strategic feasibility (Atuahene-Gima, 1993, Cesaroni, 2004, Fukugawa, 2009, Kim, 2009). We also noticed that some scholars found empirical evidence based on patent data that in-licensed technologies could possibly function as direct inputs for a firm's future technological innovations (Li-Ying et al., 2013). Thus, an emerging understanding that firms' NPD may benefit from ‘learning-by-licensing’ has gradually be shared by scholars and practitioners (Johnson, 2002).

Meanwhile, it appears that the promising benefits of NPD through ITL might not be easily obtained when externally acquired technologies become liabilities rather than opportunities due to the fact that the beneficial effects are dependent upon many other factors. For instance, firms might instead suffer their NPD if any of the following occurs: insufficient information transfer to licensee firms (Atuahene-Gima, 1993), limited availability of technologies on the market, high transaction costs due to weak appropriability regimes and poorly developed technology markets (Contractor, 1981, Teece, 1977), the risk of substituting internally developed technologies (Cassiman and Veugelers, 2006), and a lack of absorptive capacity and complementary assets inside and outside the licensee firms (Caves et al., 1983, Cohen and Levinthal, 1990, Killing, 1977). Therefore, it is relevant and important to investigate when inward technology licensing better facilitates firms' NPD. Although prior studies have sporadically suggested some potential contingent factors, they mainly focused on discussing the benefits and costs of ITL in relation to firms' NPD and failed to probe the possible effects of ITL on NPD performance within a contingency model (Atuahene-Gima, 1992, Chaney and Devinney, 1992, Katila and Ahuja, 2002, Kessler and Bierly, 2000, Li et al., 2010, Lowe and Crawford, 1983, McDonough Iii and Barczak, 1991, Mu and Di Benedetto, 2012, Teece, 1998, Tomlinson, 2010).

Therefore, this study sets out to fill in the research gap by analyzing the relationship between ITL and NPD performance under the influence of various contingencies. A contingency framework is developed based on the resource-based view (RBV) and institutional perspective. From a dynamic RBV, firms operate in a dynamic process of reflexive renewal among internal resources, capabilities and external environment (Ambrosini and Bowman, 2009). While external environment provides a firm with institutional constrains and economical opportunities, successful NPD usually also requires a firm to have internal resources and capabilities to absorb, assimilate, and reconfigure externally obtained knowledge. Therefore, in our contingency framework, we choose internal contingency factors regarding firms' ability to absorb and integrate inward licensed technology into NPD (absorptive capacity) and external contingency factors related to licensee firms' environment (i.e., technology market and knowledge endowment). More specifically, we investigate the moderating effects of these contingency factors for the relationship between licensee firms' ITL and their subsequent NPD performance. To test these effects, we use a unique dataset containing information about Chinese firms' licensing and their subsequent NPD performance in combination with other secondary data sources as the basis for this empirical research.

This study contributes to the literature in several ways. First, our conceptual framework takes a contingency perspective by taking into account moderating factors related to firm absorptive capacity and external environment. Our research approach is one of the few pioneering empirical studies that are based on a longitudinal dataset of licensee firms in this respect. Second, this study enriches the literature on the relationship between firms' external learning and NPD performance by providing a focused investigation on firms in an emerging economy, i.e., China. This empirical approach complements the extant literature, most of which has limited their empirical bases to the firms from developed countries (e.g., van de Vrande et al., 2009, Christensen et al., 2005, Dodgson et al., 2006). Finally, this study also contributes to the literature on the technology catch-up of firms in emerging economies. In recent years, learning from external technology sources through an effective technology market has been promoted in China as a primary means to catch up technological deficiency at a national level (Sun and Du, 2010). In this respect, this study also addresses Chinese firms' propensity of ‘catching up’ in terms of effective NPD based on technological inputs from external licensing.

The article is organized as follows: In the next section we present the theoretical background and hypotheses. Then, our data and method are presented. Next, we present and discuss the empirical results. Finally, we make an in-depth discussion regarding some theoretical and managerial implications based on our findings. The limitations of this study will also be addressed to guide future research directions.