Innovations for Products, Innovations for Licensing: Patents and Downstream Assets in the Software Security Industry

Abstract

This paper develops a theoretical framework in which patents and control of downstream co-specialized assets affect the way firms profit from innovation according to the stage of industry evolution. We argue that in early stages of industry life cycle the effectiveness of patents in protecting innovations or in enhancing their visibility encourages technology licensing, while ownership of downstream assets helps launch new products. We test these ideas in the Security Software Industry, which arose about 20 years ago, and exhibits the typical features of an early stage industry. Moreover, SSI patents are an effective means for technological protection and for visibility. We employ panel data on 87 firms with patents in key SSI technologies during 1993-2000. After controlling for firm size, age, and R&D intensity, we find evidence consistent with our predictions.

Keywords: Technology Licensing, Patents, Downstream assets, Software

JEL Classification: L80, O32