Real Options in Technology Licensing

Abstract

This paper examines the use of options contracts by firms acquiring rights to commercialize university technologies. By combining information about the sequence of licensing decisions with characteristics of the firms and technologies involved, I explore factors that shape decisions to purchase and exercise option contracts for these technologies. Decisions by firms that considered but did not purchase an option or a license are included in the sample. Consistent with the basic premise of real options theory, I find that firms are more likely to purchase option contracts for more uncertain technologies. Also in line with theoretical predictions, I find that firms better able to evaluate an external technology are less likely to purchase options before licensing. The results also highlight more complex motives for exercising options in technology licensing. On the one hand, firms appear to benefit from their ability to learn about the technology during the option period. On the other hand, firms better able to "absorb" the technology during the contract period may have reduced incentives to subsequently license the invention.

Keywords: real options, licensing, university-industry technology transfer, knowledge transfer

JEL Classification: M1, O31, O32, L14