Brand as credible commitment in embedded licensing: a transaction cost perspective

Purpose – The purpose of this paper is to study brand embedded licensing (technology licensing and brand licensing combined) and its theoretical difference from standard licensing (technology licensing only). The following research questions are asked: What makes embedded licensing theoretically different from standard licensing, and what determines a licensor's decision to select brand embedded licensing over standard licensing? Design/methodology/approach – This paper compares brand embedded licensing to standard licensing and argues that brand embedded licensing is a quasi‐hierarchical organizational structure, while standard licensing is a market‐based structure. Brand embeddedness in licensing serves as a credible commitment from the licensor and induces the licensee to invest sufficiently in complementary assets. Drawing on the transaction cost perspective, the determinants of embedded licensing are examined. Findings – Embedded licensing is determined by both the licensee's characteristics and the licensor's brand characteristics. The licensor is more likely to utilize embedded licensing or the licensee is more willing to demand embedded licensing when: the licensee's specific complementary investment is high; the licensee's complementary capacity is high; the market entry is at a late stage; the licensor uses separate branding; the extent of product differentiation is high; and the stage of brand globalization is advanced. A strong intellectual property rights regime and a fast pace of technology change enhance the effects of these six determining factors on the licensor's selection of embedded licensing. Originality/value – This paper challenges the classical view that licensing is a market‐based relationship by revealing that embedded licensing is a quasi‐hierarchical organizational structure.