Combining Institutional and Contractual Mechanisms to Control Transactional Hazards Related to Transfers of Technology: an Empirical Analysis of Supervision Provisions in Technology Licensing Agreements

Technology licensing provides innovators with the opportunity to substantially leverage their market expansion. But licensing also exposes valuable knowledge at appropriation and more generally to opportunism since it generates ex-post mutual interdependence. The long-term performance of the transfer for the licensor thus strongly depends upon its capability to govern the relationship successfully. Designing an efficient supervision mechanism is then key to good governance of licensing contracts. In this paper we analyse in detail the scope of supervision through three dimensions: supervision on sales; supervision on product quality; and supervision on industrial and R&D facilities. We show that licensors are likely to adjust the scope of supervision in line with contractual hazards, which depend upon the scope of the transfer, the competitive stakes, and the institutional and relational environment of the transfer. Evidence is provided by a cross-section sample of 207 licensing contracts by American, Japanese and European firms.