Technology licensing decisions : a real options perspective

As part of the growing trend toward Open Innovation, the market for technology has seen an unprecedented growth over the last decades. Yet, empirical studies in this area remain underdeveloped, and the decisions made by firms regarding technology licensing are not well known and understood. In this paper, we argue that the real options (RO) approach, which draws from financial options theory and is particularly adapted to uncertain environments, can be useful to analyze technology licensing decisions, both from an academic and from a managerial perspective. We identify the main real options that are contained in out-licensing and in-licensing decisions. We discuss the characteristics of these options, the context in which they may arise - in terms of type of technology, firm size, timing, etc. - and the benefits of using a RO approach to frame strategic decisions regarding licensing. We find that there is no "universal use" of the RO approach in this area, as a variety of real options may arise from technology licensing decisions. RO theory may be useful for scholars to analyze issues such as the optimal governance mode to exploit an innovation; yet the main benefit of the RO approach probably rests in enabling managers to translate their intuitions into clear decisions rules, to determine whether the firm should license-in or license-out a technology, and under what conditions. Finally, we find that the real options contained in technology licensing decisions have "exotic" characteristics, which implies that we need to develop user-friendly and flexible models to estimate their value.