A Dynamic Model of the Impact of Pre-Discovery Licensing on Innovation and Product Market Efficiency: Evidence from the Semiconductor Industry∗

This study evaluates the impact of pre-discovery licensing on innovation and product market efficiency. Pre-discovery licensing is a form of R&D cooperation between firms, which accounts for more than 95% of all research collaborations. Pre-discovery licensing is pursued independently between firms, i.e., without governmental support. In contrast, in a research joint venture firms cooperate in R&D, as they usually seek protection and support from government enacted laws and programs which gives rise to selection problems. Despite existing work on research joint ventures, there has been little work on pre-discovery licensing. The estimation results of our dynamic count data model show that pre-discovery licensing reduces innovative activity. We continue to estimate a semi-structural model, which provides evidence that pre-discovery licensing agreements increase costs in the product market. Our results show that pre-discovery licensing increased the price of a semiconductor chip by $0.225. Hence, consumers paid a total amount of $1.6 billion more per year due to the fact that pre-discovery licensing agreements increase costs. Our findings stand in contrast to the empirical findings on research joint ventures, emphasizing the notion that selection is a critical argument which causes different results. JEL: L11, L13, L52, O31, O32, O38.