Contracting and Transaction Costs Knowledge Base: Ronald Coase, Nature of the Firm

1. Strategic Licensing
Capturing sustainable value from technology
HIMONT
APSM10 Assignment 03
Dated: 04-05-2017
Presented by-
Deepa Shukla
Sanjay Gurtu

2. Objectives
1) Understanding Contracting and Transaction Cost
2) Nature of Firm: Ronald Coase
3) Case: Himont Technology Licensing
1) Why did Himont license its cutting edge
technology
2) Did the design of contract clauses solve some
of the licensor-licensee problems? How?

3. Nature of the Firm: Ronald Coase
 “Father” of transaction costs economics
 Currently Professor Emeritus of Economics at
University of Chicago Law School
 Nobel Memorial Prize in Economics in 1991
 Posed two Nobel-prize puzzles :
• Why do any firms emerge in a market
economy?
• Why not just One Big Firm for whole
economy?
Definition : “…the system of relationships which
comes into existence when the direction of resources
is dependent on an entrepreneur” (p. 393).

4. Transaction Cost
There are market (transaction) costs associated with using the price
mechanism to organize production
 Price discovery costs
 Contract and negotiation costs
 Regulation costs (taxes)
 Uncertainty costs
The firm will engage in the number of transactions where the costs
of doing so in the firm are equal to the transaction costs in the
market or to the costs of organizing by another entrepreneur
A firm (under the authority of an entrepreneur) can
coordinate resources and minimize transaction costs

5. Cost curve of the firm
Firm size is determine by-
 Amount of transactions
 Mistakes
 Failure to utilize factors of
production properly
 Waste of resources
 Supply price of factors of
production
As firm gets larger, there may be decreasing returns to
the entrepreneur i. e. Loss in efficiency

6. Contracting OR Licensing
 For trading their unutilized technological portfolio
(Patents) i.e. intellectual property(IP)
 Linear model of technology is no longer sufficient
 Shareholders expect faster returns and more rapid
innovation cycles
 Challenge of businesses being overtaken by their
competitors
 Create additional potential route to capture greater value in
research & innovation
 Enables a business to build direct partnerships to penetrate
fresh market

7. Handling problems of Opportunism in Vertical
Contracting
 Codification
 Reciprocal continuous know-how - Grant back
 Difficult for the licensee to invent around the patent
 Licensing implies lower control on the diffusion of the
technology
 Building tacit know-how with codified knowledge
protected by patent reduces the problem

8. Patent out-licensing levels by Industry in
Europe (2013)

9. Incentive Compatibility of Licensing Agreement
 Win-win situation for both the licensee as well as licensor
 Monetary benefits for both the parties
 Lack of complementary assets or financial capability were
the main reasons of licensing agreement
 Licensing agreement between SEF’s and downstream
companies was mainly business transaction
 Licensing between existing firms to newer firms was
mainly strategic decision

10. Rent diffusion effect v/s Revenue
 Revenue generated should be more than erosion of profit due to increasing
other firms.
 As new entrants increases in the industry, the rent diffusion effect increases
 The licensing is an optional strategy when condition(i) is satisfied
 Difference between Revenue v/s Rent diffusion is different to SEFs
 SEFs are the process technology firm, whereas Himont was downstream
product technology firm.

11. Investing in technology – Sunk Cost
 A source of revenues
 R&D funding
 General Trend – Licensing of old technology ( non – core
technology)
 Licensing – A convenient strategy
 Revenue Effect v/s Rent dissipation effect
 Licensing the technology in-house:
 Firms has distinctive complementary assests in
production and marketing
 Transaction cost involved in selling or licensing of
technology

12. Strategy of large companies
 40% - 50% licensed from third parties
 Dow Chemical – acquiring new technology, formed
license group
 DuPont – opening up of 25 specialty chemical businesses
 Eastman Chemical – formed license unit to sell intellectual
property

13. Licensing as self-sustaining approach for growth and
value creation

14. Diffused licensing
 Characteristics of knowledge base
 General & abstract -> greater division of labour
 Ease of technology transfer – high degree of
codification -> fewer interactions -> ability to reach
large markets
 Emergence of chemical engineering as academic
discipline
 Self-enforcing mechanism

15. Why did Himont license its cutting edge technology?
 Generating licensing income as a stand-alone business to
accelerate R&D
 Preventing others from competing in
 Building an accelerated global market presence
 Creating partnerships and JV to access new market
 Allowing faster technology development through licensee
feedback

16. Did the design of contract clauses solve some of the
licensor-licensee problems? How?
Yes! the design of contract clauses solve some of the
licensor-licensee problems by –
1. Feedback from licensee also helped to accelerate the
learning curve
2. Identifying the technologies that are considered to be core
3. To execute self-propelling license cycle with steps:
1. Creating Value
2. Monetizing Value
3. Reinvesting