Technology Licensing Decision of Manufacturers with Financing Needs in the Case of Parallel Imports

Abstract

In the current environment of very frequent international commercial trade, technology licensing and parallel import issues are quite common. This article studies that a manufacturer in developed countries with financing needs has a leading technology that can license this technology to backward manufacturers in developing countries in two ways, either at a fixed fee or under a royalty-capped contract, to obtain a license fee to alleviate its financial constraints. We use knowledge from game theory to build a basic technology licensing model and extend the model to the emergence of parallel imports, analyzed the technology licensing decision of the leading manufacturer and the profit changes of the participating parties when parallel imports occurred, and concluded that regardless of whether parallel imports occurred, the leading manufacturer’s technology licensing can increase its profits. Whether the leading manufacturer is licensed with a fixed fee or a royalty-cap contract depends on the difference between the license fee and the decline in profits caused by market squeeze. Our article provides insights into the technology licensing strategies of both parties when a parallel import situation arises. Also, at the end of the article, we put forward the shortcomings of this paper and the direction of future research.