Cross-border technology licensing with R&D Opportunity and Government Intervention

Technology holders may have strategic incentive to offer licensing contracts that deter (potential) rivals from conducting their own R&D. This study develops a simple model of technology licensing from a foreign firm to a home firm, in which R&D serves as an alternative means for the home firm to enter the market. We first derive the optimal licensing fees with differentiated goods and two-part tariffs. Depending on parameter values, three types of licensing contracts can emerge: (i) by means of a fixed fee alone, (ii) by means of a royalty alone, and (iii) by means of a combination of a fixed fee and a royalty. We then specifically investigate intervention by the home government: withholding taxes on royalties and R&D subsidies. A withholding tax may improve home welfare without imposing any burden on the home firm and consumers. Committing itself to an R&D subsidy, the home government can reduce licensing fees without any cost.