Technology Commercialization Strategy in a Dynamic Context: Complementary Assets, Hybrid Contracts, and Experiential Learing

This paper analyzes the strategic choices of a technology firm seeking to profit from innovation when the established product firms are better positioned to commercialize that innovation. While the predominant framework frames this as a choice between contracting and integration, this paper shows that in a context where the technology firm innovates repeatedly and has the opportunity to learn from its experience in the commercialization process, it may be optimal for the technology firm to pursue a hybrid between these two: contracting with a firm that possesses the complementary assets but retaining rights to participate in the commercialization process. The analysis is motivated by the experience of biotech firms, which in recent years have increasingly sought to retain the rights to participate in the marketing and sales stages of alliances with pharmaceutical firms (known as “co-promotion”). The paper develops a game-theoretic model of a technology firm choosing its strategy in this context, and uses the model to derive the conditions under which the firms will agree to a co-promotion (rather than a pure licensing) arrangement. It uses the model to explain the pattern of arrangements observed in biotech alliances, using a dataset of 565 alliances signed between U.S. biotech and pharmaceutical firms from 1992-2006. The results show that a firm is significantly more likely to enter a co-promotion arrangement when its technological expertise is focused on the product field of the alliance and when it is in a stronger financial position.