Research Policy 35 (2006) 1347–1361 The incidence of cross-licensing: A theory and new evidence on the firm and contract level determinants Sadao Nagaoka a,∗ , Hyeog Ug Kwon b,1 a Institute of Innovation Research, Hitotsubashi University, 2-1 Naka Kunitachi, Tokyo, Japan b College of Economics, Nihon University, 1-3-2 Misaki, Chiyoda, Tokyo, Japan Received 18 February 2005; received in revised form 8 April 2006; accepted 6 May 2006 Available online 14 August 2006 Abstract This paper examines the firm and contract level determinants of the incidence of cross-licensing among manufacturing firms. It develops a simple stochastic theory explaining such incidence, which implies that cross-licensing, compared with unilateral licensing, is more prevalent between large and symmetric firms under a reasonable set of assumptions. We find strong empirical support to these implications, based on a new dataset of more than 1100 licensing contracts by Japanese manufacturing firms. We also find that the incidence of cross-licensing is higher when the contract covers only patent than when it covers only know-how, consistent with the theory. The licensing probability between two firms depends primarily on the size of a potential licensor, which, according to the theory, is consistent with the fact that a licensor is larger than a licensee on the average. © 2006 Elsevier B.V. All rights reserved. JEL classification: O34; L20 Keywords: Cross-licensing; Licensing contracts; Patent; Know-how 1. Introduction Technology licensing plays a crucial role in innova- tion. It is an important mechanism for knowledge dis- semination, and simultaneously it enhances the ex ante incentive for R&D. 2 It can also affect the division of labor in innovation by allowing an entry of a firm spe- cialized in R&D (Arora et al., 2001). Whether stronger ∗ Corresponding author. Tel.: +81 42 580 8431; fax: +81 42 580 8410. E-mail addresses: nagaoka@iir.hit-u.ac.jp (S. Nagaoka), kwon@eco.nihon-u.ac.jp (H.U. Kwon). 1 Tel.:+81 3 3219 3471; fax: +81 3 3219 3471. 2 Licensing may also be used strategically to lower the incentive of a competitor to invent around the initial innovation (Gallini and Winter, 1985) intellectual property rights (IPRs) promote or harm inno- vation may depend critically on whether they promote licensing or not. 3 Given this importance, licensing has attracted increasing research attention in recent years. However, while there are many theoretical studies of licensing, 4 empirical work, especially with strong the- oretical underpinnings, is still scarce, although there are a few exceptions, such as Anand and Khanna (2000), 3 See Gallini and Scotchmer (2002) and Bessen and Maskin (2002) in the domestic context. See Helpman (1993) and Yang and Maskus (2001) in the international context. 4 See Gallini and Winter (1985), Gallini and Wright (1990), Katz and Shapiro (1985, 1986), Kamien and Tauman (1986), Fershtman and Kamien (1992), Kamien et al. (1992), Eswaran (1993), and Shapiro (2000). 0048-7333/$ – see front matter © 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.respol.2006.05.007