The pharmaceutical industry is traditionally known as a knowledge-intensive industry in which various technologies are combined. It entails astronomical research and development (R&D) costs, and a long-time perspective attributed to the regulatory approval required for the production of new drugs. It is characterized by a technology-push model which depends on a complicated path of R&D breakthroughs with unsettled timing and hard-to-anticipate outcomes [1
]. The extremely technology-driven, risky, costly and long drug development process used to be dominated by large pharmaceutical firms, sometimes referred to as the ‘Blockbuster Model’. However, this traditional vertical model conducted by the large pharmaceutical firms has become increasingly hard to maintain since the 1980s. The large pharmaceutical firms have been faced with the (1) patent expiration of their main blockbuster drugs, and the overall pharmaceutical industry being in the situation of (2) lowering R&D productivity due to a reduction in the number of approved new molecular entities. This indicates that the strategy of sourcing the whole required knowledge and skills to develop a new drug within the firm is becoming hard to execute [2
In order to overcome this situation, the cooperation and partnerships among the various actors have been increasing. In particular, the relationships among small biotech firms, which are research-intensive institutes, and large pharmaceutical firms are getting stronger. Since the advent of the late 1980s, biotech firms have played an important role in providing innovative biomolecules through applied research. Most biotech firms are not able to perform the long development process of new drugs. This is because they lack the required downstream assets such as marketing capabilities, professional networks, and other resources to bring their own technologies to the market [6
]. Thus, when they start their business, they consider exit strategies such as licensing, initial public offering (IPO), and the acquisition by large pharmaceutical firms. Large pharmaceutical firms not only perform in-licensing from biotech firms, they license out their products and technologies as well to supplement their financial resources and reorganize product lines. These industrial characteristics and the changing landscape are the reasons why open innovation strategies are so crucial to the pharmaceutical industry.
Under the open innovation paradigm, it is essential for firms to build up their dynamic capabilities to correspond with the kaleidoscopic environment. Conventionally, in the context of inbound innovation, studies mainly focused on the concept of the absorptive capacity, as suggested by [7
]. However, as firms began to have increasing interest in selling their technologies as a way of outbound innovation, the research on open innovation has moved from mainly considering the inbound process to investigating the outbound process and stressing the need for empirical studies on knowledge capacities [8
Reflecting these demands, numerous studies have been conducted and proved that the various capacities of firms have positive effects on the firms’ performance [8
]. However, with regard to the determinants affecting the out-licensing decision itself, only limited analysis exists. In spite of the growing importance of out-licensing activities, the hurdle for the firms to license out their technology as an outbound innovation strategy is quite steep. The success rate between the decision on out-licensing and the actual conclusion is less than 60% [12
]. This is due to the complexities of these activities, which are mainly attributed to information asymmetry problems.
Under these circumstances, ‘inventive capacity’ and ‘desorptive capacity’ as dynamic capabilities of firms have been identified as main determinants of out-licensing propensity [8
]. Inventive capacity refers to the firms’ capabilities to internally generate new knowledge. This capacity is related to the prestige, noticeability, and visibility of the licensors to the potential licensees. Desorptive capacity is related to the firms’ knowledge exploitation capabilities [8
]. The capacities that firms should build up under the open innovation systems are systematically suggested by Lichtenthaler and Lichtenthaler [10
] in their ‘knowledge management capacities’ framework. This mainstream framework does not include the knowledge retention capability, which is called ‘connective capacity.’ Connective capacity and how it affects the out-licensing decisions as a means of knowledge retention has received less scholarly attention.
This study focuses on connective capacity of the licensors as the determinant which affects desorptive capacity itself as an indicator of the performance of their outbound innovation. The research questions of the study are as follows: (1) Which capacities does a particular firm need to possess in order to actively out-license? (2) Does knowledge retention have an effect on the out-licensing decisions?
reports the negative binomial regression results for the licensors’ desorptive capacities. In order to examine the effect of each explanatory variable in detail, the regression is conducted in three ways; in Model 1, connective capacity is excluded; Model 2 is the result of analysis excluding inventive capacity; and Model 3 is the full model incorporating all variables.
First, in Model 1, FC, RND and FS of the licensors show a positive coefficient value, but only FS is statistically significant at the 1% significance level (0.00001). On the other hand, TB has negative signs but is not statistically significant.
In Model 2, both BC and CN, which represent the connective capacity of the licensors, show positive coefficients (BC: 0.00004, CN: 0.3885) at the 1% significance level. FS is positive as well at the 1% significance level (6.97 × 10−6). RND shows a negative coefficient value but is not statistically significant.
Finally, the results of Model 3 are as follows: the coefficient values of the FC and TD—the inventive capacity of the licensors—are negative, but not statistically significant. On the other hand, BC and CN, which represent connective capacity, show positive coefficients (BC: 0.0008, CN: 0.3859) at the 1% significance level, which is the same as in Model 2. FS is positive as well at the significance level (7.08 × 10−6). RND shows a positive coefficient value but is not statistically significant.
Looking at the results based on the variables, the coefficients of FC and TB—which represent the inventive capacity of the licensors—are showing inconsistent results and are statistically insignificant in both Model 1 and Model 3. This result implies that inventive capacity, with or without the influence of connective capacity, has no substantial effect on the desorptive capacity of licensors. Therefore Hypothesis 1, which stated that inventive capacity positively affects desorptive capacity, is not supported. This contradicts the results of previous studies which found that the inventive capacity of licensors positively affects the licensing propensity [12
Concerning the connective capacities of the licensors, both CN and BC showed consistent results. Both coefficients are positive at the 1% significance level. In other words, the connective capacity of licensors has been proven to have a positive effect on their desorptive capacity. As licensors actively engage in R&D collaboration, they can share the R&D results of the partners, which in turn activate their backward citations and enrich their knowledge base. Consequently, out-licensing deals are conducted more actively [10
Regarding the control variables, coefficients of FS are positive at the 1% significance level. This result follows Kim and Vonortas [27
] and Kani and Motohashi [16
] in that large licensors are more likely to license-out because they have a greater tendency to sell their non-core technologies in order to complement their revenue. This is attributed to the fact that large firms have larger patent portfolios than smaller firms. On the contrary, RND is found to not be statistically significant.
In summary, the results imply that existing licensors should strengthen their connective capacities rather than their inventive capacities to facilitate out-licensing activities. By forming collaborations, the firms could benefit from their partners’ R&D outcomes and utilize these to further strengthen their knowledge base. Consequently, this facilitates active out-licensing. This suggests that different strategies are needed for out-licensing, depending on whether a firm is already conducting out-licensing or not.
6. Discussion and Conclusions
6.1. Theoretical Contribution
The pharmaceutical industry is a high technology industry that requires a combination of in-depth knowledge of various fields and is characterized by high cost, high risk and long-term perspectives due to high regulation. It faces the problem of deteriorating R&D productivity as well [1
]. Under these conditions, the importance of open innovation strategies has been emphasized more than in any other industry, and, under the open innovation system, it is essential for firms to develop several dynamic capabilities to effectively manage their resources both internally and externally. Lichtenthaler and Lichtenthaler [10
] suggested a systematic framework for such dynamic capabilities.
Among the capabilities, the absorptive capacities of firms related to the inbound process and external exploration have been a focus of research since the 1990s. As firms have shifted their focus to outbound innovation, several studies have been conducted on desorptive capacity [13
], which is related to knowledge exploitation. The mainstream of the previous studies are studies on how these dynamic capabilities affect firm performance [8
] and licensing propensities [13
Therefore, the academic implications of this study are as follows: first, it differs from the previous studies, which have focused on the effects of dynamic capabilities on firm performance or licensing propensities. These studies have showed that the more capabilities firms build up, the higher performance they achieve. However, the desorptive capacity itself indicates that the performance of outbound innovation has received less attention as a dependent variable. Therefore, this research can be said to perform inter-capabilities analysis, which differs from the mainstream of dynamic capabilities research.
Second, previous studies dealing with the determinants of out-licensing propensity are limited to inventive capacity and desorptive capacity [13
], which is related to knowledge exploration and exploitation. The perspective of knowledge retention was not considered as a determinant of out-licensing decisions. These days, it is not hard to see the landscape in which biotech firms’ knowledge is externally retained by pharmaceutical firms without immediate knowledge internalization. However, pharmaceutical firms have ensured exclusive access to the partners’ R&D outcome by establishing partnership agreements [8
]. In other words, the determinants of out-licensing have been more systematically organized and complemented in this research.
6.2. Managerial Contribution
This study identified competencies the licensors should build up in the pharmaceutical industry to actively conduct out-licensing deals. The important point here is that it focuses on the firms that have already been out-licensing. Thus, it does not cover the decision of whether or not to out-license, but rather focuses on existing licensors to investigate whether they are further promoting their out-licensing activities. Thus, as the determinants of out-licensing, inventive capacity and connective capacity of the licensors were measured by the characteristics of their knowledge such as patents and R&D-related activities.
The empirical results of this study provide important implications for firms engaged in the pharmaceutical industry. The inventive capacity of licensors are the core competencies for forming their knowledge base and reaching the licensees with signals. Previous studies have shown that this positively affects the out-licensing propensity [13
However, according to the results of this study, inventive capacity does not have a significant effect on the licensors that are already out-licensing. On the contrary, connective capacity has a positive effect on desorptive capacity. Thus, in order to promote out-licensing activities of firms that are already out-licensing, additional efforts should be put into forming alliances or R&D collaborations with other external parties, rather than into internal R&D capacity improvement. In order to stimulate out-licensing activities, it is necessary for licensors to replenish their knowledge base through new innovations. However, there is no meaningful effect through the internal capabilities of the firms, and only the reconstruction of the knowledge base through the influx from inter-firm relationships has confirmed positive effects.
This can be explained in two ways: First, if the licensor is already engaged in out-licensing activities, this indicates that they have established some positioning in association with prestige, noticeability and technology fields related to the abilities to generate new knowledge internally. The next point is that the overall pharmaceutical industry is facing reduced R&D productivity. Increasingly stronger regulations on new drugs and developing treatments for most diseases are making it more difficult to maintain innovation [6
]. Therefore, it is more efficient and time-saving for licensors to build up their knowledge base by sharing R&D outcome through various alliances or R&D collaboration with other partners, and actively citing the other partners’ knowledge. In summary, as the desorptive capacity of licensor drives firms performance [8
], the analysis on the determinants of desorptive capacity itself is meaningful for firms wanting to know how to best actively participate in the outbound process. This will provide licensors with some guidance for sustainability in dynamic open innovation ecosystems.
6.3. Limitations and Future Study
The limitation of this study is that the determinants of out-licensing are confined to the firm-level knowledge management capacities. It has been proven through several previous studies that the effects of industry-level characteristics affect out-licensing as well [16
]. According to these studies, the licensors should consider not only their capabilities, but also the characteristics of the industry when out-licensing. Depending on how many competitors are in the market, the licensor’s out-licensing incentive will vary with two effects; the revenue effect (the degree of profits they earn from out-licensing) and the rent dissipation effect (the extent to which market share is reduced by increasing competitors in the market).
In addition, another limitation of the study is that the interpretation of the analysis result is not rigorous because of the missing classification among the firms. As mentioned earlier, the pharmaceutical industry consists of large pharmaceutical firms and small and medium-sized biotech firms. They have different incentives for out-licensing because they exhibit differences in the holdings of downstream assets. Large pharmaceutical firms tend to license out technologies that are less important to them, because they have a wealth of resources, marketing capabilities, and networking capabilities compared to biotech companies.