Cross-border Technology Licensing and Trade Policy

Abstract

We construct a theoretical model in which an outside technology licenser licenses its superior technology to either a home firm or a foreign firm, both of which are engaged in Cournot competition in the home market. We specifically explore the relationship between cross-border technology licensing and home tariffs when the two firms are asymmetric. Licensing benefits consumers but harms both home and foreign firms regardless of which firm becomes the licensee. The tariff rate affects the choice of the licensee and home welfare. In contrast with the existing literature on international technology licensing, the welfare-maximizing home government may choose such a tariff rate that induces the licenser to license the technology to the foreign firm. The optimal tariff rate may become negative in the presence of licensing. Trade liberalization may lead the licenser to switch the licensee.

JEL Classifications: F12, F13, L13, L24