Financial constraints in Markets for technology: Licensing as a source of finance

Albeit the phenomenon is currently widespread, the role of licensing in the financing of innovation has been under-investigated by scholars so far. Anecdotal evidence, instead, suggests that in some circumstances licensors is required to further develop the licensed technology which the licensee may finance by paying an upfront fee. Thus, the need for extra finances may affect the decision of the licensor to negotiate and thus actually agree on a specific form of payment. The aim of our paper is to investigate whether financial constrained licensors are more likely to choose an upfront fee-based license and more inclined to credit a portion of the initial fee against future royalties to meet their short-term financing needs. We investigate this issue by combining the Recombinant Capital’s Biotech Alliance (Recap) with Compustat and the USPTO patent database.