Technology licensing, entry mode, and trade liberalization

This study considers the interactions among technology licensing, entry mode, and trade liberalization in a licensing model of strategic commitment. Prior to the licensing agreement, an insider innovator offers the licensee a contract that may restrict the innovator to the use of generic technology, while allowing the licensee to access state-of-the-art technology. An insider innovator can enter the domestic market through either the export or foreign direct investment (FDI) channels. In this context, we characterize the optimal entry mode and the associated licensing schemes of the foreign firm in the presence of a tariff reduction. We show that a tariff reduction may switch the optimal entry mode of the foreign firm from exporting to FDI and can be detrimental to the domestic welfare of the host country and the profit of both firms.