Much of the literature on intellectual property licensing strategy deals with optimal payoff schemes that maximize the present value of a stream of licensing fees within a particular time horizon. Less attention has been paid to the optimality of clauses that add flexibility to licensing contracts, and also to more discrete decisions, such as whether certain intellectual property portfolios should be licensed or kept proprietary altogether. Furthermore, the connection of licensing strategies and the underlying innovation dynamics has not been given sufficient attention. In this study, we argue that licensing strategies executed in the early phases of an innovation's lifecycle should pay sufficient attention to securing flexibility instead of maximizing expected income alone. Failure to observe such a simple rule may have fundamental impacts on the long-term value and longevity of an innovation firm.
We use a comparative case study of Mycogen and Ecogen, within the context of the agrobiotechnology industry, to provide empirical context for our discussion. We conclude that licensing strategies should be explicitly tied to innovation dynamics. The prevailing focus of the licensing contracts on royalty fees and payoff schemes is justified in the later stages of innovation where technical and valuation strategies are drastically reduced. In the early stages of the innovation, attention should be given to flexible licensing contracts and to more discrete decisions.