Does technology licensing matter for privatization?

• Date: 01 September 2020
• Author: Arijit Mukherjee,Chenhang Zeng,Leonard F. S. Wang
• Published date: 01 September 2020
• DOI: http://doi.org/10.1111/jpet.12431

J Public Econ Theory. 2020;22:1462–1480.wileyonlinelibrary.com/journal/jpet1462

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© 2020 Wiley Periodicals, Inc.

Received: 3 April 2019

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Accepted: 25 January 2020

DOI: 10.1111/jpet.12431

ORIGINAL ARTICLE

Does technology licensing matter for

privatization?

Leonard F. S. Wang

1

|Arijit Mukherjee

2

|Chenhang Zeng

1

1

Wenlan School of Business, Zhongnan

University of Economics and Law, Wuhan,

China

2

Nottingham University Business School,

Nottingham, UK

Correspondence

Chenhang Zeng, Wenlan School of

Business, Zhongnan University of

Economics and Law, 182 Nanhu Avenue,

430073 Wuhan, China.

Email: cz_sdu@163.com

Funding information

Humanity and Social Science Planning

Foundation of the Ministry of Education of

China; Fundamental Research Funds for

the Central Universities, Zhongnan

University of Economics and Law

Abstract

In mixed oligopolies, technology licensing from a

cost‐efficient firm to a cost‐inefficient firm has been

widely observed. This paper examines the relation-

ship between privatization and licensing (by public or

private firms) with the consideration of either a do-

mestic or a foreign private firm. We find that (a) in

the case of a domestic private firm, public licensing

facilitates privatization, but private licensing hinders

privatization; (b) in the case of a foreign private firm,

both public and private licensing facilitate privatiza-

tion. Our results yield important policy implications

on privatization.

1|INTRODUCTION

The world saw a wave of privatization of state‐owned public enterprises in recent decades. It is

commonly believed that privatization is a very important issue for governments in developing and

transitional countries. However, after the financial crisis, privatization or nationalization also became

important in developed countries. On markets where public firms compete against private firms,

mixed oligopoly literature has investigated several important issues, such as partial privatization of

public firms (Matsumura, 1998), strategic privatization under international trade and investment

(Bárcena‐Ruiz & Garzón, 2005;Mukherjee&Suetrong,2009), the complementarity or substitut-

ability of privatization and subsidy policies (Lin & Matsumura, 2018;Tomaru&Wang,2018), and

privatization under an interdependence payoff structure (Matsumura & Okamura, 2015). While

these papers provide several important insights, an important empirical regularity, namely, tech-

nology transfer between the public and private firms affecting production efficiency of the firms and

the intensity of competition in the product market, did not get much attention in the literature.

In mixed oligopolies, technology licensing from a cost‐efficient firm to a cost‐inefficient firm

has been widely observed. For example, in the medicine industry, Australia’s national science

agency CSIRO licensed its new medical polymer technologies to a domestic firm PolyNovo in

2005 (Niu, 2017); in the oil industry, Chinese state‐owned firm, Sinopec, earned RMB 1.48

billion from licensing technology to foreign firms in 2008 (Ye, 2012); in the auto industry, the

German BMW Motor Corporation licensed its engine technology to Chinese state‐owned

Dongfeng Motor Corporation for the production of Fengxing T5 SUV in 2018. Despite the

practical relevance of this phenomenon, technology licensing in mixed oligopoly and particu-

larly its impact on privatization did not get much attention.

1

In this paper, we aim to investigate

the relationship between privatization and licensing (by public or private firms) with the

consideration of either a domestic or a foreign private firm.

In the case of a domestic mixed duopoly, we find that licensing by a public firm (called

public licensing) induces the government to further privatize its public firm so as to reduce the

industry production cost by shifting production toward the private firm. To the best of our

knowledge, we are the first to derive this result. In contrast, we show that the government

prefers the public firm to put more weight on social welfare under licensing by a private firm

(called private licensing). As such, private licensing hinders privatization. However, if the

private firm is a foreign firm, we find that both public and private licensing facilitate privati-

zation. The main reasons lie in the feature of the cost function and the changes in social

welfare. Our results yield important implications on privatization, and enrich the literature on

licensing and privatization.

Our paper is related to the growing literature on licensing in mixed oligopolies. Y. W. Chen,

Yang, Wang, and Wu (2014) propose a mixed oligopoly model with one public firm and two

private firms to examine the optimal licensing scheme by an innovating private firm. Both

licensing to the public firm and the private rival firm are considered. Kim, Lee, and Matsumura

(2018) develop a model with a foreign innovator in a polluting mixed duopoly, where each

polluter may purchase ecotechnology under a fixed‐fee licensing. They analyze the patent

licensing strategy in the presence of emission tax and cost asymmetry between the public and

private firms.

In addition to private licensing, it is also found that many patents are licensed by public and

partially public companies in Europe and China, not only to domestic firms but also to foreign

firms (see Li, 2011). Ye (2012) examines the optimal public licensing in a mixed duopoly with a

foreign private firm and verifies the superiority of fixed‐fee licensing over royalty licensing.

Gelves and Heywood (2016) investigate how should a cost disadvantaged partial privatized firm

license its cost‐reducing innovation to a private firm. The authors take the degree of privati-

zation as given and find out that the choice of license scheme critically depends on the own-

ership structure of the privatized firm. Following this line, Heywood, Xu, and Ye (2019) propose

a model in which a high‐cost public firm licences to a low‐cost foreign private firm.

While the above‐mentioned papers on private and public licensing in mixed markets pro-

vide important insights, they mainly focus on the choice of the licensing contract and ignore the

issue of privatization. In contrast, we show the implications of private and public licensing on

privatization and also show the implications of domestic and foreign private firms.

There are few theoretical papers that combine the issues of technology licensing and pri-

vatization. Cato (2011) investigates how privatization affects the cost‐reducing investment by

the private sector. The author shows that the impact of privatization on the private sector’s cost‐

reducing activity critically depends on the market size. Mukherjee and Sinha (2014) consider

1

The licensing issue between private firms has been well analyzed in the literature, see, for example, X. H. Wang (1998,2002), Niu (2018), and Hsu, Liu, Wang,

and Zeng (2019), but not in a mixed oligopoly market structure.

WANG ET AL.

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