Are Licensing Markets Local? An Analysis of the Geography of Vertical Licensing Agreements in Bio-Pharmaceuticals

As the value chain of the pharmaceutical industry disaggregates, upstream discovery is increasingly carried out by small research-specialized firms while downstream development, testing and marketing is conducted by global pharmaceutical firms. Licensing plays an important role in this emerging division of labor. Alcacer and his co-authors theorize that, similar to markets for upstream inputs such as scientific knowledge, proximity also may matter for licensing, which they conceptualize as downstream end markets for small biotechnology firms. They examine whether co-location affects the likelihood of vertical licensing transactions between biotechnology firms and global pharmaceutical firms. Discussions with industry executives indicate that large firms search globally for in-licensing opportunities and that licensing transactions should not be sensitive to the geographic locations of the transacting parties. However, an analysis of compounds developed by small biotechnology firms licensed to global pharmaceutical firms suggests that licensing transactions are more likely to occur between firms located in the same geographic area. The results point to the possibility that licensing markets are sensitive to the proximity of the partners, and that despite global search processes by multinationals in the pharmaceutical industry, licensing markets are localized.