Mechanisms to appropriate the returns from knowledge assets are typically divided into formal (patents, copyrights, trademarks, etc.) and informal (secrecy, complexity, lead-time, etc.). Formal and informal mechanisms do not exclude each other and are perceived by firms as complements and not substitutes. The equilibrium of formal and informal methods is dependent on various factors, such as the nature of the knowledge concerned (crown-jewel or not, business process or a new type of technology, etc.), the specifics of the market (size, turbulence, competition, etc.), the business model the firm follows, etc.

License agreements

License agreements are legal contracts which grant the licensee a right to lawfully use specific IP or knowledge, owned by the so called licensor in return of financial or other kinds of remuneration. Although license agreements grant certain proprietary rights to the licensee they do not transfer ownership over the intellectual property. Intellectual property licensing agreements may handle the use of trademarks, copyrights, patents, utility models and basically all kinds of IP.

License agreements enable the “trade” of assets between firms and serve as a platform for partnership in the search of mutual benefit. For instance, a license agreement could help a licensor reach a market for which its own production or marketing resources are insufficient. On the other hand, for a licensee the agreement could be essential in the rush to reach a specific market with new products, or when the company is in a desperate need for a superior technology to produce better quality products. Thus, a license agreement can be seen as an instrument for the distribution of risks between the licensor and the licensee.

License agreements are a safe way to control the direction of the outward flow of knowledge of the firm. For example, a licensor can choose an appropriate licensee, which operates in another business segment and therefore is not a competitor, so the licensing agreement could simultaneously benefit the licensor and not threaten his main line of business. Licensing agreements are also useful for controlling partner width (how many number of partners the firm collaborates with) and partner depth (how deep the collaboration is with each partner) in the process of collaboration.

Other contracts

Firms use many formal contractual tools such as joint venture agreements, contractual alliances, joint R&D agreements, etc. in order to step into collaboration in the search of improvement of their innovative performance. The majority of those instruments enable firms to specify expectations before commencing the initiative, to exercise legal control (protection of background IP and allocation of foreground IP rights) and to constantly monitor the progress of the project. Thus, these contracts provide flexibility and make firms more secure when interfering with each other and serve as an encouragement for collaboration.


Patents are the heavy-weight in knowledge appropriation. Aside from keeping the firm’s innovations away from others, they can also serve alternative functions, such as prevention of suits, reputation enhancing, cross-licensing, attracting venture capital, etc. Alongside those functions, patents can serve as basis for cooperation, such as in patent pools or cross-licensing practices. According to Alexy, Criscuolo, and Salter (2009)[1], patents can be beneficial for collaboration when they are perceived as a signal of innovative capabilities rather than as mean for control. In this sense, patents can play a role for firms in drawing attention from (potential) partners. On the other hand, patents ease the transfer and integration of knowledge. Integration, in this sense, is to be understood as the process of identifying and combining complementary knowledge assets[2]. As a formal IP protection mechanism patents help to clarify the technology and the knowledge at play[3], which is hardly the situation, when IP is protected through informal means, such as secrecy.

[1] Alexy O., Criscuolo P., Salter A., Does IP Strategy Have to Cripple Open Innovation?, MIT Sloan Management Review 51(1):71-77, September 2009

[2] Berggren, C., A. Bergek, L. Bengtsson, M. Hobday and J. Söderlund, eds. (2011), Knowledge Integration and Innovation - Critical Challenges Facing International Technology-based Firms, Oxford: Oxford University Press

[3] Fey, C.F. and Birkinshaw, J. (2005), External Sources of Knowledge, Governance Mode, and R&D Performance, Journal of Management, 31, p. 597-621