Title: Coordination mechanisms in the development of complementary technologies

Authors: Lucia Silva Gao, Lihui Lin, Nalin Kulatilaka

Addresses: College of Management, University of Massachusetts, Boston, MA, USA. ' School of Management, Boston University, Boston, MA, USA. ' School of Management, Boston University, Boston, MA, USA

Abstract: It is often the case that the introduction of new products and services requires the development of several distinct complementary technologies. These technologies may be independently developed by different firms. Each firm may possess a technology that has a much greater value when combined with those of the other firms to form a complementary system. The success of such a system hinges to a large extent on the ability of the firms to coordinate their innovation activities. In this paper, we build a simple model to illustrate the incentive coordination issue. We show that independent firms make less effort than an integrated firm. We use case examples to discuss how Mergers and Acquisitions (M&A), equity investments and cross-licensing serve as mechanisms to align incentives. M&A yield optimum effort levels and are often observed. Cross-equity investments tend to encourage greater effort than independent firms. Cross-licensing can be used to alleviate legal concerns when firms develop patentable complementary technologies.

Keywords: complementary technologies; incentive coordination; incentives; technological innovation; mergers and acquisitions; equity investments; cross-licensing; legal issues; patents.

DOI: 10.1504/IJMNE.2008.018679

International Journal of Management and Network Economics, 2008 Vol.1 No.1, pp.44 - 57

Published online: 14 Jun 2008 *

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