1. ¹Faculty of Business, Brock University, St Catharines, Canada
2. ²Schulich School of Business, York University, Toronto, Canada

Correspondence: PS Aulakh, Pierre Lassonde Chair in International Business, Schulich School of Business, York University, Toronto, ON, Canada M3J 1P3. Tel: +1 416 736 2100, ext. 77941; Fax: +1 416 736 5762; E-mail: paulakh@schulich.yorku.ca

Received 25 December 2006; Revised 6 December 2007; Accepted 23 January 2008; Published online 23 October 2008.

Abstract

Licensing can be considered an initial trial of a foreign market before a firm fully commits to it through other investment modes. The length of trial has great importance, because licensing duration represents part of the licensing agreement. When it is too short, the firm may not acquire the necessary experience and knowledge of the foreign market, but if it is too long, the firm misses optimal expansion timing. Arguing that licensing can be considered as a European-style real option with a fixed holding period, we develop and test a model of the determinants of licensing duration in foreign markets. Empirical results based on a sample of firms in various countries show that uncertainty and threat of competitive pre-emption in the foreign market are related to shorter duration of the technology licensing agreements. We also find that irreversibility of the impending investment moderates the relationships between uncertainty and duration. Specifically, market and technology uncertainties in the foreign market induce shorter contracts under low levels of irreversibility.