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The market for technological intangibles: A

conceptual framework for commercial
transactions

Article in International Journal of Learning and Intellectual Capital · January 2008

DOI: 10.1504/IJLIC.2008.020151

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186 Int. J. Learning and Intellectual Capital, Vol. 5, No. 2, 2008

The market for technological intangibles:

a conceptual framework for commercial transactions

Vittorio Chiesa
Politecnico di Milano
via G. Colombo 40, 20133, Milano, Italy
Fax: +39.02.2399.2720
E-mail: vittorio.chiesa@polimi.it

Raffaella Manzini and Emanuele Pizzurno*

Università Carlo Cattaneo – LIUC
Corso Matteotti 22, 21053 Castellanza, Varese, Italy
Fax: +39.0331.483.447
E-mail: rmanzini@liuc.it
E-mail: epizzurno@liuc.it
*Corresponding author

Abstract: In the last few years, the relevance of the intangible assets of
companies has clearly intensified and the corresponding market, in which
intangibles are exchanged, has grown more and more. Several authors have
deeply analysed each single commercial agreement involving intangible assets
(such as licensing, franchising, etc.), but a complete vision of the phenomena is
lacking, especially with reference to technology and technical know-how,
which have their own peculiar features. The aim of the paper is to make a step
further in this direction, focusing, among the wide variety of intangibles,
mainly on the technological ones (i.e., technology, productive know-how,
patents, software, industrial methods), in contrast to commercial intangibles. In
detail, the paper presents a deep literature analysis to highlight the different
typologies of business transactions through which technology can be bought
and sold, operating a selection in the variety of contracts and agreements used
for intangibles and it discusses the operative and managerial critical issues
in the application of that kind of transactions. Furthermore, a case study is
presented in order to deepen the managerial implications of different alternative
business transactions considered in order to exchange a technical know-how.

Keywords: technology transfer; intangible asset; technology

commercialisation; licensing.

Reference to this paper should be made as follows: Chiesa, V., Manzini, R. and
Pizzurno, E. (2008) ‘The market for technological intangibles: a conceptual
framework for commercial transactions’, Int. J. Learning and Intellectual
Capital, Vol. 5, No. 2, pp.186–207.

Biographical notes: Vittorio Chiesa is the Eni Professor of R&D Strategy

and Organisation at Politecnico di Milano, Italy. He is responsible for the
‘Entrepreneurship Competence Centre’ at the Business School of MIP. His
research interests are in technology and innovation management. He has
written a large number of publications on all the main technology management
international journals and books with international editors.

Copyright © 2008 Inderscience Enterprises Ltd.

 The market for technological intangibles 187

Raffaella Manzini is an Associate Professor at the Università Carlo Cattaneo

– LIUC, Italy. She teaches Economics and Business Organisation at LIUC
and MIP. She also teaches Technology Strategy at LIUC. She obtained
her Masteral degree in Management Engineering at MIP. Her research
interests are in R&D and innovation management, technology strategy,
management and organisation. She has several publications on these topics in
international journals.

Emanuele Pizzurno, PhD, is currently teaching Management Engineering at

Università Carlo Cattaneo – LIUC, Italy where he spends most of his academic
career. He is also responsible for ‘Managing Technical Assets in the Energy
Industry’ programme study of Master MEDEA at Scuola Mattei – Eni
Corporate University, Italy and carries out research and teaching at the
Department of Management Engineering at Politecnico di Milano, Italy. The
prevailing research and teaching topics concern the management of technology
and innovation and the management and organisation of R&D; he has
also studied environmental strategies and management. He is the author of
numerous scientific publications.

This paper is the result of the joint work of the authors. However, Vittorio
Chiesa wrote Section 1, Raffaella Manzini wrote Sections 2 and 5 and
Emanuele Pizzurno wrote Sections 3 and 4. Section 6 has been written jointly.

1 Introduction

In the last few years, the critical importance of intangible assets for enterprises have
clearly intensified. As today’s corporate asset values shift radically from tangible assets
(buildings, inventory, products) to intangible assets (ideas, patents, Intellectual Property
or IP), smart companies are using their intangible assets to boost their stock price and
create shareholder value (Davis, 1998; Kahn, 2002). The shift from tangible to intangible
assets has been dramatic. Twenty years ago, intangible assets totalled just 20% of the
corporate value, with tangible assets accounting for 80%, according to the Brookings
Institution (Blair and Wallman, 2001). Today, these numbers are nearly reversed,
estimating that intangible assets “now account for almost three quarters of US corporate
wealth” (Boulton et al., 2000) or “Intangibles are fast becoming substitutes for physical
assets” (Lev, 2001). The market and the use of these transactions will be probably grow
even more, if what the Vice President of Procter & Gamble said is true: “We have
more technology that we know to do with. We use less than 10% of our own technology
for our own products, so we maximise the value of our portfolio by licensing, selling and
sometimes donating our technologies.”
A definition of intangible assets is that it is a nonphysical or financial resource that
has a claim to a future benefit (Lev, 2001). A critical variable to be considered in the
management of intangible assets is the type of transaction through which such assets can
actually be exchanged. A transaction can be defined as a transfer of intellectual or other
intangible assets to exploit the related advantages. The aim of the paper is to investigate
the transactions of technological intangibles in order to understand if a classification of
business transactions can be put forward and managerial issues related to each specific
business transaction.
188 V. Chiesa, R. Manzini and E. Pizzurno

Box 1 Intangible asset classifications

Several classifications of intangible assets has been proposed, both from academics and practitioners.
Gotro (2002):

Patents Trademarks
Copyrights

Brugger (1989):

Brands Sale networks

Products portfolio Collecting financing ability
Technologies and technical know-how Collecting gains ability
R&D potential Authorisations
Clients portfolio (contracts)

Anson (2002)

Brand intangibles IT and database intangibles Technical intangibles

Trademark registration Operating systems Key patent
Umbrella brand name Mailing lists Packaging technology
Sub-brand name Proprietary software Manufacturing technology
Product names Databases Product shapes
Copyrights Shrink-wrap software Process technologies
Graphics Certifications Technical design
Corporate name and logo Source codes Drawings manuals

Boutellier (2000):

Marketing and customer-related intangible assets Copyright intangible assets

(trademarks, brand names, logos, customer
database, etc.)
Engineering and product-related intangible assets
(industrial design, product patents, technical
know-how, etc.)
Human resources-related intangible assets
(assembled and trained workforce, employment
plans, etc.)
Finances-related intangible assets
(planning and reporting system relationship with
shareholders and with financial community, etc.)
Data processing-related intangible assets
(system software, business operation application,
office automation, educational, etc.)
(exclusive rights and protections on
commercial, intellectual and artistic
works, etc.)
Contract intangible assets
(distribution agreements, licensing and
franchise rights, operating licenses,
employment contracts, etc.)
Location intangible assets
(easement, permits, leases, zoning
waivers and variance, use rights (air,
water, drilling, mining, etc.))
Goodwill intangible assets
(existence of assets that are in place
and ready to use, professional practice,
celebrity or reputation, etc.)

PriceWaterhouseCoopers (Pavri, 1999):

Intangible assets created by business Intangible assets that exist

under legal protection
Assembled and trained workforce, advertising programme, Patent, trademarks, copyrights,
distributor networks, training materials, customer loyalty, industrial design, trade
supplier contracts, management depth, subscriber secrets, know-how,
base, goodwill proprietary technology
 The market for technological intangibles 189

Some boundaries are traced in order to mark off the technology intangibles, in contrast
to the commercial ones. As a matter of fact, a wide variety of assets are ‘intangible’,
as shown in Box 1, where some of the classifications of these assets are briefly
presented. In this paper, the focus is only on the technological intangible assets, such
as patents, technical know-how and software (Chatterji, 1996; Jones et al., 2002; Chiesa
et al., 2007; Chiesa et al., 2008).
From the transactions side, the huge literature on this topic has explored the most
diffused business transactions and its relative features. These features have been analysed
from the managerial and juridical sides. Recent contributions (Chiesa et al., 2004a) have
highlighted that transactions may play a relevant role in determining the output value
during the valuation process of intangible assets, which significance has been largely
demonstrated by a huge amount of contributions on this topic from different points of
view (among them, Smith and Parr, 1994; Reilly and Rabe, 1997; Reilly and Scheweihs,
1999; Pavri, 1999; Boutellier, 2000; Contractor, 2001; Lev, 2001; Mercer Capital, 2001;
Anson, 2002; Park and Park, 2004).
From the managerial side, the actual relevance of the topic is demonstrated by the
interest of several authors who have deeply analysed every single commercial agreement
(licensing, franchising, etc.) (Brooke and Skilbeck, 1994; Harris, 1997; Shereman, 1999;
Anand and Khanna, 2000; Birkland, 2002). Handbooks have been put forward to help
managers face the problem of contracts and agreements (Brooke and Skilbeck, 1994) or
models to manage intrafirm technology transfer activities (Malik, 2002). Furthermore,
there are specific analyses on a single country (Stucki, 1992; Ishii and Fujiono, 1994;
Harris, 1997; Mendi, 2003; Lee and Win, 2004), about a single category of intangible
assets (Reilly and Rabe, 1997) or on a specific industry (Fontes, 2005; Rasmussen
et al., 2006).
From the juridical side, a deep literature is available that aims to draw a normative
picture. Moreover, other authors have deeply discussed each law coming out in either a
national or international context. The European know-how contract was deeply explored
(Zagato, 1996), along with the international trade of technologies, know-how and
industrial design (Foglio, 1992) and the specific features of some countries (Fisher and
Phillips, 1992; Craig et al., 2006). Also, the field of legal protection, available to defend
inventions, was explored in detail (Irish, 1994; Halstead, 1993), where the focus was on
protecting IP rights or their management (Bhaduri and Mathew, 2003).
In our opinion, a complete vision of the phenomena is lacking, especially from the
technological side, despite the importance that is recognised by several authors (Gans and
Stern, 2003; Jain et al., 2003; Laidlaw, 2003; Singh, 2003; Hindle and Yencken, 2004;
Lee and Win, 2004; Kumar and Jain, 2003; McAdam et al., 2005; Rasmussen et al.,
2006) of technology transfer in many different contexts.
The study objective is not to give a complete and exhaustive picture of the
law literature and jurisprudence, but to draw a picture of the more relevant aspects
of these business transactions in order to understand the different typologies of
transactions that are suitable and the relative managerial implications.
190 V. Chiesa, R. Manzini and E. Pizzurno

2 Research questions and methodology

According to the aim of the paper and the state-of-the-art literature, the research
questions can be synthesised in this way:
• Which are the different transactions that are suitable for selling and buying an
intangible technological asset?
• What are the main differences among the typologies of transactions that are suitable
for technological intangible assets?
• Which factors should be analysed in order to identify the most adequate typology for
a specific transaction?
According to these questions, the methodology adopted for the research is as follows.
First of all, according to the state-of-the-art literature described in Section 1,
the conceptual framework of the research has been developed (which is described
in Section 2), which defines the focus and borders of our study. As was pointed out,
the literature on the transactions for intangibles is really wide (particularly from the
juridical side) and, hence, it is necessary to clearly define the specific focus of the
research. Borders have been defined in terms of the types of assets and transactions
considered. This point is critical, since it determines the validity and generalisability of
the research results.
Then, according to the state-of-the-art literature and the borders and focus of the
study, a classification of the different typologies of transactions has been put forward that
can be used to exploit technological intangible assets (Sommer, 2002; Kelley and Rice,
2002). Such a classification distinguishes the transactions that, from a managerial point
of view, show significantly different characteristics and implications. The classification
is mainly theoretical, since it is based on the existing literature and, hence, represents
a conceptual reference. Then, an empirical analysis of the proposed classification was
necessary in order to:
• understand whether the identified differences among the transactions are actually
relevant from a managerial point of view
• identify some other critical differences or implications that the literature was not able
to point into evidence
• analyse the factors that companies actually take into account to choose a form
of transaction.
Given the aim of the empirical part of the research and according to the research
questions described above, the case study (Eisenhardt, 1989; Price, 2003) has been
recognised as a sound methodology. As a matter of fact, the case study is used here with
an explicative intent (Yin, 2003).
In the empirical study, a case has been considered in which a company has to
decide whether to licence its technical know-how or create a Joint Venture (JV) with
the potential buyer. Hence, the specific features and managerial implications of
the alternative possible transactions have been analysed according to the conceptual
framework proposed in this paper.
 The market for technological intangibles 191

The case study gave some more insights to enrich the conceptual framework, improve
its validity and define its potential use and the opportunities for further research.

3 The conceptual context of the study

In order to answer the research questions, some hypotheses about the type of intangible
assets considered and the type of transactions are necessary.

3.1 Hypothesis on the assets

We focus our attention on intangible assets. According to aim of the paper, the specific
borders of our study have to be identified:
• in the wide variety of intangibles, where different classifications have been proposed
in literature; these are quite similar, even with some differences (see Box 1). The
paper focuses just on those which have a technological content (i.e., technology,
productive know-how, Research and Development or R&D, patents, software,
industrial methods) (Utenen, 2003) in contrast to commercial intangibles
• the paper considers just the intangibles with a distinct personality, where business
transactions are possible separately and stand alone from the rest of the firm (as, for
example, in Anson, 2002). This means that it is capable of being divided from the
owner and theoretically sold, transferred or exchanged. The identifiable intangible
assets that are reliably measurable are to be recognised separately from goodwill.
According to these two hypothesis, the assets which we will focus on are
technology-based assets, as proposed by the Financial Accounting Standards Board
(FASB) classification (Boutellier, 2000; Holzmann, 2001):
• computer software and licences, computer programs, information systems,
program formats
• secret formulas and processes, recipes
• technical drawings, technical and procedurals manuals, blueprints
• databases, title plants
• manufacturing processes, procedures, production line
• study and development
• technological know-how.
Explicitly, these intangibles are not included in our study (Holzmann, 2001):
• goodwill, because it is considered as inseparable from the whole business and is
not exchangeable
• customer-based or market-based assets (i.e., lists of customers, customer base,
delivery systems, distribution channels, customer service capabilities, effective
advertising programmes, airport gates and slots, etc.)
192 V. Chiesa, R. Manzini and E. Pizzurno

• contract-based assets (rights, permits, consulting/income/licensing agreements,

contracts, etc.)
• workforce-based assets (trained staff, strong labour relations, key employees,
technical expertise, etc.) (Laidlaw, 2003)
• corporate organisational and financial assets (favourable financial arrangements,
outstanding credit rating, favourable government relations, etc.)
• artistic works; in this non-technological category, we also include the design
(even those that are registred).
What we hypothesise is that at this level, we are not analysing the details of the legal
protection of these assets as:
• patent
• copyright
• registration
or other legal titles. In fact, only in few cases (see par. 4) these affect the commercial
transaction. The main point of view is not ‘how to protect’ IP, but ‘how to exchange’ IP.

3.2 Hypothesis on the transactions

In the same way, from the side of business transactions, we have traced the boundaries.
• The paper focuses on the commercial transactions that involve, in the meantime,
a monetary corresponding amount, or where the assignment of the intangible asset
can be considered as a medium of exchange. This excludes all forms of ‘free of
charge’ transactions.
• We also exclude explicitly, according to exclusion of contract-based assets, the
commercial transactions that are sold on a secondary market (sale of licence
contract, sublicensing, etc.).
• For that same reason, we explicitly exclude all the commercial transactions that,
in any way, include goodwill or a quote of it. Certain intangible assets, for example,
an established workforce, are not separately valued; they are subsumed within
goodwill. For example, there are some examples of companies that use Mergers
and Acquisitions (M&A) to provide the technologies they need (Alcatel–Lucent
Technologies), but the study excludes any goodwill transaction. In fact, even if the
real objective of M&A is the technological asset, this operation will involve the
whole company (plants, employees, equipment, liability). Mergers are a very
expensive and very cumbersome way to buy IP.
After a deep analysis, we have excluded the following forms of commercial agreements:
• Franchising – it is a collaboration method between one or more firms, according
to which the first, called the franchisor, grants to another firm, called the franchisee,
the right to receive and use the commercial, even technological, know-how, the
brand of the franchisor, the exclusive presence in a geographical area, advertising
programmes, etc. (Birkland, 2002). In the franchising agreement, a business format
is licensed ‘lock stock and barrel’ to a licensee that is often selected and trained
 The market for technological intangibles 193

by the licensor. It can be considered, in some way, a kind of licence which almost
always includes the right to use a trademark and sometimes, technological
know-how, but it is not separable from the rest of the business. It can be considered
as the assignment of an ongoing concern, a bundle of trademarks, images and
procedures (Brooke and Skilbeck, 1994; Shereman, 1999).
• Sponsoring – this commercial agreement works as a sort of ‘opposite licence’; in
fact, the licensor actually pays the licensee to use his name or brand in exchange for
the publicity to be derived from its use.
• Merchandising (or character merchandising) – the use of a character (real or
fictional) is permitted, often through a combination of copyrights, trademarks and
even design licences. Issues of quality control loom large here, together with those of
policing low-grade infringements and resisting the ‘dilution’ of the character through
its unauthorised use in unprotected forms.
• Trademark licensing (the pure brand licensing) – a trademark is a symbol, a word or
a combination of these two. It have to be distinctive, a point of identification for a
product or service from a similar one. When the licensee is enabled to utilise the
goodwill or high public opinion derived from the use of the licensor’s marks or
brand, it is a trademark licensing agreement. This species of licence is pitted with
problems, since the bare, unrestricted use of a trademark by a licensee can result in
the trademark being regarded as no longer distinctive of the licensor’s products and
services, with the consequence that it can be invalidated. It has been excluded for its
nontechnological nature.

3.3 The juridical system

During the study, it has been observed that the law in the fields of industrial property and
IP is in line in all industrialised countries, even if each one posseses some peculiarities
(Dannenman et al., 1992; Stucki, 1992; Ishii and Fujiono, 1994; Harris, 1997; Sherwood,
2002; Mendi, 2003; Lee and Win, 2004). In consequence, what it presented is to be
considered according to the main common traits, excluding the local specific features.
The study has been based on the relevant international IP agreements or conventions or
supernational legislation:
• World Intellectual Property Organisation (WIPO) conventions
• World Trade Organisation (WTO) – General Agreement on Tariffs and Trade
• Paris Convention on the Protection of Intellectual Property (1883)
• United Nations (UN) – International Codes for Technology Transfer
• Treaty of Rome on Intellectual Property Rights (1961)
• EC regulations
• Universal Copyright Convention (1952).
The conclusions of the present study are not affected by any national legislation and can
be generalised. This aspect represents also the main limitation since the study could
neglect relevant details.
194 V. Chiesa, R. Manzini and E. Pizzurno

4 The typologies of transactions and the relative managerial implications

This section presents the exploration of each single commercial transaction that involves
technological intangible assets and a deep analysis of the common practices in the
market. In the meantime, a classification of the market transactions, according to the
bounds, is presented. As a starting point, there is the hypothesis that the vendor owns
the property and is free to sell (or licence) it. When IP is transferred from one party to
another, it is called an assignment of rights (Halstead, 1993).
A taxonomy of the licences and other agreements is proposed and then the managerial
implications are described.

4.1 The typologies of transactions

The typologies of transactions can be classified as follows:
1 The transfer of ownership
• the assignment for money consideration
• the contributions to a company
• the JV (with selling agreement)
2 The transfer of the right of use
• transfer of technology
a the licensing of the patent
b know-how licence
• copyright licence
• the JV (with licence agreement).

4.1.1 The transfer of ownership

This category includes all the business transactions in which there is a complete shift
of the ownership title of an asset from a party to another without restrictions (unless
otherwise agreements among buyer and seller).
1 The assignment for money consideration
Any type of IP can be sold (assigned) to new ownership, provided that certain
formalities are completed. After that transaction, the previous owner has lost all
control of it and cannot use, copy or licence the invention (Irish, 1994). When an
intangible asset is assigned, it will almost always be in return for payment of some
kind, in legal terms, ‘a consideration’, so the assignment constitutes a contract. It is
valid if it is signed by the owner. After the transfer, if the IP is registered, the
assignment should be communicated as appropriate.
The following are the most common features of this kind of contract:
• methodology and legal references of the contract
• contract object (technology, know-how, patent, etc.)
 The market for technological intangibles 195

• geographical restrictions
• industrial restrictions
• quantitative restrictions
• operative procedures
• length of the contract
• exclusivity term.
2 The contributions to a company
It depends strictly on national accounting rules and the permitted evaluation
methods. In this case, we assume that the owner considers the intangible asset as the
means that provide the existing company – even a new one – with equity. This case
can be considered as a technology sale paid with shares.
3 The JV (with selling agreement)
Even if, from a juridical point of view, the transaction can be equal to the assignment
for money consideration or the contributions to a company, from a managerial
perspective, the most evident difference is that in this case, the previous owner wants
to control and manage, together with a partner, the intangible asset to obtain profits
in the future.
In detail, a company establishes a formal JV (Chiesa and Manzini, 1998) with
equity involvement and a third company is created. In the JV case, the intangible
asset becomes part of a commercial transaction in these ways:
• the new company buys it from the owner
• the owner assigns the asset as equity to the new company.
In both cases, the owner uses its intangible asset as a means to develop a business
alliance and the new company will be the legal owner of the intangible asset.
The JV, in particular, has its own features; the following could be considered as
the most common characteristics of a JV contract (Foglio, 1992):
• commonly, it happens when the markets are closed to external investment or
are protected
• the collaboration between the two partners implies the common management
of the new company: the owner covers two different tasks (investor and seller
of technology)
• the JV guarantees to the owner direct control over the royalties and proper use of
the technology
• the equity share of the technology owner can be the minority, majority or equal
• on the other side, it implies a major risk – compared to a licence agreement
– related to the equity participation
• the JV agreement can provide for the sale of the licence for the technology
• the JV has it own features that are different from industries and countries.
196 V. Chiesa, R. Manzini and E. Pizzurno

In general, these are the points that a JV contract provides:

• definition
• validity (country of)
• formalisation
• terms of the contract
• assignor duties
• buyer duties
• contract duration
• secrecy (that can be considered the most critical aspect).

4.1.2 The transfer of the right of use

This category includes all the business transactions in which there is a limited shift of the
right of use of an asset that a party grants to another party with several restrictions, unless
there are different agreements (Brooke and Skilbeck, 1994; Ishii and Fujiono, 1994;
Harris, 1997; Shereman, 1999; Anand and Khanna, 2000; Berkman, 2002; Kollmer and
Dowling, 2004).
1 The transfer of technology
The transfer of technology is where products and processes are licensed for use
by licensees who may eventually acquire a technology-producing facility of their
own, becoming the ultimate competitors of the licensor. Problems in this area
include the limitations which the licensor may legitimately impose upon the use of
his inventions, know-how and other proprietary technologies and the issue of who
bears liability when the technology turns out be dangerous or unsuitable (Harris,
1997; Jain et al., 2003). In this wide category, the study found some diffused forms
of agreements (Abbott, 2003).
In general, a definition of a licence is “a permission to practice all or a part
of a proprietary right” (Brooke and Skilbeck, 1994) or, more specifically related
to this study, it can be defined as the “right that the owner of a patent or a brand,
grants to a third part, under the payment of a earning” (Brooke and Skilbeck,
1994). A licence is required for the use of a patent; normally, the use of relevant
know-how accompanies the licence, but if the know-how alone is being sold, a
licence would not be required. It is the protected information that is being licensed
(Berkman, 2002).
In the licence contract, the licensor (Anand and Khanna, 2000):
• preserves the ownership of the IP object of the licence contract
• gives to the licensee the authorisation to use it
• removes the utilisation prohibition coming from the patent, with time and
bounds according to the agreement.
Typically, on the market, the three most diffused types of licences are (Irish, 1994;
Halstead, 1993):
 The market for technological intangibles 197

• exclusive licence – the owner promises not to compete with the licence and not
to grant other licenses in the same fields
• sole licence – it means that the owner is granting only one licence, but is itself
going to compete in the same market
• non-exclusive licence – it means that other licences may well be granted and the
owner may also compete with it.
The licensing in international contracting follows these general keywords
and definitions:
• licensing in – means acquiring the licensing right from a licensor to:
a produce something on your own
b allow sublicensing for your clients.
• licensing out – assignment of a licence to a licensee to:
a take profit from your IP
b allow sublicensing for their clients.
According to the premises, a monetary payment has to be guaranteed from the
licensee to the licensor (the royalties).
Royalties (or licensing fees) are defined as “monetary earnings coming from
immaterial assets (identifiable, with a distinct personality and marketable to a third
part that is available to acknowledge) given to the owner of the intangible good, to
have to right to use it” (Abbott, 2003).
Three are three most diffused royalties methods (Kamien, 1986;
Goldscheider, 1995):
1 lump sum – it is a ‘once and for all’ contribution; a fixed quote that the licensee
have to pay at one time
2 running royalties – in this case, the royalties are calculated as the percentage per
year of the net selling price of the end product (made or sold) or as a percentage
of the sales
3 lump sum plus running royalties – a initial fixed quote plus a percentage
per year.
a Patent licence agreement
The licensor grants to the licensee just the right to perform on the basis of the
patented technology (in one or more – or part of – countries where the patent has
value), without providing any instructions to use it.
Synthetically summarised hereafter are the typical elements that characterise a
patent licence contract:
• licence grant or grant of rights – in this part of the contract, the licence is
defined as exclusive, non-exclusive or sole and if it is allowed just for a plant, a
client or a country (for example, the right to sell the product all over the world
or just in some countries)
198 V. Chiesa, R. Manzini and E. Pizzurno

• price – the licence right, also called licence fees or royalties: the amount, the
way of payment (lump sum or running royalties), timing and eventually, the
price for the licensee’s human resources training
• confidentiality – the obligation to use the information just for the aim agreed
on in the licence, the obligation to allow the employees to know just what they
need to know, the obligation to do everything to protect the information, the
obligation to keep the secret from contractors or suppliers
• title – the right to the information remains with the licensor. The licensee will
acquire the property of the documentation and the right to use it according to
the agreement
• patent infringement and third party claims – the licensor confirms that the
information does not infringe third party rights
• process performance guarantees – in the case of a plant, the licensor guarantees
a minimum level of performance
• liquidated damages – the maximum level of damage that the licensor will pay
for the infringement of the previous point
• liability – the licensee indicates the maximum aggregate liability
• exchange of improvements – the licensor and licensee will exchange
improvements for a given period
• expansion – royalties that the licensee will pay to the licensor in case the
capacity of the plant will improve
• arbitration – all the rules concerning arbitration
• miscellaneous – laws, terms of agreement, termination, default, assignment.
b Know-how licence
The intangible assets, which are in this residual category, are distinguished from
those in other categories because these are not recognised by the existence of any
statutory legislation, although they can be legally protected. The definition of
know-how (according to the directives of EU 556/89–4087/88) is “a whole of
secret technical information, substantial and identified in a appropriate form” that
is typically in making products or operating processes. The definition was given
in order to distinguish between technical know-how and commercial know-how.
The know-how is a confidential information obtained from experience; for this
reason it is not protectable by means of a patent, copyright or registered design, but
nevertheless, as long it remains secret, the information gives the owner an edge
over the competition or, at least, an edge over the new entrants in the same kind of
business. The value of know-how, according to the definition, is not necessarily
based only on secrets: part of its value consists in the lead-time the licensee gains
when it is communicated to him (EU directives: 556/89: know-how licence – 240/96:
transfer of technology). These European directives define ‘know-how licensing
agreements’ as agreements whereby one undertaking, the licensor, agrees to
communicate the know-how (e.g., descriptions of manufacturing processes, recipes,
 The market for technological intangibles 199

formulae, designs or drawings) to another undertaking, the licensee, for exploitation

in the licensed territory. A licence grants the licensee the rights to exploit this
knowledge with the limitations provided in the contract.
The most common contracts of know-how:
• know-how contract – the licensor communicates its own know-how to allow the
licensee to exploit it, according to the text of the agreements. This is typically
observed in three cases:
1 when the patents that protect the technology have expired
2 the technology (for example, a productive process) does not have the
characteristics to be patented
3 the licensor prefers to protect its invention with a secrecy policy
• patent and know-how contract – the licensor allows to the licensee its
technology, in which some elements are protected by a patent and some others
are not, according to the agreement. It is the most common case in the field
of technology.
2 Copyright licence
A copyright protects all original intellectual works; artistic works such as literature,
theatrical works, architectural works or music compositions, scientific papers,
pictures and software are included in this category.
According to the premise on the nature of the asset that is taken into
consideration, the study considers just the technological works protected by
copyright, especially software. The copyright attributes the exclusive rights of
economical exploitation to the owner, which means that the owner has the
(Marchese, 1994):
• right of publication
• right of duplication
• right of reproduction
• right of modification
• right of translation
• right of distribution/commercialisation.
In the software sector, the most diffused copyright licence is the ‘licence to use’.
The parties that participate in this agreement are called licensor and licensee,
respectively, owner and user. In case of licence to use, this allows the licensee to
acquire the complete enjoyment of software but, at the same time, it permits to the
licensor to maintain on the work the rights previously listed.
The licensee can use the software for a limited or unlimited time, according to
the specific rules of the contract agreed with the owner, and has to pay a charge. This
agreement can be exclusive or non-exclusive. As for the licences, in the second case,
the software will be licensed to a large number of clients.
200 V. Chiesa, R. Manzini and E. Pizzurno

The contract of the licence of use is almost written and it outlines also the
functional characteristics of the software in detail and the scopes; identification
number, the hardware minimum configuration and the documentation of the use of
the software itself. In general, the licensee cannot assign the software to a third party,
except in a case wherein the licensor allows this possibility because of a wider
diffusion (sometimes without direct control); the software can guarantee an
economic advantage.
The licensor has the chance to impose to the licensee a very limited utilisation
of the software (in terms of transportability from one Personal Computer (PC) to
another, or the maximum number of installations allowed), but the law guarantees to
the licensee the faculty to reproduce the software for a security copy to prevent
damage to the original one.
Essentially, the licensee acquires the right of utilisation of a software and the
property rights on physical support (as a CD-ROM or floppy disc).
3 The JV (with license agreement)
Even if, from a juridical point of view, the transaction is equal to the transfer of
technology, as pointed out in the previous section, from a managerial perspective, the
most evident difference is that in this case, the owner wants to control and manage
directly – with a partner – the intangible asset to obtain profits in the future.
In detail, a company establishes a formal JV with equity involvement and a
third company is created. In the JV case, the intangible asset becomes part of a
commercial transaction in this way: the new company licenses it from the owner.
In this case, the intangible asset is the means through which business alliances can be
built but, of course, the ownership of the intangible asset will remain with the previous
owner. The JV features are the same as what was presented in Section 4.1.1.

4.2 The managerial implications

At this level, the study considers the emerged variables which differentiate and
characterise different technological business transactions (Figure 1). These have to be
considered during the choice of the right transaction in each context (Table 1). These
implications are analysed here from the point of view of the owner, who has to decide on
the specific form of transaction to exploit a technological intangible asset.
• Ownership – obviously, when a transaction that implies the transfer of ownership is
chosen, the property itself is transferred together with the intangible asset. This is a
critical element that distinguishes between the types of transactions. In the JV case,
the new owner will be a new company that could be controlled, as a shareholder, by
the previous owner of the intangible asset
• Risk – the risk is higher when a direct investment into the equity of a company is
needed. In fact, in this case, the owner takes part of the commercial risks, while in
the opposite case, it is the counterpart (licensee, buyer, etc.) that directly takes
all the risk
• Post-agreement implications – some types of transaction do not imply for a direct
involvement of the owner after the agreement signature. In other words, after the
transaction, the owner is not affected by the management of the asset and the relative
 The market for technological intangibles 201

(economic) results. This is the case, for example, for copyrights. In other cases, such
as licensing or JV contracts, the owner is affected by the efficiency and effectiveness
of the asset exploitation, since he receives royalties (in the case of licensing) or (part
of) the profits that are specifically generated over time by the asset.
As can be seen in Table 1, all organisational forms have some differences, except for
know-how licence and patent licence, which have the same features, but in that case, the
difference is the object of the transaction itself and its IP protection.

Table 1 The differences among the different transactions

Post-agreement
Features of transactions Ownership Risk implications
The transfer of ownership
The assignment for No Low No
money consideration
The contributions to a company No (indirectly) High No
The JV (selling agreement) No (indirectly) High Yes
The transfer of the right of use
Transfer of technology
The licensing of a patent Yes Low Yes
Know-how licence Yes Low Yes
Copyright licence Yes Low No
The JV (licence agreement) Yes High Yes

Figure 1 The managerial implications of transactions (see online version for colours)

Post-agreement
Ownership implications Risk

Transaction

Some features are directly related to the transaction itself (e.g., ownership). Also,
the implications for the owner after the agreement signature are directly related to
the transaction itself. In fact, in the cases that the table has shown as ‘yes’, the owner
chooses a transaction that, in general, implies a kind of continuous relationship with the
counterpart, which means advantages and disadvantages, as illustrated in the following
case study. About the level of risk, it is necessary to specify that, obviously, the global
risk is not related only to the type of transaction.
202 V. Chiesa, R. Manzini and E. Pizzurno

As a matter of fact, other elements, such as the specific nature of the asset, the type of
potential buyer and the sector of activity, influence the risk as well. However, ceteris
paribus, the choice of the type of transaction determines a specific contribution, positive
or negative, to the total risk.

5 The case study

The case study concerns an Italian company operating as a supplier in the automotive
industry, named IC for confidentiality reasons.
IC is one of the leading European suppliers of rubber-based components for the
automotive industry, such as suspension systems, fluid transfer systems, technical rubber
items and car body seals. It has a workforce of about 5000 people, with 14 plants and
sales of about €500 billion (in 2000).
IC is asked by a company operating in Japan in the same sector of activity (named
JC) to sell its know-how in air spring production. JC recognises that such a know-how is
excellent and cannot be developed internally by JC in a short period of time, i.e., within
the right time to face the competition in the field. Hence, JC asks IC to sell its know-how
within a collaboration agreement. This implies for IC that people will be dedicated to the
collaboration and sent to the partner in order to train its workforce and, hence, to actually
transfer the know-how.
Several different hypotheses for the organisation of the agreement have been
considered, but basically, three different transactions have been proposed by JC for
exchanging know-how:
• a know-how licence – the licensing contents concern the air spring design,
development, manufacturing know-how, evaluation, prototyping and training and
have a time horizon of ten years. IC receives an initial fee and a royalty on sales. The
air spring produced with the IC know-how will be sold in several Asian countries
(among others, Japan, China, Indonesia and Thailand)
• a JV with licence agreement – in this case, JC proposes to create a JV production
plant for air springs, located in an Asian country (Thailand, or China or Korea). IC
licenses to the JV company its know-how and then IC and JC may autonomously
purchase the output produced in their respective markets. IC receives an initial fee
and also a royalty on JC’s sales
• a JV with selling agreement – with respect to the JV with licence agreement, the JV
company becomes the owner of the technical know-how.
IC is evaluating the three different proposals. From an economic point of view (the
quantitative data on fees and royalties are not reported for confidentiality reasons), it is
very difficult to point into evidence the relative advantages and disadvantages. The
economic analysis carried out by IC (based on the calculation of the net present value in
the two cases) shows that, through a careful settlement of the fees and royalties, the three
alternatives could be comparable and, hence, from this point of view, indifferent. But IC
is worried about the implications of the second and third alternatives. IC feels that the
collaboration with JC has several risks that are linked to the ‘distance’ from the partner in
terms of culture, values, managerial style and operational tools. On the other hand, the
collaboration may give IC the opportunity to improve its knowledge of the Asian market,
 The market for technological intangibles 203

with the idea that IC activities in Asian countries could be expanded in the future so as to
exploit the great business opportunities of that market. IC feels that no economic analysis
is able to fully capture these risks and opportunities and, hence, that a different set of
considerations should be joined to the economic ones.
First of all, IC considers maintaining the ownership on the know-how absolutely
critical and, hence, the JV with selling agreement is rapidly considered a nonsuitable
transaction. The maintenance of the ownership is perceived as the only way to keep
control over the know-how and its relative use. Furthermore, the ownership, in the view
of IC, could allow IC to remain a necessary partner in the future, when the know-how
will be obsolete and will require updates, developments and renewal.
The other critical problem is related to the risks of the collaboration (mentioned
above) that suggest the choice of a transaction that minimises such risks; from this point
of view, the know-how licence should be preferred to the JV with licence agreement. On
the other side, the know-how licence brings the problem that the knowledge is not
completely protected from uses other than those established in the agreement with JC.
From this point of view, IC considers that the know-how licence is relevant, but will
probably be rapidly obsolete and that in order to maintain a competitive advantage with
respect to the other companies operating in the same field, it will be necessary to
continuously create a knowledge gap through developing and renewing the existing
competencies. Hence, the risk of a lack of control over the use of the know-how is not
particularly critical, since IC think that such a know-how will be rapidly renewed.
As a consequence, the know-how licence is considered at the moment to be the most
adequate type of transaction for this specific case. At present, the agreement is still to
be defined.

6 Conclusions

The study shows that there are different transactions with common features but are
affected – sometimes strongly – by national legislations. A classification has been
proposed in categories that show significantly different features, not from a legal point of
view – it is not in the research field of this study – but from the managerial one, that have
been distinguished in:
• ownership
• the level of risk
• post-agreement implications.
These differences have to be considered when managers choose the kind of transaction in
order to maximise the profits and economic value from their technological intangible
asset portfolio.
At this level, what can be observed is that:
1 a company will maintain ownership:
• when the assignment causes potential problems for further research. It happens,
i.e., in the case of universities, where the assignment of patents is granted just
204 V. Chiesa, R. Manzini and E. Pizzurno

through licence agreements to avoid future problems with further research in the
same field
• when it has the competences to exploit the asset, as in our case study, where IC
had all the knowledge needed to exploit its know-how in air spring production
• when the level of risk, associated with the intangible asset, is considered as
coherent with the company’s profile so the company, as IC did in the case study
presented, does not need to share it with another subject.
2 a company will accept the risk:
• in the presence of a possible adequate level of economic returns, even if these
are associated with a high level of uncertainty and quantification is critical. In
the case study, that aspect will represent significant trouble; in fact, they were
not able to forecast the economic consequences (in terms of both revenues and
costs) of the agreement
3 a company will choose transactions with post-agreement implications:
• when it has the competences to exploit it, as in the case study. In fact, IC has all
the competencies to manage it directly or in a partnership as well
• if it is interested in directly maintaining control over the competencies and the
potential results or further incremental improvements (for example, when these
are fundamental to the company’s strategy). In the proposed case study, IC
wants to develop these competencies further.
Some further steps are necessary to explore more in-depth issues related to:
• timing – we have not yet collected enough information about the time required for
the different transactions and if time could be considered as the fourth important
variable in the choice of the form of transaction
a organisation – a further step in this direction has to be considered as necessary to
understand exactly what it is and if – and eventually how – this can have an
influence on the chosen business transaction
b whether the different features of the transactions have an impact on the appraisal
process of the asset. The case study suggests that a link exists between the type
of transaction and the valuation process, but it does not clarify the nature of
such a link. The economic evaluation probably has to take into account the
transaction features in the risk rate evaluation and future benefits forecasting,
but these conclusions need a deeper study.

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