Don't Fence Me In: Fragmented Markets for Technology and the Patent Acquisition Strategies of Firms

How do firms avoid being “fenced in” by owners of patented technologies used, perhaps unknowingly, in the design or manufacture of their products? This paper examines the conditions under which firms expand their own portfolios of patents in response to potential hold-up problems in markets for technology. Combining insights from transactions cost theory with recent scholarship on intellectual property and its exchange, I predict firms will patent more aggressively than otherwise expected when markets for technology are highly fragmented (i.e., ownership rights to external technologies are widely distributed); this effect should be more pronounced for firms with large investments in technology-specific assets and under a strong legal appropriability regime. Although these characteristics of firms and their external environments have been highlighted in the theoretical literature, prior research has not explored the extent to which such factors interact to shape the patenting behavior of firms. To empirically test these hypotheses, I develop a citations-based “fragmentation index” and estimate the determinants of patenting for 67 U.S. semiconductor firms between 1980 and 1994. Accumulating exclusionary rights of their own may enable firms to safeguard their investments in new technologies while foregoing some of the costs and delays associated with ex ante contracting.