Distribution of intellectual property rights and the development of technology suppliers

The importance of customer relationships as a source of suppliers’ innovative activity and competence accumulation has been widely recognised. The more a relationship involves collaboration and creative, non-standardised customer solutions, the more there is potential for the development of the supplier’s competencies – but also for a conflict of interests pertaining to the intellectual property rights (IPRs) to the output. IPRs provide the right to economically exploit and further develop an intellectual asset. The impact of a contract allocating IPRs, and thereby partly conditioning the ex post utilisation of relationship-related knowledge, has been commonly ignored in business economics literature. The increased knowledge-intensity of products has, however, increased technology firms’ concern with protecting their intellectual assets that often underlies competitive advantage and company value. This paper provides a theoretical analysis of the determinants likely to affect allocation of IPRs in buyer-supplier relationships. It also concerns consequent implications for the development of the suppliers’ competitive advantage and diversification as a means to decrease possible dependence of the main customer. Contracting on asset ownership in vertical relationships inherently involves bargaining power and incentives to make relationship-specific investments. These issues have relevance in knowledge-intensive industries, such as electronics and biotechnology, in which firms feed on cross-boundary knowledge transfers, and in which successful development of small innovative firms often depends on relationships with resource-abundant established firms.