Abstract
An electronic product like a smartphone might involve hundreds of thousands of patents. The risks caused by infringement make it necessary for enterprises to consider patent licensing when outsourcing production activities in the electronics industry. This paper studies the outsourcing strategy considering patent licensing in an electronic product supply chain composed of a patent-holding firm, an original equipment manufacturer (OEM) and a contract manufacturer (CM). In addition to outsourcing manufacturing to the CM, OEM also considers outsourcing the patent license obtaining as well. We construct two outsourcing modes, called Turnkey and Consignment. No matter under which outsourcing mode, the patent-holding firm will charge unit royalty and a fixed fee paid in a lump sum. The results show that the OEM tends to choose Consignment without considering fixed fees, while the CM prefers Turnkey. When considering fixed fees, the patent-holding firm could align their preferences by coordinating fixed fees borne by OEM and CM. What’s more, considering the environmental pollution caused by the production of electronic products, both strategies may lead to higher social welfare than the other strategy.
Highlights
Since 2010 the number of lawsuits, counter-suits, and trade complaints based on patents and designs in the electronics industry has increased significantly
Liu et al.: Outsourcing Strategy With Patent Licensing in an Electronic Product Supply Chain the fee paid by original equipment manufacturer (OEM) to the contract manufacturer (CM) includes the patent royalty
This article explores the issue of patent licensing when outsourcing production to competitors, which will extend the literature on outsourcing strategy
Summary
Since 2010 the number of lawsuits, counter-suits, and trade complaints based on patents and designs in the electronics industry has increased significantly. Apple entrusts Foxconn with processing, and the payment includes part of the cost of using Qualcomm’s technology [4] In this case, the patent-holding firm authorizes the patent to the CM and enters into a relevant patent license agreement with CM. In addition to Apple’s royalty included in the payment of processing fees, there are cases in which OEM first applies for a patent license from the patent-holding firm and entrusts the CM to process and produce the products. J. Liu et al.: Outsourcing Strategy With Patent Licensing in an Electronic Product Supply Chain the fee paid by OEM to the CM includes the patent royalty.
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