RESEARCH ARTICLE

AN EMPIRICAL ANALYSIS OF INTELLECTUAL

PROPERTY RIGHTS SHARING IN SOFTWARE
DEVELOPMENT OUTSOURCING1
Yuanyuan Chen
Department of Information Systems, National University of Singapore,
Singapore 117417, REPUBLIC OF SINGAPORE {discy@nus.edu.sg}

Anandhi Bharadwaj
Goizueta Business School, Emory University, Atlanta, GA 30322 U.S.A. {abharad@emory.edu}

Khim-Yong Goh
Department of Information Systems, National University of Singapore,
Singapore 117417, REPUBLIC OF SINGAPORE {gohky@comp.nus.edu.sg}

Software development outsourcing (SDO) contracts are plagued with ex post opportunism and underinvestment
problems. Property rights theory (PRT) argues that appropriate property rights allocation between vendors
and clients can reduce opportunism and incentivize relation-specific investments. We conduct an in-depth
content analysis of 171 real SDO contracts and empirically examine how project attributes and contract
parties bargaining power affect the allocation of intellectual property rights (IPR). We find that clients
retained more IPR when software development was modularized whereas they shared more IPR with vendors
in contracts that incorporated greater use of a vendors proprietary software. Greater levels of task complexity
were associated with more IPR sharing with vendors. We also find that the responsiveness of IPR to project
attributes varied across the different types of intellectual assets. For example, vendors were more likely to
obtain redeployment rights of know-how if they were contracted for novel software development projects.
However, clients were less likely to cede ownership of data and confidential information embedded in software
customization projects. We control for a variety of firm and transaction characteristics and the results we
obtain here are robust to concerns of endogeneity bias.

Keywords: Software development, outsourcing, contract design, intellectual property rights allocation,
property rights theory, incomplete contracts

Introduction1 cations, business process designs, technology and data archi-

Software development outsourcing (SDO) is a knowledge-
intensive process where the contracting parties create a bundle
of intellectual assets such as functional requirement specifi-
1
Ravi Bapna was the accepting senior editor for this paper. Yulin Fang
served as the associate editor.
tectural plans, algorithms, and source code (Gefen et al. 2008;
Walden 2005). These intellectual assets are created for the
core purposes of the clients business activities and in
accordance with specific instructions by the client. They
often embody the clients confidential information such as
business practices and pricing analytics. The intellectual
assets generated in the SDO process are generally protected
as intellectual property (IP) (de Laat 2005; Harison 2008).

MIS Quarterly Vol. 41 No. 1, pp. 131-161/March 2017 131

Chen et al./IPR Sharing in Software Development Outsourcing
IP laws grant asset owners a bundle of IP rights (IPR) in-
cluding ownership and usage rights to exploit the intellectual
properties. In SDO, it is generally the case that clients hire
vendor firms under the work-made-for-hire principle, where
the default norm is for clients to retain all of the new IP
created in the project. However in practice, it is striking to
observe that clients are often willing to share or cede some of
the ownership and usage rights to the vendors. For example,
Carson and John (2013) reported that clients share at least
some IPR with vendors when they outsource their research
development and engineering projects. This is also observed
in SDO contracts when clients grant vendors the right to use
or produce derivative software products for future use
(Susarla et al. 2010; Walden 2005). However, in the case of
software contracts, there is no comprehensive understanding
of (1) the intellectual assets generated in SDO and the related
IPR involved and (2) the contingency factors that determine
when vendors are more likely to obtain IPR from clients.
Understanding the first question is essential to securing the
value generated in SDO as the means to create and exploit
such value can vary considerably depending on the strategic
and complementary use of different types of intellectual
assets. We do not know enough about the appropriate ap-
proaches to protect different types of IPR in software and the
ways to exploit created values. Studying the determinants of
the allocation of IPR is a central issue in the negotiation of
SDO contracts. IPR allocation matters because it can help
reduce ex post opportunism and ensure that the contracting
parties are incentivized to invest relation-specific efforts
(Grossman and Hart 1986; Hart and Moore 1990; Milgrom
and Roberts 1992).
The purpose of this paper is to analyze the types of intel-
lectual properties generated in the SDO process and the
determinants of IPR allocation. Although IPR in software
development has been studied in the IS literature, the focus
has centered largely on the relative efficacy of various IP
protection mechanisms such as copyrights and patents to
protect against unauthorized use (Arora 1996; Leiponen 2008;
Simon 1996). The literature on risks in software and IT out-
sourcing has focused on the typical project management risks
dealing with cost, quality, and schedule of the projects, with
the concomitant approaches to better planning, monitoring,
and control (Gefen et al. 2008; Keil et al. 2000; Krishnan et
al. 2000; Tiwana 2008b, 2010; Tiwana and Keil 2009), but
has remained largely silent on IP risks. Despite limited theo-
retical work on allocation of IP rights in SDO (Walden 2005),
the software contract design literature has mainly focused on
compensation mechanisms such as pricing structure and
monetary incentives (Dey et al. 2010; Gopal et al. 2003;
Lichtenthaler and Ernst 2012) but has ignored the incentive
opportunities from IP rights.
132 MIS Quarterly Vol. 41 No. 1/March 2017
The limited empirical research on how IPR is allocated to
reduce ex post opportunism has either focus on a specific type
of IPR (Anand and Khanna 2000; Elfenbein and Lerner 2003;
Susarla 2012) or has treated IPR as a monolithic and
indivisible bundle of rights (Whang 1992). Given that the
responsiveness of contract parties investment efforts to the
allocation of IPR may depend on the value and the degree of
appropriability of individual IPR (Lerner and Merges 1998;
Walden 2005), the allocation of individual IPR or combina-
tions of IPR subsets may fulfill different contractual govern-
ance functions. Therefore, previous research focusing on a
specific dimension or lump sum effects of IPR has not been
able to differentiate their value and effects clearly and has led
to some ambiguous results (Adegbesan and Higgins 2011).
The only prior studies that have analyzed IPR framework and
allocations in contracts are Lerner and Merges (1998),
Adegbesan and Higgins (2011) and Carson and John (2013),
but these studies have not examined SDO contracts. The first
two papers examined IPR allocation in a biotechnology devel-
opment alliance and focused on the impacts of biotechnology
companies bargaining power (measured as the firms finan-
cial status) on the allocation of patent ownership. Carson and
John studied the role of IPR allocation as a dependence-
balancing mechanism to change ex post bargaining power of
contract parties in R&D engineering outsourcing. Their
findings may not be fully generalizable to the SDO context
for the following two reasons. First, the primary exchange
hazard in software development outsourcing not only arises
from contract parties bargaining power but also asset-
specificity and uncertainty in software development projects.
Software development often intertwines with other operation
and production activities within the client company (Gefen et
al. 2008; Tiwana 2008a, 2008b). The linkage between differ-
ent functional activities and the interaction between client and
vendors make the software development process complicated
and difficult for parties to foresee and articulate contingencies
in contracts, thereby increasing the hazard of ex post oppor-
tunism such as hold-up. Second, the contract partys response
to the incentive opportunity of IPR varies across industries
and sectors. In industries where lead time or secrecy is
crucial, such as the case in the software industry, the incentive
effect of property rights allocation could be different from that
in biotechnology and engineering R&D contracts. In addi-
tion, the above three studies all focus on the allocation of
patent ownership. Patent rights are not so prominent in SDO
contracts because software can be protected not only under
patent law but also under copyright and trade secret law. The
value and the appropriability of copyright or trade secret are
quite different from patent ownership given that these IPR are
governed by different rules. Against this backdrop and to the
best of our knowledge, our study represents the first attempt

at categorizing different types of IPR that are specified in
SDO contracts and the determinants of these IPR allocations
using actual contracts signed between vendors and clients.
We begin by examining what IPR are generated in the SDO
process. We refer to law textbooks (Bainbridge 2007) and the
literature in economics (Milgrom and Roberts 1992) and
software engineering (Kurbel 2008; Larman 2004; Pressman
2005) to identify key intellectual assets generated in the SDO
process. We then conduct a comprehensive literature review
of research in IPR to identify different types of ownership and
usage rights that have been examined in the prior literature.
Combining these streams of literature, we derive eight types
of IPR that are critical for SDO contracts. Next, we build a
coding scheme to analyze the content in contract provisions
in terms of how these IP rights were distributed between
contract parties. Drawing on prior theoretical and empirical
work on property rights and transaction cost economics, we
then develop specific hypotheses to show how the relative
vulnerability of the contracting parties to ex post opportunism
drives the need for IPR sharing in SDO contracts. The con-
tent analysis data coded from 171 actual SDO contracts are
used to test the hypotheses.
This study makes three significant contributions to the litera-
ture on SDO and contract design. First, we conduct a com-
prehensive analysis of IPR in SDO and develop a framework
that specifies ownership rights of five valuable intellectual
assets (namely, preparatory materials, computer programs,
databases, derivatives, and other works) and the usage rights
of these assets. This allows us to examine the value and
characteristics of different types of intellectual assets and how
the property rights of these assets are negotiated and allocated
independently or as a bundle. Second, our research con-
tributes to the literature on contract design by empirically
examining how IPR allocations serve as a governance
mechanism. SDO contracts are unique because software
development requires relation-specific investments from
vendors and the outputs are mostly customer-specific. We
develop specific hypotheses that link the antecedent factors
based on the indispensability of the contracting parties and the
degree of uncertainty in the contracting context to the
propensity of the clients to share or cede specific IPR. Our
analysis and findings enable us to advance the literatures in
both incomplete contract design and software outsourcing risk
management while providing strategic implications for soft-
ware outsourcing risk management. Finally, we develop a
coding scheme that can be used to codify contract clauses in
other IT service or technology development outsourcing
contracts. Contract design research is restricted by the avail-
ability of contracting data. Most prior studies are either based
on analytical modeling or survey data. As Carson and John
suggest in their paper,
Chen et al./IPR Sharing in Software Development Outsourcing
IPR might be better measured by observing explicit
contractual clauses rather than by questionnaire
scales. This approach might also allow better empi-
rical (and theoretical) discrimination between the
various aspects of IPR and their functioning
(p.1082).
Subsequent related research can use our coding scheme and
content analysis methods to collect and analyze data from
explicit contractual clauses. Collectively, these contributions
extend and deepen our understanding of the research on IPR
allocation in SDO contracts in a novel and distinctive way.
The remainder of the paper is organized as follows. The
following section discusses prior work on software develop-
ment and IPR allocation; we then move on to develop our
hypotheses on the determinants of IPR sharing. Next, we
describe our data, data analysis methods, and variables, which
are followed by the results, discussion, and conclusion.
Software Development and
Intellectual Property Rights
Intellectual Assets Involved in Software
Development Processes
Different intellectual assets are created in the different
software development stages. A typical software develop-
ment process comprises several generic phases: requirements
gathering and analysis, design, construction, testing, debug-
ging, and deployment (Kurbel 2008; Larman 2004; Pressman
2005). Figure 1 depicts the stages of software development
and the types of intellectual assets generated in each stage.
Software development often starts with requirements
gathering and analysis which identify a programs functions
and business investment requirements. The developer will
then design software internal structures such as subroutines,
flow charts, task divisions of modules, and definition of data-
base structure. The requirement and the design stages often
require the most up-front time and investment in creating
preparatory materials. Once the program design is complete,
the developer starts transposing the programs structural blue-
print into the source code. The construction stage often
requires the developer to be creative in conveying the blue-
print into source code. The source code is subsequently
translated or compiled into machine-readable object code.
When the coding is completed, the developer will use the
clients business data to test the program in order to find and
correct any logical and syntactical errors. The testing and
debugging process generates multiple testing plans and
reports, as well as release documentation. After the success-
MIS Quarterly Vol. 41 No. 1/March 2017 133
Chen et al./IPR Sharing in Software Development Outsourcing
Figure 1. Decision Process and Intellectual Property Creation in SDO Project Time Line (adapted from
Gefen et al. 2008; Kurbel 2008)
ful completion of testing and debugging, the program is
deployed. The developer is expected to deliver the computer
program which consists of the source code, object code,
compilation of the programs, and final product documen-
tation.
Conventional IP law suggests that the intellectual assets
generated in the SDO process can be classified into five types
of properties: preparatory materials, databases, derivatives,
other works, and software programs (Bainbridge 2007; Kep-
linger et al. 1984). The classification of these five types of
works is based, first, on their roles in the inputoutput
sequence of software development and, second, on the value
of each type of intellectual assets which is different due to
their embedded knowledge, efforts spent, criticality, and
appropriability level. Preparatory materials refer to the
inputs for software development, including requirement
specifications, algorithms, input/output formats, reports, and
protocols, whereas derivative works are the works based on
one or more preexisting software program in which a work
may be transformed, adapted, extended or modified (Bain-
bridge 2007) to facilitate development of the final product.
For example, translating an English version of a work to a
Japanese version is counted as making a derivative of the
work. The derivative is also a protected intellectual asset.
Databases comprise clients business data for software
testing, database structure, data contents, and database
displays, etc. Other works such as logos and images are often
produced in software development processes. Source code,
object code, compilation of programs, screen display, and
alpha and beta release documentation are in the software
program category which is the final output of the SDO
process.
134 MIS Quarterly Vol. 41 No. 1/March 2017
Types of IP Rights in SDO
The input and output works created in the SDO process are
subject to the protection of IP rights which are the exclusive
rights granted by law over the use of creations of the minds
for a certain period of time.2 IP owners have exclusive
control over a collection of individual rights inherent within
the property (Klein and Robinson 2011), including control
over the use of a property as well as its returns (Milgrom and
Roberts 1992), the right to grant others use of the property, as
well as the right to exclude anyone else from using the
property without consent (Bainbridge 2007). Furthermore, IP
owners are deemed to have the control of residual rights that
are not explicitly specified in contracts (Grossman and Hart
1986; Hart 1988; Hart and Moore 1990; Milgrom and Roberts
1992). For instance, under the IP laws of most countries, the
client is the default property owner of the work-in-progress
software based on the work-made-for-hire principle. Property
owners can keep the entire ownership for themselves or
transfer it wholly to another party (sole ownership). Alter-
natively, they can share the IP ownership (joint ownership) or
selectively grant IP usage rights to others (Bainbridge 2007;
Carson and John 2013).3 A few IS studies have examined
IPR in IT contracts. Elfenbein and Lerner (2003) studied
2
http://www.wto.org/english/tratop_e/trips_e/intel1_e.htm.
3
The differences between joint ownership and sole ownership are mainly
about restrictions of exploitation rights. Generally, a party of joint ownership
shall get consent from the other co-owner in order to pledge, assign, sell or
otherwise dispose of its interest in the asset to third parties. The right to
license an IP to third parties is also restricted for joint ownership unless there
is a written agreement that specifies distribution of license costs and income
between the co-owners (Bainbridge 2007; Keplinger et al. 1984).

ownership of servers, customer data, and URL in e-commerce
website development contracts. Leiponen (2008) examined
ownership of service outputs such as design, process plan, and
technology in consulting service agreements.
Usage rights are economic rights consisting of reproduction
and distribution of intellectual property (Bainbridge 2007). IP
owners can authorize others to use, reproduce, or distribute a
part or the entirety of an intellectual asset and share the
proceeds from the IP usage. The usage rights can be granted
in a limited way, for a limited time, and in a limited geo-
graphical scope or purpose of use. Prior IS research has
examined several types of usage right in IT contracts. For
example, Anand and Khanna (2000) studied the license to use
in licensing agreements and Susarla (2012) investigated the
redeployment right of know-how and intellectual assets in IT
outsourcing contracts. In the Carson and John (2013) study,
distribution right was included as an important usage right for
R&D outsourcing relationships. These usage rights are also
valuable for software developers since they can use these
intellectual assets and know-how for other clients or use them
to further develop their proprietary technologies.
Prior contracting studies (in IS and non-IS) often consider IPR
as a subset of control rights to govern contractual
relationships (Elfenbein and Lerner 2003; Lerner and Merges
1998). As summarized in Table 1, in addition to IPR,
previous research has also examined the right to terminate the
contract at will (Lerner and Malmendier 2010; Ryall and
Sampson 2009; Susarla 2012), source code escrow (Susarla
2012), non-compete clauses restricting vendors from com-
peting with clients ex post (Leiponen 2008; Mayer and
Salomon 2006), and business restrictions on clients or
vendors (Elfenbein and Lerner 2003; Leiponen 2008). These
control rights are distinct from IPR since control rights are
allocated for control over the development and relationship
management processes whereas property rights are granted for
the outputs of software development (Lerner and Merges
1998). Empirical research also suggests that the allocation of
IPR and control rights respond to different contractual risks
and criteria (Elfenbein and Lerner 2003). As our paper
focuses on IPR as a form of incentive to ensure the commit-
ment to tasks, studying other forms of control rights are
outside the scope of this research.4
The value of the intellectual properties may differ across firms
and contracting contexts in which knowledge, innovation, and
4
We also examined the distributions of these control rights for SDO contracts
in our data sample. Less than 10% of SDO contracts in the sample specified
any of these control rights, indicating that the control rights are not
necessarily important in SDO contexts. In the interest of results generaliza-
bility, we did not include these control rights in our empirical analysis.
Chen et al./IPR Sharing in Software Development Outsourcing
appropriability play a key role (Arora and Merges 2004;
Teece 1986). Individual IPR may be granted and shared
depending on the transactional environment and context
(Carson and John 2013). Hence, it is necessary to understand
the IPR system holistically. Our study focuses on the
ownership of five types of intellectual assets and three usage
rights that are economically important in SDO relationships
and that have been examined in prior literature, namely
(1) Right to use the developed software and source code for
a specific purpose after the contract ends, but not modify,
reproduce, or sell the software. This right does not allow
the party to use the developed software, to sell, or to dis-
tribute the software program to the public.
(2) Right to redeploy the residual knowledge asset such as
information relating to ideas, concepts and techniques
which are gained in the SDO process into projects for
other parties. Different from the right to use which
grants the right to use the output of the SDO project, the
redeployment right allows the rights holder to use the
know-how and information gained in the SDO process,
and the residual intellectual assets that may not have
been clearly specified in SDO contracts.
(3) Right to sell the developed software to third parties in
certain geographical regions and industries.
Theory and Hypotheses
Intellectual Property Rights Allocation
SDO contracts are inevitably incomplete because contracting
parties are usually unable to exactly prescribe the system
requirements, architecture, prototype designs, and deliver-
ables ex ante (Boehm 1989; Zmud 1980). Such contract
incompleteness is exacerbated by unobservability and unveri-
fiability of vendors actions and output quality in software
development projects (Boehm 1989; Dey et al. 2010; Mayer
and Salomon 2006). Given each partys fear of hold-up at the
renegotiation stage, SDO contracts are often plagued with
severe underinvestments (Klein et al. 1978; Susarla 2012).
The prior literature on contract design for software and IT
outsourcing has drawn heavily on incomplete contracting
based on transaction cost economics (TCE) and the property
rights theory (PRT). These theories assume that due to
bounded rationality, contract parties cannot foresee all
possible future states of the world, thereby failing to specify
a complete contract at the time of signing the contract
(Grossman and Hart 1986; Hart 1988; Hart and Moore 1990;
Williamson 1979, 1985). Contract parties who are strategic
and self-interest seeking will behave opportunistically to
MIS Quarterly Vol. 41 No. 1/March 2017 135
Chen et al./IPR Sharing in Software Development Outsourcing

Table 1. Types of Property Rights and Other Rights Studied in Prior Literature
Right Definition Related Studies
Ownership
Core technology Ownership of copyright, patent, or trade mark of core Lerner and Malmendier (2010)
technology in the development Lerner and Merger (1998)
Assets Ownership of servers, customer data, and URL Carson and John (2013)
Elfenbein and Lerner (2003)
Lerner and Malmendier (2010)
Service output Ownership of service outputs (e.g., design, process plan Leiponen (2008)
and technology)
IP Usage Rights
Right to use Right to use developed technology and embedded Adegbesan and Higgins (2011)
technologies on expiration Anand and Khanna (2000)
Carson and John (2013)
Redeployment right Redeployment right of know-how and residual information Susarla (2012)
Right to sell Right to manufacture and sell final product Adegbesan and Higgins (2011)
Carson and John (2013)
Control Rights
Right to terminate Right to terminate the contract at convenience Lerner and Malmendier (2010)
contract Ryall and Sampson (2006)
Susarla (2012)
Source code escrow Vendors shall deposit a copy of source code to the escrow Susarla (2012)
agent
Non-compete Restricting vendors from competing with clients after the Leiponen (2008)
restriction end of contracts Mayer and Soloman (2006)
Business restriction on Exclusivity restricting client to outsource development Leiponen (2008)
clients projects to other vendors during the contract period
Business restriction on Restricting service firms/vendors from providing services to Elfenbein and Lerner (2003)
vendors clients competitors Leiponen (2008)
Financial right Vendors have right to receive royalty payments from client Carson and John (2013)
Kaplan and Strmberg (2004)

further their own interests to the detriment of the counterparty
when a non-contracted occasion occurs (Williamson 1985).
The contract party that invests more relation-specific assets in
the production process is therefore likely to encounter oppor-
tunistic behaviors from the other party (i.e., hold-up). The
investing party, anticipating this ex post hazard of oppor-
tunism, will therefore refrain from investments in relation-
specific assets, leading to less optimal contracting perfor-
mance. To counter the opportunism and under-investment
problems, the PRT literature proposes that assigning property
rights to the investing parties can induce incentives to invest
critical resources in the relationship (Grossman and Hart
1986; Hart 1988; Hart and Moore 1990). Property rights
owners have ownership of the intellectual assets and also the
control rights to determine how the assets are to be used in
circumstances not specified by contracts or laws (i.e., residual
control rights) (Grossman and Hart 1986; Milgrom and
Roberts 1992). Brynjolfsson (1994) extended the PRT
approach to the study of information assets and examined the
conditions under which ownership of information assets and
complementary physical assets should be transferred or
owned by the party investing in non-contractible assets. The
IT outsourcing literature has used the PRT approach to
address the primary concerns of underinvestment and hold-up
(Walden 2005). The literature has examined the monetary
aspect of contractual governance (i.e., the pricing structure)
(Banerjee and Duflo 2000), and the optimal allocation of ex
post contractual planning and decision making (Susarla 2012;
Susarla et al. 2010).
PRT posits that when both contract parties expend relation-
specific investments, property rights of both relation-specific
assets invested in the production process and the output assets
must be assigned to the party whose relation-specific invest-
ment has relatively higher marginal effects on contract
performance (Grossman and Hart 1986; Hart and Moore

136 MIS Quarterly Vol. 41 No. 1/March 2017


1990). Property rights to development output and inter-
mediate assets in SDO are prescribed to clients because they
provide the investment needed to fund the development
efforts. However, developers effort and investment on pro-
jects are critical and oftentimes indispensable for the success
of the software development project. This is particularly true
when the clients source for a vendors specific expertise or
for the vendors proprietary technologies. To reduce hold-up
opportunism and overcome underinvestment problems, the
PRT literature proposes that clients should cede some IPR to
vendors to induce behavior that optimizes project returns
(Carson and John 2013; Leiponen 2008; Susarla 2012;
Walden 2005). Since software development creates a bundle
of intellectual properties, clients can choose to share the
whole or a part of the bundle of properties with vendors (i.e.,
ownership sharing) or retain property ownership for them-
selves while granting individual usage right to vendors (i.e.,
usage right sharing) (Arora 1996; Arora and Merges 2004;
Walden 2005). In this study, we refer to these types of IPR
ownership and usage distribution choices collectively as IPR
sharing.
Deciding the extent of IPR sharing is crucial in contract
design literature. Prior literature on contract design combines
transaction cost theory with the PRT approach and identifies
factors that influence the degree of opportunism and thereby
increase the pressure for IPR sharing. Ex post opportunism is
exacerbated by the degree of uncertainty in the contract
(Williamson 1985), the extent of asset specificity in the
relationship (Hart 1988; Williamson 1979), and the degree of
appropriability of IPR (Oxley 1997; Teece 1986). Uncer-
tainty is defined as a lack of knowledge of future contin-
gencies (Arrow 1974). A high level of environmental and
task uncertainty as well as the contract parties behavioral
uncertainties can make it impossible to prescribe contin-
gencies that may occur in the future, thereby increasing the
hazard of opportunism. Asset specificity refers to the degree
to which an asset can be redeployed to alternative uses and by
alternative users without sacrifice of productive value
(Williamson 1989, p. 142). Relationship-specific investments
have low values outside of the contractual relationship. When
a transaction requires specific investments in the production
process, an ex post quasi-rent is generated amounting to the
differences in values between the intended use of the specific
investment and the next best use of it. The firm that does not
invest the specific assets may request a larger share of the
quasi-rent from the investing party that has expended the
specific investments by threatening termination of the rela-
tionship (Klein et al. 1978). Anticipating this hold-up threat,
the investing party would bargain for a large share of quasi-
rents in ex ante contract negotiations to secure their stake.
Appropriability concerns also affect the extent of contractual
safeguards in place, especially when parties have proprietary
Chen et al./IPR Sharing in Software Development Outsourcing
assets at stake that could be appropriated by the contract
partner for other uses in the relationship. The greater the
magnitude of such concerns, the greater the extent to which
the parties will retain IPR to protect the assets involved
(Oxley 1997; Teece 1986).
Although contracting hazards play a key role in IPR
allocation, there are additional factors that can influence IPR
distribution between contract parties. Aghion and Tirole
(1994) extend the PRT approach to study IPR allocation in a
situation of resource restriction. They suggest that resource
indispensibility and relative bargaining power, in addition to
opportunism and underinvestment, also play a role in the
allocation of property rights. Resourse indispensibility refers
to the degree of substituability of rival products. In the
absense of alternative resources, contract parties who control
the indispensible assets will have relatively stronger bar-
gaining power. Therefore, it is reasonable to assume that they
will use their dominant positions to negotiate for as many
rights as possible for themselves.
The TCE and PRT theoretical propositions are supported by
prior empirical literature which finds that allocation of pro-
perty rights are subject to the contract partys indispensability
and bargaining power (Carson and John 2013; Elfenbein and
Lerner 2003, 2012; Kaplan and Strmberg 2004; Leiponen
2008; Lerner and Malmendier 2010; Lerner and Merges 1998;
Ryall and Sampson 2009). For example, Elfenbein and
Lerner (2003, 2012) found that the ownership of three impor-
tant assetsservers, URL, and customer datawas assigned
to alliance partners whose contributions to Internet portal
development were relatively more indispensable. Kaplan and
Strmberg (2004) and Lerner and Merges (1998) tested the
bargaining power due to financial strength and found that
contract parties with more financial resources retained more
residual control rights. Leiponen (2008) studied another
source of indespensibility and bargaining powerservice
providers innovation capabilitiesand found that more
innovative service providers retained more control over
intellectual assets. Walden (2005) formulated five types of
intellectual property ownership structures and posited that
three factorsusefulness of software, resale value of the
software, and relative importance of specific investments
affect the design of ownership structures in SDO contracts,
while Carson and John (2013) found that vendors had more
IPR when there were greater environmental uncertainty and
asset specificity in the projects.
In summary, a comprehensive review of the theoretical and
empirical literature based on TCE and PRT shows that
contract parties asset indispensability and bargaining power,
along with the degree of uncertainty inherent in incomplete
contracting, drive the need for IPR sharing as a useful govern-
MIS Quarterly Vol. 41 No. 1/March 2017 137
Chen et al./IPR Sharing in Software Development Outsourcing
ance mechanism (beyond simply relying on the pricing mech-
anism to align parties interests). Dependence on a vendors
proprietary technology and the degree of modularity in
software design have served as useful mechanisms to examine
the level of asset indispensability and contract parties
bargaining power respectively (Baldwin and Henkel 2014;
Bush et al. 2010; Dourish and Edwards 2000; Pressman
2005). To get to the question of project-related uncertainty,
we turn to the software engineering literature which has care-
fully examined software project characteristics and associated
risks (Boehm 1989; Cataldo and Herbsleb 2013; Na et al.
2004; Nidumolu 1995; Pressman 2005). Specifically, the
degree of project complexity has been widely identified as a
key amplifier of project uncertainty and thereby tends to drive
up project-specific risks (Gopal and Koka 2010; Gopal and
Sivaramakrishnan 2008; Mooi and Ghosh 2010; Susarla et al.
2010; Tiwana 2010). Additionally, when clients require
software customization and newness in the project, vendors
have to make relationship-specific commitments and this in
turn induces hold-up and misappropriation opportunities,
consequently driving up the overall risks associated with the
project (Haines 2009; Hasan and Lokan 2013; Kurbel 2008;
Wang 2002). Taken together, the above five factors deter-
mine the degree of relative vulnerability of the contracting
parties to ex post opportunism and therefore we argue that
these factors are explicitly considered by the client in deter-
mining the IPR sharing and allocation mechanisms. For
expositional clarity, we take the clients perspective and
develop hypotheses relating these five factors to IPR sharing
between clients and vendors.
Project Newness
In SDO, vendors are commonly hired to develop new soft-
ware systems for the client, which could mean either devel-
oping a program from scratch or adding new functionalities to
an existing program. New software projects often pose addi-
tional challenges to vendors, stemming from a lack of under-
standing about the project requirements as well as the needs
of potential end users (Humphrey 1995; Nidumolu 1995;
Pressman 2005). Hence, new software development projects
demand a high level of relation-specific investments from
vendors. Requirements analysis is the most important stage
in the software development process, especially for applica-
tions that are novel and involve unstructured tasks (Zmud
1980). Vendors have to develop a deep understanding of the
clients business processes, and spend hours interviewing end
users to elicit their requirements for information display.
Vendors are also required to invest upfront efforts in trans-
lating these requirements into detailed design specifications
before the coding phase can begin (Kurbel 2008). These are
among the most time-consuming and challenging outsourcing
138 MIS Quarterly Vol. 41 No. 1/March 2017
projects with regard to communication requirements between
the clients and the vendors employees (Liao et al. 2010).
However, for modification of existing systems, it is relatively
easier for the clients to perform the requirements analysis and
develop precise systems specifications. In such cases, the
vendors investment on relation-specific development is
relatively smaller compared to that of totally new systems.
Once vendors begin the requirements analysis phase, their
relation-specific assets are subject to the risk of hold-up by
clients (Susarla et al. 2010). Clients may try to renegotiate to
derive more value from the project or they may even renege
on the contracts if they discover the development project to be
infeasible. For instance, the client can abandon the project
completely or take the requirements specifications to contract
with a new partner. Anticipating this, vendors are likely to be
reluctant to invest upfront efforts. Based on PRT (Grossman
and Hart 1986; Hart 1988; Hart and Moore 1990), such hold-
up problems can be mitigated by allocating IPR to the vendor
so as to generate the best possible incentives for motivating
the vendor to expend maximum efforts in developing the new
software system. Therefore, from an incentive perspective,
we hypothesize that
H1: Vendors that are contracted for new software
development projects are more likely to be assigned
individual IPR or gain more IPR in SDO contracts.
Task Complexity
A complex task consists of multiple and possibly unknown
dimensions that are associated with project and performance
uncertainties (Nidumolu 1995). In a complex software
project, not only are the functionalities and specifications of
the final output difficult to define, but development costs and
delivery dates are difficult to estimate at the contracting stage
(Kalnins and Mayer 2004; Susarla et al. 2010; Wang 2002).
Moreover, complex software development often requires
frequent changes on the agreed-upon requirements and archi-
tectural design (Holmstrom and Milgrom 1991; Prendergast
2002). Such project uncertainties raise the difficulty and costs
of contracting (Holmstrom and Milgrom 1991; Prendergast
2002). For example, in a study of IT contracts, Anderson and
Dekker (2005) found that the complexity of IT products and
ex ante uncertainties about the quality and performance speci-
fications of the IT transaction were associated with hold-up
problems and higher contracting costs.
Task complexity also increases performance uncertainty. In
complex development projects, the outcome of the project is
difficult to estimate and measure regardless of the estimation
techniques used (Kurbel 2008; Nidumolu 1995). Frequent

adaptation of requirements analysis in the software develop-
ment process makes it impossible to predict SDO performance
outcomes such as actual costs, completion time, system
benefits, the softwares compatibility with the clients existing
systems, and the softwares technical performance such as
functional errors and bugs (Gefen et al. 2008; Kalnins and
Mayer 2004; Nidumolu 1995). Such performance uncertain-
ties give contractors an incentive to shirk and cut corners on
a project. In addition, incomplete requirements specification
and ambiguous design inevitably result in higher coordination
costs. For these reasons, the rate of failure is higher for com-
plex software projects. Complex projects, therefore, require
higher relation-specific investments from the vendor, such as
greater investments in communication and closer coordination
with the client (Clemons and Hitt 2004). When these projects
fail or when the clients end the contracts prematurely, the
relation-specific investments will become sunk costs for ven-
dors. Vendors may thus have a lower incentive to commit
effort to the project, especially when their efforts are non-
contractible.
To mitigate the risk of underinvestment, PRT holds that when
contracts are incomplete, the party that owns or controls an
asset will collect the residual returns on its own non-
contractible investment and will therefore be motivated to
make these investments (Hart and Moore 1990). Thus, by
granting certain ownership or usage rights to the vendor, the
client firm is likely to induce higher motivation on the
vendors part to put in the requisite efforts, leading to our next
hypothesis:
H2: Vendors that are contracted in software
development projects with a higher level of task
complexity are more likely to be assigned individual
IPR or gain more IPR in SDO contracts.
Customization
Customization is the tailoring of software for a specific user
(organization or business unit) and differs from the develop-
ment of generic software (off-the-shelf software packages)
that is designed for the mass market (Dittrich et al. 2009;
Haines 2009; Hasan and Lokan 2013). Customized software
typically incorporates knowledge components and business
rules that are specialized to the end users. Such personaliza-
tion has been shown to improve both usage and productivity
of computer systems and research suggests that it even
increases the sense of end-user empowerment (Dittrich et al.
2009; Fischer and Scharff 2000). In fact, research in software
engineering emphasizes the importance of user goals, prefer-
ences, and skills in designing customized software (Hui et al.
2003).
Chen et al./IPR Sharing in Software Development Outsourcing
When clients choose to have customized software developed,
it is an effective signal of the uniqueness of the firms IT and
business context. Customized software embodies firm-
specific knowledge that clients normally would not want their
competitors to access. However in SDO, the clients will have
to share with vendors their specific business requirements,
practices, and trade secrets that might be significant sources
of competitive advantage to them (Dittrich et al. 2009; Haines
2009; Hasan and Lokan 2013; Walter 2003). The knowledge
assets created and exchanged during the SDO processes repre-
sent valuable IP and are subject to potential expropriation
(Arora and Merges 2004; Oxley 1997). In transactions where
appropriation problems are greater, explicit provision for
property rights are used to protect vulnerable parties (Teece
1986; Williamson 1991). Client firms are therefore more
likely to be motivated to retain the full IPR to the final
product as well as to all the intermediate knowledge assets if
they feel appropriation issues are critical.
Viewed from the vendors perspective, developing custom
software is labor intensive (Dibbern et al. 2004) and vendors
often need to acquire unique skills and business knowledge in
order to complete the particular customization (Wang 2002).
Such investments are highly client-specific and not readily
transferable to alternative uses without losing substantial
value, thereby reducing the vendors bargaining position in ex
post renegotiations. Moreover, vendors often need to coor-
dinate closely with clients personnel in order to complete
custom development tasks. The interdependencies between
clients and vendors create a potential hold-up problem for
vendors because vendors are responsible for completing
projects within time-bound deadlines, but in cases of inter-
dependence, the vendor has to rely on the clients personnel
to make progress on the necessary tasks (Mayer 2006; Mayer
and Salomon 2006). The vendor anticipating this vulner-
ability could potentially under invest unless sufficient safe-
guards are provided. A call to PRT would suggest that
vendors should be allocated IPR as a safeguard against
potential opportunistic behaviors.
The above discussion suggests that clients are likely to be
pulled in both directions, toward greater sharing of IPR to
motivate vendors against underinvestment of efforts, and
toward little or no sharing of IPR to protect their own IP
assets. However, to balance the dependence on vendors in
customized software projects, substitutive incentives such as
time and materials pricing and other monetary incentives
(e.g., bonus payments for vendor performance) could be used
to sufficiently motivate the vendors and to counter the risk of
underinvestment. On the other hand, it is difficult to come up
with alternative mechanisms to protect the clients specific
investments and intellectual properties other than through
explicit IPR embedded in the contracts. With increasing
MIS Quarterly Vol. 41 No. 1/March 2017 139
Chen et al./IPR Sharing in Software Development Outsourcing
investments in specific assets, the clients quasi-rents increase
and, anticipating this, clients would expect more ex ante
contractual safeguards in the form of higher IPR allocated to
themselves. Therefore, we hypothesize that
H3: Vendors that are contracted in customized
software development projects are less likely to be
assigned individual IPR or gain less IPR in SDO
contracts.
Vendors Proprietary Technology
Although cost reduction is still the most common motivation
for software outsourcing (Lacity et al. 2009), many companies
have outsourced for more strategic reasons which include
gaining access to leading-edge technologies and know-how to
improve business or process performance (DiRomauldo and
Gurbaxani 1998). For example, even though Microsoft has
strong in-house software development capabilities, it hired
Inktomi to develop supporting software for Microsofts search
engine. The main purpose of the contract was to access
Inktomis proprietary coupled cluster technology that enables
the connection of multiple computers to operate as a single
computing system.
When vendors are hired to develop software using their
proprietary technology, their preference, unless explicitly
controlled by the client, would be to make architectural design
choices that exploit their proprietary designs and technologies
(which could include design methodology, development tools,
and other proprietary code needed to develop the new
software). Software development knowledge tends to be
complex and involves a large number of different individuals
and interacting technologies and routines. The connections
between these elements are often highly context-specific.
Therefore, the vendors proprietary technology and contextual
knowledge become indispensable resources and clients will
not be able to continue the focal software development project
without the vendors cooperation. In some circumstances,
vendors have accumulated innovation capabilities that exploit
their proprietary systems and can make unique intellectual
contributions to the clients project. Thus, vendors can derive
bargaining power from the valuable resources they bring to
the software development process and negotiate for more
ownership or usage rights of the generated intellectual assets
(Emerson 1962; Heiskanen et al. 2008; Mayer and Salomon
2006; Mesquita et al. 2008). As vendors proprietary tech-
nologies becomes indispensable to the success of SDO
projects, clients will be more likely to share ownership or
usage rights with vendors as a form of incentive mechanism
to encourage valuable resource deployment. At the same
time, this can overcome opportunistic bargaining by vendors
140 MIS Quarterly Vol. 41 No. 1/March 2017
threatening to withhold resources. Under such conditions, the
tenets of the PRT predict a greater degree of IPR allocated to
the party with the better bargaining position (Aghion and
Tirole 1994). Therefore, we hypothesize that
H4: Vendors that are contracted in software
development projects based on vendors proprietary
technology are more likely to be assigned individual
IPR or gain more IPR in SDO contracts.
Software Modularity
We next turn our attention to software design modularity and
examine its implications for the extent of IPR shared with
vendors. Modularity has emerged as a general set of
principles for software design and refers to the manner in
which a high level design is decomposed into constituent
subsystems (modules) that can communicate through
standardized interfaces (Baldwin and Clark 2000). By
adopting a more modular design, one avoids what would
otherwise be an unmanageable spaghetti tangle of systemic
interconnections (Jordan and Lowe 2004). Work in the
strategic management literature has examined the effect of
modularity on alliance control (Bush et al. 2010; Sanchez and
Mahoney 1996; Tiwana 2008a, 2008b) and has shown that
that the design principles of loose coupling and standardized
interfaces provide a form of embedded coordination that
renders redundant overt managerial supervision (Sanchez and
Mahoney 1996).
In software outsourcing, design modularity can be an impor-
tant consideration both in the boundary between the out-
sourced system and the clients base systems as well as,
among the different components of the new system. Modu-
larity insulates the client from new and unfamiliar underlying
technologies used by the vendor and affords the client the
ability to plug its existing (base) systems into the new system
without changing its base applications (Kurbel 2008). Clients
can apportion development tasks to multiple vendors with
different skill sets. Multi-vendor sourcing helps to protect
clients from vendor opportunism by reducing the lock-in risk
that is inherent when working with a single vendor. More-
over, modular systems are easier to change and replace,
thereby reducing the overall control that a vendor can exercise
both in the current project as well as in future work (e.g.,
through maintenance contracts). Therefore, modularity
reduces resource-dependence of the client and thereby
weakens ex post bargaining positions of the vendor. Further-
more, modularity in software design helps protect the clients
knowledge base from risks of misappropriation because no
single vendor is likely to gain access to the entire domain of
knowledge possessed by the client. Since the client will only

need to share with each vendor the knowledge needed for
their particular subsystem as well as the interface knowledge
common to all vendors, this can significantly lower appro-
priability concerns (Baldwin and Henkel 2014).
Modularity of products has also been shown to increase the
level of standardization within an industry. For example, in
manufactured products such as bicycles (Galvin and Morkel
2001), it has been shown that increasing modularity in design
fragmented the industry into a series of largely independent
subcontractors hired primarily through market-based con-
tracts. The fragmentation of the industry based on specialized
capabilities led to economic efficiencies and lower barriers to
entry. Even though designing software remains a more
complex activity than bicycle manufacturing, it is likely that
the effects of greater modularity will have a similar impact on
at least some segments of the software industry. The overall
effect would be to reduce the clients dependence on the
vendor and thereby to lower bargaining power for the vendors
and lower willingness on the part of the clients to share or
cede IPR to the vendors. Therefore, we hypothesize the
following:
H5: Vendors that are contracted in software
development projects to develop modular systems
(i.e., outsourced software has well-defined interfaces
with the clients existing systems) are less likely to
be assigned individual IPR or gain less IPR in SDO
contracts.
Empirical Analysis
Data Collection and Measures
Data for our study comes from software development con-
tracts culled from the U.S. Securities and Exchange Commis-
sion (SEC) and further augmented with data from ICC full-
text annual reports for international company profiles.5 The
SEC regulations (17 C.F.R. Part 229) require publicly-listed
companies to disclose material contracts6 in their financial
filings and software development contracts are frequently
included in the filings of companies registered in the United
States. We initially collected 215 SDO contracts signed
5
ICC Full-text Quoted Company Annual Report contains the annual reports
published by 2,800 British companies listed on the London Stock Exchange
and the top 500 European companies.
6
Material contracts are generally understood as any contract upon which the
registrants business is substantially dependent, as in the case ofagree-
ment[s] to use a patent, formula, trade secret, process or trade name (SEC
regulations (17 C.F.R. Part 229)).
Chen et al./IPR Sharing in Software Development Outsourcing
between the years 1992 and 2007 (both years inclusive). To
maintain generality in our analysis, we excluded transactions
where (1) the contract was a renegotiation or restatement of
a previous agreement between the two firms, (2) one firm had
a controlling interest in the other firm (greater than 50%), and
(3) multiple vendors were specified in the same contract. We
also dropped 43 contracts due to substantial missing informa-
tion. Our final sample comprised 171 SDO contracts span-
ning 13 industries, of which 163 agreements were signed by
U.S. companies and 8 by UK companies. 121 agreements
were with U.S. vendors and the remaining 50 were signed
with vendors from 20 different countries. About 59% of the
clients were from high technology industries. The frequency
distribution of the sample across industries was found to be
similar to those of other licensing agreements and alliance
contracts which have been studied in prior literature (Anand
and Khanna 2000; Oxley 1997). Of the 171 contracts in the
final sample, 55 contracts released contract values, ranging
from a maximum exceeding $650 million to a minimum of
$20,000, with an average value of $5.66 million. A total of
54 contracts were for simple enhancements or for adaptive or
perfective changes to an existing system; 76 other contracts
involved reengineering an existing system; another 41
required vendors to develop new systems, interfaces, or appli-
cations. We were able to collect contract length information
for 169 agreements from the contracts, the firms 10-K
reports, and press releases. The length of the contracts ranged
from 3 months to 300 months with a mean length of 29.8
months and a standard deviation of 29.1. Overall, about 71%
of the contracts used a flexible pricing structure (T&M and
cost-plus). About 39% of the contracts in the sample were
signed after the year 2000, with 20% of the clients having had
prior business interactions with the vendors.
The data obtained from software contracts were supplemented
with additional variables that served as controls for the empi-
rical analysis. For each contract, we searched the Factiva
News archive using client and vendor company names to find
contract-related press releases. In addition, we collected
dominant client information from COMPUSTAT, CRSP, and
the firms financial statements. Statement of Financial
Accounting Standards (FASB) No. 14 requires firms to dis-
close the identity of any customer representing more than
10% of the total sales of a firm. We collected the customer
abbreviations from the COMPUSTAT industry segment files
and followed the matching procedure used by Fee and
Thomas (2004) to get the full company names from CRSP.
When vendors were not publicly traded companies, we
collected information on dominant clients from the Business
Relationship and Risk Factors sections of the clients
financial statements and further searched contract information
from other press releases. For nonpublicly listed firms, data
about their revenue and the number of employees were culled
MIS Quarterly Vol. 41 No. 1/March 2017 141
Chen et al./IPR Sharing in Software Development Outsourcing
from company websites and Bloomberg Businessweek data-
base for small and medium size companies. We downloaded
the lists of IT technology companies from three online
resources: the Fortune 1000 technology firms, the Informa-
tion Week list of 500 technology companies, and the Inter-
national Association of Outsourcing Professionals (IAOP)
Global Outsourcing 100 and sub-lists. Vendors reputation
was coded based on whether the vendor was included in any
of these lists. Country-level software piracy rates were col-
lected from the Business Software Alliances (BSA) annual
piracy studies (BSA 2008; IPRC 2003) and were used as
indicators of the legal protection environment for IPR.
Dependent Variable
We coded two dependent variables: the propensity for
sharing individual IPR with vendors and the extent of IPR
allocated to vendors. Referring to the economics and IT
contract design literature (e.g., Carson and John 2013;
Elfeibein and Lerner 2003; Leiponen 2008; Lerner and
Malmendier 2010; Milgrow and Roberts 1992; Susarla 2010),
we developed a coding scheme to code the five types of
ownership rights and the three usage rights in each of the 171
contracts (see Table 2).
Ownership refers to the rights for full control over the pro-
perty and to the proceeds generated by the property. Each of
the five types of assetssoftware program, database,
preparative material, derivatives, and otherswas coded as
1 if ownership was assigned to the client, 2 if there was joint
ownership, and 3 if it was assigned to the vendor (Elfeibein
and Lerner 2003). Panel A of Table 3 provides the frequen-
cies and cross frequencies of the five ownerships for all of the
contracts in the sample. As expected, most of the SDO con-
tracts assigned IPR ownership to clients. Overall, less than
37% of the sample contracts allocated sole ownership of any
of the five assets to vendors. For example, about 37% of the
sample assigned ownership of developed software to vendors,
with only 28% giving vendors ownership of the database
created during the software development processes. Cross
tabulation shows that at least 70% of contracts assign bundles
of ownership rights to vendors. For instance, ownership of
software program clustered with ownership of preparative
materials at a rate of 95%. Owning both assets gives vendors
the traceability to link software development requirements to
corresponding design artifacts, code, and test cases to support
numerous software engineering activities and software modi-
fications (Pressman 2005).
Usage Rights. Clients, as property owners, can choose to
retain property ownership and grant usage rights to vendors
or share the proceeds from the property. Three usage rights
142 MIS Quarterly Vol. 41 No. 1/March 2017
right to use the developed software, redeployment right of
know-how, and right to sell developed softwareare critical
economic rights in software development relationships. Each
of the usage rights was coded as 1 if the client retained the
sole ownership of the software program (i.e., vendors did not
have joint or sole ownership) and granted the usage right to
the vendor, and coded as 0 if the vendor did not have property
ownership and the focal usage right (Adegbesan and Higgins
2011; Elfenbein and Lerner 2012; Lerner and Malmendier
2010; Susarla 2012). Panel B in Table 3 shows that out of 90
contracts where clients held sole ownership of software pro-
gram, about 41% granted vendors the right to sell developed
software and share proceeds with clients; only about 34% of
the contracts allowed vendors to use or modify the software
program and code after the contract ended; and less than 18%
of vendors gained the right to redeploy residual information
in other projects. Cross frequency analysis between the usage
rights indicated that less than 60% of client owners authorized
vendors both the right to use and the right to sell simul-
taneously and only about 40% of vendors who were granted
right to use software also had the right to redeploy residual
information and know-how gained in the SDO process.
Extent of Ownership/Usage Rights. The extent of vendor
ownership and usage rights were also used as dependent
variables to capture the total number of asset ownership
(either joint or sole ownership) and usage rights assigned to
vendors. The mean of the extent of ownership is 1.65 with a
standard deviation of 2.14, whereas the mean of the extent of
usage rights is 0.93 with a standard deviation of 0.90,
demonstrating a different rights allocation strategy between
ownership and usage rights and that asset ownerships were
bundled but usage rights were often assigned separately.
Explanatory Variables
The measures of the five SDO project characteristics
namely, extent of project newness (newness), task complexity
(complexity), customization (customization), vendor proprie-
tary technology (proprietary), and software modularity
(modularity)were coded from the Recital and Task and
Technology Description sections in the SDO contracts. We
coded newness as a three-level categorical variable based on
the levels of newness in the requirement specifications
(Kurbel 2008), coded as 2 if the vendor was contracted to
develop completely new systems or applications, as 1 if it was
to reengineer or add new functionalities to an established
system, and as 0 if it was to do simple enhancement or modi-
fications on the clients existing system. Complexity mea-
sures the levels of difficulty in specifying task descriptions,
performance measurements, and verifications in contracts
(Lerner and Malmendier 2010). This measure for software
 Chen et al./IPR Sharing in Software Development Outsourcing

Table 2. Coding Scheme for IPR Specifications

Type of IPR References Examples
Ownership of Bainbridge Example 1: Client Ownership
developed soft- (2007); [PrintOnTheNet.com, Inc., and Ducat Commerce, LLC] Developer agrees that the development of
ware program Keplinger et the printing related work of the Software is work made for hire within the meaning of the
Categorical (1-3) al. (1984) Copyright Act of 1976, as amended, and that the Software shall be the sole property of Buyer.
Example 2: Joint ownership
[U S West Communications, Inc. and OneLink Communications, Inc] In the course of or as a result
of performance under this agreement, inventions, discoveries, adaptations, ideas, specifications,
functional requirements, business and technical information, computer or other apparatus
programs, software, copyrightable material, documentation, trade secrets, trademarks, and other
ideas, knowledge or data, unless specified otherwise in this agreement, all such intellectual
property shall belong jointly to both Parties.
Ownership of Bainbridge Example 1: Client ownership
material for (2007); [PrintOnTheNet.com, Inc., and Ducat Commerce, LLC] Developer hereby assigns to Buyer, without
developed Keplinger et further compensation, all of its right, title and interests in any and all related materials with respect
software program al. (1984) to the Software (in the form of notes, sketches, drawings and as may otherwise be specified by
Categorical (1-3) Buyer).
Example 2: Vendor ownership
[Avesis and National Computer Services] The software, programs, and related documentation
developed by National for Avesis pursuant to this agreement shall be owned by National
(Developer).
Ownership of Bainbridge Example 1: Client ownership
database for (2007); [Avesis and National Computer Services] All of the information, data and contents of databases
software Keplinger et and reports developed and compiled by National for Avesis pursuant to this agreement shall be the
development al. (1984) property of Avesis.
Categorical (1-3) Example 2: Joint ownership
[mPhase and Lucent] All developed information, data and test results created jointly by one or more
employees, contractors, consultants or agents of one Party working in conjunction with one or more
employees, contractors, consultants or agents of the other party during the development period,
and as a direct result of work performed under this agreement, shall be owned jointly by both
parties.
Ownership of the Bainbridge Example: Client has right to make derivatives
derivative from (2007); [Federated Systems Group, Inc and Mobinetix Systems, Inc] The Buyer may use the New Software
developed Keplinger et to prepare derivative works of the Software, and may otherwise modify, enhance, reverse engineer,
software program al. (1984) decompile or otherwise handle it. All enhancements developed by the Buyer, including all modifi-
Categorical (1-3) cations and derivative works shall become and remain the sole and exclusive property of the
Buyer.
Ownership of other Bainbridge Example: Client owns ownership
assets not (2007); [American Insurance & Syntel 2000] To the extent that any Work Product, under applicable law,
specified in the Keplinger et may not be considered works made for hire, Syntel hereby irrevocably assigns and transfers to AH
contract or not al. (1984) the ownership of all rights, title and interests in such Work Product (including copyrights, whether
related to the published or unpublished and patents and all other intellectual property rights thereto)....Upon
developed termination of the Agreement for any reason, any Work Product will be delivered to AH with Syntel
software retaining no copies of Work Product.
Categorical (1-3)
Right to use Adegbesan Example: Client owns ownership but client grants Vendor the right to use technology after
technology after its and Higgins the end of the contract
creation and (2011); [CCSI and Pencom] Limited license of software package. Subject to CCSIs acceptance of the
contract termina- Carson and Phase Three Deliverables, CCSI will grant to PENCOM the worldwide right and license to use a
tion, Binary (0/1) John (2013); functionality, structure, sequence, or organization similar to that contained in the software package
Lerner and in developing software for third parties where PENCOM performs such development without
Merges reference to the software package.
(1998)

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Table 2. Coding Scheme for IPR Specifications (Continued)

Type of IPR References Examples
Right to sell the Adegbesan Example: Client owns ownership but grants vendor the right to sell or license the created
created technology and Higgins software
to other third party, (2011); [eMed and AWARE] eMed shall have the exclusive right to use and sublicense software developed
Binary (0/1) Carson and by AWARE for medical use....AWARE shall have the exclusive right to distribute software and other
John (2013); components included in the Work Product but AWARE shall not distribute the Work Product to the
Lerner and following companies in medical and healthcare industries
Merges
(1998)
Right to redeploy Susarla et al. Example: Client owns ownership but grants vendor the right to redeploy knowledge assets
knowledge assets (2010) in the third partys project
in other projects, [Carnival Cruise & Allin (2001)] Allin will not be precluded from using Residual Information in the
Binary (0/1) field of IT consulting and integration for itself or for other customer. The term Residual
Information shall mean information relating to ideas, concepts and techniques which are related to
Allins business activities.
Non-compete (0/1) Leiponen Example: Vendor cannot compete with the Client after the end of the contract:
(2008); Mayer During the term of this Agreement and for a period of 12 months after the termination of the
and Soloman Developers service, the Developer will not be interested or concerned in any business which
(2006) develops, manufactures, produces, provides, markets, distributes or otherwise deals in products or
services or both which are of a type similar to the products or services which are developed,
manufactured, produced, provided, marketed, distributed or otherwise dealt in by the Company now
or at any time during the term of the Developers consulting services. Such restriction will apply
within the geographical area of business operations in which the Company has an office and
carries on business or has carried on business within the 12 month period ending on the date of
termination of the Developers service.

Table 3. Frequency and Cross-Frequency of Individual IPR

Panel A: Ownerships (n = 171)
Client Joint Vendor Cross-Frequency (%)
Types N Freq(%) N Freq(%) N Freq(%) Program Database Material Derivative
Program 90 52.63 18 10.53 63 36.84
Database 105 61.40 18 10.53 48 28.07 76.19
Material 93 54.39 18 10.53 60 35.09 95.24 80.00
Derivative 102 59.65 19 11.11 50 29.24 76.19 70.83 75.00
Other 84 49.12 26 15.20 61 35.67 88.89 91.67 90.00 73.77
Panel B: Usage rights sharing when clients own the sole ownership of software program (n = 90)
Vendor Cross-Frequency (%)
N Freq(%) Use Redeploy
Use 31 34.44
Redeploy 16 17.78 39.29
Sell 37 41.11 58.89 18.89

complexity has been used in several studies (Dey et al. 2010;
Gefen et al. 2008; Gopal and Sivaramakrishnan 2008; Gopal
et al. 2003). Referring to the scale of software complexity
developed by Gefen et al. (2008, p. 551), we coded com-
plexity based on the levels of extensiveness of task descrip-
tion; it was coded as 0 (low) if it was easy to specify a clear
and extensive technical description, deliverable milestones,
and quality requirements for deliverables, as 1 (medium) if
parts of technical description were specified in the contract
without corresponding quality measurement criteria, and as 2
(high) when the contract had little by way of details regarding
the task or when the description was very generic. High
levels of task complexity denote low levels of contractibility.
Following Susarla (2012), we coded customization as 1 if the

144 MIS Quarterly Vol. 41 No. 1/March 2017


contract required the vendor to have domain knowledge and
skills unique to the clients business to develop custom soft-
ware or to customize existing software, and as 0 if neither of
these conditions held. Proprietary indicates the indispen-
sability of the vendors to the contract and was coded as 1 or
0 based on whether or not the contract specified that the
vendor firm would utilize its copyrighted or patented tech-
nologies for the SDO task. Modularity was coded as 1 if the
project was to develop a subsystem of an existing system and
the contract provided specifications for user exits to link the
software to the existing systems (Kurbel 2008), and 0
otherwise.
Controls
In order to control for alternative explanations and other
potential confounds, we included several additional variables
that served as important controls: (1) flexible pricing struc-
ture (Gopal and Koka 2010), (2) prior inter-firm interaction
between contract parties (Goo et al. 2009; Rai et al. 2009),7
(3) dominant client (Banerjee and Duflo 2000; Fee et al.
2006; Fee and Thomas 2004; Susarla et al. 2010), (4) ven-
dors reputation (Banerjee and Duflo 2000; McGuire et al.
1988; Preston and OBannon 1997; Susarla et al. 2010),
(5) software piracy level in the vendors operating countries
(Marron and Steel 2000; Moores and Chang 2006),
(6) log(vendors age) indicating vendors relative experience,
(7) high-tech client indicating whether the client is in a high-
tech industry8 (Francis and Schipper 1999), (8) log(clients
age), (9) clients size, (10) log(contract length) (Susarla et al.
2010), and (11) year dummy to capture other unaccounted
time-period effects by using the year 2000 as the cut-off point.
In some circumstances, the client may have granted the ven-
dor the right to sell but simultaneously used a non-compete
clause to restrict the vendor from competing with the clients
business, for example, by selling software directly to the
clients customers. This type of non-compete restriction will
reduce the value of the vendors usage rights. Hence, we
included a non-compete control dummy to indicate whether
the contract specifies a non-compete clause.9 Table 4 pro-
vides a description of the variables and measurements.
7
We identified prior interaction from the Recital section in the contract and
Business Relationship section from the financial statements. We aug-
mented the information of business interactions through searching of press
releases and industry reports.
8
The full list of high-tech industries is available on the website of the Bureau
of Labor Statistic ( http://www.bls.gov/opub/mlr/2005/07/art6full.pdf).
9 could lead to biased estimates of the effects of our focal
We thank one of the reviewers for pointing out the possibility that non-
compete restrictions may interfere with the usage rights.
Chen et al./IPR Sharing in Software Development Outsourcing
To ensure coding consistency and reliability, two under-
graduate law degree students independently carried out the
coding of all the contracts and the supplementary data (control
variables). Examples of sample provisions from actual
contracts were provided to the coders who were trained
extensively with a few comprehensive contracts. We checked
the inter-coder reliability for all variable coding and found
them to be high (Cohens k = 0.81 or above). Two senior
computer science degree students also independently coded
all the contracts and supplementary information following the
same coding scheme to further ensure the reliability of the
coding scheme among students with different domain knowl-
edge backgrounds. Throughout the coding process, the results
of the recoding were almost identical to the previous law
degree students results. Overall, we believe that this process
resulted in a highly reliable coding of the contract and
supplementary data. Table 5 provides the summary statistics
and correlations of the main variables in our empirical
analysis.
Model Estimation and Results
We propose an econometric model that explains a vendors
ownerships and usage rights as a function of the variables
featured in the hypotheses, along with all the controls
described above. The first set of dependent variablesthe
propensity of individual ownership and usage rights
sharingare ordinal and binary variables respectively; and
the second set of dependent variablesthe extent of owner-
ships and usage rights sharingare ordinal.
Care was taken to address potential endogeneity concerns in
our econometric specification. First, IPR assigned to the
vendor is typically negotiated during the contracting process
and may be co-determined with other governance mechanisms
such as pricing structure (i.e., simultaneity and self-selection
issues). As depicted in Figure 1, the typical arrangement in
SDO is for the client to search and identify a vendor company
to develop and implement a software system with stated
functionalities (Gefen et al. 2008). The client and the vendor
will then negotiate the specific terms such as what is to be
developed, how the work will proceed, and the payment terms
ex ante and come to agreement on the most important aspects
which will then be written into the contracts before the
development work starts. Second, additional and potentially
relevant characteristics that influence IPR allocations may be
unobserved in the contracts. Unobserved factors, such as the
clients software development capabilities and its risk pref-
erences, might influence the clients inclination to share IPR
with the vendor. Failure to account for these possibilities
explanatory variables. The prior literature on outsourcing
MIS Quarterly Vol. 41 No. 1/March 2017 145
Chen et al./IPR Sharing in Software Development Outsourcing
Table 4. Variable Descriptions and Measurements
Variable Description
Newness Categorical variable = 2 if vendor is
contracted to develop new systems,
interfaces or applications for the client
(i.e., no existing system with similar
functionalities); = 1 if vendor is
contracted to reengineer an existing
system or add new functionalities to an
established system; = 0 if vendor is
contracted to do simple enhancements,
adaptive or perfective changes to an
existing system.
Complexity Categorical variable = 0 if the contract
has very extensive technical
description, deliverable milestones, and
specific criteria to determine the quality
of the end product; = 1 if the contract
has some technical description but has
no product measurement
criteria/milestones; = 2 if the contract
contains very little details or generic
description of the task and
measurement criteria.
Customization Binary(0/1) = 1 if the vendor shall have
specialized knowledge or skills unique
to client (e.g., vendor develops software
using the clients application
development environment; or the
software is customized to the clients
business processes and activities); = 0
if none of the above two situation
exists.
Proprietary Binary (0/1) = 1 if the software is
developed using vendors existing
proprietary technologies including
copyrighted and patented technologies;
= 0 if the contract does not specify use
of any of the vendors existing
proprietary technologies.
Modularity Binary (0/1) = 1 if the contract requires
vendor to develop a subsystem or a
standalone system or provides clear
interface specifications to connect to
the clients existing system(s). No
impact on other systems is expected
and no knowledge of other systems is
required; = 0 if the contract does not
specify the vendor to develop a
subsystem and contract does not
provide any clear interface
specifications to connect to the clients
existing system(s)
146 MIS Quarterly Vol. 41 No. 1/March 2017
Examples and Measures Referred literature
Example 1: [A. I. Soft, Inc. & Empire Group 2001] 1.1 Services: Gefen et al. (2008);
the Developer hereby agrees to develop the Companys first Gopal and Koka (2009);
artificial intelligence software algorithm, known as Randomix, as set Pressman (2005)
out in the Business Plan of the Company.... (Newness =2).
Example 2: [Tribune & AdStar, INc (2002)] Recitals: WHEREAS,
AdStat agreed to develop, customize and deploy the CareerBuilder
Service solely for the benefit of Tribune; the Parties now desire to
enhance the existing CareerBuilder Service by developing,
customizing and deploying new Tribune specified functionalities, in
the form of software Modules, for use with the CareerBuilder
Network.... (Newness =1).
Example: [Tribune & AdStar, Inc. (2002)] Argyres et al. (2007);
AdStar shall be responsible for (i) reconfigure and customize the Mayer and Soloman
AdStar Service, (ii) install data and other components into the (2006); Susarla (2012)
AdStar database, and (iii) develop the Modules and complete
certain specified tasks, all in the manner, time and date as
specified on Exhibit A hereto and as necessary to support the
requirements of the CareerBuilder services....Upon delivery of the
completed CareerBuilder Service, Tribune shall conduct the
Acceptance Tests as specified in Exhibit A.... (Complexity = 0
indicating low level of task complexity).
Example 1: [Canon Computer Systems, Inc. & Pencom Systems Chen and Bharadwaj
Inc. (1994)] CCSI desires to retain Pencom to use its technical (2009); Mayer and
information and know how to develop a wholesale distribution Soloman (2006); Susarla
systems for tracking CCSIs imports and exports....Pencom will (2012);
identify the major business objects in the problem domain, their
attributes, class hierarchy, and relationships. Pencom shall
document these specifications and shall include Booch class
instance, process, and timing diagrams in sufficient detail to clearly
convey the system requirements....The document will be focused
on defining the areas and problems to be addressed by the new
system, the basic form that the functionality will take, and the return
to be expected from the improvements. (Customization = 1).
Example 2: [American Insurance & Syntel (2000)] Syntel will
maintain (1) a Time Reporting System; and (ii) a Project
Management Systems. Both of these systems may be a non-
customized, off the shelf version of current software, acceptable to
AH....(Customization = 0).
Example: [Tribune and Adstar, Inc. (2002)] RECITALS, Argyres et al. (2007);
WHEREAS, AdStar is the sole and exclusive developer and Mayer and Soloman
worldwide owner of a proprietary software product that is used, (2006);
together with AdStars hosting and servicing facilities, to provide
Tribune a service known as the AdStar Service (Proprietary = 1).
Example: [Danka Office Imaging Company (Danka) & Network Adapted from Gefen et al.
Printing Solutions Ltd. (NPS) (2003)] Exhibit A: 4. NPS shall (2008); Tiwana (2008a,
redesign the Danka Print Manager Application User Interface. a. 2008b)
NPS shall integrate the various modules of JAS Print into a single
Windows application. The Danka Print Manager will be accessed
through a single icon on the user desktop and/or Start Menu. The
Danka Print Manager application will then provide access to the
various sub-modules currently included in JAS Print Solutions.
Danka and NPS will jointly develop the best practice to accomplish
this task, which may include the use of a Window with tabs for each
function, or a task bar that contains controls to launch the sub-
functions of JAS. (Modularity =1).
 Chen et al./IPR Sharing in Software Development Outsourcing

Table 4. Variable Descriptions and Measurements (Continued)

Variable Description Examples and Measures Referred literature
Flexible pricing Binary (0/1), control = 1 if the contract specifies flexible pricing for software Banerjee and Duflo
development (e.g., time & material or cost plus pricing), (2000); Gopal and Koka
= 0 if the contract specifies fixed price payment for software (2009); Gopal et al. (2003)
development.
Prior interaction Binary (0/1), control = 1 if client and vendor had prior business interaction such as Chen and Bharadwaj
software development, marketing relationship, or equity exchange (2009); Mayer and
before the contract; otherwise = 0. Salomon (2006)
Dominant client Binary (0/1), control = 1 if the client firm accounted for 10% or more of the vendors Banerjee and Duflo
annual revenues, which is mandated disclosure by SEC guidelines; (2000); Fee et al. (2006);
otherwise = 0. Fee and Thomas (2004);
Susarla et al. (2010)
Vendors Binary (0/1), control = 1 if the vendor was listed among any of the following: (i) the Banerjee and Duflo
reputation Fortune 1000 technology firms, (ii) Information Week list of 500 (2000); McGuire et al.
technology companies, or (iii) International Association of (1988); Preston and
Outsourcing Professionals (IAOP) Global Outsourcing 100 and OBannon (1997); Susarla
sublists; otherwise = 0. et al. (2010)
Piracy level Categorical data (0-2), control = 2 if the piracy level of vendor country in the contract year was Marron and Steel (2000);
more than 0.70; = 1 if the piracy level was in the range of 0.30-0.69; Moores and Chang (2006)
and = 0 if the piracy level was below 0.30.
Log(firms age) Numerical data, control = log(number of years of the establishment of firms). Self-generated
High tech client Binary (0/1), control = 1 if the clients primary 3-digit SIC code is any of the followings: Francis and Schipper
283, 357, 360, 361, 362, 363, 364, 365, 366, 367, 368, 481, 737, (1999, p. 343)
and 873; otherwise = 0.
Client size Categorical data (1-4), control = 1 if the number of clients employee was in the range of 50-100; = U.S. Small Business
2 if it was in the range of 100-250; = 3 if it was in the range of 250- Administrations small
5000; = 4 if it was more than 5000. business size standards
Log(length) Numerical data; control Measured as log(total months of contract duration). Susarla et al. (2010)
Year dummy Binary (0/1), control = 1 if the contract was signed after Year 2000; Chen and Bharadwaj
= 0 if the contract was signed before or at Year 2000. (2009)
Non-compete Binary (0/1), control = 1 if the contract had a non-compete clause; otherwise = 0. Leiponen (2008); Mayer
and Soloman (2006)
Public vendor Binary (0/1), instrument = 1 if the vendor was a public company in the contract year; Self-generated
otherwise = 0.
Distance dummy Binary (0/1), instrument = 1 if the geographical distance between two contract parties Self-generated
operating address > 500 kilometers; otherwise = 0.
Labor cost Binary (0/1), instrument = 1 if the change of average wage index > U.S. GDP growth rate; = Self-generated
0 otherwise.
Extent of IPR Dependent variables: Total number of ownership (either joint or sole ownership but not Carson and John (2013);
Sharing Ownership (0-5); Usage rights (0-3) double counted) awarded to the vendor; total number of usage Lerner and Merges (1998)
rights allocated to the vendor.
Individual IPR Dependent variables: Ownership is coded as a three-scale variable = 1 if this IPR is Elfenbein and Lerner
Sharing Ownership (1-3); Usage right (0/1) allocated to the client; = 2 if this IPR is jointly owned; = 3 if the (2003, 2012)
vendor has the ownership. Usage right uses binary coding = 1 if
the vendor has the usage right but is not awarded any type of
ownership of software program.

MIS Quarterly Vol. 41 No. 1/March 2017 147

Chen et al./IPR Sharing in Software Development Outsourcing

Table 5. Summary Statistics and Variable Correlations

Mean Std. Min Max Flex New Comp. Cust. Prop Mod. Prior V.rep Dom. Leng
Flexible pricing 0.71 0.46 0.00 1.00 -0.04
Newness 0.92 0.74 0.00 2.00 -0.09 1.00
Complexity 0.73 0.75 0.00 2.00 -0.05 0.07 1.00
Customization 0.54 0.50 0.00 1.00 0.10 0.05 -0.27 1.00
Proprietary 0.58 0.50 0.00 1.00 0.08 0.15 -0.02 0.03 1.00
Modularity 0.58 0.50 0.00 1.00 -0.02 0.13 -0.10 0.12 0.14 1.00
Prior 0.20 0.40 0.00 1.00 0.09 -0.03 -0.07 0.17 -0.18 0.02 1.00
V. reputation 0.33 0.47 0.00 1.00 0.05 0.10 -0.08 0.04 0.07 0.04 0.08 1.00
Dominant client 0.30 0.46 0.00 1.00 -0.10 -0.01 -0.09 0.03 -0.04 -0.04 0.08 0.12 1.00
Log(length) 3.13 0.73 1.10 5.70 -0.19 -0.05 0.08 -0.07 -0.02 -0.14 0.01 0.02 0.02 1.00
Ownerships 1.65 2.14 0.00 5.00 -0.05 0.00 0.26 -0.16 0.05 -0.33 -0.04 -0.04 0.06 0.22
Usage rights 0.93 0.90 0.00 3.00 -0.04 0.21 0.32 -0.30 0.18 -0.05 -0.02 -0.16 0.02 0.04
Mean Std. Min Max Flex New Comp. Cust. Prop Mod. Prior V.rep Own Usage
Year dummy 0.39 0.49 0.00 1.00 0.14 0.07 -0.04 0.07 0.12 0.07 -0.07 0.01 -0.22 -0.15
Log(vendor age) 1.90 1.00 0.41 5.04 -0.07 0.08 0.00 -0.09 -0.04 0.03 0.04 0.07 -0.20 -0.07
Piracy level 0.83 0.57 0.00 2.00 0.01 0.11 -0.09 0.06 0.02 -0.03 0.20 0.21 -0.07 -0.07
High tech client 0.59 0.49 0.00 1.00 0.14 0.17 -0.01 -0.12 0.11 -0.06 0.07 0.07 -0.02 0.02
Log(client age) 2.55 1.29 0.41 5.24 -0.21 -0.11 -0.01 -0.02 -0.06 0.12 0.01 -0.05 -0.12 0.02
Client size 2.04 1.18 1.00 4.00 -0.05 -0.20 -0.01 -0.01 -0.17 -0.04 0.12 0.05 -0.07 0.05
Non-compete 0.09 0.29 0.00 1.00 0.16 0.22 -0.04 0.01 -0.01 -0.13 0.09 0.12 0.11 0.20
Public vendor 0.43 0.50 0.00 1.00 0.15 -0.16 -0.03 -0.12 -0.02 0.05 0.05 0.04 -0.22 -0.01
Distance
0.54 0.50 0.00 1.00 -0.02 -0.05 0.02 0.03 -0.16 -0.04 0.09 -0.01 0.17 0.09
dummy
Labor cost 0.85 0.36 0.00 1.00 -0.06 0.01 0.04 0.00 -0.03 0.00 0.09 -0.02 0.05 -0.07

N = 171 (note: N for usage rights is 90). Bold numbers indicate significant correlation at p < 0.05.

suggests that pricing structure is endogenous to the con-
tractual governance structure because clients often select
pricing structure as a major incentive mechanism to control
the risks and costs in contractual relationships (Banerjee and
Duflo 2000; Gefen et al. 2008; Gopal and Sivaramakrishnan
2008). Therefore, in order to correct for potential biases that
could arise as a consequence of endogeneity, we adopt the
two-stage control functions approach (Heckman and Robb
1985; Wooldridge 2007) for our empirical analysis. In the
two-stage estimation, we estimate an equilibrium model of
pricing structure that predicts the probability of choosing
flexible pricing in the first stage.
We use three instrumentspublic vendor, distance dummy,
and labor costto satisfy the requirement of the exclusion
restriction for the two-step control function estimation ap-
proach. Public vendor is measured as 1 if the vendor was a
publicly listed firm. Distance dummy is an indicator for
geographical distance (of more than 500 km apart) between
the clients and vendors operating addresses, and labor cost
is measured as 1 if the average wage index (AWI) was higher
than U.S. GDP growth rate, indicating a high labor cost busi-
ness environment. Most of the clients in our sample were
located in the United States. We used U.S. AWI data
published on the USA Social Security Official Website and
collected GDP growth rate from the U.S. Bureau of Economic
Analysis website10 to calculate labor cost. These three vari-
ables may affect a firms selection of flexible pricing but are
less likely to influence the IPR sharing.11 In the second stage,
10
USA Social Security: http://www.socialsecurity.gov/oact/cola/
AWIgrowth.html; U.S. Bureau of Economic Analysis: http://www.bea.gov/
itable/index.cfm.
11
Public vendors have more reliable financial resources and care more about
their reputation. Therefore, clients may be more comfortable signing variable
pricing contracts with public vendors. A large geographic distance increases
the costs of travelling from the vendor site to the client. Thus, clients may be
more prone to select fixed price contracts to control such costs. Clients are
less likely to select flexible pricing if the labor costs change frequently.
However, these three factors would likely not affect IP ownership and usage
rights allocation in SDO contracts.

148 MIS Quarterly Vol. 41 No. 1/March 2017


we use estimates from the pricing structure model to derive
the correction terms lambda, which is the inverse Mills ratio
(IMR)the error correction term generated in the first stage
equation. Lambda is then included in the regression of IPR
allocations in the second stage equation to control for the
correlation between the error terms of the two equations. In
sum, our econometric model is structured as follows:
First Stage: Pricing Structure Model
PR(FlexiblePricing = 1|X) = (X');
PR(FlexiblePricing = 0|X) = 1 = (X');
where, Pr denotes probability, is the cumulative
distribution function (CDF) of the standard normal
distribution, and X denotes a vector of regressors
including five explanatory variables, all controls and
three instruments.
Second Stage: Individual IPR Sharing Propensity
and Extent of IPR Sharing Model
PR(IPR Sharing)/Extent of IPR Sharing =
M(xoo + ePricing + 1Lamda + g2)
where, M(@) is a probit or ordered probit function for
Pr(IPR Sharing) and extent of IPR sharing, respec-
tively, xo is a vector of variables including the five
explanatory variables and all controls, and Lambda
is the error correction term generated from the first
stage model estimation.
We report the marginal effects of explanatory variables and
controls in Tables 6 and 7. Column (1) in Table 6 presents
the first-stage probit results of the pricing model. Task
complexity, year dummy, client age, and non-compete dummy
were significantly associated with pricing structure. It shows
that complex software development contracts were more
likely to use flexible pricing and experienced clients preferred
fixed pricing to avoid moral hazard and shirking problems,
which is in line with earlier findings (Gopal and Sivarama-
krishnan 2008). Contracts signed after Year 2000 preferred
to use flexible pricing and contracts with a non-compete
clause were more likely to choose flexible pricing. Two out
of three instrumentspublic vendor and labor costwere
significantly related to pricing structure. From correlation
statistics, we also see that these two controls were not signi-
ficantly correlated with IPR allocations, demonstrating that
these two instruments were indeed exogenous variables.
We first run the two-stage control function model estimations
to analyze the extent of IP ownership and usage rights
Chen et al./IPR Sharing in Software Development Outsourcing
sharing. The extent of ownership sharing was measured as
the total number of IP ownerships (either joint or sole owner-
ship but not double counted) that vendors have. The extent of
usage rights was measured as the total number of usage rights
granted to the vendor under the circumstances that the vendor
was not awarded any type (i.e., joint or sole) of ownership
rights to the software. In our sample, 90 out of 171 contracts
did not grant vendors any type of ownership. The estimation
results reported in Columns (2) and (3) in Table 6 provide
good support for the hypotheses. We found project newness
to be significantly associated with the extent of usage rights
sharing but not the ownership, thus partially supporting H1.
Task complexity was positively associated with the extent of
vendors ownership and usage rights, thus supporting H2.
The marginal effect of task complexity indicates that task
complexity leads to 0.34 more ownership and 0.49 more
usage rights assigned to the vendor. Customization was
negatively and significantly related to the extent of the owner-
ship and usage rights, supporting H3. The marginal effect of
customization was -0.48 for ownership and -0.88 for usage
rights. Consistent with our prediction in H4, the results
demonstrate that a vendors use of proprietary technology
was positively associated with more IPR assigned to the
vendor with a marginal effect of 0.47 for ownership and 0.77
for usage rights. The estimated marginal effects associated
with modularity were -0.71 for ownership and -0.70 for usage
rights, suggesting that increasing software modularity reduces
the clients proclivity to share ownership and usage rights of
end products with vendors, fully supporting H5.
We also use the same estimation method to analyze the
propensity of sharing of individual IPR. As seen from the
results reported in Columns (1) through (8) in Table 7, project
newness was only positive and significant for redeployment
right, whereas customization was negatively associated with
the ownership of data, right to use, and right to sell. We
observe that task complexity was positive and significant for
many of the IPR except for the ownership of data, right to use,
and right to redeploy. As hypothesized, proprietary was also
positive and significant for the majority of IP rights except for
the right of derivative. Vendors do not need to negotiate for
the ownership of derivative because they own the proprietary
technology that is the key for the software development.
Instead, they might negotiate for the ownership of the soft-
ware program to derive financial benefits from the developed
software without restrictions. Modularity was negative and
significant for most of the IPR except for the ownership of
database, right to use, and right to sell. This finding is consis-
tent with one of the major benefits of modularity: modular
design reduces the interdependence among modules and
minimizes the need for the sharing of proceeds. We sum-
marize these key findings in Table 8.
MIS Quarterly Vol. 41 No. 1/March 2017 149
Chen et al./IPR Sharing in Software Development Outsourcing

Table 6. Regression Results (Dependent Variable = Extent of Vendors IPR)

Two-Stage Control Function 2SRI SURE
(1) (2) (3) (4) (5) (6) (7)
VARIABLES Pricing Ownership Use Right Ownership Use Right Ownership Use Right
-0.588** -0.321 -0.869** -1.048* -0.749** -0.119
Flexible pricing
(0.232) (0.419) (0.392) (0.577) (0.323) (0.226)
-0.277 0.086 0.608** 0.014 0.895*** 0.076 0.365***
Newness
(0.172) (0.183) (0.253) (0.198) (0.282) (0.205) (0.123)
0.388** 0.337** 0.489** 0.325** 0.462** 0.291* 0.237**
Complexity
(0.164) (0.144) (0.203) (0.142) (0.200) (0.156) (0.111)
-0.217 -0.478** -0.883*** -0.517** -1.080*** -0.400 -0.501***
Customization
(0.267) (0.234) (0.312) (0.234) (0.327) (0.297) (0.175)
0.227 0.472* 0.767** 0.518** 0.624** 0.347* 0.449***
Proprietary
(0.242) (0.243) (0.303) (0.247) (0.308) (0.186) (0.167)
0.390 -0.707*** -0.695** -0.634** -1.071*** -0.421** -0.429**
Modularity
(0.244) (0.245) (0.334) (0.255) (0.382) (0.174) (0.179)
-0.126 0.222 0.144 0.199 0.021 0.111 0.078
Prior
(0.296) (0.279) (0.341) (0.280) (0.347) (0.363) (0.198)
0.135 0.043 0.318 0.082 0.104 0.014 0.172
Vendor reputation
(0.257) (0.231) (0.296) (0.235) (0.310) (0.306) (0.170)
0.447* -0.550** -0.314 -0.457 -0.073 -0.725** -0.237
Year dummy
(0.256) (0.271) (0.326) (0.287) (0.363) (0.298) (0.162)
0.281 0.091 -0.064 0.132 -0.183 0.113 -0.056
Dominant client
(0.268) (0.227) (0.312) (0.231) (0.319) (0.310) (0.183)
0.170 -0.253 -0.297 -0.224 -0.343 -0.265 -0.134
Piracy level
(0.226) (0.223) (0.248) (0.222) (0.249) (0.267) (0.145)
-0.047 -0.308*** -0.036 -0.301*** -0.277 -0.387 -0.012
Log(vendor age)
(0.125) (0.111) (0.331) (0.110) (0.343) (0.307) (0.180)
0.272 -0.303 0.034 -0.238 0.058 -0.404*** -0.013
High tech client
(0.244) (0.247) (0.151) (0.255) (0.151) (0.148) (0.086)
-0.256** -0.054 -0.444*** -0.010 -0.587*** -0.110 -0.236***
Log(client age)
(0.102) (0.116) (0.153) (0.123) (0.165) (0.122) (0.076)
-0.003 -0.071 0.054 -0.070 0.031 -0.038 0.019
Client size
(0.070) (0.063) (0.080) (0.063) (0.082) (0.083) (0.047)
-0.149 0.271* 0.024 0.235 0.170 0.476** 0.022
Log(length)
(0.168) (0.162) (0.220) (0.164) (0.232) (0.209) (0.127)
1.307** 0.469 0.869 0.775 -0.168 0.680 0.543*
Non-compete
(0.641) (0.454) (0.540) (0.601) (0.766) (0.523) (0.289)
0.575**
Public vendor
(0.249)
0.095
Distance dummy
(0.230)
-0.414*
Labor cost
(0.208)
0.223 -0.060 0.301 -0.856*
Lambda/Residual
(0.643) (0.829) (0.356) (0.496)
Observations 169 169 89 169 89 89 89
Log likelihood -85.78 -166.14 -83.87 -165.85 -82.36 -117.6 -117.6
Pseudo R/R 0.164 0.159 0.212 0.161 0.227 0.127 0.385
Note: Two contracts did not disclose the lengths. All coefficients represent marginal effects. Standard errors in parentheses. ***p < 0.01, **p <
0.05, *p < 0.10

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 Chen et al./IPR Sharing in Software Development Outsourcing

Table 7. Two-Stage Control Function Analysis Results (Dependent Variable = Propensity of Individual
IPR Sharing)
(1) (2) (3) (4) (5) (6) (7) (8)
VARIABLES Program Material Data Derivative Other Use Redeploy Sell
-0.701*** -0.761*** -0.755*** -0.539** -0.438* -0.051 -0.667 -0.387
Flex. pricing
(0.235) (0.236) (0.235) (0.233) (0.226) (0.517) (0.674) (0.552)
-0.025 -0.142 -0.058 0.032 0.119 0.404 0.801** 0.471
Newness
(0.186) (0.188) (0.187) (0.186) (0.181) (0.309) (0.351) (0.310)
0.347** 0.338** 0.194 0.364** 0.313** 0.320 0.502 0.505*
Complexity
(0.149) (0.149) (0.151) (0.150) (0.144) (0.251) (0.360) (0.264)
-0.257 -0.313 -0.502** 0.031 -0.168 -1.085*** -0.771 -1.145***
Customization
(0.234) (0.235) (0.234) (0.231) (0.226) (0.398) (0.510) (0.399)
0.625** 0.686*** 0.618** 0.359 0.505** 0.656* 0.916** 0.634*
Proprietary
(0.254) (0.255) (0.254) (0.247) (0.237) (0.376) (0.405) (0.382)
-0.703*** -0.599** -0.211 -0.671*** -0.699*** -0.556 -0.860* -0.516
Modularity
(0.246) (0.245) (0.248) (0.248) (0.240) (0.425) (0.493) (0.441)
0.254 0.197 0.156 0.397 0.070 -0.028 0.715 0.693
Prior
(0.276) (0.277) (0.282) (0.274) (0.262) (0.409) (0.601) (0.431)
0.085 -0.037 0.005 0.320 -0.008 0.356 -0.115 0.281
V. reputation
(0.237) (0.237) (0.237) (0.237) (0.227) (0.359) (0.464) (0.382)
-0.715*** -0.547** -0.559** -0.762*** -0.925*** -0.067 -0.402 -0.687
Year dummy
(0.271) (0.268) (0.270) (0.268) (0.261) (0.400) (0.539) (0.443)
0.058 0.199 0.156 -0.255 0.108 -0.679* 0.720 0.068
Dom. client
(0.233) (0.234) (0.234) (0.237) (0.224) (0.412) (0.491) (0.387)
-0.385* -0.263 -0.000 -0.433* -0.312 -0.063 -0.655 -0.259
Piracy level
(0.231) (0.229) (0.227) (0.229) (0.217) (0.296) (0.444) (0.309)
-0.322 -0.236 -0.421 -0.483* -0.458* -0.581 0.453 -0.021
Log(v. age)
(0.253) (0.253) (0.257) (0.250) (0.246) (0.421) (0.575) (0.192)
-0.172 -0.219* -0.219* -0.172 -0.168 -0.097 0.381 0.366
H. tech client
(0.112) (0.113) (0.113) (0.110) (0.107) (0.187) (0.262) (0.424)
-0.155 -0.132 -0.087 -0.064 -0.081 -0.282 -0.484** -0.295
Log(client age)
(0.117) (0.117) (0.118) (0.118) (0.112) (0.182) (0.241) (0.189)
0.026 0.029 0.028 -0.047 0.022 0.099 0.069 -0.014
Client size
(0.064) (0.064) (0.064) (0.064) (0.061) (0.101) (0.129) (0.098)
0.360** 0.374** 0.353** 0.297* 0.340** 0.160 0.456 0.369
Log(length)
(0.170) (0.170) (0.173) (0.171) (0.161) (0.283) (0.346) (0.287)
0.285 0.441 0.132 0.566 0.157 -0.051 1.112 1.183
Non-compete
(0.490) (0.490) (0.492) (0.474) (0.470) (0.694) (0.727) (0.735)
Lambda -0.054 -0.021 0.102 -0.590 -0.373 0.051 -0.212 1.470
(0.651) (0.657) (0.665) (0.661) (0.631) (0.517) (1.278) (1.224)
Observations 169 169 169 169 169 89 89 89
Pseudo R 0.200 0.196 0.158 0.170 0.175 0.226 0.328 0.300
Note: For the first stage result, refer to Column (1) in Table 6. Two contracts did not disclose the lengths. Standard errors in parentheses. ***p
< 0.01, **p < 0.05, *p < 0.1

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Chen et al./IPR Sharing in Software Development Outsourcing

Table 8. When to Share Individual IPR (Based on the main results in Table 7)
Transaction Characteristics
Contract requires Contract requires
Vendors Vendors high relationship- high relationship-
bargaining bargaining specific specific SDO project has
power is high power is high investment investment high uncertainty
(measured by (measured by (measured by (measured (measured by
Instance of IPR proprietary) modularity) newness) customization) complexity)
Program Yes Yes No No Yes
Material Yes Yes No No Yes
Data Yes No No Yes No
Derivative No Yes No No Yes
Other Yes Yes No No Yes
Right to use Yes No No Yes No
Redeployment Yes Yes Yes No No
Right to sell Yes No No Yes Yes

Among all the controls, flexible pricing was negatively
associated with the all of the ownership types but not the
usage rights. The negative coefficients of pricing indicate
substitutive relationships between two types of incentive
mechanisms: monetary incentive and property ownership
incentive. Prior interaction and vendor reputation were not
significantly associated with any of the IPR. The year dummy
was negatively and significantly associated with all instances
of the ownership but not the usage rights, indicating that, in
more recent years, clients were more reluctant to cede owner-
ship to vendors, perhaps due to greater level of industry
maturity and standardization. Contract length was positive
and significant for all ownership types but not the usage
rights. This result suggests that ownership sharing is used
more often as an incentive mechanism than usage rights
sharing in long-term contracts. Other controls such as vendor
age, dominant clients, high tech clients, client age, client size,
and non-compete were largely not significant factors in
influencing IPR sharing propensities.
Robustness Checks
Additional robustness checks, beyond the two-stage control
functions estimation described above, were also carried out.
One concern is related to the exclusion restriction of the three
instruments used in our models. We performed a two-stage
least square estimation on the extent of vendor ownership by
including the three instrumental variables. The Sargan
statistic (for test of over-identification) was 4.93 at p-value =
0.085 under the null hypothesis that the all instruments are
valid instruments. Therefore, we failed to reject the null
hypothesis at the p < 0.05 level, demonstrating that the three
instruments are indeed good instruments to control for the
potential endogeneity of pricing structure.
We also used the two-stage residual inclusion (2SRI) method
to estimate the extent of IPR sharing and the propensity of
individual rights sharing. Instead of using the error correction
term (i.e., Lambda), we included the response residual in the
first-stage probit analysis as an additional regressor in the
second-stage estimation. Prior econometric literature has
proved that 2SRI estimation is consistent for nonlinear
regression models (Terza et al. 2008). The results of the
extent of IPR sharing were reported in Columns (4) and (5) in
Table 6. We report the 2SRI estimation of individual IPR
sharing propensity models in Table 9. The 2SRI results for
the main explanatory variables were mainly consistent with
the results of using error correction terms in the control
function estimation.
Another concern relevant to our study is to examine whether
vendors preferred additional ownership when compared to
usage rights. In estimating the vendors aggregate number of
IPR as the dependent variable, our results do not provide any
information about the relative importance of these two sets of
rights. To examine this possibility, we used the Chow test
after a seemingly unrelated regression (SURE) (Green 2003)
of 90 contracts to examine whether there exist significant
differences in preferences between ownership and usage
rights (Columns (6) and (7) in Table 6). The Chow test
revealed significant differences between the estimated coeffi-
cients of all five main explanatory variables in the regressions
of the extent of ownership and usage rights at the p < 0.05
level. The marginal effects of four main variablesproject

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Table 9. Two-Stage Residual Inclusion (2SRI) Estimation Results

(1) (2) (3) (4) (5) (6) (7) (8)
VARIABLES Program Material Data Derivative Other Use Redeploy Sell
Flexible pricing -0.765* -0.869** -1.009** -0.262 -0.433 -1.365* -1.375 -0.081
(0.395) (0.396) (0.400) (0.399) (0.377) (0.768) (0.884) (0.720)
Newness -0.059 -0.188 -0.139 0.033 0.052 0.737** 1.063** 0.577*
(0.198) (0.199) (0.198) (0.198) (0.191) (0.367) (0.518) (0.334)
Complexity 0.338** 0.326** 0.175 0.353** 0.288** 0.315 0.509 0.446*
(0.147) (0.147) (0.148) (0.149) (0.142) (0.250) (0.372) (0.255)
Customization -0.278 -0.339 -0.544** 0.027 -0.213 -1.344*** -0.598 -1.209***
(0.235) (0.236) (0.235) (0.233) (0.228) (0.443) (0.543) (0.407)
Proprietary 0.650** 0.719*** 0.672*** 0.362 0.551** 0.539 0.717 0.539
(0.257) (0.258) (0.256) (0.250) (0.239) (0.391) (0.520) (0.389)
Modularity -0.667*** -0.551** -0.125 -0.676*** -0.628** -0.988** -1.207** -0.622
(0.256) (0.255) (0.258) (0.261) (0.249) (0.492) (0.597) (0.476)
Prior 0.243 0.183 0.131 0.403 0.052 0.095 0.851 0.597
(0.277) (0.278) (0.283) (0.276) (0.263) (0.428) (0.633) (0.427)
Vendor reputation 0.102 -0.014 0.046 0.315 0.027 0.125 -0.373 0.199
(0.240) (0.240) (0.240) (0.240) (0.230) (0.378) (0.526) (0.396)
Year dummy -0.672** -0.489* -0.455 -0.770*** -0.843*** -0.519 -0.031 -0.490
(0.287) (0.284) (0.285) (0.285) (0.275) (0.472) (0.602) (0.477)
Dominant client 0.077 0.225 0.202 -0.262 0.142 -0.846* 0.641 0.036
(0.238) (0.238) (0.239) (0.242) (0.229) (0.435) (0.507) (0.391)
Piracy level -0.369 -0.242 0.038 -0.425* -0.278 -0.111 -0.697 -0.272
(0.231) (0.229) (0.227) (0.228) (0.217) (0.300) (0.440) (0.307)
Log(vendor age) -0.171 -0.217* -0.213* -0.185* -0.173 -0.869* -0.446 0.239
(0.111) (0.112) (0.112) (0.110) (0.107) (0.457) (0.290) (0.435)
High tech client -0.288 -0.191 -0.338 -0.481* -0.389 -0.088 0.258 0.015
(0.259) (0.259) (0.263) (0.257) (0.252) (0.192) (0.591) (0.189)
Log(client age) -0.179 -0.163 -0.141 -0.066 -0.127 -0.454** -0.605** -0.346*
(0.124) (0.124) (0.124) (0.124) (0.118) (0.208) (0.262) (0.194)
Client size 0.029 0.032 0.033 -0.049 0.025 0.084 0.045 -0.015
(0.064) (0.064) (0.064) (0.064) (0.061) (0.103) (0.133) (0.098)
Log(length) 0.340* 0.347** 0.305* 0.295* 0.302* 0.334 0.608 0.339
(0.174) (0.174) (0.175) (0.174) (0.164) (0.297) (0.381) (0.299)
Non-compete 0.399 0.603 0.445 0.431 0.317 1.426 0.082 1.022
(0.621) (0.619) 0.619 (0.610) (0.600) (1.018) (1.149) (1.047)
Residual 0.074 0.121 0.278 -0.274 0.019 -1.345** -0.912 0.249
(0.354) (0.354) (0.357) (0.360) (0.341) (0.651) (0.831) (0.652)
Observations 169 169 169 169 169 89 89 89
Log likelihood -126.6 -126.3 -125.93 -127.2 -139.6 -42.63 -27.52 -43.03
Pseudo R 0.200 0.196 0.160 0.169 0.174 0.259 0.344 0.288
Note: Two contracts did not disclose the lengths. Standard errors in parentheses. ***p < 0.01, **p < 0.05, *p <0.10.

MIS Quarterly Vol. 41 No. 1/March 2017 153

Chen et al./IPR Sharing in Software Development Outsourcing
newness, customization, proprietary, and modularityon
usage rights are larger than those on ownership, demon-
strating that clients preferred to cede vendors usage rights
rather than grant ownership when they outsourced for devel-
opment projects of high asset-specificity and when the
vendors bargaining power was relatively strong.
The pricing structure is potentially endogenous to contractual
IPR allocation as mentioned above. The selection of the
pricing structure may influence the IPR allocations and these
effects may differ across the selected pricing model. To
assess the consequences for self-selection on vendor IPR allo-
cation, in the second stage of the control function estimation,
we divide the dataset into two subgroups, flexible pricing and
fixed pricing contracts, and run two separate ordered probit
estimations to estimate the parameters across the two pricing
structures. As shown in Table 10, the estimated parameters
varied across the two pricing structures. Project newness,
customization, and proprietary technology were significant
only for flexible pricing contracts but not for fixed pricing
ones. Clients expectations about the higher risk of flexible
pricing coupled with appropriation concerns and dependence
on vendors technology may have led to IPR sharing as a
particularly useful mechanism to reduce ex post opportunism.
Task complexity was positive and significant for the extent of
ownership sharing in fixed pricing contracts but not for
flexible price contracts, indicating that the effect of IPR
allocation on addressing the uncertainty-caused ex post
opportunism issues is more prominent in fixed pricing
contracts. Modularity was negative and significant for both
fixed and flexible pricing contracts in terms of ownership
sharing but not for usage rights, demonstrating that modular
design decreased the need for ownership-based incentive
mechanisms. The different results across two types of pricing
contracts provide a more insightful understanding of how
IPR-based incentives substitute for pricing incentives in
different kinds of outsourcing tasks.
Another concern relates to the high percentage of flexible
pricing contracts in our sample (71%). One of the possible
explanations might be that some contracts combined software
development and maintenance services in one agreement and
used both fixed and flexible pricing methods for different
tasks. We tried to address this issue by dropping contracts
with long durations (more than 60 months) from the sample
and reran the two-stage control function analysis of individual
IPR sharing. When dropping long contracts, we assumed that
such contracts were hybrid contracts. As a result, 24 con-
tracts were dropped from the sample. Among 147 contracts
left in the sample, 101 contracts (68%) were flexible pricing
ones and the other 46 were fixed pricing ones. The main
results of this alternative sample were consistent with the
results using our full sample. This set of robustness check
154 MIS Quarterly Vol. 41 No. 1/March 2017
results is reported in Table 11. Although the ratio of flexible
pricing contracts is still high compared to other studies, the
consistent results obtained indicate that the potential over-
sampling of flexible pricing should not pose a significant
concern to the results reported here.
Discussion and Conclusion
We started this paper by highlighting two research gaps in our
understanding of the IPR and the determinants of IPR
allocation in SDO. Bridging these gaps is important for
developing a consistent theoretical framework for analyzing
IPR allocation in SDO contract design, especially as
intellectual property has become more important to the
competitive positioning of firms in the digital economy
(Leiponen 2008; Lerner and Malmendier 2010). Our paper is
among the first to comprehensively examine the different
types of IPR involved in software development processes.
Modern property rights theory (Grossman and Hart 1986;
Hart 1988; Hart and Moore 1990) defines ownership as the
control rights over the assets. This simplified notion of
ownership implicitly assumes a monolithic nature of property
rights and fails to account for a multifaceted concept of
property rights as asset ownership is actually a bundle of
partitions of property rights (Alchian and Demsetz 1972,
1973). Our study overcomes this limitation through a com-
prehensive content analysis of 171 SDO contracts. We find
that IPR embodied in software contracts is not monolithic.
Instead it is a hybrid bundle of ownerships and usage rights
and the ways that these rights are allocated are quite diverse
across software contracts. For example, about 53% of the
contracts in our sample offered sole ownership of the software
program to the client; less than 37% granted any rights to the
vendor, and the remaining 10% provided for joint ownership
between the two contract parties. This ratio in our sample is
consistent with the SDO practice that clients own all the IPR
of deliverables based on the default work-made-for-hire rule
and it also hints that the value of different types of IPR are
heterogeneous and contract specific. The empirical finding on
the diversity of IPR framework sheds light on the multifaceted
nature of IPR in SDO contracts and responds to the calls for
correcting the PRT theory for the lack of accounting for
partitioning of ownership (Kim and Mahoney 2005, p. 236).
As a significant step in this direction, our study suggests that
IPR allocation in incomplete contracts should take into
account different types of IPR and their independent values in
contractual relationships. Hence our research enriches the
modern property rights theory and adds to the growing body
of literature that examines contractual governance of SDO
contracts (Chen and Bharadwaj 2009; Susarla et al. 2010;
Walden 2005; Whang 1992).
 Chen et al./IPR Sharing in Software Development Outsourcing

Table 10. Second-Stage Ordered Probit Analysis Results

Ownership Usage Rights
(1) (2) (3) (4)
VARIABLES Fixed Flexible Fixed Flexible
0.176 0.405** 1.194 0.491**
Newness
(0.252) (0.184) (1.439) (0.203)
0.596** 0.277 1.012 0.569***
Complexity
(0.262) (0.177) (0.937) (0.221)
-0.631 -0.650** -2.092 -0.521*
Customization
(0.407) (0.270) (1.424) (0.303)
-0.234 0.776*** -0.125 0.496*
Proprietary
(0.416) (0.290) (1.370) (0.296)
-0.814* -1.070*** -0.385 -0.512
Modularity
(0.455) (0.277) (1.101) (0.326)
-0.586 -0.688** -0.610 -0.113
Year dummy
(0.479) (0.284) (2.912) (0.312)
-0.067 -0.484** -2.009* -0.268
Log(length)
(0.245) (0.198) (1.093) (0.218)
-0.861 -0.191 2.410 -1.149
Lambda
(0.701) (0.483) (1.719) (0.706)
Observations 50 119 17 72
Log likelihood -57.55 -105.9 -11.68 -72.68
Pseudo R 0.069 0.195 0.447 0.145
Note: due to the small sample size, we only included the main explanatory variables in the regressions. Standard errors in parentheses. ***p <
0.01, **p < 0.05, *p < 0.1

The results show that IPR sharing depends on the vendors
bargaining power, asset-specificity, and the degree of uncer-
tainty in SDO projects. But different types of intellectual
property rights have different values and functions to motivate
the contract parties and safeguard against contractor oppor-
tunism. All of the ownerships, with the exception of deriva-
tive ownership, seem quite sensitive to the relative bargaining
power of the parties measured by proprietary technology.
When a software development project relied more on the
vendors proprietary technology, the predicted sharing of
ownership increased, a finding that is consistent with prior
theory (Aghion and Tirole 1994; Argyres and Liebeskind
1999; Kim and Mahoney 2005). Project level uncertainty is
another important determinant to the division of IP rights.
Many software development projects are replete with uncer-
tainty and performance risk. We find that this is explicitly
taken into account in the contract parties investment deci-
sions and addressed up front in contract negotiation through
IPR sharing. We find that for the majority of intellectual
assets, the vendors ownership increased with the task com-
plexity of outsourced projects. The finding suggests that
clients can effectively use IP ownership as an incentive
mechanism to ensure vendors investment efforts in tasks with
a high degree of uncertainty. Derivative ownership is useful
in SDOs that are replete with project and performance uncer-
tainties but may not work in projects requiring a high level of
asset specificity. Our finding of negative impacts of modu-
larity on IP ownership sharing indicates that client firms can
use software modularity to offset the need to share ownership
with vendors. A strategic implication of this finding is that
investment on developing product and process modularization
capabilities can be very valuable for client companies.
Beyond ownership rights, clients can also grant usage rights
to encourage vendors to invest in relationship-specific assets.
However, when significant uncertainties exist, usage and
redeployment rights do not appear to be useful mechanisms
for incentivizing vendors. Instead, clients may consider
granting vendors the right to sell the developed software if
they do not want to cede any property ownership to vendors.
IP owners have full control over future income because
ownership confers the ability to make decisions affecting the
distribution of an income stream whose magnitude and even
existence are uncertain ex ante. A significant managerial

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Table 11. Analysis Results after Dropping 24 Long Contracts

(1) (2) (3) (4) (5) (6) (7) (8) (9)
VARIABLES pricing program material data derivative other use redeploy sell
-0.789*** -0.921*** -0.869*** -0.568** -0.546** -0.113 -1.193* -0.369
Flex. pricing
(0.257) (0.259) (0.260) (0.256) (0.248) (0.583) (0.652) (0.637)
-0.267 -0.084 -0.171 -0.129 -0.067 0.133 -0.085 0.485** 0.468
Newness
(0.188) (0.200) (0.202) (0.202) (0.202) (0.195) (0.339) (0.236) (0.332)
0.383** 0.317** 0.349** 0.265* 0.302* 0.277* 0.783*** 0.256** 0.712**
Complexity
(0.167) (0.157) (0.157) (0.161) (0.159) (0.152) (0.276) (0.124) (0.299)
-0.159 -0.197 -0.282 -0.570** 0.103 -0.139 -0.689* -0.406** -1.133***
Customization
(0.293) (0.247) (0.248) (0.251) (0.246) (0.239) (0.409) (0.195) (0.435)
0.188 0.617** 0.638** 0.585** 0.489* 0.478* 0.459 0.218* 0.781*
Proprietary
(0.266) (0.276) (0.278) (0.281) (0.276) (0.258) (0.441) (0.126) (0.443)
0.284 -0.794*** -0.660** -0.281 -0.750*** -0.722*** -0.256 -2.939* -0.678
Modularity
(0.266) (0.267) (0.268) (0.274) (0.270) (0.261) (0.496) (1.549) (0.501)
0.270 0.192 0.285 0.205 0.203 0.161 0.718 0.476 0.436
Prior
(0.356) (0.316) (0.320) (0.328) (0.318) (0.301) (0.502) (1.802) (0.483)
0.189 -0.067 -0.121 0.022 0.203 -0.092 0.316 -0.197 -0.043
V. reputation
(0.282) (0.261) (0.262) (0.264) (0.262) (0.250) (0.407) (0.128) (0.434)
0.569** -0.586** -0.452 -0.458 -0.622** -0.867*** -0.528 -0.090 -0.951*
Year dummy
(0.277) (0.280) (0.281) (0.286) (0.279) (0.271) (0.430) (0.951) (0.538)
0.505* 0.044 0.167 0.176 -0.286 0.115 -0.819* 0.362* -0.219
Dom. client
(0.299) (0.250) (0.252) (0.253) (0.257) (0.241) (0.440) (0.201) (0.436)
0.146 -0.258 -0.207 0.037 -0.296 -0.244 0.233 -0.215* -0.185
Piracy level
(0.236) (0.238) (0.242) (0.242) (0.238) (0.226) (0.341) (0.118) (0.323)
-0.015 -0.207* -0.224* -0.269** -0.178 -0.190 -0.105 -0.078 -0.097
Log(v. age)
(0.035) (0.121) (0.123) (0.125) (0.120) (0.116) (0.204) (1.145) (0.217)
-0.077 -0.468 -0.322 -0.559* -0.578** -0.565** -0.626 0.303* 0.289
H. tech client
(0.138) (0.287) (0.290) (0.302) (0.287) (0.279) (0.450) (0.165) (0.458)
0.195 -0.089 -0.019 0.004 -0.059 -0.006 -0.166 0.340 0.303
Log(c. age)
(0.271) (0.126) (0.127) (0.131) (0.127) (0.122) (0.206) (0.573) (0.215)
-0.245** 0.030 0.006 -0.001 -0.006 0.016 0.207* 0.158** 0.003
Client size
(0.120) (0.070) (0.070) (0.071) (0.070) (0.068) (0.115) (0.072) (0.114)
-0.098 0.363* 0.450** 0.472** 0.401* 0.457** 0.004 0.303** 0.270
Log(length)
(0.079) (0.216) (0.218) (0.226) (0.223) (0.209) (0.376) (0.128) (0.398)
-0.314 0.494 0.566 0.158 0.984* 0.256 1.254 0.456** 1.862**
Non-compete
(0.241) (0.517) (0.518) (0.524) (0.506) (0.500) (0.829) (0.202) (0.909)
1.178*
Public vendor
(0.671)
0.812***
Dis. dummy
(0.288)
-0.430
Labor cost
(0.255)
-0.322 -0.380 -0.267 -0.412 -0.689 0.341 0.228 2.030
Lambda
(0.718) (0.728) (0.757) (0.726) (0.698) (1.127) (0.342) (1.598)
Observations 147 147 147 147 147 147 80 80 80
Log likelihood -70.75 -109.1 -108.2 -106.0 -107.6 -119.5 -37.68 -13.36 -36.29
Pseudo R 0.204 0.203 0.205 0.181 0.189 0.180 0.305 0.640 0.343
Standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.10

156 MIS Quarterly Vol. 41 No. 1/March 2017


implication of these results for SDO client firms is that
sharing of individual IPR can be used as incentives for non-
contractible investments and to safeguard from ex post
opportunism. When and how to use IPR sharing will however
depend on the relative bargaining position of vendors, the
complexity level of the SDO projects, and the asset specificity
of the underlying investments.
Naturally, there are some limitations to our study. First, the
data were limited to information disclosed in SEC filings and
complementary data sources. These sources provided limited
background information about the vendors and the clients.
Our choice of variables was subject to the availability of the
contract data. Although our results are suggestive of the
effects of software characteristics such as task complexity,
proprietary technology, and modularity on the decisions of
IPR allocation, our measures are somewhat blunt and may not
perfectly capture or fully reflect the breadth of the underlying
project and technology characteristics. The results obtained
here are also subject to potential sample selection bias, in the
sense that we only observe contracts for publicly listed firms
and only those contracts that the firms choose to file with the
SEC.
Notwithstanding these limitations, the results obtained here
facilitate a greater understanding of SDO contracts. Our
coding scheme for IPR can be extended to studies of other
types of technology development agreements. It will be
interesting to examine IPR provisions across a diversity of
technology agreements in different industries. Another direc-
tion for future research is to investigate the effects of modular
design on outsourcing choices. For example, our results
suggest interesting linkages among modularity, task com-
plexity, and proprietary technology in the design of contracts.
An interesting extension of our study would be to explore
how modular design influences the type of sourcing in the
sense of multi-vendor versus single-vendor and the levels of
task complexity and customization therein.
The pricing structure in SDO contracts is another interesting
variable worthy of further exploration, especially in conjunc-
tion with IPR assignments. Pricing is negatively and
significantly associated with all types of ownership but not for
usage rights. The negative marginal effects suggest that IPR
sharing substitutes for pricing structure when it functions to
motivate relation-specific investments. The results in Table
10 also indicate that clients allocate more IPR to vendors in
fixed-price contracts and for complex tasks. Past studies have
shown that clients favor fixed price contracts over time and
material contracts (Gopal and Sivaramakrishnan 2008)
because they can transfer risks to vendors via fixed pricing.
We also find that clients use IPR sharing in flexible pricing
contracts that require vendors to invest a high level of
Chen et al./IPR Sharing in Software Development Outsourcing
relation-specific assets or when vendors have relatively strong
bargaining power. These findings suggest that IPR allocation
can be used to address residual contractual hazards and hence
complement pricing incentives. This result has important
strategic implications for incomplete contracting and requires
further examination.
Finally, it is also interesting to note that the vendors share of
IPR in SDO contracts seems to have decreased in recent
years. The results based on a binary distribution of the
sample into two time periods (before and after year 2000),
shows less vendor IPR allocation in the latter period.
Additional regression analyses by calendar year show that
IPR sharing arrangements have been less frequently used over
time and that the extent of IPR sharing (depth of use) has
decreased over the years. One possible explanation for this
trend is that writing IPR clauses in contracts requires adequate
specification of property rights and therefore the cost of
negotiation for IPR is higher than that for other contractual
governance mechanisms such as pricing and revenue sharing.
Whether or not the reduced usage of IPR sharing in later years
is due to a learning effect is left for future research.
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About the Authors
Yuanyuan Chen is an assistant professor in the Department of
Information Systems at the National University of Singapore (NUS).
She joined NUS in September 2008 after she received her Ph.D.
(2008) and LL.M. (Master of Law) degrees from Emory University
(USA). She also holds a LL.M. degree from National Huaqiao
University (China) and is a certified lawyer in China. Yuanyuans
current research focuses on law and economics of IT and IT-enabled
services. In specific, her research interests include the following
three areas: economics of intellectual property; global governance
framework for cloud computing; and cybersecurity and data
protection. Her research has been published in journals such as
Information Systems Research, Journal of Strategic Information
Systems, and Journal of Singapore Academy of Law.
Anandhi Bharadwaj is the Goizueta Term Professor of Information
Systems at the Goizueta Business School, Emory University. Her

research interests include the business value and impact of infor-
mation technology, digital business strategies, healthcare processes
and systems, and technology outsourcing. She currently serves as
a department editor at Management Science. She also has served as
a senior editor at Information Systems Research (20092015), and
as an associate editor at Management Science (20072014), Infor-
mation Systems Research (20032008), MIS Quarterly (20022004),
and Journal of the AIS (20022008). Her research has won
numerous awards and been published in several leading journals
such as Information Systems Research, Management Science, MIS
Quarterly, Organization Science, Productions & Operations Man-
agement, IEEE Transactions, and Annals of Operations Research.
She has presented her research at numerous national and inter-
national conferences.
Khim-Yong Goh is an associate professor of Information Systems
and Assistant Dean (External Relations) in the School of Computing
Chen et al./IPR Sharing in Software Development Outsourcing
at the National University of Singapore (NUS). He received his
Ph.D. degree (2005) in Business Administration (Marketing:
Economics and Quantitative Methods) from the University of
Chicago, Booth School of Business. He holds a B.Sc. (First Class
Honours) degree (1997) in Computer and Information Sciences and
a M.Sc. degree (1998) in Information Systems from the National
University of Singapore. Khim-Yongs research interests include
consumer and firm behaviors in markets with network and social
interaction effects, marketing and advertising in digital media
environments, competitive product, pricing and promotional
strategies in IT-mediated markets, and applied econometric and data
analytic methods. Khim-Yongs research work has been published
in top-ranked international academic journals such as Management
Science, Journal of Marketing Research, Information Systems
Research, IEEE Transactions on Engineering Management, Journal
of the Association for Information Systems, Information and
Management, Journal of Interactive Marketing, and Journal of
Electronic Commerce Research.
MIS Quarterly Vol. 41 No. 1/March 2017 161
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