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Session Overview

This session focuses on a new vision of innovation management for the 21st century, that of “open innovation.” It considers empirical evidence on the use of external innovations by firms, and the implications of such evidence for the theory of open innovation, and more generally for theories of innovation and firm competitive advantage. The topic of external innovation will be addressed by an international team utilizing a broad range of methods and data sources.

Overcoming Limitations of Traditional Innovation Models

As developed by Chesbrough (2003), the open innovation paradigm provides a mechanism for identifying and incorporating external innovations, as well as a way to monetize otherwise wasted outputs of internal innovation efforts.

It focuses on the limitations of the efficacy of the model of vertically integrated firm innovation common to large firms of the latter half of the 20th century. In particular, the traditional model assumes that a firm needs to have its own basic research to develop new ideas for innovations, and that only those ideas are worth commercializing; this leads to a “not invented here” bias, in which scientists and engineers ignored technological breakthroughs that occurred outside the firm. The second problem is that some innovations could not be commercialized within the firm, and thus the returns to those innovations spill over to new or existing competitors (Klepper, 2001; Chesbrough, 2002).

Teece (1986) had long suggested that smaller firms that are incompletely integrated (or unable to appropriate their returns) should license their technology or procure missing parts of the value equation from external suppliers. However, the implication from Teece is that larger firms with commensurate resources could and should continue the fully integrated model.

However, the reality is that at the end of the 20th century and beginning of the 21st century, an increasing number of even the largest firms have found it impractical to maintain the fully integrated funnel. Some companies have long used more flexible strategies for innovation; firms such as Intel and Cisco have relied heavily on externally sourced technology, while others such as Microsoft and Qualcomm have relied on other firms to commercialize their technologies. Meanwhile, firms that previously championed the fully integrated model, such as IBM and Proctor & Gamble, today are moving to a more open model that maximizes the returns from internal and external innovation.

Open Innovation and the Use of External Innovation

Open Innovation (Chesbrough, 2003) describes a 21st century paradigm for industrial innovation, in which firms work with external partners to both commercialize their internal innovations and provide a source of external innovations that can be commercialized. This panel focuses on the second half of that paradigm, the use of external innovation.

A firm embracing external innovation would use a broad range of sources for a firm’s innovation and invention activities, including customers, rivals, academics, and firms in unrelated industries while simultaneously using creative methods to exploit a firm’s resulting IP (Chesbrough, 2003). While the use of external sources of innovation is nothing new, recently the most successful high-tech firms have been those that “free ride” on the basic research of others. The open innovation paradigm therefore goes beyond simply the externalization of research and development and is as much a change in the use and management of IP as it is in technical and research driven generation of IP.

Many models have been developed to explain how firms can exploit external knowledge. Perhaps the simplest method is to imitate a competitor: such free riding on the product and market investments of rivals is a common way for firms to overcome a first mover strategy (Lieberman and Montgomery, 1998). Investing in R&D increases the ability to absorb externally produced innovation and knowledge (Cohen and Levinthal, 1990). Consulting with customers can provide firms ideas about discovering, developing, and refining innovations (von Hippel, 1988). Public sources are also an important source of knowledge, for example government R&D spending was identified almost 50 years ago as an important stimulus for private R&D (David, Hall, and Toole, 2000). Similarly, university research is often explicitly funded to generate external spillovers (Colyvas et al, 2002).

Despite this prior research related to external innovation, there are major gaps in what we know. The lack of empirical work specifically focused on open innovation leaves the following among the unanswered questions about external innovation:

• How does the widespread use of external innovation impact the boundaries of the firm, barriers to entry and imitation?
• Does external innovation change the importance of innovation as a core competency and source of competitive advantage? Or does it merely shift from one type of innovation (such as component innovation) to another such as systems integration (cf. Prencipe et al, 2004)?
• Is external innovation most appropriate for mature industries where other capabilities such as branding and distribution offer more potential for advantage than innovation? Or can it also be applied in young, high-growth industries with high levels of technological uncertainty?

References

Chesbrough, Henry (2002) “Graceful exits and missed opportunities: Xerox’s management of its technology spin-off organizations,” Business History Review 76, 4, 803-838.

Chesbrough, Henry (2003) Open Innovation, Boston: Harvard Business School Press.

Cohen, Wesley M. and Daniel A. Levinthal (1990) “Absorptive Capacity: A New Perspective on Learning and Innovation,” Administrative Science Quarterly,35, 1, 128-152.

Colyvas, Jeannete, Michael Crow Annetine Gelijns, Roberto Mazzoleni, Richard Nelson, Nathan Rosenberg, and Bhaven N. Sampat (2002) “How do university inventions get into practice?” Management Science, 48, 1, 61–72.

David, P.A., Hall, B.H., and Toole, A.A. (2000) “Is public R&D a complement or substitute for private R&D? A review of the econometric evidence.” Research Policy, 29, 4-5, 497-529.

Klepper, Steven (2001) “Employee Startups in High-Tech Industries,” Industrial and Corporate Change, 10, 1, 639-674.

Lieberman, Marvin B. and David B. Montgomery (1998) “First mover (dis)advantages: retrospective and link with the resource-based view.” Strategic Management Journal,19, 12, 1111-1125.

Prencipe, Andrea, Andrew Davies and Mike Hobday (2004) The Business of Systems Integration, Oxford: Oxford University Press.

Teece, David (1986) “Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy,” Research Policy 15, 6, 285-305.

von Hippel, Eric (1988) The Sources of Innovation. New York: Oxford University Press.

West, Joel and Scott Gallagher (2004) “Open Innovation: The Paradox of Firm Investment in Open Source Software,” working paper, Silicon Valley Open Source Research Project, October 2004, URL: http://www.cob.sjsu.edu/OpenSource/Research/WestGallagher2004.pdf