From vertically integrated closed innovation towards a more open view

As was already mentioned earlier, traditionally innovation was viewed as an inherently closed process with most operations running inside the boundaries of the company and R&D processes taking place in ‘secretive in-house laboratories’ in a vertically integrated fashion (Chandler, 1962). Company knowledge and technologies were protected and kept safe from external influences. We proposed to refer to this view on innovation management as ‘closed innovation’ or the ‘vertical integration model’. The main idea was that companies experienced significant economies of scale when integrating all R&D effort into the company. In a broader sense, vertical integration refers to management styles that bring large portions of the supply chain not only under a common ownership, but also into one corporation. Mowery (1983) situates the largest emergence of internal, centralized R&D departements in the beginning of the 20th century. Chesbrough (2003) lists the implicit rules of the Chandlerian view on closed, vertically integrated innovation:

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- We should hire the best and the brightest people, so that the smartest people in our industry work for us.

- In order to bring new products and services to the market, we must discover and develop them ourselves.

- If we discover it ourselves, we will get it to market first.

- The company that gets an innovation to market first will usually win.

- If we lead the industry in making investments in R&D, we will discover the best and the most ideas and will come to lead the market as well.

- We should control our intellectual property, so that our competitors don’t profit from our ideas.

Still according to Chesbrough (2003), this closed innovation paradigm led to a virtuous circle, where increased investment in R&D leads to fundamental technology breakthroughs and to new products and features, which in turn lead to increased sales and profits via existing business models, which enable to increase the investment in R&D.

Figure 6: the virtuous cycle, retrieved athttp://www.mindsheet.com/innovation-like-clockwork/ However, gradually more and more research and insights pointed out to some side effects of this virtuous circle, insights that would later play an important role in the Open Innovation paradigm. First is Arrow’s (1962) idea of economic spill-overs. According to him, spill- overs are a byproduct when investing in R&D, as it cannot be predicted what the outcome of research will be. This means that R&D produces ‘excess’ knowledge that does not lead to fundamental breakthroughs or new products. Teece (1986) also pointed out to the fact that research needs to be appropriated in order to come to successful innovation. He demonstrated that the winners from breakthrough ideas need not necessarily be the original inventors, but can also be companies that control for example distribution and consumer

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service. Therefore it can be more important for a business to be able to win at marketing, distribution, manufacturing and other areas than to come up with a big idea in the first place. Teece proposed a model on how value is appropriated from the imitability of technology and complementary assets, and helps explain whether an innovator is likely to profit from an innovation or not. This already provides some evidence against the virtuous circle of closed innovation. In his later works Teece expanded on this, introducing the notion of dynamic capabilities, by which he means the ability of firms or organizations to address rapidly changing environments by integrating, building or reconfiguring internal and external competencies (Teece & Pisano, 1994). Research also started exploring strategies to manage the innovation process in terms of strategy, such as the ‘make or buy’-decision (Veugelers & Cassiman, 1999; Cassiman & Veugelers, 2002). This coherent view on firm capabilities also built further on previous notions of firm capabilities, such as Cohen and Levinthal’s (1990) influential work on absorptive capacity of organizations, or the ability to recognize the value of new knowledge, appropriate it, and apply it to commercial ends. They argue that the absorptive capacity is enhanced by increasing the internal R&D teams, which leads to the fact that a firm’s investment in R&D has a direct impact on its absorptive capacity. In the meantime, some other ‘erosion factors’, as Chesbrough (2003) termed them, led to cracks in the foundations of the virtuous cycle. An increased job mobility (Cooper, 2001), the recognition of decentralized knowledge (Evans & Wolf, 2005) and shorter product life cycles (Van de Vrande et al., 2009). Chesbrough (2003) adds more capable universities, a declining US hegemony and a growing access of start-ups to venture capital as additional erosion factors which led to a more open view on innovation processes and to the death of the virtuous circle. Gassman and Enkel (2004) also mention the escalating costs of industrial R&D, and the dearth of resources as main reasons why companies started looking for new innovation strategies. They see this phenomenon reinforced by the increasing globalization of research, technologies as well as innovation through the amplified use of ICT. Chesbrough and Bogers (2014) recently added the rise of social media as a final erosion factor because it has brought the knowledge access and sharing capabilities of firm-specific internal ICT networks to the internet.