SHARING IS CARING: OUTBOUND OPEN INNOVATION AND THE SUBSEQUENT INNOVATION PROCESS
ARAKSYA AYVAZYAN Universidad Carlos III de Madrid
Calle Madrid, 126, 28903 Getafe, Madrid, Spain SAID MATR
Universidad Carlos III de Madrid ABSTRACT
We focus on a setting of a purely outbound open innovation model, where a firm explicitly waives the exclusivity rights of its intellectual assets. We introduce a novel explanation for such a decision, benefits from markets for technology, and explore the consequences on innovation in the liberated technological areas.
INTRODUCTION
Recently, the prevalence of open innovation has increased as a model for organizing firm’s innovation process. As emphasized by Chesbrough, Vanhaverbeke, & West (2006, p.1), “open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal
innovation, and expand the markets for external use of innovation, respectively”. Much of the prior work on the topic has focused on the “outside-in” knowledge flows (i.e. “inbound open
innovation”). Yet, practicing open innovation also implies “inside-out” knowledge flows, where the firm reveals its proprietary knowledge to the outside world (Dahlander & Gann, 2010). This
practice has become increasingly popular among big players, such as IBM, Google, Tesla, Sony and many others in industries like software, semiconductors, pharmaceuticals, or automobile. The incentives for firms to waive access to their proprietary assets include creating and obtaining returns from standards and their development (West, 2003), advancing collective innovation (Levin et al., 1987), increasing the demand for their still proprietary assets that are complementary to the opened up ones (Alexy & Reitzig, 2013), or pursuing social goals (Contreras, 2015). However, the potential implications of these practices on the innovation amount and type subsequently generated, market structure, and on trading activities in markets for technology, remain underexplored.
Therefore, there is a need to disentangle the effect of inside-out open innovation (i.e. outbound open innovation)1from outside-in open innovation, to improve the overall understanding of the
phenomenon of open innovation.
In this paper, we focus on a context of the so-called “non-pecuniary” outbound open innovation (Dahlander & Gann, 2010), where the firm liberates its knowledge for the public for no direct financial benefits, such as royalties or inventors’ intellectual property (IP) rights, in return for using the opened up knowledge. Specifically, we explore the consequences of the decision of a firm to donate a significant amount of its exclusive knowledge assets on the industry, in terms of
innovation characteristics, market structure and the impact in the markets for technology. Besides, we study the influence on the focal firm’s innovation process and the ways it utilizes the
knowledge created subsequently. By doing so, we attempt at providing a wide picture of outbound open innovation.
THEORY AND HYPOTHESES
Outbound Openness and the Characteristics of the Subsequent Innovations
As a firm waives access to its proprietary technology, other players in the market are per se exposed to more knowledge. Exposure to external knowledge sources increases the likelihood that firms in the affected industry will seek to make use of the external knowledge (Huber, 1991), especially if the contribution is large. One explanation is that the made-public knowledge translates into reduction in entry barriers, due to which other firms get encouraged to become more involved in the opened areas of knowledge (Boudreau, 2010). These barriers can be in the form of
transaction and negotiation costs, as well as litigation threats (Wen et al., 2016). In their paper, Parker & Van Alstyne (2017) argue that platform openness stimulates third-party developers to build upon the made-free knowledge and generate R&D spillovers, thereby helping the platform holder to build momentum behind a specific area of knowledge (Boudreau, 2010). In fact, another reason behind involvement of outside inventors is that external triggers, which can be in the form of radical innovations, technological or government policy changes, or emergence of dominant design, among others, can potentially affect the future of the industry (Bower & Christensen, 1995). Therefore, a firm operating in the industry is inclined to adopt and develop the externally developed technology available for-free in the market in order to keep its competitiveness. As a result, we expect more participants to innovate in the opened up knowledge fields, and more knowledge to be created with more resources freely available in the market.
Hypothesis 1a (H1a): The more openness introduced in the area of knowledge, the more knowledge is created in that area of knowledge.
Hypothesis 1b (H1b): The more openness introduced in the area of knowledge, the more participants innovate in that area of knowledge.
The next logical step is to understand whether the increase in the number of participants comes from new-to the field entrants versus existing firms in the industry. Noteworthy to mention that exposure to external knowledge is not a sufficient condition for a firm to benefit from it. Because of the cumulative nature of the innovation process and the need for specific resources and capabilities to be able to transform new information into commercializable outcomes, not every actor in the market would promptly start inventing and contributing to the innovation output in a new-to-the-firm domain. Zahra & George (2002) review the absorptive capacity (AC) concept and differentiate between two types of absorptive capacities: potential AC and realized AC, which separate the acquisition and assimilation components of the construct from the transformation and exploitation ones, respectively. They state, “Exposure to diverse sources does not necessarily lead to PACAP [potential AC] development, especially if these sources have low knowledge
complementarity with the firm” (Zahra & George, 2002, p.193). Wen et al. (2016) show that the number of new product introductions by start-ups increases due to strategic openness. From this perspective, one could expect that the number of new-to-the-field participants would also increase. However, since new product development represents the commercialization part of the innovation process, we speculate that it is related to the realized AC. Meanwhile, knowledge creation would arguably require more science-related capabilities, which makes it more associated with the
potential AC. In other words, the firm needs an existing know-how in the field in order to be able to use the liberated technologies to create new knowledge. Therefore, we anticipate that a firm
without an existing set of absorptive capacities will be less willing/able to get involved in the areas of liberated knowledge, if these knowledge fields are unknown to the firm.
Hypothesis 1c (H1c): The more openness introduced in the area of knowledge, the proportion of new-to-the-field participants out of total participants decreases.
Outbound Openness and the Radicalness of the Subsequent Innovations in Knowledge Fields The usage of external sources may facilitate firms to combine and create various
technologies and new knowledge (Nelson & Winter, 1982). Dependent on how intensively firms draw on external sources of innovation, they may create innovations with different degrees of novelty. Laursen & Salter (2006) suggest that firms’ relying deeplyon a few external sources of innovation favors radical innovations. Meanwhile, relying broadly, yet less intensively, on a greater number of external sources of knowledge favors incremental innovations. Connecting the concept of outbound openness to the depth of knowledge, we argue that the more a firm opens up in a specific area of knowledge, the more deeply others have the opportunity to draw upon that knowledge. Further, on the one hand, radical innovations naturally involve a high level of
uncertainty and complexity, which increases the need for more information and people involved in the innovation processes (Murray et al., 2016; Eisenhardt & Tabrizi, 1995). Not surprisingly, the complexity and uncertainty inherent to radical innovations are also associated with increased lead-time necessary for their development (Kessler & Chakrabarti, 1999). On the other hand, as we hypothesize, outbound openness increases the chances of getting more participants involved in creating knowledge, via reducing access costs. This, in turn, allows for more possibilities for knowledge recombination. Following the logic from innovation recombination scholarship (Fleming, 2001; Nelson & Winter, 1982; Ahuja & Lampert, 2001; Jung & Lee, 2016), combining new knowledge with existing knowledge leads to the generation of more radical inventions. Finally, as argued by O’Connor (Chapter 4), outbound openness may also facilitate the processes and reduce the time necessary for radical innovation development. Thus, given the availability of more information, commitment from more inventors and shortened time required for invention, due to strategic openness, the latter is likely to contribute to more radical knowledge creation in the field.
Hypothesis 2 (H2): The more openness introduced in the area of knowledge, the more radical knowledge is created in that area of knowledge.
Outbound Openness and Markets for Technology
Arora & Gambardella (2010) claim that in addition to information asymmetries and moderating transaction costs, the uncertainty about the commercial value of a technology plays a significant role in the demand for the technology. We expect that the uncertainty in the value of technology will decrease in the presence of outbound openness, through increased innovation output and number of contributors in the area of knowledge. Reasonably, an increasing number of inventing firms in a specific field may signal an attractive business opportunity with lower risks. Therefore, for inventors preferring technology outsourcing to in-house technology development, as a faster and safer way to innovate and market a technology (Veugelers & Cassiman, 1999), there are more possibilities for exploiting the "buy" option in more open knowledge fields. This is because outbound openness fastens the innovation processes and increases the number of
participants. On the supply side in the markets for technology, Arora, Fosfuri, & Gambardella (2004) claim that technology markets are characterized with less competition, in comparison to product markets. Wen et al. (2016) find that outbound openness increases the introduction of new products by start-ups, which naturally means even more competition in the downstream product market. This competition aspect, together with the reduced access costs and risks of litigation, due to outbound openness, may encourage inventors, especially the technology specialists, using Arora & Gambardella (2010) terminology, to invent technologies in order to sell them in the technology markets.
Hypothesis 3 (H3): The more openness introduced in the area of knowledge, the more trading activities of intellectual properties takes place in that area of knowledge.
Outbound Openness and the Opening Firm’s Subsequent Innovations
From the point of view of the focal firm, when voluntarily surrendering control over its knowledge, it faces the tension between growth of knowledge in the knowledge area and loss of control (West & O’Mahony, 2008). On the one hand, the firm may encourage more participants to contribute (growth) (Parker & Van Alstyne, 2017). On the other hand, the firm will have no control over the future development and strategic directions the knowledge can take. We propose that the right-holders may enjoy externalities in the form of innovation outcomes generated using the liberated knowledge, which could explain, partially, such behavior at the absence of direct financial benefits. Specifically, we study two strategies/modes that the firm may use to take advantage of the potential externalities generated by the liberated knowledge. First, it may employ its internal R&D capabilities to capitalize on these externalities or it may buy these subsequent inventions through markets for technology. With the growth in the number of participants in the knowledge domain, the competitive environment arguably becomes more dynamic, increasing the need for developing and renewing prevailing capabilities to match the changing requirements of the environment (Teece et al., 1997). Unlike radical innovations, incremental innovations are generally more appropriate for stable environments, as they allow reinforcing existing market structures (Ettlie &
Subramaniam, 2004). Therefore, innovating, in general, and innovating radically in these
knowledge fields becomes a priority for the focal firm. Since strategic openness is likely to attract attention from outsiders and encourage more, and more radical knowledge creation, as argued in the first and second hypotheses, one could expect that this openness may also represent an opportunity of expanding novel solutions in the technological areas, where the firm has existing know how (Gatignon et al., 2002). Thus, we argue that the focal firm will seek means to internalize the knowledge that is created by others, using its opened up knowledge. For that, it could build upon the newly created knowledge or decide to buy the new knowledge. We expect that the firm will pursue both paths for the following reasons. For buying option, the argument is related to the firm's absorptive capacity in the liberated fields that provide the firm with the ability to evaluate, absorb, and build on the knowledge created by others. Besides, Cassiman & Valentini (2016), discussing the complementarities between inbound and outbound knowledge flows, provide multiple arguments for the probable different types of costs that the firm can save, such as
cognitive, organizational, and transaction costs, by practicing both strategies. Therefore, the focal firm that opens up its knowledge can be more efficient in practicing inbound openness due to the benefits from the above-mentioned complementarities. This leads us to anticipate that focal firm will be acquiring external sources of knowledge to internalize on their strategic openness
Hypothesis 4a (H4a). The more knowledge a firm contributes to the area of knowledge, the more knowledge and the more radical knowledge the firm creates in this area.
Hypothesis 4b (H4b). The more knowledge a firm contributes to the area of knowledge, the more it builds upon the subsequently created knowledge in this area.
Hypothesis 4c (H4c). The more knowledge a firm contributes to the area of knowledge, the more knowledge/innovations it buys in the domains of the opened up knowledge.
Outbound Openness and the Radicalness of Subsequent Innovations in Knowledge Fields RESEARCH SETTING
Our study makes use of IBM’s patent pledge of 500 patents in 2005 as a shock to the level of openness in the IP strategy of IBM. Having the sample period from 1999 to 2010 allows us to implement a differences-in-differences strategy to explore the effects of openness. To answer the research questions of the current study, we perform analyses at two different levels. One of them includes the level of knowledge domain, represented by technological classes, according to The United States Patent Classification (USPC). We use these class-level analyses (with class-year type of observations) to explain the temporal variation in outcomes, such as the innovation output, innovation radicalness, new-to the field entries to the class, and patent trading activities, using the openness level of the technological class.
In another set of analyses, mainly concerning the internalization hypothesis (H4b), we use data at the level of patent (with patent-year observations). To construct the control group of patents (initial control group) for the 500 pledged patents (initial treated group), we match each pledged patent with patents from the same technological class and the same application year. Following Arts, Cassiman, & Gomezshere (2017) to create a similarity score between the patents, we ask for a minimum similarity score of 15%. In the next step, we differentiate between direct and indirect citations received by the initial treated and control groups of patents. Specifically, a patent that cites any of the initial patents (treated or control) represents a direct citation. Further, a patent that cites the patent citing any of the initial patents represents an indirect citation.
METHODS
For the class-level analyses, we run the regressions under the specification of a random effect generalized least squares (GLS) estimator:
Yjt= α + β Opennessjt + γ After 2005t + δ Opennessjt×After 2005j+ uj+ εjt , (1) where jindicates the technological class, and tindicates time. For the error components, uj indexes an individual-specific effect and εjt is an idiosyncratic error term. Our baseline regressions take the relevant characteristics of the innovation process as dependent variables (Yjt). We regress these variables on the openness measure of the technological class, according to the extent of the class’ presence in the patent pledge. To capture the extra effect of the decision of opening up this knowledge, we interact the openness measure with a dummy variable for the years from 2005 to 2010. We use a similar setting for the patent-level analyses, with the difference in the openness
measure, where it is a dummy variable if the patent belongs to the pledge or cites the pledged patent directly or it is an indirect citation as explained previously. From the equation above, we use a differences-in-differences design with continuous treatment and dichotomous treatment time.
RESULTS
Our paper sheds light on the relationship between strategic openness and the subsequent innovation process. Consistent with the majority of our hypotheses, the findings show that a substantial amount of liberated knowledge boosts up the innovation process at the domain level. We find that the larger IBM’s contribution to the knowledge fields, the more knowledge,
subsequently, is created in these domains and that this new knowledge tends to be more radical in nature. Our findings suggest that openness encourages other entities to get involved in the opened areas of knowledge. This trend, however, is channeled through an increase in the involvement of existing organizations, since the number new contributors into the knowledge does not seem to be significantly altered. The plausible cause behind the surge in the use of the opened up knowledge is related to the reduction in the access costs and litigation risks, due to outbound openness.
Furthermore, the trading activities in the markets for knowledge increase proportionally to the openness in the areas of the liberated knowledge. We rely on the argument that outbound openness reduces the uncertainty of the commercial value of the liberated technologies. From our analysis, the focal firm itself creates more knowledge and knowledge that is more radical with the strategic openness. Our results also suggest that internalization of the benefits from openness for the firm takes place through buying the innovations from others who used the opened up knowledge.
CONCLUSIONS
The current paper contributes to the literature of open innovation, by studying the effects of the outbound type of openness untangled from the inbound openness. We provide insights on the repercussions of the strategic openness on relevant innovation outcomes and market characteristics, in terms of the number and type of contributors of the innovation outcome. To our knowledge, this study is the first to examine the outbound openness relation to the markets for technology along with how the liberation of knowledge affects the trading chances of the related knowledge. Our study provides a new aspect to the debate regarding the role of IP protection in the markets for technology (Arora & Gambardella, 2010). We highlight that outbound openness increases trading activities for knowledge assets, thereby stimulating knowledge markets, which, likely, improves the match between innovations and firms. The latter lies at the heart of the paradigm of open
innovation literature (Chesbrough, 2003). Therefore, another implication of the current study could be relevant for regulators and policy makers to consider promoting/encouraging firms to practice outbound openness as a means to boost innovation in knowledge domains.
ENDNOTES
1. In our study, we interchangeably use the terms outbound open innovation, outbound openness, and strategic openness to refer to the inside-out type of open innovation.
