The dynamics of open innovation - firm-level benefits and the externalities of openness

Lead Research Organisation: University of Birmingham
Department Name: Birmingham Business School


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Description 1. There is little evidence of a 'paradigm shift' in open innovation. Specifically, levels of openness (as measured by the use of external linkages in innovation activity) in Irish manufacturing have shown no systematic change over the period 1991 to 2008.

2. Openness in terms of breadth of external linkages enhances innovation performance, but there are limits to this in both static and dynamic terms. There is little evidence of changes in this pattern over time.

3. There are important dynamics in open innovation: firms learn from engaging in open innovation activity. Openness to external knowledge sources involves a process of interaction and information processing. Such activities are likely to be subject to a learning process, as firms learn which knowledge sources and collaborative linkages are most useful to their particular needs, and which partnerships are most effective in delivering innovation performance. We find that learning effects mean that firms which had experience of managing external collaborations in previous periods derive more innovation output from openness in the current period.


4. Small firms and large firms benefit differently from open innovation. Small plants have on average significantly lower levels of openness, a pattern which has not changed significantly since the early 1990s. However, the effect of 'breadth' of openness (i.e. variety of innovation linkages) on innovation performance is stronger for small firms than for larger firms. Small plants also reach the limits to benefitting from openness at lower levels of breadth of openness than larger firms. Our results suggest that small firms can gain significantly from adopting an open innovation strategy, but for such firms appropriate partner choice is a particularly important issue.

5. Internal 'openness' is also important. For example, design is closely associated with success in innovation. Adopting designer-led new product development (NPD), however, results in a much greater design effect on NPD performance than more functionally-oriented strategies. The impacts of design on NPD outcomes are also strongly moderated by other plant characteristics. For example, the beneficial effects of design on NPD outputs are only evident for plants which also engage in R&D. Also, while both small and larger plants do gain from using design as a functional specialism and as part of multi-functional teams, the additional benefits of design-leadership in the NPD process are only evident in larger plants.

6. There is evidence of externalities in openness. Openness may itself generate positive externalities by enabling improved knowledge diffusion. Without public intervention firms' innovation strategies may be more 'closed' than the socially optimal level. Our results suggest that externalities of openness in innovation are significant and that they are positively associated with firms' innovation performance. We find that these externality effects are unlikely to work through their effect on the spread of open innovation practices. Instead, they appear to positively influence innovation outputs by either increasing knowledge diffusion or strengthening competition.
Exploitation Route The research could be of potential use both to firms interested in the strategic value of openness in innovation, and in terms of public policy. In the latter case two aspects of the research are of particuar significance. One is that SMEs may derive greater benefits from open innovation than larger firms, althoig they find it harder to do. thsi may help inform policy on SMEs, a major element of BIS policy. The second is the positive externality effects of open innovation. The potential for these (positive) externalities suggests a divergence between the private and social returns to openness and the potential for a sub-optimal level of openness where this is determined purely by firms' private returns. In other words without public intervention firms' innovation strategies may be more 'closed' than the socially optimal level. This provides a rationale for public policy aimed at promoting open innovation practices among firms.
Sectors Manufacturing, including Industrial Biotechology