Firms practicing open innovation (OI) face a constant challenge: they need to decide which knowledge they should develop in-house, which to buy or co-develop and which to sell or license. Knowledge is the cornerstone of the open innovation strategy. Firms need to constantly strategize it. If internal knowledge does nor support the firm’s business model, it will be out-licensed or sold. If external knowledge complements its business model, it will be insourced and used to develop new products or businesses (Vanhaverbeke and Cloodt, 2014: 258). Not only does knowledge insourcing boost business growth, but it also helps incubate early stage ventures which top management has decided to pursue (ibid, 2014: 261).
One of the key tasks of open innovation managers is to set up relations with external partners. They take the form of various transactions (ibid, 2014: 261). The productivity of collaboration increases through cooperative specialization (Alchian and Demsetz, 1972*). If partners make investments, transaction costs occur because of fear of opportunism (Williamson, 1985*). Although co-specialization increases productivity, partners are exposed to a higher risk compared to owners of general resources (Klein et al., 1978*).
Research on open innovation deals shows that firms tend to choose a collaboration format so that they could jointly maximize the value of a transaction rather than to minimize transaction costs (Vanhaverbeke and Cloodt, 2014: 262). Joint collaboration on “the development and commercialization of innovations” requires high confidence among the partners in order to utilize the full strategic potential of their cooperation. Since they prioritize pursuing transactional value, they might choose cooperation modes with higher transaction costs as long as “[…] the expected joint gains outweigh transaction cost considerations” (Zajac and Olson, 1993*).
The resource-based view of the firm stresses the firm’s independence and competition with other firms based on the unique resources and capabilities that they have. By contrast, open innovation focuses on the interdependence of the resources which firms possess to develop innovative solutions (Vanhaverbeke et al., 2008*). Firms practicing open innovation rely on both internal and external resources to develop new products (Chesbrough, 2003b*). Firms of various sizes often struggle with developing the needed resources in-house, and have to find partners to enable the flow of resources between them. Increased permeability of firms’ boundaries will help use resources more efficiently and better address market needs (Elmquist et al., 2009; Arora et al., 2001a, 2010*).
According to the relational view of the firm, critical resources can be found externally. The combination of resources in a unique way might give partners a competitive advantage over firms which pursue a stand-alone strategy. Resource-based partnership also requires making certain investments (Dyer and Singh, 1998*). Although sharing resources increases the competitiveness of firms, it also increases mutual interdependence. This limits the range of manoeuvres that firms have, which – paradoxically – might also decrease their competitiveness if they pursue their own projects (Pfeffer, 1987*).
Many firms operate in an environment where knowledge is more diverse and globally distributed than it used to be (Chesbrough, 2003a*). Consequently, “a sustainable competitive advantage” cannot be gained only by possessing “difficult-to-imitate resources”, but requires “difficult-to-replicate dynamic capabilities”. One of the main categories of dynamic capabilities deals with identifying and shaping technological and commercialization opportunities. This task requires extending the search horizon to external knowledge and balancing it with internal knowledge. To establish this balance, the firm needs to set up various processes such as directing internal R&D or learning about customer needs (Teece, 2007*).
Open innovation is closely related to the firm’s absorptive capacity, defined as the “firm’s ability to recognize the value of new information, assimilate it, and apply it to commercial ends” (Cohen and Levinthal, 1989, 1990*). Both open innovation and absorptive capacity emphasize that internal and external knowledge should be properly balanced. To access and assimilate external knowledge, firms need to invest in developing their internal R&D capabilities. This helps monitor external technologies and develop tech know-how (Arora and Gambardella, 1994; Rosenberg, 1990; Cohen and Levinthal, 1989*). Firms need to learn how to profit from external knowledge and balance it with their ability to develop and utilize internal knowledge (Chesbrough, 2003a, 2006a; Gassmann and Enkel, 2004*).
Firms can benefit from open innovation through early involvement in new technology or business opportunities. External partners provide access to various externally developed technologies and market opportunities. They can notice new technologies or market developments better than a single firm. Firms practicing open innovation have more flexibility to decide when to start the internal innovation process. Initially, they start exploring the commercialization possibilities of technology through their partners such as universities, startups, research-labs or suppliers. Delaying investments in internal innovation allows firms to minimize risks. In addition, open innovation gives firms the option of an early exit for R&D projects which do not meet expectations (Vanhaverbeke and Cloodt, 2014: 272).
Once a firm has decided with whom to team up, it needs to start and execute the partnership. Contacting external partners can be done directly or through innovation intermediaries, known as innomediaries. The success of cooperation is determined by setting up the right relation with the partner. It is important to determine the most appropriate governance mode for collaboration and to ensure that each partner benefits enough from collaboration. It should also be noted that managing internal innovation is a complex task, but managing open innovation is even more challenging. Only firms which have the right structures and processes in place can establish effective collaboration with external partners (Vanhaverbeke and Cloodt, 2014: 276).
References:
Vanhaverbeke, W. and Cloodt, M. (2014) Theories of the Firm and Open Innovation. In H. Chesbrough, W. Vanhaverbeke and J. West (Eds.), New Frontiers in Open Innovation. Oxford: Oxford University Press, 256–278.
*Cited in Vanhaverbeke and Cloodt (2014: 262–269).