Ann-Kristin Zobel, UC Berkeley*

Does Patenting Enable or Inhibit Open Innovation? Evidence from New Technology Organizations in the Solar Industry

Ann-Kristin Zobel, UC Berkeley*

Benjamin Balsmeier, KU Leuven**

Henry Chesbrough, UC Berkeley*

* Haas School of Business, Institute for Business Innovation

University of California

Berkeley CA 94720-1930

USA

** Faculty of Economics and Business

KU Leuven

Naamsestraat 69 – bus 3535 3000 Leuven

Belgium

Does intellectual property (IP) enable or inhibit open innovation? In the traditional closed innovation model where firms primarily rely on their corporate R&D facilities, the relevance and role of formal appropriation mechanisms, such a patents, has been widely discussed, yielding mixed findings and insights regarding their effectiveness (e.g. Mansfield, 1986; Mazzoleni and Nelson, 1998; Jaffe, 2000). As firms increasingly open up their boundaries by promoting inward and outward knowledge flows and entering into collaborative innovative relationships, the role of IP seems to be even less clear. The emergence of the phenomenon of open innovation has been accompanied by a debate in the literature concerning whether formal IP rights – such as patents – enable or inhibit open innovation (West, 2006). With a few exceptions (Laursen & Salter, 2014; Hagedoorn & Zobel, 2013; Hagedoorn, Lokshin, & Zobel, 2013), there is, so far, only limited understanding and empirical evidence regarding the association between formal IP and firms’ openness in innovation, thereby, calling for additional research to shed light on this issue.

The current discussion in the literature regarding the role of IP in an open innovation context can be roughly divided into two perspectives. One perspective suggests that there is a positive association between formal appropriation and the openness of firms. This view emphasizes the importance of IP strategies for creating and capturing value in the context of open innovation (e.g. Chesbrough, 2003; 2006) and reveals positive associations between firms’ degrees of openness and their preferences for formal IP (Hagedoorn & Zobel, 2013; Hagedoorn, Lokshin, & Zobel, 2013). An opposing perspective emphasizes the role of informal and open exchanges and, thereby, implies that there is a negative association between formal appropriation mechanisms and openness in innovation (e.g. von Hippel and von Krogh, 2006; Baldwin and von Hippel, 2011). Finally, a number of scholars propose some middle ground that suggests that IP enables open innovation to some extent but may hinder openness in innovation if firms focus too much on appropriabilty (West & Gallagher, 2006). In line with this suggestion, Laursen and Salter (2014) demonstrate a curve-linear relationship between the importance of formal appropriation and firms’ breadth of search and collaboration across external partners.

Despite this emerging empirical evidence and the suggestion of some middle ground bridging the two opposing perspectives of formal appropriation versus open exchange, important questions remain to be addressed. First, prior empirical research investigated general preferences of firms regarding different appropriation strategies (Laursen and Salter, 2014; Hagedoorn and Zobel, 2013; Hagedoorn, Lokshin, and Zobel, 2013). While this work generates important insights regarding how preferences related to appropriation and openness are correlated, we only have a limited understanding of what happens when firms actually receive IP rights. In this context it is important to examine the relationship between the openness of firms and the actual stock of IP that they possess (see Laursen and Salter, 2014). In the context of our paper, we focus on a particular type of stock of IP, i.e. patents. Patenting has an outstanding position among formal IP strategies in general (e.g. Blind et al., 2006) and, particularly in the context of open innovation (Chesbrough, 2006; Bogers et al., 2011).

Second, in investigating associations between openness and appropriation, existing literature has, so far, focused on the external search breadth and depth of firms (Laursen and Salter, 2014). However, external search captures only one aspect of open innovation strategies of firms (West and Bogers, 2013) and can be considered the ‘soft side’ of open innovation (Laursen & Salter, 2014) that often precedes more formal collaborative relationships. Yet, existing research sheds only little light on the actual contents of these more formal relationships in an open innovation framework[1]. It seems unlikely that one size fits all: that inter-organizational relationships do not vary by the kind of relationship in question.

The concept of open innovation encompasses a variety of relationships with a range of partners. These relationships entail the transfer and exchange of different types of resources, including diverse forms of technology, knowledge, and other complementary assets. Particularly in the context of appropriation and IP, the differentiation between external search openness and actual relationships might be an important one. Assuming that different types of resources are being exchanged in these diverse relationships, it becomes a relevant question whether the association between openness in innovation and appropriation differs across relationship types. In this paper we operationalize the contents of relationships and are able to investigate differences in their associations with IP (i.e. patenting). This analysis enables us to contribute to the current discussion in the literature by developing a more differentiated picture regarding the associations between IP and different types of relationships that constitute a firm’s open innovation portfolio.

Finally, appropriation and patenting in particular has mainly been investigated in the context of large, high-tech multinational firms. Empirically there is very little work on patenting by new technology organizations or start-ups (Mann and Sager, 2007). However, patenting may play an important role in the strategies of new technology organizations. For instance, prior work has shown that patenting positively influences the growth of start-ups and their ability to attract financing (Graham et al., 2009; Hsu and Ziedonis, 2013; Helmers and Rogers, 2011; Mann and Sager, 2007; Hoenen et al., 2014). Furthermore, patenting may be particularly relevant for smaller and younger firms as compared to larger and established ones. The availability of patents facilitates the entry of smaller firms contributing technology to products assembled by larger firms (e.g. Arora & Merges, 2004) and is particularly relevant for new technology organizations that are less likely to be able to compete on the basis of complementary assets (Blind et al., 2006; Graham et al., 2009).

Similarly, current literature has been relatively silent on the role of open innovation for new technology organizations. While a number of contributions discuss the relevance of open innovation practices for small and medium enterprises (van de Vrande et al., 2009; Lee et al., 2010; Parida, Westerberg, and Frishammar, 2012), the role of firms in their early life-cycle has so far been neglected, especially as the empirical analyses of these contributions explicitly exclude new technology organizations, start-ups, or micro organizations. However, new technology organizations have been repeatedly identified as having the capacity for radical innovation that can deliver disruptions to existing markets (van de Vrande et al., 2009; Lee et al., 2010). At the same time, they often lack resources to develop and commercialize new products in-house and, as a result, are more often inclined or forced to collaborate with other organizations in order to overcome their liability of smallness (van de Vrande et al., 2009; Parida, Westerberg, and Frishammar, 2012). Hence, it is a particularly interesting question whether patenting enables or inhibits open innovation activities of new technology organizations, as open innovation may be crucial for these firms to overcome their resource constraints and fully deploy their capacity for radical innovation.

Given the relevance of both patenting and open innovation strategies for new technology organizations and the scarcity of research in these domains, this paper sets out to address these gaps in the literature by investigating how patenting activities of new technology organizations in the solar industry are associated with their openness in innovation. More specifically, we investigate to what extent patenting activities of new technology organizations increases or decrease their subsequent number of inter-organizational relationships. Do new technology organizations become more open or more closed when they receive a patent? And do these responses vary by the type of relationship? In addressing this question the current study sheds some light on the much debated role of formal IP for enabling or inhibiting open innovation.

CONCEPTUAL BACKGROUND

Open Innovation

New models of open innovation that suggest that firms increasingly make use of external sources of knowledge and external paths to market for existing knowledge have spawned a new stream of research investigating the antecedents and outcomes of firms’ degrees of openness in innovation. So far, openness in innovation has mainly been conceptualized in terms of firms’ external search openness – the degree to which they search broadly and deeply across external knowledge sources (Laursen and Salter, 2006; 2014; Grimpe and Sofka, 2009; Garriga, von Krogh, and Spaeth, 2013; Salge et al., 2013; Koehler et al., 2013). Emerging empirical research has established first antecedents of the breadth and depth of external search openness – including resource constraints and abundance of external knowledge (Garriga, von Krogh, and Spaeth, 2013) – as well as their outcomes in terms of innovativeness (Laursen and Salter, 2006; Chiang and Hung, 2010) or new product performance (Salge et al., 2013; Koehler et al., 2013). We are now also seeing surveys of open innovation adoption in large firms, which examine both the prevalence of outside-in open innovation, as well as inside-out open innovation (Chesbrough and Brunswicker, 2014).

In addition to the general search openness of firms in terms of breadth and depth, the relevance of actual, more formal inter-organizational relationships has been highlighted in the literature (e.g. Laursen and Salter, 2014). More formal collaborations can provide firms with access to complementary resources that enable the innovation as well as the commercialization of new products and ideas (e.g. Ahuja, 2000). Especially in the context of new technology organizations, firms are likely to build different types of open innovation relationships that differ in the complementary resources that are being sought and exchanged (Christensen, 1996; Christensen et al., 2005). These types of relationships can vary in purpose, including, for example, research and science-based relationships as well as relationships targeted towards the commercialization of new technologies and products (Du, Leten, and Vanhaverbeke, 2014). Though open innovation at the commercialization stage has not been considered seriously in the existing literature, it can be an important topic, “…since economic values of innovation at the commercialization state are to a large extent towards other downstream players” (Lee et al., 2010, p.291).

In the context of this paper, we go beyond the general search openness of firms and take into account the nature of different types of formal relationships in which diverse complementary resources are being exchanged between partners. As a result, central to our understanding of open innovation is the portfolio thinking of different types of relationships in which firms exchange various resources. Hence, we define the overall openness of innovation in terms of the number of different types of inter-organizational relationships that the firm engages in to exchange various types of complementary resources.

Open Innovation and IP

Different perspectives have started to emerge in the literature regarding the association between IP and openness in innovation. First of all, the above mentioned dichotomy splits the field into those scholars that suggest that IP enables open innovation and those that propose a detrimental effect of IP on the openness of firms’ innovation processes. The first group of scholars argues that there are substantial risks involved in the openness to external parties and that firms are concerned about involuntary knowledge spillovers, building on the Arrow disclosure paradox (Arrow, 1962; Cassimann and Veugelers, 2002). These risks and concerns can be mitigated by putting formal IP mechanisms in place (Chesbrough, 2003; 2006). The predominant underlying reasoning of this perspective is that protection makes the knowledge holders more confident that they can share knowledge without losing control of it (e.g. Arora et al., 2001).

A second group of scholars emphasizes the inherent nature of knowledge sharing and openness. They suggest that innovation can only be considered ‘open’ when all information is a public good and when it is nonrivalrous and nonexcludable (Baldwin and von Hippel, 2011). Any means of formal IP, such as patenting, would contradict this common understanding of openness (von Hippel and von Krogh, 2006). This stream of literature has a strong heritage in the open source movement in software (e.g. Lerner and Tirole, 2000; von Hippel and von Krogh, 2003), open science (e.g. Dasgupta and David, 1994; David, 2005), and the user innovation literature (e.g. von Hippel and Katz, 2002).

In addition to this primary dichotomy, authors have taken different perspectives regarding the direction of the association between IP and openness in innovation, as well as the underlying mechanisms that explain this association. On the one hand, a first perspective addresses the question of ‘what are drivers of openness in innovation?’ and considers IP a main antecedent of openness in innovation. The main underlying logic suggests that IP in general, and patenting in particular, are enablers of knowledge sharing and knowledge transfer (Cohen et al., 2002; Branstetter, Fisman, and Foley, 2006) and, thereby, will have a positive effect on firm’s open innovation strategies.

On the other hand, literature suggests that firms’ openness in innovation influences the degree to which they formally or informally protect their knowledge assets. This perspective deals with the question of ‘what are drivers of firms’ IP strategies?’ whereby different firm characteristics can shape these strategies (James et al., 2013). More recently, it has been suggested that IP and the degree to which it is protected is subject to managerial choice (Pisano, 2006). Under this assumption, various dimensions of the firm’s innovation strategy are likely to shape its preference regarding the formal and informal protection of IP (James et al., 2013). In line with this assumption, the breadth and depth of the openness has been shown to influence firms’ preferences for formal and informal IP (Hagedoorn and Zobel, 2013; Hagedoorn, Lokshin and Zobel, 2013). Similarly, adjacent literature streams, such as the literature on strategic alliances has demonstrated that inter-organizational relationships lead to increased patenting activities of firms (e.g. Deeds and Hill, 1996; Mowery, Oxley and Silverman, 1996; Ahuja, 2000; Wuyts and Dutta, 2012). In this context, patents measure the extent to which strategic alliances lead to knowledge transfer, and thereby, increase the innovative output of alliance partners.