T HE B ERLIN S ENATE AND ITS ROLE IN OPEN INNOVATION

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T ^HE B ^ERLIN S ENATE AND ITS ROLE IN OPEN INNOVATION

A regional study on the effectiveness of public policy measures

s1718193, 31 August 2012 Strategy and Innovation Faculty of Economics and Business

Rijksuniversiteit Groningen Supervisor:

Dr. Rene van der Eijk

Master Thesis M. C. Michael

EXECUTIVE SUMMARY

In past times most firms executed their innovative activities within the company's own borders. Nowadays such conduct of research and business becomes less and less conceivable. Innovation theory speaks of a new imperative to shift one's thinking from a closed to a more open innovation mentality.

At the centerpiece of open innovation stand the relationships open innovation is comprised of. A comprehensible concept of the key relationships of open innovation processes is the concept of innovation system and the associated triple helix model. An innovation system can be understood as the system of interactions between the government, industry and academia in the process of development, diffusion and use of knowledge in the innovation process. Nowadays various countries are trying to adopt some sort of triple helix innovation model that carries the university- industry- government relationship as one of relatively equal and interdependent spheres that overlap and take on the role of each other.

Using the example of Berlin, or more specifically, the Berlin Senate Department for Economics, Technology and Science, the research objective of this thesis is to understand how public policy measures can stimulate open innovation efforts between companies and research institutes.

In order to get to the bottom of that question the prevalent innovation policies of the Senate have been evaluated. In addition to that interviews with companies, policy makers and policy performers have been conducted. In a next step a data matrix systematically linking the respective results has been created.

In total there are eight innovation policies, four of which focus on traditional aspects of innovation such as financing, developing and launching new products whilst the other four structurally allow or oblige a certain openness. The most important open innovation policy measure of the Berlin Senate is the ProFIT program.

The interviews were structured along the themes of the importance of open innovation, the role of the Berlin Senate for Economics, Technology and Science in open innovation and the perceived effectiveness of the policy instruments.

Open innovation was perceived to be a highly important subject and the main actors of the regional innovation system of Berlin agreed in their perception of the need of open innovation. The recurring opinion was that the Senate subsidy measures are difficult to qualify for and implement. On the other hand once a company has been benefitted with the measure the sentiment turned positive. ProFIT projects have been evaluated positively in their effect on the forthcoming of the innovation and mostly the interviewees spoke positively about the cooperation and knowledge transfer character of the projects.

Talking to governmental and non-governmental sources it became clear that both sides viewed the Senate as money- giver. However the conversations revealed that there are other needs concerning open innovation.

Recommendations for the Senate based on those needs and in conclusion of this study are the following:

A strategic interleaving between the individual instruments could result in a higher number of total projects within open innovation. An evaluation of the pro- and con- arguments of the policy measure Innovation Assistant suggests itself which should clarify whether or not it makes sense to redistribute the budgeted amount towards a more favorable open innovation measure. The Senate could consider tax reduction for SMEs who are also innovating companies instead of subsidizing only very few SMEs. The Senate also could redistribute some of its program budget towards the organization and realization of appropriate networking

world. Most importantly however the Senate is advised to transform its negative belief system towards the general quality of its total applicant pool to a more positive one so that innovation can prosper. Right now the Senate makes the impression to only sponsor very few "winners" instead of sponsoring a higher amount of

"winning ideas".

ABSTRACT

In past times most firms executed their innovative activities within the company's own borders. Nowadays such conduct of research and business becomes less and less conceivable. Innovation theory speaks of a new imperative to shift one's thinking from a closed to a more open innovation mentality.

Using the example of Berlin, or more specifically, the Berlin Senate Department for Economics, Technology and Science, the research objective of this thesis is to understand how public policy measures can stimulate open innovation efforts between companies and research institutes.

In order to get to the bottom of that question the prevalent innovation policies of the Senate have been systematically evaluated. In addition to that interviews with companies, policy makers and policy performers have been conducted. In a next step a data matrix systematically linking the respective results has been created and the associated findings have been analyzed.

Key words: open innovation, triple helix, innovation system, innovation policy, Berlin Senate

TABLE OF CONTENT

page

1. Introduction 1

1.1. Motivation 1

1.2. Research objective 2

1.3. Research question 3

1.4. Why relevant 3

1.5. Design and methods 4

2. Literature review 4

2.1. Open innovation 4

2.1.1. Shift from closed to open innovation 5

2.1.2. Value enhancement via open innovation 6

2.1.3.Managerial implications of open innovation 7

2.2. Innovation system 8

2.2.1. The concept of innovation systems 8

2.2.2 The triple helix model 9

2.2.3. Added value and performance evaluation of an innovation system 11

2.3. The role of the government 12

2.3.1. What is public policy and why it is needed 12

2.3.2. Instruments of public policy 13

2.3.3. Public policy in innovation 15

2.4. Conclusion of the literature review 16

3. Methodology 17

3.1. Aim of study 17

3.2. Research question 18

3.3. Approach and methods used 18

3.3.1.Documentation 19

3.3.2. Interviews 20

3.3.3.Validity and reliability 25

4. Results 25

4.1. Results documentation 27

4.2. Results Interviews 31

4.2.1. Results non-governmental interviews 31

4.2.2. Results governmental interviews 42

5. Discussion 50

5.1. Awareness and perceived importance of open innovation 50

5.2. The role of the Berlin Senate for Economics, Technology and Science in open innovation 53 5.3. The perceived extent to which public policy instruments stimulate open innovation

59

6. Conclusion 63

6.1. Answering of the research question 63

6.2. Implications and limitation of study 66

References 67

Appendix I 70

Appendix II 78

1

1.1. Motivation

"Much evidence identifies innovation as the main driver for company growth, prosperity and sustained profitability" (Drucker 1988, Christensen, 1997, Thomke, 2001). "Innovation is the total set of activities leading to the introduction of something new, resulting in strengthening the defendable competitive advantage of a company" (Van der Meer et al., 2007).

In past times most firms executed their innovative activities within the company's own borders.

Nowadays such conduct of research and business becomes less and less conceivable. Innovation theory speaks of a new imperative to shift one's thinking from a closed to a more open innovation mentality. Chesbrough (2003) introduced the concept of open innovation and defines it as: "A paradigm that assumes that companies can and should use external ideas as well as internal ideas, and internal as well as external paths to market, as the companies look to advance their technology".

Although open innovation is a relatively new concept, its underlying ideas are not as new at all. A Firm's custom to collaborate with its external environment is as old as the fundamental features of invention itself. Nevertheless open innovation can be understood as "a comprehensive concept of how to leverage external sources of knowledge in order to drive internal growth" (Grönlund et al.,2010).

From the end of the 20th century on environmental changes and globalization increasingly have forced firms to take a new approach to innovation. Some of the welcoming features of open innovation are the likelihood of firms to cut risks and costs, get to the market faster and offer more integrated product solutions.

At the centerpiece of open innovation stand the relationships it is comprised of. A comprehensible

concept of the key relationships of open innovation processes is the concept of innovation system

and the associated triple helix model. An innovation system can be understood as "the system of

interactions between the government, industry and academia in the process of development,

diffusion and use of knowledge in the innovation process" (Lundvall, 1985, Freeman, 1987, Nelson,

1993). Nowadays various countries are trying to adopt some sort of triple helix innovation model that

carries the university- industry- government relationship as one of relatively equal and

interdependent spheres that overlap and take on the role of each other. Within the intersection

spaces hybrid organizations and trilateral networks are formed and innovation can prosper

(Etzkowitz, 2002).

2 Searching for an interesting theme for a research proposal around the topic of open innovation an observation was made which was later going to shape the direction of this thesis: It was found that a great share of the prevalent literature fairly focuses on the relationship between companies and research institutes. However there is a third important actor that has been identified to impact innovation processes which is the government. The government has devised diverse policy instruments which are aimed at organizing specific dynamics between state agencies and those who the instruments are addressed to. Those instruments are taxation, regulation, subsidies and public ownership.

The rising importance of open innovation has now been indicated but how does the government contribute to this? Does the government specifically stimulate open innovation and if so, how effectively does the government do that?

In order to conduct a study revolving around that topic a research scope had to be chosen. It was opted for Germany in this regard. In order to narrow the scope of this study even more down to create the parameters for a small, compact and comprehensible in- depth study it was decided to focus on the region of Berlin. The state agency responsible for the drafting of the Berlin innovation policy portfolio is the Berlin Senate Department for Economics, Technology and Science.

1.2. Research objective

Using the example of Berlin, or more specifically, the Berlin Senate Department for Economics, Technology and Science, the research objective of this thesis is to understand how public policy measures can stimulate open innovation efforts between companies and research institutes.

In order to get to the bottom of that question the prevalent innovation policies of the Senate will be

systematically evaluated. In addition to that interviews with companies, policy makers and policy

performers will be conducted.

3

The research question used for this study will be the following:

To what extent does the Berlin Senate Department for Economics, Technology and Science stimulate open innovation efforts between companies and research institutes?

Following sub- research questions will be used in order to answer the main research question:

1. What are the current policies imposed by the Berlin Senate that stimulate open innovation activities between Berlin companies and research institutes?

2. How do Berlin companies evaluate the existing policies?

3. How do other important actors (policy makers/ policy performers) evaluate the current policies?

1.4.Why relevant

This thesis is a complementary approach to those innovation policy analyses that already have been conducted for the federal state of Berlin. An example of such a comprehensive study is the report of PricewaterhouseCoopers of 2010. A curious fact is that the term "open innovation" as such doesn't find much use yet in the German language. Speaking to various officials and company managers the lack of awareness of the term was a recurrent conspicuity. Together with the chief of the innovation funding department of the Berlin Senate Department for Economics, Technology and Science an analogous term in German language was developed which is "Innovation unter der Berücksichtigung von Verbünden und Wissenstransfer" (=innovation on condition of cooperation and knowledge transfer).

Considering the widespread unawareness of the open innovation term among German policy

makers, -performers and companies it will be especially interesting to find out about the presence of

the concept or aspects of it in the actual policies. Since there hasn't been a study yet on Berlin or

even on Germany that explicitly evaluates policies in terms of stimulating open innovation, this thesis

can deliver a narrow but decent contribution to the innovation discussion. The goal of this study will

be the creation of a handful of actionable advices for the Berlin Senate regarding the stimulation of

open innovation between companies and research institutes.

4

The design structure of this study will be assumed from a related study of open innovation from Groenveld (2008) and the extensive innovation policy analysis that already has been conducted for the federal state of Berlin (PricewaterhouseCoopers, 2010). The theoretical centerpiece of this thesis are three concepts: open innovation, innovation system and the government's role in open innovation. The literature review outlines those concepts. The follow- up chapter will comprise the methodology which clarifies the approach and the methods used in order to answer the research question at hand. This study will have a qualitative exploratory character and uses documents as well as interviews in order to find an answer to the research question. Subsequent to the methodological chapter the results- section will follow. The first part of the results- section will introduce the identified innovation policies. The second part will display the results of the conducted interviews with policy makers, performers and companies and systematically present the most important findings in a colored data matrix. The discussion section will interpret the results and lead to the next chapter, the conclusion, where finally the research question will be answered. In a final step limitations of this research will be addressed and an interesting question for future studies will be phrased.

2. LITERATURE REVIEW

In order to analyze the role of the Berlin Senate for Economics, Technology and Science in open innovation efforts between companies and research institutes the following three concepts will be presented: open innovation, innovation system and the role of the government in the innovation system (inspired by Groenveld, 2008).

2.1. Open innovation

The following section introduces the concept of open innovation and discusses a number of topics

that could be of use in the understanding of the concept, such as the shift from closed to open

innovation, value enhancement via open innovation and managerial implications within open

innovation.

5 2.1.1. Shift from closed to open innovation

Chesbrough (2003) was the first to introduce the concept of open innovation and defines it as

"commercializing internal as well external ideas by deploying in-house as well outside pathways to the market". In his articles of 2003 and 2006 Chesbrough outlines the shift from closed innovation to open innovation:

In past times, the internal R&D operations were viewed as elementary strategic asset of the company and thus, any course of action towards innovation within the R&D department was highly protected.

R&D outcomes further built an entry barrier for newcomers to the market. Today on the other hand leading industrial firms and other R&D active companies have to deal with a continuously growing competition from numerous newcomer firms. The interesting aspect hereby is that these start- up firms often perform little or no research by themselves. Instead they source major parts of their ideas via open innovation. The justification of the open innovation reasoning is taken almost exclusively from examples of the so- called high technology driven industries such as pharmaceuticals, information technology and the computer industry. However Chesbrough and Crowther (2006) point out that one also can detect evidence of the concepts associated with open innovation outside high technology oriented firms.

But when did this trend start and why? In the classic closed innovation model companies needed to exercise great control over the entire value chain of their operations. From the very first idea generation up to product manufacture, marketing, distribution and service, the firms took charge of everything themselves. For a long time that way of doing things was held to be the right way.

In the end of the 20th century however a number of factors have led to a steady decline in the effectiveness of closed innovation: "The steep rise of mobility and availability of highly-educated people as well as the increased availability of private venture capital" are two very important reasons why closed innovation has steadily decreased in feasibility (Chesbrough, 2003). Gassmann and Enkel (2004) explain the shift towards the open innovation model as follows: "The increasing globalization of research, technology and innovation, the new information and communication technologies as well as new organizational forms and business models reinforced the phenomenon of open innovation."

In the new open model the innovation tends to move more easily between the firm and the environment. This occurs via the combining of internal and external ideas as well as the use of internal and external paths to the market in order to bring forward the development of new technologies.

The table below depicts the most important distinctions between closed and open innovation:

6

Innovation

The smart people in our field work for us.

To profit from R&D, we must discover it, develop it and ship it ourselves.

The company that gets innovation to market first will win.

If we create the most and the best ideas in the industry, we will win.

We will own all results from contract research with universities.

Open Innovation

Not all smart people work for us. We need to work with smart people inside and outside the company.

External R&D can create significant value. Internal R&D is needed to claim some portion of that value.

Building a better business model is more important than getting to market first.

We should profit from other's use of our IP (license out) and we should license in other's IP whenever it advances our business model.

We will partner with universities to create knowledge and encourage use outside our field.

Table 1:Open and closed innovation, source Chesbrough (2003)

Most importantly, the table illustrates that a shift in innovative actions should be preceded by a shift in the way people perceive the firm and its environment. The focus should be on the innovative value which can be enhanced via the strategic involvement of outside parties in the product development process. Collaborations with other intra- sector firms, suppliers, competitors, research institutions or even customers are conceivable. The business model plays a paramount role in the question of how value can be created from innovations and which parts or processes have to be generated internally or externally to the firm boundaries.

2.1.2. Value enhancement via open innovation

Gassmann and Enkel (2004) argue that innovation cycles can be shortened and research and development costs can be cut in the open innovation scenario. West and Gallagher (2004) point out that open innovation is more likely to offer firms a greater return on innovations and thus a greater share of intellectual property. Despite the abovementioned arguments on the pro-side of open innovation it needs to be added that not every aspect of Chesbrough's concept is entirely new.

Porter (1980) for example had underpinned the importance of different forms of cooperation between business entities such as alliances and networks earlier than Chesbrough did. In his works Porter (1980) explained in detail why cooperation may enable partners to achieve a stronger position together than they would possibly be able to achieve alone.

De Rochemont et al., (2007) explains how and why open innovation can be profitable for firms: To

begin with, open innovation can offer collaborating partners the generation of knowledge or

technologies that could not be generated by individual firms alone due to risk and cost barriers to

innovation. Moreover, if firms collaborate along the value chain, they potentially could cover bigger

7 parts of this very chain. Integrated innovations across the value chain, in turn, have great potential to strengthen the competitive position of the associated industry and thus, the national economy.

2.1.3.Managerial implications of open innovation

Das and Teng (2002) highlight that the cooperation between numerous parties has its challenges in the increased need for coordination, integration and control at the "right" places. Besides companies may feel uncomfortable to work that "openly" with more loosely defined boundaries, and dependencies created towards parties outside their own organizational context. Thus, open innovations imply a certain conflict potential. In other words, for an open innovation to work, an appropriate organizational structure and management style have to be applied (Chiesa and Manzini, 1998).

In this context Gassmann and Enkel (2004) propose the transition of the company's solid organizational boundaries into a semi- permeable membrane allowing the innovation to move easily between the company's internal processes and the external environment. Chesbrough (2004) makes the addition that openly innovating companies are likely to be more sensitive to market uncertainty and technological uncertainty than others.

Finally, Chiesa and Manzini (1998) describe cooperation as a dynamic process which evolves over time since the external context evolves and the partners' learning and experiences accumulate. This in mind, it can be reasoned that organizational modes of cooperation may evolve over time as well.

Summary

The concept of open innovation was introduced by Chesbrough (2003) and is defined as

"commercializing internal as well external ideas by deploying in- house as well outside pathways to

the market". Open innovation can add value to the company due to the prospects of greater return

on innovative activities resulting in a greater share of intellectual property. Additionally, open

innovation can enable an integrated innovation across the value chain which strengthens the

competitive position of the associated industry and thus, the national economy. For an open

innovation to work, an appropriate organizational structure and management style have to be

applied. Scholars propose the transition of the company's solid organizational boundaries into a

semi- permeable membrane to allow the innovation to move more easily between the company's

internal processes and the external environment.

8

The following section deals with innovation systems. To begin with, the concept of innovation systems will be illustrated and different forms of innovation systems will be mentioned. Finally, the dimensions and issues around the topic of performance evaluation of innovation systems will be discussed.

2.2.1. The concept of innovation systems

According to Lundvall (1985) the core of an innovation system are the interactions between the actors needed in order to turn an idea into a marketable product, process or service. Innovations are a product of a "collective process" and the term "open innovation system" underlines that firms do not innovate in isolation. In the innovation process, firms engage in some sort of interaction with other firms, universities, other educational institutions or research centres. Moreover firms interact with government agencies, financial institutions and so on. The link between all those different actors are "knowledge and investment flows, authority and partnership arrangements" (Cooke et al., 1997).

Innovation systems can exist on different levels and can be distinguished by different criteria. Those criteria can be of technological, spatial, industrial or sectoral nature. Over the last decade a number of systemic concepts on innovation have been introduced. In the mid 1990s the term "regional innovation system" began to circulate (Cooke, 1996, Maskell and Malmberg, 1997). Innovation systems also can be categorized as "national innovation systems", "local innovation systems" or

"sectoral innovation systems". For the sake of completeness it must be added that here are more variations to the term which are not listed here.

The focus of this thesis suggests the application of the term "regional innovation system"."Regional

innovation systems" have been defined in numerous different ways such as: "...the elements and

relationships which interact in production, diffusion and use of new, and economically useful

knowledge and are located within the borders of a region" (Lundvall 1992). Complementary to this,

Nelson (1993) proposes following definition: "a set of institutions whose interactions determine the

innovative performance of regional firms". This thesis will make use of the definition of an innovation

system that has been phrased by Lundvall.

9 2.2.2 The triple helix model

Forthcoming the triple helix model of Etzkowitz and Leydesdorff (2000) will be introduced. That model, in the strict sense of the word, aims at clarifying the relationship structure within a national innovation system. The fundamental relationships of a regional innovation system are the same as in the national system, merely the scope is much smaller and there are fewer players. Therefore, this thesis will work with the concept of the triple helix model.

The triple helix illustrates the university-industry-government relationship ideally as one of relatively equal and interdependent spheres that overlap. In the following three figures will be introduced, all of which are showing one form of the triple helix model.

Figure 1: In this model the state is the dominant component of the three. The state incorporates, controls and oversees the university and industry. Examples of nations in the use of that model are the former Soviet Union and Eastern European countries.

STATE

Figure 1: A "state- owned" model of state-industry- academia relationships

Figure 2 shows a model with three separate institutional dimensions that have clearly cut borders

towards each other, but that also have relationships to each other along their spheres. The US is

supposed to follow such a model (at least in theory).

10 Figure 2: A "Laissez faire" model of-.industry- academia relationships

Figure 3 depicts the "optimal "form of the triple helix model. This model illustrates the university- industry-government relationship as one of relatively equal and interdependent spheres that overlap and take on the role of each other. Within the intersection spaces hybrid organizations and trilateral networks are formed. Nowadays various countries are trying to adopt some sort of triple helix innovation model (Etzkowitz, 2002).

Figure 3: "The optimal triple helix" model of state- industry- academia relationships

The first of the three triple helices is considered to be an unsuccessful innovation model since it

"suppresses bottom-up initiatives" and therefore suppresses innovation activities instead of encouraging them. Most countries and regions try to engage in some sort of triple helix model as shown in figure 3. The goal hereby is to create an environment that furthers and facilitates innovations and that entails "trilateral initiatives for knowledge based economic development"

(Etzkowitz, 2002).

11 2.2.3. Added value and performance evaluation of an innovation system

Whilst connections external to the innovation system are of growing importance for the national economy, the influence of the prevalent industrial relations, educational, scientific and technical institutions, government policies, cultural traditions and many other institutions within the system are absolutely fundamental. The significance of the system derives from its immanent relationships and networks (Freeman, 1995).

For the sake of completeness it must be added that there are limited possibilities to measure and analyze the evolving impact of all the inherent and interrelated features of an innovation system on the performance of firms for the associated region or for the national economy as such (Malerba et al, 2002). The triple helix model of Leydesdorf and Etzkowitz (2000) is a proper display of the evolving dynamic of the key player- relationships within an innovation system. It is safe to say that the value of an innovation system to a certain extent can be broken down to the performance of the key players (academia-Industry-government). But this is true only to a certain extent because equally it can be argued that the sum of the trilateral dynamic may amount to more than its individual parts would suggest. Therefore the individual dimensions need to be assessed in relation to each other and never in a stand- alone fashion. The intersection qualities and relationship nature of the key players are the crucial angles of an adequate performance measurement.

In order to evaluate the performance of an innovation system key player assessment however will not yet be sufficient. The entire pool of institutions, policies and resources that further innovation within the economy need to be factored in. Especially the nation's industrial clusters and the linkages between them are hereby of paramount importance (Furman et al, 2002). As stated above, an innovation system comprises numerous different types of actors: organizations and firms, policy bodies, venture capitalists and so on. For an adequate performance assessment all these actors and not only the key players need to be assessed in their connection to the entire system and not individually (Carlsson et al, 2002).

All components need to have a certain size and quality for the system to perform well. In addition to

this, several measures need to be used to evaluate performance. The most integral aspect to be

illuminated hereby could be extent to which an innovation system contributes to long- term

economic growth. The more complementary measures one uses that focus on the intersection

qualities next to the performance of the influential actors the clearer the picture may become of the

innovative capacity and the more integrated the outcomes will be.

12

A national or regional innovation system can be defined as the elements and relationships which interact in production, diffusion and use of new and economically useful knowledge and are either located within or rooted inside the borders of a national state or region. The triple helix model introduces three different ideas of how the state, industry and university dimensions can be organized within a national innovation system.

Nowadays various countries are trying to adopt some sort of triple helix innovation model that carries the university-industry-government relationship as one of relatively equal and interdependent spheres that overlap and take on the role of each other. Within the intersection spaces hybrid organizations and trilateral networks are formed.

In order to evaluate the performance of an innovation system the entire pool of institutions, policies and resources that further innovation within the economy need to be factored in. Especially the immanent industrial clusters and the linkages between them are of paramount importance. For an adequate performance assessment all these actors need to be assessed in their connection to the entire system and not individually.

2.3. The role of the government

In the following chapter the role of the government on innovation will be discussed. This thesis focuses on the firm perspective and on the city of Berlin. For that reason the government will be defined as the Berlin Senate for Economics, Technology and Science. The chapter will start with the definition of the concept of public policy and move on to an overview of public policy instruments. In a final step a linkage between public policy and innovation will be established.

2.3.1. What is public policy and why it is needed

The policy process could be defined as "the process of how interested political actors interact within political institutions to produce, implement, evaluate and revise public policies" (Schlager and Blomquist, 1996).

According to Moe (1990) The structural choice approach views the creation of public policies as outgoing from "the interaction of interest groups, bureaucrats and politicians within the context of democratic politics". The policies of this approach are understood as "institutional ordinance".

Therefore changes in respect thereof are understood as result of the effort of rational individuals

that collaborate for mutual gain and hurdle collective content or action problems.

13 The German government as well as the Berlin Senate apply the structural choice approach of policy development. In Germany there are a lot of interest groups with influence on politics. Examples of these groups are branch organizations, human rights organizations, milieu groups and so on.

In modern society most economic dynamics are best coordinated via market mechanisms and capitalist actors. Market mechanisms "coordinate the resources and the behavior of public and private actors" (Edquist, 1999). Despite the pretty reliable market mechanism and its coordinating character in a market economy there are times and reasons that may call for public intervention in order to complement or turn around certain trends. Generally speaking there are two scenarios for public intervention in a market economy. Firstly, the market mechanisms and associated capitalist firms must have failed to solve certain problems that stand in the way of macroeconomic goals.

Secondly, public measures need to have the power to solve or soothe the problem. But why do markets fail? This can occur because of a number of reasons revolving around the challenges within the concepts of barriers to entry, economies of scale and scope, information asymmetry and so on (Norgren and Hauknes, 1999).

Innovation can be a tricky undertaking for firms. It is usually hard to find an accurate prediction of the duration and cost of a new business development project. Neither the dimensions of its commercial success can be foreseen precisely. The German economy furthermore consists to over 80% in small and medium enterprises (SMEs) and in Berlin the numbers are even higher. 98% of the firms in Berlin are SMEs (according to the Industrial Chamber of Commerce Berlin). SMEs are often unable to afford large R&D departments and are therefore not in the position to ensure the necessary technological standard for their innovative activities. Public policy stimulating the collaboration between firms and between firms and research institutes are therefore a useful and often even necessary tool to keep the national economy's competitive position up (Norgren and Hauknes, 1999).

2.3.2. Instruments of public policy

Public policy instruments have technical as well as social components and organize specific dynamics between state agencies and those who the instruments are addressed to. In the following an inventory of the specific public policy instruments will be given:

Taxation

Taxes are unpopular but it is not possible to run a state without them. Taxes may be defined as

"pecuniary burden laid upon individuals or property owners to support the government" (Black's Law

14 Dictionary, 2009). One form of taxes are regulatory taxes, for example in the area of consumption of doubtful products such as tobacco or alcohol (Peters and van Nispen, 1998).

Regulation

Regulation is "administrative legislation that constitutes or constrains rights and allocates responsibilities" (Levi- Faur, 2011). Regulation further can be viewed as an alternative to public ownership, one that permits the state agencies to follow particular non-market objectives while leaving ownership unchanged and passing the policy costs over to the private sector. In other words, regulation permits state agencies to redistribute income in a non- obvious fashion. Regulatory policies serve in different ways: they have a symbolic character and show the legitimate power of the state, they set out values and interest of the state for everyone to see and they fulfill pragmatic objectives around the organization and direction of systems and people.

The coercive character of regulation and taxation may provoke a certain form of resistance from the people the policy is imposed on. This however does not go well with the thought of the interwoven relationships between the key actors within an innovation system.

The consequence of regulation and taxation can diverge energy away from innovation centered thoughts and activities towards the coping or avoiding of regulatory or tax- induced pressures.

Subsidies

A subsidy is a paid assistance to a business or an entire economic sector. Most subsidies are provided to producers or are distributed in order to avoid the decline of an industry. Often taxes and subsidies are complementary approaches for the same policy objective such as taxing undesirable behavior whilst subsidizing desirable behavior (Peters and van Nispen, 1998).

State ownership

State ownership are property interests that are vested in the state rather than communities or an individual. This form of ownership may hold for the control of any asset, enterprise or even industry at any level, national, regional or local (Clarke, Kohler, 2005).

Nowadays numerous market economies have privatized formally publicly owned firms in the national

market's leading industries. Private ownership can generally be favored to state ownership if the

nation wishes to create and maintain a strong innovative capacity (Schleiffer, 1998). The criticism

hereby lies in the notion that private firms tend to neglect social goals. Also there is the prevalent

fear of monopoly power and other scenarios that could disturb the market forces and thus put a

15 strain on the economy. Schleiffer (1998) underlines that many of such worries can be countered by using other forms of government policies without having to resort to state ownership.

2.3.3. Public policy in innovation

Cooke et al. (1997) defines the importance of innovation policies and practices as "vehicle of activating social capital in order to enhance systemic innovation capacity". The system of innovation approach stresses the fact that firms do not innovate alone but in synergy with other firms, organizations and other institutions within the system (Edquist, 1999).

According to Chaminade and Edquist (2008) countries that have a high innovative capacity are likely to have adopted some sort of systemic innovation approach. Germany maintains its competitive international position mostly thanks to its innovative capacity, therefore it is safe to assume that a systemic approach on innovation is prevalent within German national borders. A downside of the systemic approach are lacking indicators for performance measurement (see previous chapter) and due to its complexity there may be implementation difficulties apart from the components of the system that may organically evolve and adapt to the ever-changing demands of a modern market economy. It remains to stress that policy evaluation and, if necessary, quick revision and adaption need to be at the centerpiece of the systemic innovation system since a dynamic system categorically requires a dynamic supervisory and managerial approach in order to stay alive.

Apart from sensitively reacting to the dynamics of the systemic innovation economy, when and how should policy makers take action within the innovative process? Chaminade and Edquist (2008) indicate that intervention is required wherever the system is not operating well. That is, when there are systemic problems of any sort.

Summary

This chapter discussed the government's role on innovation. Since this thesis focuses on the firm perspective and on the city of Berlin the government will be defined as the Berlin Senate for Economics, Technology and Science. The policy process could be defined as the process of how interested political actors interact within political institutions to produce, implement, evaluate and revise public policies.

The German government as well as the Berlin Senate apply the structural choice approach of policy

development. The structural choice approach views the creation of public policies as outgoing from

the interaction of interest groups, bureaucrats and politicians within the context of democratic

16 politics. Even in a market economy such as Germany there are times and reasons that may call for public intervention.

The state has the following public policy instruments at hand: taxation, regulation, state ownership and subsidies. The system of innovation approach stresses the fact that firms do not innovate alone but in synergy with other firms, organizations and other institutions within the system. It can be assumed that Germany uses the systemic innovation approach.

Scholars suggest that intervention is required in the systemic innovation approach wherever the system is not operating well.

2.4. Conclusion of the literature review

The three chapters of the literature review have the purpose to clarify the elementary concepts and relationships between the concepts around the topic of open innovation and the state's involvement in open innovation. In the first chapter the concept of open innovation is introduced and the rising importance of open innovation is stressed. The most important fact to remember hereby is that companies seldom innovate in isolation anymore. Cooperation and knowledge sharing between actors that want or need to innovate to stay in business have become more common, if not necessary.

The second chapter introduces the different actors that are involved in the innovative process. The triple helix model has been outlined to display the key players (government-industry-academia) and the relationship structure between them. The open innovation literature stresses the importance of the industry-academia relationship in open innovation and neglects to dissect the government- industry- relationship in the same elaborateness. This is astonishing since the government has the power and the instruments to reasonably impact the innovation process .

In the end of the third chapter it can be inferred that the government can significantly influence the

innovative landscape of a country. For that very reason public policies deserve the missing

explorative attention in order to close the gap of accumulated knowledge between the state and the

industry- academia impact on open innovation.

17

3.1. Aim of study

This study aims to contribute to the clarification of how effectively the Berlin Senate for Economics, Technology and Science stimulates open innovation efforts between companies and knowledge institutes within its regional borders. In order to investigate this question the triple helix model of innovation system of Leydesdorf and Etzkowitz (2000) will be used. The triple helix model advocates that a dynamically interacting and equipollent triad relationship between the governing state agency, industry and academia is the optimal ground for open innovation to prosper.

Open innovation has risen in importance due to the fact that very few companies nowadays innovate in isolation anymore. The catchwords cooperation and knowledge sharing between partners, groups and networks have become more and more important in the innovation discussion. This holds especially for small and medium enterprises (SMEs) which do not have the resources to manage the entire innovation process by themselves.

Berlin lies within the borders of a country which is industrially extremely advanced and at the same time very poor in natural resources. Therefore it owes its competitive market position to its strong innovative capacity leading to high quality products and services. In addition to this Germany's industrial landscape consists to more than 80 percent of SMEs whilst in Berlin the trend goes beyond 98 percent of SMEs. The facts of this paragraph recently have been learnt from a very insightful conversation with an official of the Industrial Chamber of Commerce. These numbers accentuate the importance of innovation and especially of open innovation within the national borders of Germany and the regional borders of Berlin.

Being one of the three dominant institutional spheres according to Leydesdorf and Etzkowitz (2000)

it can be assumed that the Senate has enough power to significantly impact the innovation landscape

of Berlin. In order to investigate how effectively the Berlin Senate stimulates open innovation a

research question and three sub- research questions have been developed.

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Following research question will be used for this study:

To what extent does the Berlin Senate Department for Economics, Technology and Science stimulate open innovation efforts between companies and research institutes?

Following sub- research questions will be used in order to answer the main research question:

1. What are the current policies imposed by the Berlin Senate that stimulate open innovation activities between Berlin companies and research institutes?

2. How do Berlin companies evaluate the existing policies?

3. How do other important actors (policy makers/ policy performers) evaluate the current policies?

3.3. Approach and methods

In order to answer these questions a complementary research approach is taken. The first sub- research question can be answered via the analyzing of existing documentation of innovation policies. In order to keep a narrow focus and allow for a compact and specific in- depth analysis, the term innovation policy will be narrowed down to the specific category of programs that are designed to facilitate innovation activities between companies and knowledge institutes. The second and third sub- research questions can be answered in interviews with companies and other non- governmental and governmental sources. Thereupon it will be made use of a data matrix to bring the results of the documentation and interviews face to face.

The approach and methods used for this thesis fall under the category of case study research. Case studies typically use a combined approach of data collection such as present documentation and interviews. "Any finding or conclusion is likely to be much more convincing and accurate if it is based on several different sources of information following a corroboratory mode."(Yin, 2003).

The research question of this study focuses on "how" effectively the Berlin Senate for Economics,

Technology and Science does its job in stimulating open innovation between companies and

knowledge institutes. Additionally, the investigator of this study has little control over the events or

subjects of the research matter and the research matter itself focuses on a contemporary

phenomenon within a real- life context. According to Yin (2003) the sum of these characteristics

suggests the use of a case study research. More specifically, the case study method allows an

investigator to detect meaningful and holistic features of real- life events and revolves around "the

understanding of the dynamics within single settings" (Eisenhardt 1989).

19 3.3.1. Documents

In order to avoid a biased representation of facts it is important to critically assess the documents' sources and the authors' backgrounds (Yin, 2003). In this study documentation is used that either comes directly from the Berlin Senate or from sources that are (partly) paid with public funds (Investment Bank Berlin, extensive evaluation study of PricewaterhouseCoopers, 2010). Therefore a complementary approach of data collection is very important for the purpose of this study. Hence the interviews become an integral and absolute necessary research tool in order to validate the findings. The most important use of documentation in a case study is to "confirm and amplify proof from other sources" (Yin, 2003).

Deciding upon a qualitative study of Berlin's open innovation policy instruments an inventory of existing measures had to be created. In order to find an exhaustive overview of such policy instruments the Berlin Senate Department for Economics, Technology and Science was consulted.

The department head for innovation funding provided a very comprehensive overview and elucidation of the prevalent innovation programs which he even designed himself. A descriptive overview of those programs could also be found on the website of the Investment Bank Berlin and on the website of the Senate itself.

It was decided to take these open innovation policy programs of the Senate as independent variable for the current research (indicated by color grey) . Before going on to the interviews, see tables below:

Innovation instrument VC Fond Technology

Technology Coaching Center Berlin Kredit Innovativ Berlin Kapital

Innovation or open innovation instrument ProFIT Loan ProFIT Grant Open innovation instrument Innovation Assistant

TransferBONUS

Table 2: Innovation instrument

Collaboration/ networking

Compulsory Innovationassistant, TransferBonus

Optional ProFIT Loan, ProFIT Grant

Table 3: Collaboration/networking

20 3.3.2. Interviews

According to Yin (1994) interviews are one of the most important sources of case study proof.

Questionees can deliver valuable insights into a research matter. Therefore, as a complementary step to the program map analysis, a number of interviews with key people within the area of public policy have been conducted. Those interviews were open ended and semi- structured so that the associated results can have a qualitative and elaborate nature. Yin (2003) advocates this form of guided conversations instead of fully structured queries in case study research. In this way a great amount of information can be shared and thus, findings with unexpected character can be explored in more detail.

The interview questions will be based on and make use of the concepts discussed in the literature review in order to create a holistic picture of the public policy situation at hand. Inspired by Groenveld (2008) the interview protocol will revolve around the following superordinate subjects:

A. The awareness and perceived importance of open innovation

Numerous scholars such as Chesbrough (20003), Gassman and Enkel (2004) or De Rochemont et al (2007) argue that the concept of open innovation continuously rises in significance. Some of the reasons for that notion are the following: For a rising number of firms it is hardly possible anymore to only use the resources and knowledge available within the companies' own boundaries and still remain innovatively competitive. In comparison, open innovation accrues the advantages of shortened innovation cycles and radically reduced research and development costs. This is especially important for small and medium sized enterprises which often do not have a significant amount of resources at their disposal for research, development and commercialization activities. In frequent instances open innovation can offer firms a greater return on their innovative ideas and thus, a greater share of intellectual property or competitiveness. Additionally, there are fortunate situations when open innovation can enable an integrated innovation across the value chain which, in turn, strengthens the competitive position of the associated industry and therefore the regional and national economy.

B. The role of the Berlin Senate for Economics, Technology and Science in open innovation

In order to get an idea of how the Berlin Senate for Economics, Technology and Science can impact

open innovation processes the concept of national innovation system and the triple helix model of

21 Etzkowitz and Leydesdorff (2000) can be used. The triple helix model underpins the importance of a well- oiled triad relationship between the three institutional spheres (government- academia- industry) which should have overlapping scopes of responsibility and function in order to stimulate open innovation in the best possible way.

Despite all advocacy for the triad relationship of the three institutional spheres there is an important demur that needs to be taken into account. The governmental body is subjected to two premises for public intervention in a market economy: market failure and the ability to solve or mitigate that failure. Therefore, the Senate's active participation in the innovation system is only desirable or even acceptable for adverse instances or trends of the economy which the market is unable to remedy by itself. Within the process of open innovation market failures are needs for open innovation which could not be facilitated by the market. The government uses specific public policy instruments to impact the innovation process whereas in this thesis only the public policy instrument of subsidies and its impact on beneficiary companies and research institutes will be investigated further.

C. The perceived extent to which public policy instruments stimulate open innovation

The instruments used for actively influencing innovation processes are taxation, regulation, subsidies and public ownership. With these measures the government can stimulate open innovation. The instrument used for this thesis are open innovation facilitation programs of the Berlin Senate Department for Economics, Technology and Science and belong to the subsidy category of public policy instruments. A subsidy is a paid assistance to a business or an entire economic sector. As stated in the literature review, most subsidies are provided to producers or are distributed in order to avoid the decline of an industry. The following interviews are conducted to assess the extent to which those innovation facilitation programs are perceived to effectively stimulate open innovation efforts between companies and knowledge institutes.

The interviewees selected are mapped below.

Interviewees

At the Berlin Senate contact details of companies were inquired that have made use of public

innovation facilitation programs entailing some degree of cooperation and knowledge transfer. Also

the contact details of one or two cluster managers were inquired and it was asked to be forwarded

to an official of the Investment Bank Berlin. The very first interview was conducted with an official of

the Industrial Chamber of Commerce who had then established the important contact to the chief of

innovation funding of the Berlin Senate.

24

Company representatives interviewed

Comany Upcload GmbH Dr. Lausch GmbH Berlin Heart GmbH

Jenoptik Polymer Systems GmbH, Former Epigap Optoelektronik GmbH

Name interviewee

Sebastian Schulze

Prof. Dr. Wolfgang Lausch

Sven- Rene Friedel Enrico Pertzsch

Function interviewee

Co-Director/Co- Owner

Founder/Director Director Finance and

Administration

Department manager and active member of developing team

Description company

Online body measuring and linking to fitting online shopping portals

Engineering and consulting services with ecological focus

Developing, producing and distributing of innovative system for mechanical heart support

Development and distribution of mass-customized optoelectronics

No employees 19 12 225 Epigap at times of the ProFIT

measure and before acquisition:30 Used

instrument

TransferBONUS Innovation Assistant

ProFIT ProFIT

Knowledge institute representative interviewed

Humboldt University Berlin

Name interviewee Prof. Dr. Beate Meffert

Function interviewee Cooperation coordinator and university professor

Cooperation partner Lüth und Dümchen GmbH

No employees cooperation partner 22

Instrument used ProFIT

Industrial Chamber of Commerce representative interviewed

Industrial Chamber of Commerce Berlin

Name interviewee Heike Schöning

Function interviewee Reference person for innovation, technology and science

Governmental interview sources

Berlin Senate representatives interviewed

Senate department Berlin Senate for Economics, Technology and Science

Berlin Senate for Economics, Technology and Science

Name interviewee Oliver Bathe Chief of innovation funding Function interviewee Kristin Kölbl Administration officer

Cluster representative interviewed

Biotop Berlin Brandenburg GmbH (Part of TSB)

TSB Innovationsagentur Berlin GmbH

Name interviewee Wolfgang Korek Gerrit Rössler Function interviewee Manager International

Relations

Manager

Investment Bank Berlin representative interviewed

Investment Bank Berlin

Name Andreas Wörlein

Function interviewee Chief department officer investment funding

25 3.3.3. Validity and reliability

Joppe (2000) defines those two concepts as follows: Validity determines "whether the research accurately measures what was intended to be measured or how truthful the research results really are". Reliability can be understood as "the extent to which results are consistent over time and an accurate representation of the total population under study". Important to notion at this point is that a method can be reliable or in other words measuring the same thing consistently over time whilst not being valid.

To the validity and reliability of this study it can be said the following:

All interviewed companies are cases that the Berlin Senate itself has put the researcher in contact with. Further they are all beneficiaries of public funding within one of the three programs that somewhat touch the subject of open innovation: ProFIT, Innovation Assistant or TransferBONUS.

Moreover it was noticed in the forwarded emails which the researcher has received that the internal communication between the Berlin Senate and the Investment Bank Berlin revolved around the selection of some "successful cases" for the inquiring Master student to interview. However who could blame them for that and who would expect a governmental body to forward unsuccessful cases to be investigated further?

It cannot be forborne to factor in the high possibility that the pre- selection of cases by the Senate and the bank will lead to a slight positive evaluation bias of the beneficiaries' opinions concerning innovation support measures. Also it can be questioned whether anyone who receives a treat of someone and who is subsequently asked by the sender of that treat to give an interview to someone else about it, would talk the treat down after it has been received. One of the interviewees furthermore was in the midst of applying for the next "treat" which in this case was the ProFIT funding of the Senate. That beneficiary had already completed two ProFIT projects before having applied for the third one. This is a rather delicate position to be in which probably does not exactly incline the applicant to talk the "treat" source down.

4. RESULTS

This chapter will systematically map and analyze innovation policies. In order to do so, conceptualities of the terms policy, program and project need to be clarified.

The best way to do that is with the aid of a commented graphic. The graphic below depicts the

innovation policy structure the way it can be found in Berlin. The structure has the form of a pyramid

26 with superordinate goals on the top successively followed by strategy, instruments and eventually actors which are on the executing level. The pyramid as a whole can be understood as innovation policy.

Figure 4: Innovation policy

The term innovation policy measure can be confusing because in everyday speech it may refer to policies on three different levels: to innovation policy as a whole (=goal, strategy, instruments and actors) or to its two sub- categories. Innovation policy namely comprises policies on two more levels, on the program- level and policies on the project level. Policies on the program- level are designed to realize a future macroeconomical objective hereby fanning out into policies on the project- level.

These are designed to focus on short term results and primarily concern the participants involved.

Program- level policies further can be understood as a stimulus to start an initiative which will further evolve in the midst of market forces. For project- level policies participation can be individually or between firms and/ or knowledge institutes. Whilst the results of the project only concern its participants the results of all project- level policies however should feed into the superordinate program- level policy objective.

The program- level policies of this thesis are called ProFIT, Innovation Assistant and TransferBONUS.

Project- level innovation policies will be investigated that took place within these programs. In the graphic above both program- level policies as well as project- level policies belong to the subsidy

Innovation Policy

Goal

Strategy Instruments

Actors

27 instrument category level of innovation policy. Other instruments would be taxation, regulation and public ownership which will be excluded from this research.

In the following, this chapter will systematically assess the prevalent innovation policy measures of the Berlin Senate for Economics, Technology and Science using documentation and interviews.

Bringing the knowledge of the two together a data matrix will be used.

4.1. Results documentation

The first table below introduces the prevalent innovation policy programs and makes a distinction between open and non-open measures. In Appendix 1 an overview of the entire innovation policy program inventory of the Senate can be found including a short explanation of why some of those programs can be categorized as open measures whilst others can't.

Innovation instruments VC Fond Technology

Technology Coaching Center Berlin Kredit Innovativ Berlin Kapital

Innovation or open innovation instrument ProFIT Loan ProFIT Grant Open innovation instrument Innovation Assistant

TransferBONUS

Table 4: Inventory of innovation policy measures and distinction between open and non- open policies

In total there are eight innovation policies, four of which focus on traditional aspects of innovation such as financing, developing and launching new products whilst the other four structurally allow or oblige a certain openness. It is important to add that the ProFIT program, whilst more likely to be performed in cooperation with others does not specifically require innovators to cooperate as a prerequisite. Therefore it would be wrong to solely regard ProFIT as open innovation instrument.

ProFIT can be used by sole established firms and it can be used by new founding firms.

If this was a national study one could criticize the relative amount of clearly open innovation policies opposed to the amount of grey zone instruments and non- open innovation instruments. However this is the inventory of a region and there may be a limited amount of suitable applicants for the fixed innovation policy budget. Hence a higher amount of structural flexibility may suggest itself.

The next table summarizes the most important features of the open innovation policy programs: