The role of openness in innovation: a stakeholder engagement approach

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The role of openness in innovation: a stakeholder

engagement approach

Master Thesis

Strategic Innovation Management

University of Groningen

Faculty of Economics and Business

MSc BA: Strategic Innovation Management

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Abstract

Both the fields of open innovation and the stakeholder theory have been separately studied in the literature by a variety of scholars, however no research has been done to explain the relationship between them. This thesis investigates what the effect of stakeholder engagement on firms’ innovative performance is, while using an open innovation approach. The hypotheses were tested by analysing a sample of 3864 firms based in 58 countries, covering 13 different sectors. The main findings of the research is that firms with a high engagement with stakeholders have a higher degree of formal protection mechanisms compared to firms with a lower engagement with

stakeholders. The results also show that firms that engage more with stakeholders are active in more markets. These findings are in line with the case studies provided in the open innovation paradigm literature, and provide new insights for further research. Furthermore, this thesis lays the foundation for a stakeholder approach to the open innovation paradigm.

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1. Introduction

Globalization has changed the business environment radically, and rapidly. It has decreased the distances of markets in ways people could not have imagined a century ago. Globalization is manifested in the form of a rise of the Internet, liberalization of trade and the decreased costs of transportation, which all influence the way companies are doing business (Garrett, 2000). Competitiveness in the current marketplace is something all companies strive for, as they need to stand out from their (global) competitors. Simply making one product and focusing on this is no longer a sustainable business operation. This is where the concept of innovation comes into place. As Schilling (2013) states in her book: “technical innovation is now the most important driver of competitive success”. She was not the only one to highlight the importance of innovation, as over the past decades many have argued the same (e.g. Teece, 1986; Lundvall, 1988; Zahra, 1996; and Barczac, Griffin, and Kahn, 2009). It is said to be the main driver for companies to maintain, and increase a high

profitability (Kostopoulos et al., 2010; Christensen, 1997). As the concept is used in multiple disciplines, levels and natures, Baregheh, Rowley and Sambrook (2009, p. 1334) identified innovation as following: “[innovation is] the multi-stage process whereby organizations transform ideas into new or improved products, services or processes, in order to advance, compete and differentiate themselves successfully in their marketplace”.

Large parts of the research in traditional innovation in the 20th century have been dominated with the idea that a firm is best of vertically integrating the process of innovation (West & Bogers, 2011). Some have argued that controlling this process is the reason that large multinational firms have a reason to exist and are able to be successful (e.g. Armour & Teece, 1980). This process of vertical integration has been challenged in the recent years, as major changes have taken place in society. Due to factors such as the aforementioned globalization, the environment has become more turbulent and competition has intensified (Rothwell, 1994). Because of this, the modern firm needs to adapt their business model to integrate the environment as a part of their business; a shift in the concept of innovation is taking place.

Instead of firm’s solely using vertically integrated innovation models, a rise has been observed in more horizontally integrated processes. In 2003, Chesbrough proposed a model that integrated the different stakeholders in the environment in multiple facets of the innovation process. The open innovation paradigm focuses on flows of

knowledge that can enter and leave the organization at all times of the innovation process (Chesbrough, 2003). To engage in the open innovation process a

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The process of open innovation thus increases the knowledge flows in the

organization, not only inbound flows to the organization but also outbound flows are highly relevant (Lichtenthaler, 2009). The inbound knowledge flows involve an increase in technology transfer, as the firm is not fully reliable on their own internal R&D any longer. The outbound flow of knowledge in the open innovation paradigm focuses on the increased commercialization possibilities of their innovative activities (Chesbrough & Crowther, 2006). Chesbrough and Bogers (2014) argue that there has been confusion when it comes to the term open innovation, as some (e.g. Von Hippel, 2005) use the term open as a synonym for user-centric. In addition, there is a distinct difference between the open innovation paradigm (or theory) and the literature about the upcoming open source systems and/or companies1. Due to the relative newness of the subject, most evidence of the theory of open innovation is built on qualitative studies (Van De Vrande, De Jong, Vanhaverbeke & De Rochemont, 2009;

Wynarczyk, Piperopoulus & McAdam, 2013), such as case studies (e.g. Dodgson, Gann & Salter, 2006; Henkel, 2006) and interviews (e.g. Chesbrough & Crowther, 2006).

All things equal, it becomes evident that there is a higher engagement with stakeholders in the new innovation paradigm, compared to the old vertically integrated method of innovation. The way that companies engage with all the

different stakeholders in the environment is an important question that many scholars have been researching. Some argue that the only reason the firm has a reason to exist is the shareholders (Friedman, 1970), whilst others argue a broader approach is needed. In the theory proposed by Freeman (1984), the stakeholder theory, the

argument is made that all stakeholders should be taken into consideration when doing business. Stakeholders include all groups or individuals who can substantially

influence, or are influenced by, the firm (Jensen, 2001). Belderbos, Faems, Leten & Van Looi (2010) show that degree of engagement with stakeholders affects the innovative performance of the firm, but also note that this relationship is not solely positive. The degree to which firms have the ability to spend money, time and other resources affects said performance (Laursen & Salter, 2006).

Undoubtedly, the stakeholder theory and open innovation describe a similar process within the organization, as both theories highlight the importance of external

knowledge and stakeholders to access information (Gould, 2012). There is, however, very little literature that links both concepts, definitely not in the quantitative stream of research. This study couples both the process of open innovation and the

stakeholder theory on a firm level, in which the relationship between the level of stakeholder’s engagement and the influence on innovative performance of a firm is proposed. Therefore the following research question was developed: “Does the degree

of engagement with stakeholders affect the innovative performance of firms?”

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To address this research question this study will look at both the degree of engagement with stakeholders and the expected outcomes in the process of open innovation paradigm. The assumption is made that a higher engagement with stakeholders is aligned with a more open approach to innovation and therefore positively influences the results of the open innovation paradigm in the form of intellectual property, licensing agreements, operating in diverse markets and financial performance.

The following structure can be expected in this research paper. Firstly, a theoretical analysis of open innovation, the innovation processes and the stakeholder approach will be presented. After that, the development of the hypothesis will be described and explained. Following the hypothesis development the methodology used in the paper is presented. The methodology includes an explanation of the sample, data and the used the measures followed by the descriptive statistics and the analysis techniques. Then the results are discussed. In the final part of paper the results are presented followed by the discussion, limitations, further research and managerial impactions.

2. Literature Review

The following section of the paper there explores the stakeholder theory and the open innovation paradigm by reviewing the literature. The first section discusses the stakeholder theory and the importance of stakeholders. The second section

concentrates on the open innovation paradigm with a focus on three aspects of said theory; the role of intellectual property rights (IPR), the market differentiation and the degree of licensing caused by open innovation.

2.1 Stakeholder Theory

The stakeholder theory introduced by Freeman (1984) takes a different perspective towards doings business: rather than simply trying to increase the profits or efficiency within the firm, the objective is expanded. The theory is builds on the concept that all stakeholders surrounding the firm are important for the long-term success (Laplume, Sonpar & Litz, 2008). The main focus of the stakeholder theory is the relationships of a firm with its surrounding factors with an accent on the stakeholders, and how this firm behaves in the environment it is situated in (Key, 1999).

Freeman (1984, p. 4) argues that “business and service organizations are experiencing turbulence” and that the way businesses were interacting with the world around them would not be sustainable. The strategies of firms were previously based on the static nature of the environment of the firms, whilst due to globalization the

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to change their strategy, as otherwise they would not be able to face the ongoing changes in the world.

The theory is built on the premise that decisions that take place within a firm are not taken with sole interests of the shareholders, but should also include the other stakeholders (Jensen, 2001). It thus functions as an alternative for the stockholder-based theories on which modern capitalism is build (Freeman, Harrison, Wicks, De Colle, 2010). The definition of a stakeholder by Freeman (1984, p.25) is argued to be quite broad: “any group or individual who can affect or is affected by the achievement of the firm’s objective”. This means that not only the shareholders, but also a rather highly differentiated number of stakeholders should be considered when taking action within the firm. The identification of stakeholder thus surpasses the simple

shareholder approach that is introduced by Friedman (1970), who argued that the only reasons firms exist is to satisfy the needs of the shareholders. In the perception of Freedman (1984) not only the shareholders, but stakeholders such as the employees, suppliers, customers, competitors, environmentalists, local communities, media, consumer advocates, the government and the natural environment should be

considered when taking strategic decisions within the firm and developing a business strategy. Mitchell, Agle and Wood (1997) add that there are stakeholders that can use unlawful means to affect the firm when they don’t agree with the business practices such as environmentalists and terrorists. Even though they have no legitimacy, their influence can affect the objectives of the firm.

The interaction with stakeholders is thus, according to the previous authors,

established as a perquisite of doing business, but some argue that this is not enough for a sustainable business strategy. This is because the firm can interact with a

customer, competitor or employee without actually “inquiring about his or her wants, needs, well-being or capabilities“ (Noland & Philips, 2010). They argue that there is a need for engagement in doing business, where both parties have at least a minimum of recognition and respect in the way the actions are going to affect the other party. In this light, one might argue that the engagement with stakeholders (and thus

stakeholder theory) is simply a mechanism to improve the corporate social responsibility of a firm.

Greenwood (2007) does not agree with this statement. She identifies the engagement with stakeholders as the practice to positively interact with the stakeholders in the activities of an organization. This means that the engagement with stakeholders is applicable to multiple facets of the firm, and is thus not limited to the scope of corporate social responsibility. Arnstein (1969) explains that the stakeholder

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The engagement with internal and external stakeholders is thus an important aspect of the stakeholder theory, which can improve the relations with the stakeholders at several stages of the firms’ operations in general including, but not limited to, the innovative process.

2.2 Open Innovation

The way firms innovate has changes continuously, as market conditions demand changes (Rothwell, 1994). Rothwell (1994) argues that a rise in pace and increasing degrees of complexity of technological change have forced firms to changes their innovation process. In the old model of innovation, both the innovation process and outcome were developed internally (Huizingh, 2011). The new changes have pushed towards a more vertically integrated process. These changes have led to a greater degree of flexibility and efficiency allowing firms to respond to changes in market. Chesbrough (2006) agrees with Rothwell (1994), identifying several erosion affecting the process of innovation. He argues that the increasing availability and mobility of skilled workers, an increase in the market of capital ventures, increasing possibilities for external idea application and the increasing capability of external suppliers (see Table 1) have led to a more innovative process which he coined the open innovation

paradigm.

Erosion Factor Description

1. Increasing availability and mobility of skilled workers

A huge increase in the enrolments of university students lead to an increase in the amount of specific knowledge, internal R&D was no longer the sole place for knowledge

2. Increase of Venture Capitalism

Due to economic growth higher risk/reward possibilities were created. This lead to increasing numbers of R&D employees leaving the firm for better prospects

3. External options for ideas sitting on the shelf

Combining the first two erosion factors, the newly, highly trained R&D employees got the opportunity to develop their ideas which were sitting on the shelf at their multinational organization 4. Increasing Capability

of the External Suppliers

The combination of the above factors lead to an increase in the capabilities of external suppliers whom were able to bring specific (higher quality) products than companies were able to produce internally

Table 1: Erosion factors (Chesbrough, 2006)

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evident that the outlook on innovation should change in such a way that firms should open the boundaries of their firm in order to, on the one hand, increase the knowledge flow from external stakeholders into their own firm, whilst on the other hand

simultaneously engage with external stakeholders to appropriate more value from the internal R&D procedures. An important aspect of the open innovation paradigm is that (innovative) projects can be launched from internal and external sources, with technology or knowledge having the possibility to enter in more stages of the process (Elmquist, Fredberg & Ollila, 2009).

Since the introduction of the book, the concept has gained considerable attention in academic and management literature (Dahlander & Gann, 2010; Chesbrough & Bogers, 2014). Two main aspects have been identified in the literature to explore the concept of open innovation, namely the exploration and exploitation across

boundaries of the firm. Enkel, Gassman & Chesbrough (2009) identify firms that use the coupled mode of open innovation activities, which occurs when a firm engages both in both in the inbound and outbound open innovation process.

2.3 Exploration

The concept of exploring (or inbound open innovation) external knowledge for the innovative process is not new. Multiple scholars have shown the importance of external knowledge acquisition before the introduction of the open innovation paradigm (e.g. Granovetter, 1973; Von Hippel, 1988; Pissano, 1990). This said, Laursen & Salter (2006) underline that the change in a search for external ideas and technologies is a central component to the movement towards open innovation. New ideas and possibilities often arise from interaction with partners, or alliances, in different lines of business, since these companies will give access to a different knowledge base (Dittrich & Duysters, 2007). Companies that engage in closed

innovation processes are mostly focussed on the internal production of knowledge and innovations, not being able to tap into the knowledge of partners and alliances

(Rothwell, 1994). Scholars (e.g. Cassiman & Veuglers, 2002) have shown that there is a complementarity in the usage of external knowledge acquisition, but Chesbrough (2006) goes one step further claiming that the firms implementing a strategy of open innovation should value the external knowledge at the same degree as internal knowledge generation.

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The external knowledge that can be tapped into is very diverse, as there are many information sources, from different industries, which can increase knowledge of the firm (Spithoven et al., 2011). Sources of external knowledge include in-licensing agreements and strategic alliances with other firms (Lichtenthaler, 2008). This means that the firm can attain resources, knowledge, but also the complementary goods of partners (Powell et al., 1996; Dyer & Singh, 1998). When scanning the environment for knowledge, other sources such as with end-users (Lettl, Herstatt, & Gemuenden, 2006), lead users (Von Hippel, 1986), universities (Laursen & Salter, 2006), and suppliers (Hoegl & Wagner, 2006) have been proven to be useful. The process of exploration (or outside-in innovation) thus increases the knowledge of a firm, and eventually should increase the innovativeness of the firm (Spithoven et al., 2011). This said, there are issues that might arise when looking for or using a wide variety of external sources of innovation. Problems include an oversaturation of the internal knowledge absorption possibilities that lead to an attention problem (Laurens & Salter, 2006). Another issue that can affect the innovation strategy is the risk of outsourcing critical information to other firms in the process of the collaboration (Dahlander & Gann, 2013).

From an open innovation theory perspective it thus becomes evident that the

surrounding environment is of huge importance in the exploration of knowledge. This means that a high degree of engagement is necessary to be able to absorb this

knowledge, as without the engagement, the full potential of the external knowledge sources may not be used. One can argue that integrating non-R&D stakeholders that are influenced by the firm can influence the inflow of external knowledge as well, an example being environmentalists. Once these groups are integrated in the process of open innovation, possibilities might arise. When careful engagement is in place, these groups may provide knowledge that is not available within the firm or the firms’ R&D alliance partners, leading towards a more inventive process of innovation.

2.4 Exploitation

The exploitation aspect of open innovation (or outbound open innovation) refers to the way a firm appropriates value from their innovative activities.

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The engagement of non-R&D workers in the innovation process can be valuable to the company as informal ties with people from other organizations can help to understand how new products are created and commercialized (Van de Vrande et al., 2009). Spinning-out start-ups are supported by the parent company in different ways; examples include, but are not limited to, financial, legal, and administrative assistance (Chesbrough, 2003).

Finally, licensing can be useful for a company to gain financial and strategic benefits. The financial benefits from licensing are the streams of revenue from licensing agreements, in which the firm monetizes the unused technical knowledge (Lichtenthaler, 2008). The strategic benefits include the improvement of the competitive position in (new or foreign) markets, and an increase in the external adoption of the product to set industry standards (Lichtenthaler & Lichtenthaler, 2009; Ehrhardt, 2004). Once the industry standard has been set the firm then has the ability to provide complementary resources based on the standard, and gain value which otherwise might not have been realised. This will thus lead to an improvement on the return on investments of their research and development (R&D) activities (Arora, Fosfuri & Gambardella, 2001). An example of the ability to increase the return on investment is Xerox (Chesbrough & Rosenbloom, 2002). The company started 11 new ventures, which combined, have a total market value worth twice as much as the parent company (Van de Vrande et al., 2009).

Compared to firms that engage in an open innovation strategy, the firms engaging in a closed innovation strategy do have a minimized risk of knowledge spill overs (Arora et al., 2001, Laursen & Salter, 2006). The resources, knowledge and competencies developed by internal R&D can leak to competitors whom have the opportunity to create their own value with this, if firms are not careful enough in what knowledge they supply. Therefore caution or appropriate measures (such as protection

mechanisms) should be taken into account when engaging in open innovation.

Firms engaging in open innovative activities should thus integrate a greater variety of knowledge exploitation. The involvement of non-R&D workers in innovative

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3. Hypothesis Development

Based on the theory introduced in the previous section, four hypotheses were

developed. It is expected that the engagement with stakeholders in the process of open innovation is very important. Without the engagement with the stakeholders, the all-important inflow of external knowledge is hard for firms to capture. This said, the engagement with stakeholders also plays an important role in the outflow of

knowledge, as the engagement can create possibilities to appropriate value from the innovative processes within the firm. In the next section of the paper an analysis will be provided between the role of engagement with stakeholders and the IPR activity, licensing revenues, the differentiation across markets and the financial performance. The IPR activity is investigated due to the role of IPR not only in the exploitation but also the exploration component of the open innovation paradigm. Then the licensing and the different market activities of firms are discussed, as they describe the

exploitation aspect of the open innovation paradigm. Finally, a description is made of the relationship between the engagement with stakeholders and the financial

performance, as a positive influence is expected.

3.1 Role of Intellectual Property Rights

Protection of the proprietary knowledge within a firm can be done in different ways, including formal and informal mechanisms (Dahlander & Gann, 2010). Formal mechanisms include options such as patenting, trademarks and copyrights of innovations and knowledge, whereas trade secrets, first mover advantages, and confidentiality lock-ins are informal ways of protecting the innovations (Schilling, 2013).

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Chesbrough (2003) highlights the need for IPR for those firms engaging in an open innovation strategy as it makes it possible for the firm to actually capture the value from their innovative activities. Andries and Faems (2012) show that for both SME firms and large firms benefit from patent protection, as they show that patent

activities increase the ability to generate revenue from new products. In this light one can thus conclude that for the exploitation of innovative activities, and thus the capturing of the value of the innovations, there is a need for firms to have a strong intellectual property strategy.

Alexy, Criscuolo and Salter (2009) argue that the ownership of patents has several advantages for the firm as it can also act as a signalling mechanism towards other firms. Having formal IPR show the surrounding stakeholders that the firm has a certain expertise, which can attract partners and give an improved basis for negotiations. Enabling the open innovation strategy in the inbound exploration of knowledge in the firm broadens the firms’ intellectual property (IP) generation and development of new products (NPD) which should allow the firm a more sustained and faster NPD process with more substantive product advancements (Sisodiya et al., 2013). This said, there is some disagreement in the literature on open innovation. Some scholars (Von Hippel & Krogh, 2006, Laursen & Salter, 2006) argue that the openness and accessibility of knowledge should not be restrained by intellectual property. They claim that the usage of IPR will increase costs and thus impede or cripple the process of innovation.

Nevertheless, seen the fact that the use of IPR is a huge aspect in both the exploration and exploitation aspect of the open innovation paradigm, the following hypothesis is developed:

Hypothesis 1: A higher degree of stakeholder engagement is positively related to a higher degree of intellectual property rights

3.2 Licensing Revenues

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licensing of intellectual property is IBM, whom generated a total of $1.2 billion in licensing revenues in 2004 (Arora et al, 2001; Chesbrough, 2006).

Companies involved in closed innovative activities try to restrict the outflow of knowledge, as they do not want to take the risk of spill overs. This, however, means that said these types of firms lose the opportunity to gain revenue from licensing. Licenses provide a real opportunity to increase the return on the R&D, as the value of the licenses often goes hand in hand with a high profit margin (Rivette & Kline, 2000; Fosfuri, 2006). This said, firms should take into consideration what intellectual

property is licensed out, as licensing out the core value (or the crown jewels) of the business does not pertain a long-term strategy (Fosfuri, 2006).

Thus, an increase in the licensing fee revenues is expected, as companies engaged in open innovation can use the unused and under-utilized ideas and concepts to license them out. Therefore the following hypothesis is developed:

Hypothesis 2: A higher degree of stakeholder engagement is positively related to a higher degree of licensing revenues

3.3 Differentiation in Markets

Chesbrough (2003, 2006) has argued that the open innovation paradigm gives way for firms to engage in different ways to exploit the innovative activities within the firm. As explained in the previous section licensing out unused knowledge can be valuable, however firms also have the opportunity to explore other ways of exploiting

innovative ideas. As an example Chesbrough (2003) cited Xerox was an example that he mentioned that engaged with more stakeholders in the environment to create new business opportunities in different markets.

A higher degree of stakeholder engagement is expected to lead to a higher

understanding of the market in which the firm is situation. This said, the increase in knowledge from stakeholders (which are not necessarily in active in the current market) is expected to also influence the degree of knowledge of markets in which the firm is not active in. Keeping this line of thought, the expectation is that the increased knowledge of markets in which the firm is not active, will give firms with a high stakeholders engagement a better view of the requirements (or the needs) to enter alternative markets. Secondly, firms with a high degree of engagement can use their (un-used) expertise and knowledge in other markets to identify new sources of income, and thus exploit their innovative activities. If the firm then sees the

opportunity to enter a new market, chances of a successful penetration increase with a higher engagement with stakeholders as they know what the wants and the needs in the market are.

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engagement with stakeholders is expected to give firms more opportunities to explore a greater number of markets as they as they can use their (un-used) knowledge. Taking this into consideration, the following hypothesis is proposed:

Hypothesis 3: A higher degree of stakeholder engagement is positively related to a higher number of markets in which the firm operates

3.4 Financial performance

The direct relationship between higher stakeholder engagement and financial performance has been elaborated on by only a handful of scholars. From an open innovation perspective, Sisoyada et al, (2010) look at the ability of firms to make and manage relationships with other firms. They argue that this relational capability positively moderates the inbound open innovation and performance relationship. Laursen and Salter (2006) look at the breadth and depth of open innovation activities, and argue that both have an inverted U-shaped effect on the firms’ performance. They argue that there can be the problem of over searching, and that firms’ engaging too much with other firms will lead to a decrease in the performance. When analysing the relationship from a stakeholder management point of view, the relationship between a strong stakeholder management and value creation for the firm has been shown to be positive (Hillman & Keim, 2001; Choi & Wang, 2009). Choi and Wang (2009) show that a high degree of stakeholder relations helps firms to sustain high profits in a well-performing situation, and when poorly well-performing the high degree of stakeholder relations helps the firm move out of the disadvantaged position faster.

Hypothesis 4: A higher degree of stakeholder engagement is positively related to higher financial performances

The expected relationships between the variables can be reviewed below in Figure 1.

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4. Methodology

This section of the paper will describe the data and sample, continuing with the explanation of the measurements and concludes with the descriptive statistics of the data.

4.1 Data and Sample

The data used for this paper is a combination of data from three databases. First of all, the Asset4 database is used to gain knowledge of the Environmental, Social and Governance (ESG) data needed to measure the degree of stakeholder engagement. The second database used for this paper is Datastream, which gave insights in various financial and accounting measures. Finally, the Orbis database is used to collect data needed for trademarks and patent information. The sample is based on the availability of the ESG data from the Asset4 database, leading to a total sample of 3964 firms worldwide (retrieved by taking the ASSET4 ex. US and ASSET4 US sample).

4.2 Measurements

4.2.1 Degree of Stakeholder Engagement. For testing the hypothesis in this

paper the degree of the firm’s engagement is the independent variable.

To develop the scale of a firm’s degree of engagement a combination of measurements was used, based on several stakeholders that the firms has to deal with. The main idea behind the variable is that once a firm has a higher degree of

engagement with the stakeholders, the more open the firm is. Although the number of stakeholders can be seen as endless (Greenwood, 2007; Freeman et al. (2010), for the sake of the research a decision was made to use 5 main stakeholders that affect the firm’s strategy based on an adapted methodology of Waddock and Graves (1997). Their analysis based on the stakeholder theory had to be adapted in such a way that the measures would capture the insights of their methodology combined with aspects of the open innovation paradigm, as some of the measures were not relevant for our research (such as social participation issues which looks at controversial areas of doing business). The stakeholders that were identified to be important include the employees, the customers, the suppliers, the community and the natural environment. The variables taken to identify the relationships between the firm and the five main stakeholders can be summarized in appendix one. The second appendix elaborates on how the measures were combined to form a factor.

4.2.2 Degree of Formal Protection. As a dependent variable to test the first

hypothesis, the degree of formal protection is used. To measure the degree of formal protection, the number of patents and trademarks of a firm in 2015 were analysed. These measures were taken because Chesbrough (2006) identified the usage of patents as one of the main pillars of the open innovation paradigm, as they are vital for the exploitation and exploration of the innovative activities in the firm.

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scholars in the field of economic research (Hagedoorn & Cloodt, 2003). Additionally, the number of trademarks were included as well, as Hagedoorn and Zobel (2015) have shown in their research that 71.3% of the firms use this method of formal protection to protect their innovative capabilities and 56,4% use it as a signalling device. The data was retrieved from the Orbis database.

4.2.3 Licensing Revenue. In order to test hypothesis 2 and find out if there is

a link between the degree of stakeholder engagement and the revenue firms gain from licensing, the in-licensing revenues from 2015 were taken from the Datastream database. In the literature, the licensing revenue has not been extensively used as a dependent variable in the light of open innovation nor the stakeholder theory, which provides the opportunity to give new insights.

4.2.4 Market Differentiation. As stated in the hypothesis development, the

market differentiation of firms has not been empirically researched by other scholars in the open innovation nor the stakeholder management theory. Therefore a measure had to be developed to see if the hypothesis holds up. An analysed was done to test the relationship by looking at the number of unique industries in which the firm is active. The data from 2015, taken from the Datastream database, shows the industry orientation of the firms based on the 10 primary Standard Industrial Classification (SIC) codes in which they were active.

Industry SIC CODES

Mining, Construction 100-1999

Food, Textiles, Apparel 2000-2390

Forest Products, Paper, Publishing 2391-2780

Chemicals, Pharmaceuticals 2781-2890

Refining, Rubber, Plastic 2891-3199

Containers, Steel, Heavy Mfg. 3200-3569

Computers, Autos, Aerospace 3570-3990

Transport 3991-4731

Telephone, Utilities 4732-4991

Wholesale, Retail 4992-5990

Bank, Financial Services 6150-6700

Hotel, Entertainment 6800-8051

Hospital Management 8052-8744

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A firm active in both the Chemicals & Pharmaceuticals classification and the

Hospital Management classification receives a score of two. A higher number of

unique industries will thus lead to a higher score. Every industry a company is active in leads to an extra score, and as the Datastream database provided the 10 main SIC codes, the minimum score for the firms is 1 whilst the maximum score is 10.

4.2.5 Firm performance. To assess the firms’ performance the financial data

in 2015 from the Datastream database was collected. Following previous studies on firm performance (Lin, Lee & Hung, 2006; Hung & Chou, 2009) the Tobin’s Q measure of long-term performance was used. Tobin’s Q is a good measure to evaluate performance as it takes into account the firms intangible assets, which is not easy to capture (Jose, Nichols & Stevens, 1996; Ceccagnoli, 2009). Secondly, Hung & Chou (2013) argue that the value has a smaller average error, higher average correlations, and that it is suitable to compare different industries due to the fact that it cannot be affected by accounting conventions. Thirdly, Sisoyada et al. (2009) add that the Tobin’s Q is a forward-looking measure, which reflects the long-term profitability of the firm. A disadvantage of the value is that it includes stock-market based

information to evaluate the long-term values of the firm, which can be misleading as this information can fluctuate and change suddenly due to external factors (Hung & Chou, 2013).

The Tobin’s Q is calculated as following (Sisoyada et al., 2009):

!"#$!!_{! ! =}!"#$%& !"#$% !" !"#$% + !"#$#"#% !"#$% + !"#!" !"#$% !""#$"

4.2.6 Control Variables. It is expected that several variables influence the

proposed hypothesis. A decision was made to include the firms’ size, age, R&D intensity, country of origin and primary industry. It has been shown that there can be a difference in the open innovation activities when looking at the size of the firm

(Hossain, 2015; Brunswicker & Vanhaverbeke 2015; Laurens & Salter, 2006; Katila & Ahuja, 2001), therefore the control variable for the size has been included. The measure size of the firm is taken as a logarithmic function of the number of employees in the firm in the year 2015 (Cheng & Huizingh, 2010). The data was retracted from both Datastream and Orbis and then combined.

The age of the firm can also influence the practice of innovation (Yamin & Otto, 2004), therefore this measure was added control variable was added. The year the firm was founded was taken and subtracted this from 2016, leaving the number of years a firm is in operation. This variable was then transformed into a logarithmic function. The data was taken from Datastream.

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with a value between 1 and 2) which made it possible to transform the measure using a natural logarithm. The data from 2015 was taken from Datastream.

The country of origin was also included as a control variable. The reason for this is that first of all the country of origin can influence the innovative process, and secondly, it can also influence the stock market values that might have an influence on the Tobin’s Q measure (Belderbos et al., 2010). Finally a control for the primary industry of the firm was taken into account, as this might influence the results in the analysis. Based on the aforementioned SIC codes, the primary industry in which the firm is active is controlled for, this is said to influence the process of open innovation (Mina, Bascavusoglu-Moreau & Alan Hughes, 2012). This data from 2015 was retrieved from Datastream.

4.3 Descriptive Statistics

In table 3 the descriptive statistics of the data can be found. The difference in

observations is caused by the incompleteness of the databases. From this data one can conclude that the average age of the firm is 69 years, and has 28,781 employees. The average amount of patents and trademarks the firms hold is 2356 whilst being active in 2.5 unique industries. Due to the use of different databases and limited data availability within each database there is a difference in the number of observations available for each variable. Table 4 the Pearson correlations between the variables can be found.

Variable N Mean St. Dev. Min. Max.

Degree of Stakeholder Engagement 3702 -0,000059 0,9584358 -1,561 2,15

Firm Performance 3864 1 1 0,015 11,24

Licensing Revenues 1108 45000 747000 0 23900000

Number of Industries 3928 2,46 1.395.569 1 10

Number of Patents and Trademarks 3859 2.322,65 17713,14 0 483327

Firm age 1826 68,79 48,86 4 544

Number of Employees 3358 28527,70 66909,15 0 2200000

R&D intensity (log & transformed) 1528 0,040 0,06 0 0,5756956 Note: Licensing Revenues are in thousands of US Dollars

Table 3: Descriptive Statistics

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1 2 3 4 5 6 7 8 1. Degree of Stakeholder Engagement 1

2. Firm Performance 0.269*** 1

3. Licensing Revenues 0.197*** 0.323*** 1

4. Number of Industries 0.269*** 0.014 0.250*** 1

5. Number of Patents and Trademarks -0.126 -0.0531 -0.271 -0.319*** 1

6. Firm age 0.154* -0,0337 -0.0306 0.299*** -0.0737 1

7. Number of Employees 0.344*** 0.231*** 0.0862 0.198** -0.163* 0.352*** 1 8. R&D intensity (log & transformed) -0.0835 0.0556 -0.245** -0.306*** 0.440*** -0.206** -0.177* 1

* p<0.05, ** p<0.01, *** p<0.001

Table 4: Pearson Correlation Matrix

4.4 Analysis Techniques

To test the hypothesis, two types of regressions were used due to the difference in data. First of all, to test the effect of the degree of stakeholder engagement and the number of patents and trademarks a negative binominal regression analysis was performed. The patents and trademark variable is based on count data, which means that the data is ordinal, and values do not take a value under 0 (Cameron & Trivedi 1986). The distribution is non-normal, and has a certain degree of over dispersion (as the likelihood test of alpha in the test equals 0). For the other models, a linear

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5. Results

In this section the results for each of the hypotheses will be discussed based on the results that were identified using STATA 14. Eight models will be presented based on the four hypotheses that were developed in section 3. The first model tests the

influence of the control variables on the number of patents and trademarks. In the second model the independent variable of stakeholder engagement is added, subsequently testing hypothesis 1. The other dependent variables are tested in the same fashion, first introducing a model with control variables only and introducing the independent variable later. The fourth, sixth and eighth model thus test the influence of the stakeholder engagement on the degree of licensing, the number of markets and financial performance of the firm, testing hypothesis 2, 3 and 4.

The results of the analysis can be found in table 5. The model displays the coefficients in the analysis with the standard errors between brackets; the stars in the table

resemble the level of significance of the variables.

The results from model two show that there is a positive, significant relationship (β=0.690, p<0.01) between the degree of stakeholder engagement and the number of patents and trademarks. This means that firms that have a higher degree of

stakeholder engagement have more patents and trademarks than firms with a lower degree of engagement with stakeholder, and thus the conclusion can be made that hypothesis 1 is accepted. When the dummy variables are assessed, one can see a positive relationship between the firms’ age (β = 0.555, p<0.01) and size (β = 0.646, p<0.01) on the number of patents and trademarks. This is not surprising, as it

indicates that older and larger firms have more patents and trademarks. When it comes to the ratio of R&D intensity the effect is also positive and significant (β=9.5, p<0.00), effectively explaining that a higher degree of R&D in a firm leads to more patents and trademarks.

When assessing the fourth model, one can see that there is a positive relationship between the engagement with stakeholders and the degree of licensing which not significant (p>0.10). These results lead to a rejection of hypothesis 2.

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increase in R&D spending leads to a decrease in the number of active industries. As these results show the hypothesized relationship between the engagement of

stakeholders and the number of markets, hypothesis 3 is not rejected.

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Table 5: Results of the Regression Analyses

Negative Binomial Regression Analysis Regression Analysis

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

Patents and Trademarks Patents and Trademarks Licensing Revenue Licensing Revenue Number of Markets Number of Markets Performance Firm Firm Performance

Stakeholer Engagement 0.725*** 0.277 0.169* -0.0134 (0.0799) (0.220) (0.0735) (0.0433) Firm Age 0.690*** 0.555*** 0.178 0.216 0.249** 0.239** -0.0664 -0.0714 (0.108) (0.108) (0.279) (0.291) (0.0870) (0.0893) (0.0516) (0.0527) Firm Size 0.864*** 0.646*** 0.974*** 0.879*** 0.222*** 0.170*** -0.0838*** -0.0708** (0.0450) (0.0537) (0.133) (0.155) (0.0418) (0.0484) (0.0248) (0.0285) R&D Intensity 11.22*** 9.494*** 1.384 1.107 -4.414*** -4.873*** 4.372*** 4.124*** (1.719) (1.663) (4.007) (4.235) (1.286) (1.319) (0.762) (0.778)

Fixed Industry Effects yes yes yes yes yes yes yes yes

Fixed Country Effects yes yes yes yes yes yes yes yes

Constant -6.469*** -4.407*** 2.701 2.565 -0.158 0.114 1.454** 1.365*** (0.839) (0.904) (1.874) (2.227) (0.762) (0.843) (0.454) (0.498) Observations 750 738 183 176 750 738 749 737 R-squared 0.757 0.756 0.215 0.220 0.434 0.433 Adjusted R-squared 0.671 0.661 0.159 0.162 0.394 0.391 F test 8.720*** 7.977*** 3.838*** 3.798*** 10.72*** 10.25*** Average VIF 2,57 3,36 4,01 4,37 4,05 4,4

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6. Discussion and Conclusion

In this study, more insights to the question “does the degree of engagement with

stakeholders affect the innovative performance of firms?” are sought after. Whilst

both the concepts of open innovation and stakeholder engagement have been extensively researched, there has never been a combination of both concepts in an empirical setting.

A model was developed to gain insights in the influence of the engagement with stakeholders on the innovative performance of firms, looking specifically at the influence on the degree of the usage of IPR, the exploitation of the innovative activities, the differentiation in markets and the overall financial performance. In the model controls were added to also check for the effects of the industry and country, R&D intensity, the size and the age of the firm.

Based on a sample of 3864 firms worldwide, the proposed hypotheses were tested. The results showed that there is a significant correlation between the engagement with stakeholders and the usage of formal protection mechanisms and diversification of markets, whilst the hypothesised relation between engagement and revenue of licensing and firm performance shows correlation but is not significant. This research assessed the relationship between the degree of engagement with stakeholders and the formal protection mechanisms. Statistical analysis proved that this relationship is highly significant, from several conclusions can be made. First of all, it can be argued that there is a need for firms to protect their knowledge, as there is a higher risk of spillovers when engaging more actively with a higher variety of stakeholders. This is in line with Hagedoorn and Zobel (2015), whom argue that there is a positive relationship between the degree of openness in firms and the usage of IPR in their firm. Secondly, in the light of the open innovation paradigm, a highly relevant aspect is the exploitation of the developed innovations. The argument can be made that firms with a high engagement of stakeholders need a strong base of IPR to capture the value from their innovations.

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In conclusion, this study has found that there is an influence of stakeholders on innovation performance of firms. However the results show more refined answers to this question. The engagement of stakeholders will influence certain factors of a firm’s innovative performance, mainly the increase in intellectual property rights activity and more differentiated market activity. However, this study shows that a higher engagement will not directly influence licensing performance, nor financial performance of the firm.

7. Limitations, Future research and Managerial Implications

Like any research, this research paper has its limitations. The literature for the role of intellectual property, licensing and financial performance has been researched quite extensively. However, the literature review in this study has shown little research on the differentiation in markets of firms in light of engagement with stakeholder or open innovation. It could be argued that the relationship between these two variables has been considered too obvious and therefore never been extensively empirically researched. However, this relationship is interesting as firms that operate in multiple industries might possibly benefit more from the stakeholder engagement. Especially interesting is which stakeholders influence these firms most. The identification of the (non traditional R&D) stakeholders for different types of firms would be an

interesting topic for future research. This leads to the second limitation of the research, which is that no distinction is made between the stakeholders. This means one cannot look at the individual influence on certain aspects of the firms’ innovative performance. This, in turn, makes it impossible for us to elaborate on the effect of each separate stakeholder. Thirdly, there are limitations to the data that has been used in this research. The data based on the sample was often incomplete (e.g. the R&D intensity and licensing revenue), which might have influenced the results of the paper. Future research should investigate what the influence is of other stakeholders (e.g. government). Most managers and CEO’s would be interested in the impact of

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this relationship and their subsequent effects. Finally, an interesting opportunity to investigate in further research is what the cultural implications are that the

relationship between stakeholder engagement and open innovation. On both the firm and national level the perception of stakeholder engagement can influence the way stakeholders are perceived and integrated in the firm, this might lead to interesting results.

The main implication for managers that can be taken from this study is the importance of a good stakeholder strategy in the innovative process. Once a firm is able to

systematically identify the stakeholders that can influence the firm’s performance, a wide variety of knowledge can be obtained which can be useful for the innovative process. This said, this research shows that companies that are more engaged with stakeholders tend to have a higher degree of formal protection, something that can be important in the process of working alongside such a company, especially in a collaborative R&D alliance. Secondly, this research shows that firms are expected to be active in more markets when their engagement with stakeholders is high. This finding might be interesting for firms wanting to expand into new markets whilst the firm is not engaged with their stakeholders, as a higher degree of engagement with stakeholders might lead to (external market) opportunities which were not seen before.

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Appendices

Appendix 1: Description of the Measures of Stakeholder Engagement

Aspect of Stakeholder Engagement

1. Employees Measures

Workforce Training and Development

The managements’ commitment and effectiveness to provide training and education leading to an increase in intellectual capital, workforce loyalty and development of competencies and skills in the workforce

Training & Career Development Policy The possibility for employees to develop themselves

Workforce Employment Quality The managements’ commitment to provide a high-quality employment leading to a higher degree of loyalty and long term orientation Margins and Performance

The management commitment and effectiveness towards maintaining a stable cost base, reflecting a company's capacity to improve its margins and performance through production process innovations

Performance Improvements If management sets specific objectives to be achieved on the employee satisfaction strategy

Performance Monitoring If the company monitors the employee satisfaction

2. Suppliers

University Partnerships If the company cooperates with schools or universities

Supplier ESG training If the company provides training in environmental, social or governance factors for its suppliers 3. Community

Com. Monitoring If the company monitors its reputation or its relations with communities

Com. Reputation Processes & Involvement If the company has a policy to be involved in the local community in the countries of operation Product Responsibility & Technology Know-How

Sharing If the company voluntarily share licenses, patents, intellectual property or useful technology with developing countries

Environmental Partnerships If the company reports on initiatives with NGO's, governmental or industry organizations which are focused on improving environmental issues 4. Customers

Product Responsibility Monitoring If the company monitor the impact of its products or services on consumers or the community more generally Customer Satisfaction Percentage The percentage of customer satisfaction as reported by the company

Product Innovation A company's capacity to reduce the environmental costs and burdens for its customers through innovative activities 5. Environment

Product Innovation and Eco-Design Products If the company reports on specific products which are designed for reuse, recycling or the reduction of environmental impacts CSR Sustainability Index If the company reports on belonging to a specific sustainability index

Product Innovation and Implementation If the company describes the implementation of its environmental product innovation policy Product Innovation and Improvements If the company set specific objectives to be achieved on environmental product innovation

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Appendix 2: Factor Analysis Stakeholder Engagement

Before the hypothesis could be tested, a factor analyses between the variables had to be done. To gain a good overview of which components could be included into the factors, a primary factor analysis was done to identify factors. First of all, the data was analysed based on a Pearson correlation analyses between the underlying variables. All of the measures taken had a correlation of at least .3 with one other variable, suggesting a reasonable factorability (Neill, 2008).

Secondly, the Keiser-Meyer-Olkin measurement of sampling adequacy is 0.89, well above the required 0.6 and seen as “Meritorious|” (Kaiser, 1974). After doing the tests, a factor analysis was conducted to see if the variables linked up. To develop the correct factors, the measures should satisfy certain criteria. Firstly, every measure must have a loading of at least 0.3 with the factor. Secondly, a measure cannot have a loading higher than 0.4 with more than one factor. Thirdly, the proposed factors must make sense when combining the measures.

The results of the first factor analysis did satisfy the first and second criteria, but the last criteria was a problem. When looking at the eigenvalues of the proposed factors, four factors were proposed, but the proposed factors did not make a lot of sense (the loadings led to a combination of different type of stakeholder measures). Therefore this factor analysis was discarded.

Using dummy variables in factor analysis can be problematic. To make more sense out of the factors, two new scale scores were created by combining variables that took a value of 0 or 1. Combining all scores of the four dummy variables related to the community aspect of the engagement with stakeholders created the first new variable. The second new variable was a combination of the other five dummy variables. To make a correct scale, the minimum and maximum scores (score being the sum of the dummy values) per industry were calculated. After these calculations, the scales were calculated using the following formula:

!"#$%&'(()*+,- = !"##$%&'()*"+, – !"#"$%&'($$)#"*+

!"#$%&%'(%%&)$*+ – !"#"$%&'($$)#"*+ ∗ 100% For the other scale (rest variables) the same procedure was done and the process of the factor analysis was done once more.

The role of openness in innovation: a stakeholder engagement approach