Antecedents of Open Innovation Appropriation Choice over Time

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Antecedents of Open Innovation Appropriation

Choice over Time

Advanced International Business Management & Marketing Course Code: EBM091A25 / NBS8199

David Reint Kraai Stadhouderslaan 57a 9717 AK Groningen d.r.kraai@student.rug.nl S2034069 / B4017383 University of Groningen Dr. M.M. Wilhelm m.m.wilhelm@rug.nl

Newcastle University Business School Dr. H. Bahemia

hanna.bahemia@newcastle.ac.uk

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Abstract

Recent literature has identified the need to further research the relationship between open innovation and appropriation methods. Firms want to protect their knowledge so they can appropriate the rents themselves, but have to open up to other organizations like competitors, suppliers, buyers, universities and governments to keep up with the rapid speed of innovation. The goal of this thesis is to find out what the antecedents are for firms choosing certain appropriation methods for their open innovation initiatives, taking an organizational learning approach. By taking this approach, it is argued that whilst formal appropriation methods like patenting are initially popular among firms, over time they tend to move to informal appropriation methods, which challenges the expectations of existing literature. Furthermore, it is found how companies can use open innovation as an appropriation method itself. Finally, it is found that the interviewed firms move away from engaging in open innovation with direct competitors and move towards organizations like universities, governments and companies in unrelated industries instead, due to a lack of trust in competitors developing over time. Further quantitative research is needed to verify these findings.

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Acknowledgements

I would like to make use of this opportunity to express my gratitude to everyone who helped me during the making of this thesis. First of all, I am thankful for the extensive feedback, guidance and advice from my supervisors Dr. M.M. Wilhelm from the University of Groningen and Dr. H. Bahemia from the Newcastle University Business School, which extended far beyond the requirements stipulated by the dissertation guidelines.

Secondly, I would like to thank the companies that were willing to participate in my thesis by allowing me to interview people who had a high understanding of their innovation process. Doing interviews was something I was nervous about, but I enjoyed them due to the willingness of the experts to share their knowledge with me.

Thank you,

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1. Introduction

In today’s environment, it is becoming increasingly difficult for firms to meet customer demand by solely looking for solutions within the boundaries of the firm. This is the antithesis of open innovation, a term first used by Henry Chesbrough in 2003. Open innovation entails not only making use of a company’s own capabilities, but also of those of others, such as competitors, suppliers, consumers and universities. As Chesbrough (2006) puts it: “Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively”.

However, alongside the advantages, open innovation also brings its own challenges. One of the major issues is how firms can make sure they capture rents on their innovations, both outside in as inside out (Eisenhardt and Martin, 2000). Adding competitors, suppliers, buyers and / or universities to the innovation process can, for instance, lead to unwanted knowledge spill over. The research on the subject of open innovation and appropriation is sparse, despite calls of need for further research in this area (West et al., 2014; Huizingh, 2011; Spithoven, Vanhaverbeke and Roijkakkers, 2013). Literature that does look at the relationship between open innovation (including for example Laursen and Salter, 2014; West et al., 2014) have, to my knowledge, neglected the influence of organizational learning, despite its proven effect in neighbouring literature. The thesis aims to fill this research gap. Firstly, I will look at how firms prevent unwanted knowledge spill over to open innovation partners. Secondly, I will look at how firms make use of appropriation measures to capture rents on their innovations.

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Based on the literature review, some puzzles are identified that lead to research gaps. First, the research objective is finding out if firms change their appropriation strategies over time. I have also checked for confounding variables like the industry the firm is active in, whether it makes mostly incremental or radical innovations and others. The research is an exploratory multiple case study for finding out which variables influence the choice for certain appropriation methods for open innovation over time. The thesis is theory building based on the case study method. Interviews were done in which respondents were asked about their experiences over time, meaning that this is a retrospective cohort study.

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2. Literature Review

The literature review starts with the introduction of the key concepts, which are open innovation and appropriation measures. Then, existing literature on open innovation and appropriation measures will be discussed, followed by open innovation in combination with time. Finally, research gaps will be identified at the end of the literature review section. Potential factors that influence the open innovation appropriation approach will be identified and illustrated in the theoretical framework.

2.1 Open Innovation

Before open innovation is introduced, it is helpful to first define closed innovation, in order to better understand the difference. Closed innovation entails that companies stay within the firm’s boundaries for the marketing and development of their products or services (Grönland, Sjödin and Frishammar, 2010). In this case, during the innovation process, only internal resources are used. The idea is that successful innovation requires control, which leads firms to mainly look at their own capabilities (Chesbrough, 2003).

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effects on the suppliers as well, who increasingly are being integrated into the innovation process, which can lead to an improved performance of innovating (Hagedoorn, 2002).

The trends described in the previous section are part of the open innovation paradigm. Open innovation, a term coined and subsequently developed by Henry Chesbrough (2003a) entails that ideas that are external or internal are seen as having an equal value, contrary to what is traditionally the case, with the Not Invented Here syndrome (Katz and Allen, 1982) being an example of how external ideas are not always welcomed. Indeed, firms increasingly realize that not all good ideas come from themselves, but also that not every good idea from the firm has to be commercialized by themselves (Jana, 2007). Later researchers have added items to the open innovation definition, like the notion that the pursuance of both internal and external innovation is done on a systematic basis, including the commercialization (West and Gallagher, 2006), that open innovation takes place during the complete innovation process (Lichtenthaler, 2011) and by Chesbrough himself, adding that flows of knowledge can go through more than two organizations and that these flows can both be pecuniary as well as non-pecuniary (Chesbrough and Vanhaverbeke, 2006; Chesbrough and Bogers, 2014).

Three core processes of open innovation can be identified, which are outside-in, inside-out and coupled processes (Gassmann, 2006). Outside-in open innovation takes place when a firm extends its knowledge base by integrating knowledge of others, like competitors, universities, buyers and suppliers (Enkel, Gassmann and Chesbrough, 2009). Enkel and Gassmann (2008) find that knowledge sources can be clients (78 percent), suppliers (61 percent), competitors (49 percent) and research institutions (21 percent). Inside-out open innovation is when companies sell ideas, intellectual property rights and multiply technologies to the external environment (Enkel, Gassmann and Chesbrough, 2009). Corporations make money by selling or licensing innovations to other institutions. Finally, the coupled open innovation process combines outside-in and inside-out open innovation (Enkel, Gassmann and Chesbrough, 2009).

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likely to develop products that not only perform better commercially, but also are of increased diversity (Faems, van Looy and Debackere, 2005). The access to these resources should not only lead to better products, but also to offerings that are harder to copy by competitors when speaking in terms of VRIN (Barney, 1991). First, according to Dyer and Singh (1998), the level of expertise that can be created through open innovation is bigger than that which is possible when firms are acting independently. Secondly, it allows firms to combine their possession of market power and prestige. Especially for new, often small firms the increased visibility, reputation, brand image, and prestige coming from working with larger, better known firms are beneficial (Barringer and Harrison, 2000).

Also, access to new knowledge can happen by innovating with users. Increasingly, firms are not only innovating for but also with users. An example of a firm making use of customers’ input is SPSS, which hosts workshops at which it learns from the needs and ideas of its so called power users. Some companies even build their entire business model around the input of users. A prominent example of this is Wikipedia. So, by integrating users earlier in the innovation process, companies can anticipate demands earlier (Desouza et al., 2008; Dodgson, Gann and Salter, 2006).

Besides the access to resources, cost reduction can also occur. Traditionally, when applying transaction cost theory, one looks at the make or buy decision (Walker and Weber, 1984). Open innovation adds a third option: make, buy or partner (Barringer and Harrison, 2000). Working together more closely and creating a mutually beneficial environment reduces opportunism through mutual trust and desire to stay in the network.

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Although there are advantages of open innovation as just mentioned, there are also drawbacks attached to open innovation. For one, a risk of participating in open innovation initiatives is that companies may lose proprietary information (Gulati, 1995). Secondly, open innovation requires the combined efforts of two or more firms, leading to an increased level of complexity (Spekman et al., 1998). It can also be difficult to decide the number of firms to work with. Working with other firms is the whole point of open innovation, however, working with too many firms might lead to attention problems (Laursen and Salter, 2006). At a certain point, firms start to deal with diminishing returns from open innovation (Ahuja, 2000), stemming from problems with maintaining relationships with a big number of partners (Sapienza et al., 2004). Another risk is that firms may become too reliant on other firms. This can be especially troublesome, because by making use of other companies’ R&D facilities, companies might let their own R&D departments become out-dated because they are not used anymore to warrant maintaining the R&D facilities (Gemünden, Ritter and Walter, 1998). A firm might also outsource that what makes its R&D unique to other firms, eroding any competitive advantages a firm might have had (Dahlander and Gahn, 2010).

2.2 Open innovation and appropriation

An important issue is that open innovation makes capturing value from your innovations more difficult stemming from the increased complexity of the open innovation process versus the traditional closed innovation process (Spekman et al., 1998). As mentioned by Teece (1986), other firms being able to replicate innovations dis-incentivizes firms to engage in innovative activities. Opening up the firm for open innovation is exactly what makes it easier for other firms to find out how things are done. Laursen and Salter (2014) describe the difficulties of open innovation and the protection of intellectual property rights, as firms want to open up but protect their intellectual property at the same time. Intellectual property is an important issue with open innovation because the amount of knowledge flowing between companies and the increased complexity of the process (Chesbrough, 2003a; Lichtenthaler, 2007) make it more difficult to capture the rents themselves. One of the answers to this problem are appropriation measures.

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from innovations. The article by Teece (1986) shows that where there is a tight appropriability regime (meaning that it is relatively easy to protect technologies), innovators generally reap more benefits from their innovations, otherwise following firms may come in to secure the benefits. According to Teece (1986) the innovation process can be divided in two parts: first the creation of the innovation and secondly the commercialization. When a following firm lets another firm do the innovating and then uses its complementary assets to get a cost advantage versus the innovating firm, the following firm can capture the profits of the innovation, without even spending money on R&D.

Appropriation can be done through both formal and informal means. Formal appropriation measures mainly consist of patents, trademarks, registered designs and copyrights, with other less known formal appropriation measures including semiconductor intellectual property cores and plant variety rights (Hall et al., 2014). The most common formal method for safeguarding the appropriation on innovations are patents (Mansfield, 1986). Patents can be granted for inventions that encompass at the minimum at least some scintilla of improvement over the current body of knowledge. Even though patents differ from country to country, standards are in place in most of Europe. Common components of patents are that they are issued by the state, that they last at most 20 years, and they require that the innovation is described in the patent specification, which can be seen as a drawback of the patent. For the duration of the patent, others are not allowed to use the technological improvements described in the patent (Cornish and Llewelyn, 2007; Hart, Simon and Fazzani, 2013).

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A drawback to patents is that the company has to describe its innovation in detail so other companies do not accidentally copy the innovation. However, these companies can make use of the descriptions to work out a way to work around the patent or, in case that is unsuccessful, be ready when the patent expires (Romer, 1990). Furthermore, patents can be very expensive. Not only getting a patent costs money, the enforcement of patents can be expensive as well. Finally, a firm might not want to patent, or at least enforce a patent because of its social implications. This could stem from hindering other companies to also innovate not being beneficial to the patenting firm or because of moral objections of the inventors (Mazzoleni and Nelson, 1998).

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Economists see these intellectual property rights as a means to encourage innovation where there is market failure. They are recognized as an effective way to resolve the appropriability problems associated with knowledge creation, but are generally also seen as impeding competition (Greenhalgh and Rogers, 2007). Gallini (2002) finds that stronger IP regimes at first glance seem to be associated with more open innovation. Strong patents may be a positive influence on an innovator’s choice to license technologies instead of using them exclusively. Furthermore, stronger patents allow for more vertical specialization. Through attraction of financial capital, this allows researchers to specialize in intellectual assets, which then can be licensed (Lerner, 1994). Having stronger IP regulation increases the licensing of innovations because they reduce transaction costs. Furthermore, Laursen and Salter (2005) find that open innovation practices are more prevalent in industries with high levels of appropriability, such as pharmaceuticals, versus industries with low levels, such as textiles, though exceptions exist, like paper and printing industries. However, the distinction between different means of IP protection (such as patents and secrecy) is not clear. A final note to be made here is that the usage of either formal or informal appropriation measures does not mean the other form cannot also be used. Even though this is suggested by earlier research (for example by Teece, 1987), more recent literature even mentions a reinforcing effect between the two (De Faria and Sofka, 2010; Thomä and Bizer, 2013).

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between the level of appropriation and open innovation is also discussed by Laursen and Salter (2005), who call it the paradox of openness. Furthermore, it is also found that differences exist in what firms prefer in appropriation strategies. For example, Arundel (2001) finds that, generally speaking, secrecy is valued more highly than patents by firms from all sizes, though the bigger the firm the higher the chance it rates patents more favourably. Arundel also finds weak evidence that participation in cooperative research and development enhances the importance of patents over secrecy, indicating that open innovation has different requirements for appropriation measures than normal (closed) innovation.

Recently, open innovation literature has started to focus on what Laursen and Salter (2014) call the paradox of openness. Firms want to keep knowledge to themselves but are forced to open up in order to keep up with the pace of innovation. Articles that look at this issue include the work on co-ownership of intellectual property (Belderbos et al., 2014), selective revealing (Henkel, Schöberl and Alexy, 2014) and governance of decision rights (Gambardella and Panico, 2014). West and Bogers (2014), in their review of research on open innovation also indicate a need for studying what the moderators and limitations are of leveraging external sources.

2.3 Open innovation over time

The previous section illustrates that the relationship between open innovation and appropriation is still unclear. Indeed, articles about the current standing of open innovation (e.g. West et al., 2014; Huizingh, 2011; Spithoven, Vanhaverbeke and Roijkakkers, 2013) also call for the need of a better understanding of what role appropriation plays in the open innovation process.

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Other pieces of literature also discuss the existence of learning effects. These mention that firms, by developing their absorptive, connective and desorptive capacities, improve their management of innovation related collaborations with external partners due to learning effects. Performance does not increase merely by implementing a certain open innovation policy, but instead performance increases due to learning effects and experience, which take time to materialize (Cohen and Levinthal, 1990; Lichtenthaler, 2011). Experience is often cited as having an influence on future R&D initiatives. This is found in multiple research areas. For instance, in strategic alliances, previous experience has an impact on the choice for a certain alliance structure (Oxley, 1999). Oxley also mentions that when appropriability hazards exist due to weak intellectual property regimes, effects on firms’ strategy are found. When a firm has had negative experiences, like unwanted knowledge spill overs, with appropriability, it will try to avoid situations in which these are likely to occur. In another study, Oxley (1997) finds support for the hypothesis that when firms have had experiences with appropriability hazards, they will change their strategic alliances to be more formal and they try to get a position of power, meaning a more hierarchical relationship.

Experience is closely related to the theory of learning effects. For instance, Argote and Ingram (2000) mention a learning effect that stems from the network members getting experienced with open innovation and innovation partners. For example universities patent more with experience (Mowery, Sampat and Ziedonis, 2002). Lee et al. (2010) also mention a learning effect taking place for open innovation activities, but they focus more on size of the firm than on experience.

Secondly, there has been research that has indicated that time has an impact on open innovation. Arundel (2001) notes a shift from more informal appropriation measures to more formal ones like patenting over time. Arundel finds that a pro-patenting attitude is developing and that firms that make use of collaborative tend to find patents of greater value than secrecy. One might expect a same shift for appropriation measures applied to open innovation over time, however, as mentioned earlier, the added complexities of open innovation versus closed innovation change preferred appropriation measures, so this might be different as well.

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becoming more strict (Lingling and Song, 2011). Thirdly, the level of open innovation also changes due to the rivalry within an industry. For instance, when cost reductions became more important in the automobile industry, General Motors and Toyota started working together (Hamel, Doz and Prahalad, 1989).

2.4 Research gaps

The above seems to indicate that there is a relationship between open innovation and appropriation mechanisms, however, to my understanding no research has been done on open innovation and appropriation over time. The aim of this research is to solve this puzzle. Using the existing literature and taking an organizational learning viewpoint, I identified the following gaps to be researched. First, I want to find out what antecedents influence the choice of appropriation measures for open innovation over time. As discussed above, current literature is contradictory on the relation between the focus on appropriation and open innovation. I expect that the focus on formal appropriation to become bigger the more experience a firm has with open innovation. No literature has looked at whether firms increase their focus on formal appropriation because of the time they are employing open innovation for, and other research seems to indicate that successful appropriation mechanisms differ from open innovation versus closed innovation (see for example Laursen and Salter, 2005). The second research gap I want to fill with this research is to see if the general shortcomings in enforceability of patents, along with its costs and time needed to get one, influence the choice towards other formal ways of appropriation such as contracts and NDAs. For both gaps, the underlying model of flow is as following:

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3. Methodology

The thesis is built on the case study method based on expert interviews. The aim of this study is to contribute to the development of theory about open innovation and appropriation by specifying the effect organizational learning has on the relationship between these concepts. This means the study is a theory building research (Dul and Hak, 2007; Voss, Frohlich and Tsikriktsis, 2002). From the objects of study, which are companies since the study uses the firm as the unit of analysis, propositions will be developed, giving way for other researchers to test those in a quantitative way through, for example, the use of surveys (Voss, Frohlich and Tsikriktsis, 2002). Though the research methods of qualitative and quantitative research differ, this does not necessarily mean a different epistemology. Advantages of case studies are that phenomena can be studied in their natural settings, complex problems can be answered on why, what and how, and case studies are well suited for exploratory research where not all variables or relationships are understood (Voss, Frohlich and Tsikriktsis, 2002; Meredith, 1998).

Due to the increasingly rapid changing business environment, field based research methods like the case study have increased in popularity. The case study is often used to develop new theories (Lewis, 1998). Drawbacks of the case study are that they are time consuming, need good interviewing and conclusions that can be generalised need to be carefully made. On the flipside, case studies can lead to new insights, new theory and have a high practical validity. Moreover, also for the researcher himself a case study can be beneficial since it introduces him with real problems (Voss, Tsikriktsis and Frohlich, 2002; Blumberg, Cooper and Schindler, 2008).

According to the research, two criteria are important for selecting candidate cases: convenience and the chances of discovering the researched relationship at those cases (Dul and Hak, 2007; Cooper and Schindler, 2003). One way that helps the convenience for example is that all companies are from the northern part of the Netherlands.

Criteria for good Case study research

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of the thesis: reliability and validity. Reliability basically covers if the research would be done again by other researchers, who use identical research methods, would they obtain the same results? To get a high level of reliability, the researcher has to work in an objective manner and certain measures have to be taken to ensure this happens (Thomas, 2004).The second consideration is that the research needs have a high level of validity. Two different kinds of validity can be distinguished. First, internal validity questions if the evidence that is collected actually is reflecting what is being researched. A research that consistently measures the wrong thing, can have a high level of reliability but its internal validity is not. External validity governs whether what is researched is specific for the sample or can be generalized beyond the sample for a larger population. Generally speaking, case studies are seen as having low external validity, so quantitative research in the future might be necessary to account for this.

Case selection

According to Dul and Hak (2007), a case study is defined as a study in which one or a small number of cases are chosen, and results from the case study are analysed with the help of techniques that are qualitative in nature. Generally speaking, the lower the number of case studies, the greater a researcher can increase the depth of observation (Voss, Frohlich and Tsikriktsis, 2002). However, single case studies also come with limitations, mentioned by Leonard-Barton (1990). These include a limit to the generalizability, risks of misjudgement, and exaggeration of data that is easily available. Even though multiple cases might reduce the depth of the research, it helps to guard against observer bias and by using multiple cases, the generalizability of the study is increases (Yin, 2003; Blumberg, Cooper and Schindler, 2008). There is not set number as to how many cases are needed for a case study. However, some considerations can be made. For example, focusing on a single case allows for more depth, but has the disadvantage of limited generalizability. To fix this issue, one can make use of multiple cases, but either more resources are then needed or each case can be analysed in less depth (Voss, Frohlich and Tsikriktsis, 2002).

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Pilot interviews

Case selection has been done on the basis of theoretical sampling (Eisenhardt, 1989), or purposive (Miles and Huberman, 1994), rather than on statistical. Theoretical sampling is a process in which new cases are chosen not necessarily with the aims of capturing a representative reflection of the whole population, but more to get a more thorough understanding of the different cases (Jupp, 2006). Several factors underlie the selection of cases. Cases were selected that differed from each other to account for confounding variables, which allows us to see whether certain behaviour occurs in different circumstances. The criteria here were firm size and age, country, type of innovation activity (radical or incremental) and the industry the firm is active in. Below is a table of the firms interviewed, along with some of their characteristics.

Also, getting access to certain companies also played a role in which cases were selected. Besides some companies not being interested in participating in this research, other reasons included time constraints or not willing to share information to the outside.

Data collection

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Data has been collected by using secondary data, but mainly through the use of interviews. Besides the two pilot interviews, four in depth interviews were held. The transcripts of these interviews can be found at Appendix B. Firms were contacted by phone, during which I gave them a general idea what the interview was going to be about. This also allowed the respondents to prepare for the interviews. Prior to the interview, I made sure to present the respondents with the consent form (see Appendix A) to make sure I had evidence the respondents agreed to participate, as well to make sure that if any questions arose, they had a way to contact me.

The interviews were setup to be semi-structured. This has both the benefit of being able to prepare in advance, as well as giving the respondents the freedom to share their views in their own terms. This helps in keeping the research open minded, because with structured interviews the risk can be that interviews will be used to confirm the researcher’s suspicions (Blumberg, Cooper and Schindler, 2008).

Coding

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4. Results

Fourcompanies have been interviewed. The companies have been anynomized in order to satisfy to guarantee the confidentiality of the data. The companies are listed in the table below.

Interviewee Industry Company Position Number of interviews

A Chemicals Research on and selling of fullerene derivatives and cosmetics Chief Operations Officer 2 B Ground Exploration Exploration products, research and mapping of areas Chief Executive Officer 1 C Medical Equipment Producer of ergometric equipment Managing Director 1

D Biotechnology 3d cell culture techniques on nano level

Chief Executive Officer

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Table 4.1: Interviewed companies

First, within case analyses will be performed for each of the interviewed companies. After this a cross-case analysis will be performed to compare the behaviours of the companies to one another.

4.1 Within Case Analysis 4.1.1 Company A

Company A is a small research firm active in the chemicals industry founded in 2005 that since recently also started selling cosmetic products. I interviewed the Chief Operations Officer.

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“We used to joke that you used to be able to get a patent on a cell with four attachments. That would mean all molecules in the world. There once was the case of a firm that made a device used in a lot of research. After a while they successfully started to sue everybody who used the device, claiming that the resulting knowledge was also theirs, because their products were used.”

However, currently it is not possible anymore to get patents that are very broad. This makes patenting more expensive, but it also meant that patents on the products companies like Company A make have become rare. Patents are now given to the methods used to create the products, rather than for the products themselves. The reason for this is that companies started to exploit the patent system. An issue with this is that it is hard to check which methods a competitor has used in creating their products. The interviewee mentions the troubles that occur during the patent process nowadays:

“Organizations just tried to file as many patents as possible. Big companies like Shell tried to claim the whole world, and if possible also the moon. I always say, you try to patent the moon, but you are lucky when you end up with Luxembourg. But if you start with Luxembourg, eventually if you are lucky you might get Rambrouch.”

According to the interviewee, regulations becoming more strict is not the only challenge the company faces regarding its patents. A second problem is that they found patents being difficult to enforce. This is a major drawback, since when applying for a patent, the company does need to specify its innovation in great detail. The aforementioned regulation changes have even made this a bigger issue, because now firms are required to write descriptions in even more depth than when the firm started. Regarding the enforcement of patents, the Chief Operating Officer states that they do now want to get involved with patent litigation, since it is ‘an extremely expensive hobby’.

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products were being featured in publications, which helped them to stand apart from competitors. It allows the company to cite an independent source that also recommends Company A’s product. This helps the company to differentiate themselves in a way that is hard to copy, without the use of patents.

Finally, Company A has over time worked less with competitors. This has to do with there not being a suitable protection mechanism. The company has learned from negative experiences, where open innovation partners made use of unwanted knowledge spillovers that they would rather engage in collaborations with organizations in other fields.

4.1.2 Company B

Company B is a firm that consists of two parts: a service part that helps with the mapping of areas and a production part, which supplies the products used in the service part so customers can do the research themselves. Innovation takes place mostly in the production part of the company. I spoke to their Chief Executive Officer.

When the firm started, the main reasons for engaging in open innovation activities were knowledge creation and reputation effects. However, nowadays Company B, like Company A, has a reason to engage in open innovation activities that is not one of the regular reasons to do so, like financial benefits, access to resources, networking or product development due to a change in regulations. They feel forced to undertake innovation with Canadian competitors. This is explained by Company B’s main market being Canada. Two reasons force them to engage in open innovation activities with their Canadian competitors, as the quote below shows:

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Like most of the other companies, the interviewee indicated that they currently do not have a patent strategy. Reasons cited that in previous encounters with the patenting process they found that the benefits of patents were not worth the costs, time and troubles with enforcement. Like Company A, Company B noted that protection of patents is especially difficult in other countries. Seeing as the mining market, the company’s primary buyer, is mainly in Canada, this also devalued patents and over time, the firm moved their focus from patents to a combination of secrecy and contracts and NDAs. Like most of the other companies, these alternatives offer the same protection but at lower costs.

4.1.3 Company C

Company C is the largest and most established firm that has been interviewed with around 100 employees and has been founded in 1946 on the basis of a patent. This patent has long expired and nowadays Company C does not have an active patent strategy. As the Managing Director puts it:

“We were founded on the basis of a patent that [the name of the founder] bought back in the beginning of the firm. We’ve made and are still making ergometers on the basis of that patent, even though it has long expired. We currently do not have an active patent strategy anymore. It is a lot of work, it costs a lot of money and we just don’t feel like it. We tend to make use of cooperation agreements, contracts and NDAs when working with other organisations. They are a form of formal secrecy if you will.”

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4.1.4 Company D

Company D is a research company located near Company A. However, their experiences with appropriating from open innovations differ significantly from the other companies. Where all companies started with patents, Company is the only firm I interviewed that still has an active patent strategy.

The Chief Executive Officer also mentions reputation effects being an important reason for engaging in open innovation activities:

“For the more advanced applications, it is almost always the case that you are dependent on academic and industrial experts of those tissue types. They really understand what the results mean. However, it is also really good for the name of your company to work together with these universities.”

Why does this company still use patents? The CEO gives their reason:

“Often we are financially driven to patent IP. It is not necessarily for enforcement, but we are also sometimes financially motivated. Eventually, the worth of the company, which as a start-up is on your mind, you have stockholders who hope that the firm increases in value. And that is, for a large part, determined by whether you have a technology, or at least a part of a technology, to which you can point and say: that’s really ours and you must keep your hand off it. So it might cost money but it does give you a very clear, bordered part of property”.

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4.2 Cross-Case Analysis

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Main Themes Sub Themes Illustrative Quotes

Patent Shortcomings

Costs “When we started out we wanted to get property right on everything because we thought patents would be useful for this. That is also why we thought we could work with direct competitors because the results could be written down in a co-owned patent. The problem here however, is that so much time but also money goes into the patent process, that it is not achievable for us.” – Chief Operating Officer from Company A

Time “The moment of applying for a patent is far before when you are able to use it. Others can read the patent descriptions and get knowledge from that.” – Managing Director of

Company C

Enforceability “In our industry, it is hard to check when someone breaks into one of our patents. Research groups, universities, all these organizations, they couldn’t care less about your patents, and enforcement is not realistic for us.” - Chief Operating Officer from

Company A

Having to describe the innovation

“You know, what one the main drawbacks for us of patents aside from the money and costs associated, is that you have to explain your innovation as well so instead of patents, we started using non-disclosure agreements more.” – Chief Executive Officer

from Company B

Patent Substitutes

No substitutes needed

“Patents are a main part of our strategy. Where other increasingly experience difficulties with patents, we are not affected by that. 3D cell culture is still a new industry so there are a lot of possibilities regarding patenting.” – Chief Executive Officer from Company

D

Informal Protection

(So more an informal focus?) “Yes, for some things we found, the only way for us to profit from it, is to keep it secret by not telling it to anybody. Because even if I only write it down, and that can be in a patent for instance, than the rest of the world knows about it.” – Managing Director from Company C

OI as appropriation measure

“What we do nowadays, by collaborating with universities, our products get into publications. It allows us to say, not only we think it is better, an independent source also thinks so. This creates an advantage versus competitors. It allows us to differentiate ourselves.” Chief Operating Officer from Company A

“Products used in the mining industry must have in some way Canadian roots, which is why we started collaborating with Canadian firms. Equipment has to satisfy a lot of criteria to be allowed in Canada. So we use collaboration with Canadian competitors to get access to those markets.” – Chief Executive Officer from Company B

Partner Choice

Move towards unrelated industries

“We nowadays mainly try to work with companies from complementary industries. That way you keep the advantage of open innovation that both have interest in the result but at the same time you are not poaching on someone’s territory. With competitors, the feeling remains that they will try to acquire knowledge that you meant to keep in-house.” – Chief Executive Officer from Company D

(Do you still work with competitors?) “Well, one of the issues that became clear over time is that there is less trust than what would be there when you work with companies that are active in other industries or with those who are suppliers or buyers. We noticed at the Canadian firms that they were very reluctant to share information that was not specifically stipulated in agreements. Other innovations we have worked on, for instance some of the technology sensors going into our sensors, we did those with companies that also had an interest in the end result but were not competitors of us.” – Chief Executive

Officer from Company B

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The table shows that that patent shortcomings are often mentioned and that most of the companies start looking for alternatives. The figure below also shows this change of focus. The downward facing line represents a focus on formal appropriation measures, whilst the other line shows the percentage of firms are focussed on informal appropriation measures. Though generalizability is low because of the small number of cases, it does help illustrate that the focus on informal appropriation measures is increasing. This is conflicting with the expectations (for example: Oxley, 1999), but also with the literature on appropriation on innovation in general, not only on open innovation. A lot of literature mentions the increasing importance of patents, especially for technology intensive firms (Arora, Fosfuri and Gambardella, 200l; Granstrand, 1999; Jaffe, 2000; Bekkers and West, 2009), which most of the interviewed firms are.

Figure 4.1: The shift in focus from formal to informal appropriation methods

Finally, when looking at the dataset in ATLAS.ti, the same is found. Figure 3 is a code co-occurrence table that shows the relationship between different forms of appropriation mechanisms and the beginning and current situation.

0% 25% 50% 75% 100%

Starting Situation Current Situation

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Beginning Now

Contract n/a -0,25

Lead Time Advantage n/a -0,08

NDA -0,11 -0,55

Patent -,50 -0,12

Publication n/a -0,08

Secrecy -0,17 -0,075

Figure 4.2: Code Co-occurrence table of appropriation methods with moments in time

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Company A Company B Company C Company D Early Situation Partners Universities Competitors Universities Competitors Universities Competitors Universities Buyers Competitors Complementary Industries Goal Knowledge Creation Networking Knowledge Creation Access to Markets Reputation Effects Knowledge Creation Knowledge Creation Reputation Appropriation Measures

Patents Patents Patents Patents

Current Situation Partners Universities Buyers Hospitals Complementary Industries Universities Competitors Complementary Industries Governments Universities Universities Buyers Competitors Complementary Industries Goal Knowledge Creation Networking Protection Knowledge Creation Access to Markets Financial Benefits Protection Financial Benefits Firm Resources Networking Knowledge Creation Reputation Appropriation Measures Secrecy Specificity Publications Secrecy NDAs Patents Secrecy NDAs Contracts Patents

Innovation Radical and incremental

Radical and incremental Incremental Radical

Regulation Changes

More strict Products must contain locally sourced parts, government support initiatives Increased government support initiatives No significant changes

Firm Size 5 employees 10 employees 100 employees 4 employees

Industry Chemicals for

research and cosmetics

Ground Research Medical

equipment and Ergonomics

Biotechnology

Year Founded 2005 2000 1953 2011

Table 4.3: Firm Overview

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“We want to have a basic data package that is entirely ours. That is why we patented IP on our basic technology.”

It is also mentioned that because of the prices of patents, firms try to get patents on the underlying technologies. This is also illustrated by Company B, who also mentioned firms working together on basic underlying technologies, where they all needed them but developing these technologies individually would cost too much:

“So, what you see is that companies from the same market segment who developed certain basic technologies together, of which Eindhoven is a great example. Big SME clubs came together who said they needed a basic technology. They are basically competitors.”

By patenting these underlying technologies, Company D is able to license their innovations to others. Another explanation can be the legal form of Company D. Company D has stockholders, for whom the value of the firm is important to get a high return on investment. Patents add value to the company. The Chief Executive Officer mentions the following:

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5. Discussion

5.1 Propositions

One of the most interesting findings, and one that was mentioned at almost every company interviewed, is that at first, there is a real willingness to patent but along the way firms try to find substitutes for the usage of patents. This does not mean that companies do not want to patent anymore, but that they experience problems with the design of patents and their inherent flaws over time. All but one of the interviewed companies does not have a patent strategy. For instance, the CEO from Company B stated that they have no way to enforce patents. Their competitors are mostly clustered in Canada and when they did an open innovation project with one of their competitors, they soon realized other Canadian firms infringed in the patents resulting from the open innovation project. However, Company B does not have the resources to enforce patents.

This, coupled with the time and money involved with the patent application process, forces companies to look for other forms of protecting their output resulting from open innovation.

A way to cope with the general issues of patents is to rely more on secrecy. This goes against the expectations resulting from the literature review. As was mentioned there, capturing value from open innovation is more difficult than capturing value from regular innovation (Spekman et al., 1998). This is illustrated by Teece (1986), who states that open innovation makes it easier for other firms to replicate innovations from others. This can be linked with the work of Hurmelinna-Laukkanen, Sainio and Jauhianen (2008), who find evidence for the hypothesis that in industries where there are weak appropriation regimes, firms tend to make use of more formal appropriation measures.

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Proposition 1. Due to experience with ineffectiveness of patents because of costs, time and enforceability issues, organizations tend to change their appropriation focus from formal to informal for open innovation activities in the future.

Another way in which firms try to avoid patents is not by switching to informal appropriation methods, but also by employing other formal appropriation methods. These include, for instance, contracts and NDAs. According to the companies interviewed, these protection methods suit them better because they cost less time and money to employ but offer the same protection as patents, because the added protection offered by patents is often not enforceable for these companies. This leads to the following proposition:

Proposition 2. Due to experience with ineffectiveness of patents because of costs, time and enforceability issues, organizations tend to make use of other formal appropriation methods than patents for open innovation activities in the future.

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Proposition 3. Instead of looking only at appropriation problems with open innovation, open innovation itself can also be used as a substitute to protection.

The final proposition is related to the types of innovation partners. There is a noticeable trend of companies, who in early stages work with direct competitors, develop a preference for engaging in open innovation with organizations active in unrelated firms. This is due to negative experiences with working with competitors. Competitors can easily obtain knowledge that is not part of the open innovation agreement. The problem is that there is not an appropriation methods that could help with this. By collaborating with other partners than competitors this issue is mitigated, whilst still having the benefits of open innovation. This leads to the following proposition:

Proposition 4. Because of negative experiences with appropriation methods, firms over time avoid working with competitors and move their focus towards unrelated industries.

These propositions challenge what is often mentioned regarding appropriating in R&D collaborations. The general consensus is that firms that engage in R&D collaborations value patents more than secrecy (e.g. Granstrand, 1999; Arundel, 2001; Huizingh, 2011). Patents are seen as assisting in R&D collaborations by signalling a firm’s potential partners, by being a benchmark during negotiations and by helping with sharing dividends at the end of collaborations (Penin, 2005). This is also initially the case for my sample, but by taking an organizational learning approach, it is found that over time firms that engage in open innovation actually move from a focus on formal appropriation methods like patents to more informal ways to protect their innovations. Formal appropriation methods are limited by how well they can be defended in court and if they are a credible threat to imitators. Furthermore, it is important if imitators are able to invent around the patent (Sherry and Teece, 2004; Gans and Stern, 2003; Mansfield, Schwartz and Wagner, 1981).

What seems to be the right appropriation strategy?

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helps in reducing the transaction costs ( Baldwin, 2008; Henkel, Baldwin and Shih, 2013). The main argument however, is that by making innovations modular, companies can compensate for a weak appropriation regime for one asset with a strong appropriation regime with another part (Staudenmayer, Tripsas and Tucci, 2005). For example, Henkel, Baldwin and Shih (2013) mention the integration of cartridges, which were difficult to protect, with the printhead. This integration helped to protect the cartridges. The opposite is also possible, with for example the case of M-Systems, who split their drivers from their flash sticks so users were able to adjust them more easily, without revealing their secrets. So, IP modularity means that one part is useless without the other part. This can also be seen as trying to increase the specificity of the innovations done with outside partners, which was also found at the companies that were interviewed.

Based on the interviews however, the choice for certain appropriation methods seems to be mainly influenced by the level of experience a firm has with open innovation activities. This could indicate that organizational learning plays a larger role in the decision process than previously thought. When a firm has experience in this area, external factors seem to also influence the choice of appropriation methods. These are not only on the firm level and include factors like the propensity of competitors to use certain appropriation methods as well as how big of a lead the focal firm has in innovating compared to competitors. The choice for appropriation methods in the sample can be illustrated in the figure below:

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5.2 Contributions

This piece of research follows West, Salter, Vanhaverbeke and Chesbrough’s (2014) identification of the need to better understand what role appropriability plays in open innovation. The thesis has yielded four propositions on the basis of which further empirical analysis can be done. The main finding is that over time, firms seem to focus more on informal appropriation methods, or at least avoid using patents due to learning effects. One specific point of interest here is that open innovation itself can be used as a means to differentiate offerings, making appropriation methods somewhat superfluous. Examples are getting published by working with universities or collaborating with established companies which can give the focal firm legitimacy.

Another important finding is that it seems like the choice for certain appropriation measures depends on the innovation partner. For example, patents are the most popular with innovation done with competitors and universities. However, this might also be linked with the goal of the innovation alliance, with competitors and universities also scoring above average on having knowledge creation as the goal of an open innovation project.

Finally, the choice of certain types of partners over the interviewed firms’ lifetimes might be indicative of the failure of formal appropriation methods. Most organizations seem to learn that it is risky to work with competitors, though this might just be where a lot of the gains of open innovation can be had. In the interviews, firms often cited appropriation methods as a reason why they stopped working with competitors, though it seems like if there were better protection options they would still want to.

5.3 Managerial implications

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5.4 Limitations and opportunities for future research

Like any piece of research, this thesis also has some limitations. The first and main limitation is the generalizability of the findings, or better yet the possible lack thereof. When contacting firms to conduct interviews, the goal was to get an as diverse group as possible, in terms of, for example, types of innovation, industry, firm age and firm size. However, it soon became clear that smaller firms were more receptive to participate, leading to the biggest firm having 100 employees. This might have an impact on the ability to generalize findings to bigger firms, as one of the reasons mentioned multiple times to engage in open innovation activities being the lack of resources firms face. This might be a smaller problem for bigger firms. Building a quantitative research on one or more of the propositions seems like a logical avenue for future research. A second limitation of the study is that whilst the goal was to find out changes over time, the study was retrospective instead of longitudinal. This has to do with time constraints, but asking respondents about experiences with open innovation activities in the past might not yield as robust findings as asking them about current experiences.

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Antecedents of Open Innovation Appropriation Choice over Time