The paradox of openness: How do SMEs manage the tension between value
creation and value appropriation?
Supervisor: Professor dr. Dries Faems Co-assessor: dr. Pedro de Faria
Master Business Administration: Strategic Innovation Management Faculty of Economics and Business
University of Groningen August 2016 Martijn Kindt s2029758 Pausgang 6 9712 EZ Groningen m.w.kindt@student.rug.nl Word count: 11.898
Abstract
This research uses case studies to give insights in the perception and the management of the paradox of openness by SMEs in the Life Science and Health sector. At the beginning of this research this sector was identified as a unanimous sector, which uses high degrees of open innovation business models. The interviews lead to believe that this sector was much more diversified than previously assumed and therefor the perception and the management of the paradox as well. This finding lead to the formation of a classification with three classes in order to better understand both the paradox and the coping styles of SMEs within the LSH-sector. These classes are: the selective open innovator, the open innovation enthusiast and the true open innovator.
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Table of content
Abstract ... 1 Table of content ... 2 Introduction ... 3 Literature background ... 5Value creation in SMEs ... 5
Value appropriation in SMEs ... 6
Absorptive capacity ... 8
Paradox of openness in SMEs ... 9
Methodology ... 12 Research Design ... 13 Data collection ... 14 Data analyses ... 14 Results ... 16 IQ Products... 19 Haemoscan... 23 Biotransfer ... 26 Extra Cura BV ... 30 Discussion... 33 Classification ... 33
Implications, limitations and future research ... 39
Theoretical implications ... 39
Managerial implications ... 40
Implications for policymakers ... 41
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Introduction
A research stream getting more and more attention in the past two decades is open innovation (Huizingh, 2011). “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” (Chesbrough, Vanhaverbeke, & West, 2006, p. 1). In open innovation the business model is used as source of value creation and value capture (Chesbrough et al., 2006). A difficult process that managers have to manage in applying open innovation, is the paradox of openness; “the creation of innovations often requires openness, but the commercialization of innovations requires protection” (Laursen & Salter, 2014, p.867).
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This research tries to fill this gap by the following research question: How do SMEs manage the tension between value creation and value appropriation?
In order to get a better understanding on the underlying mechanisms on how SMEs manage this paradox, cases with high degree of collaboration where selected. The selected cases will be SMEs in the Life Science and Health sector. This sector is known for using high levels of openness with respect to open innovation search strategies (Chesbrough, 2006; Brunswicker & Vanhaverbeke, 2015). Companies that use open innovation practices, tend to collaborate with more and more different partners, which increases the changes of facing the paradox of openness.
This research adds to the understanding of how to manage the paradox of openness in SMEs. It therefore extends the literature on open innovation and innovation management in SMEs. Although the term of the paradox is relatively new to the field, the tension between value creation and value capture has been recognized for quite some time (Cassiman & Veugelers, 2002; Donnelly, 2011).
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Literature background
In order to evaluate the paradox of openness in SMEs, I will first provide separately some challenges for both value creation and value appropriation in SMEs. After that, I will discuss the paradox of openness in more detail and which challenges this poses for SMEs in particularly. By doing so, the tension between value creation and value appropriation will become more vivid.
Value creation in SMEs
Value creation in open innovation happens through the combination of internal and external knowledge sources to create new ideas for innovation (Chesbrough et al., 2006; Olander et al., 2009). In their study, Laursen and Salter (2014) identify suppliers, clients or customers, competitors, consultants and private R&D institutes, universities, and public research institutes as external sources. “For many firms, open innovation is a requirement and not merely an option because they cannot do everything in-house” Lichtenthaler (2011, p.89). This is especially the case for SMEs because they lack certain resources and capabilities (Lee, Park, Yoon & Park, 2010). Lee et al. (2010) point to the fact that SMEs are good at creating value but not at commercializing it. This contrasts with the results from Spithoven et al. (2013) who argue that SMEs are less effective in generating new products and services through open innovation, but do experience great benefit from the sales generated because of their open innovation activities.
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because the collaboration with universities could foster the most radical innovation (Lee et al., 2010). The lack of collaboration with universities can be caused by the great difference in culture in university-industry relationships and the difficulties SMEs encounter with maintaining all these different relationships and their culture (Van de Vrande et al., 2009; Hossain, 2015). Hossain (2015) argues that Open Innovation in SMEs is used more for new product innovations than for incremental innovation. This alters their partner selection more towards universities and other partners often used for radical innovation, which conflicts with earlier suggestions.
Searching for knowledge in external sources can be costly and even counterproductive if not applied in the right direction, hurting innovation performance (Laursen & Salter, 2006). Searching too broad or too deep for external knowledge can result in over-search. SMEs have limited financial resources and can not afford the costs of over-search. SMEs do however benefit less from search strategies to boost innovative performance (Lee et al., 2010). SMEs cannot maintain a large amount of networks, therefore a few relevant are essential for open innovation activities (Hossain, 2015). Intermediaries of knowledge exchange could point to a valuable solution (Lee et al., 2010).
Value appropriation in SMEs
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to be more careful with the intellectual property they share and benefit more from protection mechanisms compared to larger firms (Hossain, 2015; Spithoven et al., 2013).
Knowledge protection can be formal like patents or contracting. Informal methods of protection are secrecy, lead times, complementary assets, first mover advantages, complexity and lock-ins. Secrecy refers to disclosure of information, which can vary in extent. Lead time refers to the process of creating a successor, superior product or service at such a pace that the competition can not follow that pace. Complementary assets refer to supplementary assets like manufacturing, distribution, marketing used independently or together to deliver value of an innovation. First mover advantages are the advantage a company has when is the first one in a given market with a particular kind of product or service. This can grant them the access to certain scare resources first but also be the first to build a reputation in that given market. Complexity of a product or service refers to the fact that competitors do not fully understand the product or the process in which it is made, the last one making reverse engineering difficult. Lastly, lock-ins refers to the creation of high switching costs, mostly through integration or complementary assets to keep the customer loyal to a companies’ product (Dahlander and Gann, 2010; Laursen & Salter, 2014; Olander et al., 2009; Teece, 1986; Teece, 1998).
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(Holgersson, 2013). Therefore the function of patenting can be secondary, but in a different way compared to large firms, which mainly use patents for freedom to operate (De Rassenfosse, 2012).
Considering an additional downside of patent use, is the fact that the procedure of applying for a patent makes the knowledge explicit and public. The knowledge in SMEs is more tacit than explicit (Brunswicker, 2013), suggesting that the best way of knowledge protection would likely be informal rather than formal. In that case the most profitable protection would not be the strongest way of protection (Huizing, 2010). Both secrecy and HRM policies (e.g. labor legislation) can be good methods to keep this knowledge inside the firm (Olander et al, 2009).
Absorptive capacity
Essential in the effectiveness of external knowledge sourcing in open innovation is absorptive capacity (Cohen & Levinthal, 1990; Zahra & George, 2002, Brunswicker & Vanhaverbeke, 2015). Although external knowledge sourcing is important, it can never replace the in-house knowledge and R&D and thereby highlight the importance of absorptive capacity. This concept describes the ability of a firm to value, assimilate and apply new knowledge. Absorption has two distinct phases: identify and access opportunities and to assimilate and incorporate (Huang and Rice, 2009) this in in line with the reasoning of Zahra and George (2002) of potential absorptive (PACAP) capacity and realized absorptive (RAPAC) capacity.
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strong regimes of appropriability, RACAP and sustainable competitive advantage go hand-in-hand because of high imitation costs. Under weak appropriability regimes, the relation between RACAP and sustainable competitive advantage is likely to be weak or would not exist at all.
A Company could chose to buy-in technology rather than developing it internally. The lack of adequate absorptive capabilities will alter the commercialization of the innovation, leading to a more slowly introduction into the market because of a time consuming process of learning (Huang and Rice 2009, Chesbrough et al., 2006). The development of such capabilities often takes several years, but the successful development of them could solve the issues that the paradox of openness poses (Lichtenthaler, 2011). Because of the cumulativeness and domain-specific elements, absorptive capabilities are path-depend in nature (Cohen and Levinthal, 1990). With the short-term negative effect of absorptive capacity on innovation performance, SMEs could lack the financial resources to overcome the discrepancy towards the long term benefits (Huang and Rice, 2009). SMEs might have less absorptive capacity in volume but a positive note is that they are more flexible and market responsive, making it easier for them to absorb market-based knowledge and applied technology. Another contributing factor could be their pragmatic attitude to solving problems Spithoven et al. (2013).
Paradox of openness in SMEs
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The paradox is greatly illustrated by Olander, Hurmelinna-Laukkanen & Mähönen (2009) who discuss the difficulties in coordinating knowledge sharing and protecting in order to gain value creation and value capture, which in this research will be referred to as value appropriation. An overview of this tension is presented in table 1:
Table 1. Olander (2009, p.353): Knowledge protection/sharing dilemma.
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Co-patenting can be used to cope with the paradox of openness. If there is better legal intellectual property protection, firms are more willing to collaborate and combine their complementary knowledge (Belderbos et al., 2014; Cassiman and Veugelers, 2006), with trust being the major reason behind this willingness (Faems et al., 2008). Belderbos et al. (2014) researched the possibility of co-patenting, depending on the overlap in exploitation domain. When both partners are active in different exploitation domain, like in an inter-industry or university collaboration, it is less likely that shared ownership would restrict appropriability. The co-patenting with universities could also increase the market value, likely because a lack of appropriation risks from these types of partners. Research has shown that this type of research is especially fruitful for radical innovations. Beside all these benefits, the co-patenting with a university can also be used as a marketing tool, by signaling and attacking other investors by showing that this relationship exists. Although co-patenting seems promising, we don’t know yet if this approach is equally fruitfully for SMEs, given the earlier discussed limitations patents pose to SMEs.
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Methodology
The open innovation literature and especially the paradox of openness is an immature field of literature. The paradox could even be described as quite a new observed phenomena and to date not researched at the SME level. A case study is an excellent start to widen the knowledge on this interesting literature stream; “Case study is an in-depth exploration from multiple perspectives of the complexity and uniqueness of a particular project, policy, institution, program or system in a “real life” context (Simons, 2009, p. 21).” The European Commission defines SMEs as companies with less than 250 employees or a turnover less than 50 million euro and balance sheet with less than 43 million euro (Commission Recommendation, 2003).
13 Research Design
The innovation monitor 2016 was used to select the case. At the beginning of 2016, 2701 SMEs in the Northern-Netherlands, which have applied for a subsidy at the SNN in the period of 2010-2015, received an email to take part in the Northern Netherlands Innovation monitor. To minimalize selection problems, we also approached 294 Northern-Netherlands SMEs, which didn’t apply for a subsidy at the SNN, to take part in the research. In total 432 Northern-Netherlands SMEs have filled in the survey substantially.
From this survey I ended up with 18 companies within the LSH-sector by their SBI-code (standardized business classification). I chose 5 cases out of this selection, based on how much these companies use different external knowledge sources in their R&D process. These external sources, where: 1. Customers, 2. Advisory companies, 3. Suppliers, 4. Competitors, 5. Universities or other knowledge institutions and 6. Companies from other sectors, thereby similar to those used in the research of Laursen and Salter (2014). The five companies that used the most of these external sources where selected.
14 Data collection
The Interviews lasted 60 minutes and where semi-structured. Questions where generated with insights from the literature and the survey results. Co-patenting could be a good solution in overcoming the paradox of openness, as is showed by Belderbos et al. (2014), but was not an answering option in the Innovationmonitor 2016. Therefor it was added to a sub question to the interview guide along with other value appropriation mechanisms redeemed important by the literature. The general interview guide can be found in Appendix I.
The results from the survey of the Innovationmonitor 2016 revealed some interesting results per company. Some answers seemed to contradict each other or have extreme value compared to the theoretical or general average of the survey. These results differ per company and questions where added to each specific interview guide, which can be found in Appendix II.
Data analyses
A single researcher was used to analyses the interviews and to create the descriptions and a typology of the cases. To partially overcome this bias, the research sent both the transcript and the case description to the interviewees in order to check the interpretations of the researcher. With this so-called ‘Member check’ the quality of the obtained data increases (Swanborn, 1996).
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Results
19 IQ Products
General information
IQ Products is a biotech company, founded in 1987 and is a spin-off of the University Medical Centre Groningen (UMCG). At the start the company developed antibodies, at the time a fairly new technology. The end users were, and still are hospital laboratories.
Value creation
Goodwill and playing it fair is more important for this company and the manager than opportunistic behavior. “I prefer to pay a few percent royalties, so someone would also do some marketing for me than to offend and break a nondisclosure agreement.”
Also if the manager would see a collaboration opportunity between two of their collaboration partners, he likes to bring these two companies in to contact with each other, without trying to get some commission fee out of his intermediary: “I hope others will do the same for me. But it is not always clear if it happened in that exact way.”
IQ Products has two employees who are active in maintaining the relationships with external partners. Within their networking activities they see their small size as an advantage: “Usually the size of a company is an inhibitory factor on the coordination with partners.”
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kind of projects IQ Products is interested in and matches these with patents or ideas from other companies in the database.
The external R&D expenditures are spent on expertise of from another party. Because IQ Products doesn’t have the resources to develop this competence themselves, they buy-in certain know-how. In their product development they installed a couple of these tests at an external partner like the UMCG.
Value appropriation
In collaboration with other companies, IQ Products is most times the facilitating partner. In the past they worked together with competitors, nowadays less. This collaboration in the past was aimed to follow their behavior closely, which gave them good insights in their market share, where IQ Products was missing revenue.
The competitor is most of the times also the client in other markets where they deliver their products OEM. The advantages of this is that a competitor could be more familiar with a foreign market and its regulations. This form of collaboration is mostly done with countries with IP regimes similar to Europe.
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Complexity of the products is moderate and reverse engineering is possible with the products of IQ, especially because some of their products are published in academic papers. Still, even in these papers not all the details are shared.
The use of contracts is relatively high, but is in line with the rest of the industry. It is very common to sign nondisclosure agreements and this step is rarely skipped, even between companies and universities.” The collaboration with universities is usually without friction and conflicting interests, but the IP always remains with IQ Products.
Selling products under their own label is of course in the best interest of IQ Products, but big volumes requires investments. By working together with other companies, they are able to maintain flexible: “If I have to double or tenfold the production of a single reagent, it would not be a problem.”
Currently they are working with a company which wanted to use their marketing and sales to register their products in the European market. IQ products wanted to earn its investment back with the distribution of the product and decided to start a Joint Venture. This required investment from both sides and would overcome the risk of only being used for this introduction and not earning back the investment.
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Co-patenting is not used as a way of dealing with apropriabillity. The manager expects two main problems with this approach: “At each given time, one party or the other could claim a majority share of 51%. And each share of the patent can be sold and acquired by different party, leaving the remaining party vulnerable to an unwanted third party.”
The biggest challenge for IQ Products is their marketing and sales with its distribution channels. IQ Products can not afford to put an office in each country. Therefor they have to rely on distributors.
Paradox of openness
When confronted with the paradox of openness the manager mentions that this depends on the situation and the type of collaboration partner. With universities the expectations are very clear upfront: IQ Products owns the IP rights and the universities get market conform prices. With other companies it is more difficult.
23 Haemoscan
General information
Haemoscan is a spinoff of the UMCG and tests haemo-compatibility which is the compatibility of blood with other bio materials such as implants. Besides testing haemo-compatibility for other companies as a service, they also develop organ damage markers to test for organ damage after an operation. As a third business activity, Haemoscan develops test kits and sells them as products for companies to do test themselves. This kind of research is relatively new to both the research area and the market applications.
Value creation
They are working closely together with a company from anther industry to develop a quick-test. Heamocscan develops the method and the coating but uses this (strategic) partner to develop the hardware. This is a partner from the same area, so they see each other regularly which speeds up the development.
Mostly mouth-to-mouth advertising is the process by which new clients hear about and come to Haemoscan. But when we talked about congresses, he stated the following: “That is our marketing. That’s why we still publish in academic papers. It shows the world that we are good in what we do.” So publishing in academic papers is seen as a marketing tool in combination with attending congresses. Next to that, the publishing is used to provide influence to the ISO-commission where the manager is part of. Hereby Haemoscan tries to shape the environment around them with its regulation to a state desired for them.
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new tests that are needed. The other part of innovation is by developing new market applications like the quick-tester.
Haemoscan redeems subsidies to be important for certain innovations they do. The development of the quick-tester would not be possible without subsidies: “That would not be possible within only our own turnover. For that kind of money we specially employed someone.”
Value appropriation
Many of their customers from haemo-compatibility testing are outside of the Netherlands. Communication usually only happens by email, after sometimes only meeting someone once at a congress. Protocols are formed to establish mutual expectations, after which the results are communicated.
None of their product have a current patent, the main reason behind this being the time and costs that come in play for applying for a patent: “I got a patent in the past, but I let that one expire. I am not interested in doing that whole process all over again.” But also the volume plays an important role in the decision for applying for a patent: “Many of our products are not produced in bulk. So if you have the feeling that you have developed something, like we are doing now with those quick-tests, it becomes a different story.”
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If they develop a completely new product, they will treat it as a new company. With the proof of principle they will need production facilities that mostly likely would not fit their current business model. The manager states: “For that you would need special facilities with certain knowledge and knowhow, which we do not have. We would most likely need specialists in quality assessment, marketing and scaled production.”
Paradox of openness
When confronted with the openness paradox the manager acknowledge the existence: “We are especially more open towards universities but more closed towards competitors within business environment.” Haemoscan shares everything with the university, until the moment they reach the point of technological development. At that point they also keep things more to themselves.
26 Biotransfer
General information
Biotransfer is an advising company which has shares in a biotech company named Vivomicx, and a bio medical company named SenzAir. Vivomicx is a spin-off of the University Mediacal Centre Groningen. It is a company that specializes in identifying biomarkers by providing subsets of cells to test the effectiveness of a certain drug. SenzAir originated from a technology developed by the University of Twente. SenzAir added certain applications, making it suitable for analyzing human breath and also making it suitable to patent.
Value creation
Biotransfer itself uses a lot of subsidy possibilities in their business model. By looking for subsidies for other companies, Biotranfser ensures that part of that newly granted subsidy will be used to pay for the consulting hours: “You can apply for a subsidy for everything.” Without subsidies most of the innovations of SenzAir or Vivomicx would not be possible, because banks do not give loans early in the innovation process. But the manager/CEO does admits that rules and regulations around these subsidies are becoming more strict and specific: “They make it too specific. You would have to be lucky to have a project that fits those specifications.”
Biotransfer tries to search for investors for both SenzAir and Vivomicx. With their expertise in consultancy in the Life Science industry and their knowledge from both SenzAir and Vivomicx, they are able to provide clients with new applications for an existing product.
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possibilities of the product. If they write about this in academic papers the effect is two sided: 1. The companies gain new insights in the possibilities of their product. 2. The companies get a very effective form of marketing out of their first customers reaching out to a whole new group of customers like hospitals or other medical institutions.
Small SMEs or even single entrepreneurs seem to be collaborating together. They do this to share expertise and in order to support each other: “We all work together in a network of small businesses. For me, that is the new model of innovation: Network innovation.”
Value appropriation
Vivomicx continuously improves the set of protocols that make up their method. They are trying to stay ahead of the competition and the big pharmaceutical companies. Their desire is to develop this process into an automated computer algorithm, so it can be patented. Beside the use of patents, SenzAir relies on secrecy, complexity and formal contracts of disclosure.
Working together with universities always relies on agreements. If the university wants to publish some of the results of their collaboration, they first have to wait a couple of months, giving Biotransfer the possibility to patent. After publishing patenting is not possible anymore. To develop the products from SenzAir, they work together with specialized partners in that area with complementary assets. Sometimes this is also a regular buy-in of certain technology or knowledge by contract.
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development of the project. A good and knowledgeable project manager would be able to act critical towards these attempts.
Paradox of openness
At a Health Hub, an incubator and networking community close to where the company is situated, they are trying to use the model open innovation as much as possible. When confronted with the paradox of openness the manager states the following: “Open innovation is wonderful. You pick up many ideas, on the other hand, how do you manage your IP? That’s always complicated for me.” Patents and secrecy are the first things that come to mind and companies inside the Health Hub do talk about the challenges that the paradox creates, but concrete solutions are not clear.
The paradox does obstruct the innovation process but the manager is not too afraid of idea theft: “Everyone is busy and every company has to make money. They will not suddenly drop everything in order to run after your idea. Especially when it has a high time-to-market.” The fear of coping however does increase if the complexity of a product is lower: “If it is just the case of assembling of technologies, than it becomes a ‘thing’ again.” It is worth noticing that the fear of coping and idea theft is felt, the manager has never experienced that someone took a run with his idea. He points to the fact that repercussion could be the driver behind this non-experience: “It is a small world, especially here in the North (Netherlands). If you steal someone’s idea, you will only have to do that once and you will be out of business.”
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30 Extra Cura BV
General information
Extra Cura originated from an intrinsic drive to change the healthcare system with process thinking and securing these processes. The intrinsic motivation has its origin with the background of the CEO as a healthcare professional in wound treatment. The company tries to reduce costs in healthcare in terms of more efficient way of working and no waste. This in terms also improves the quality of the care that is delivered.
Value creation
The supplier delivers the software essential for the core business of Extra Cura. This business process management software provides the building blocks for their implantations. Each implementation at a new client differs to some degree. The manager is very reluctant towards subsidies. Extra Cura tries to continuously improve the solutions it provides towards their customers. They regularly engage in a conversation with their customers to ask if a solution works the way they expected or need in the future: “Our products are solely co-creation.”
Collaborations with universities provide new insights in smarter implementation and making these implementations measurable. They also provide marketing opportunities in the case an university publishes the results of a study: “Every publication about this way of thinking helps to spread the philosophy.” Next to that, these collaborations can provide new clients in the case of university medical centers.
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towards a difference of interest: “The minister of Economic Affairs gets assessed on economic growth, whereas my business suppresses economic growth in parts of the industry. Just because I do not want to flush money down the drain.” He sees this as the main basis for not getting subsidies in the first place.
Also advising partners for the innovation subsidy application hasn’t been fruitful in the past. Because the consultant doesn’t work for the company, the alignment of interest can be conflicting sometimes: “It was a really frustrating process and in the end the consultant made the decision not to grant to my project, which was heavily influenced by someone on the paycheck of a competitor of mine.”
Although investments are always interesting they come with certain drawback. The manager likes to be free in the way he does business: “I financed this company out of my own pocket and that makes me very much unrestricted.” Next to that, he points to the fact that investments could add extra costs, since interests have to be paid back. “I believe I got something good here and I am not going to change the world at once, but I keep enough clients to prove that this is possible.”
Value appropriation
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take a look at how they made it. But how you shape those processes to every line in detail is kept for ourselves.”
The manager doesn’t like overly complicated contracts, but mostly works with trust as a basis for a collaboration. Their development process is rapid prototyping, which enables them to have very short deployment times. This also allows them to add features overtime, making their product a completely integrated solution. The dependence of the customer on their product increases with each step, driving up switching costs to another company.
Paradox of openness
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Discussion
In this section the classification with types will be formed to describe the cases as depicted in the results section. Classifications provide a set of decision rules in order to assign organizations to heterogeneous groups. Together these groups form a mutually exclusive and exhausting set of organizational forms (McKelvey, 1982). The classification aims to answer two sub questions: How does this class perceive the paradox of openness? And how do they cope with the paradox of openness? This coping could be either managing it or even overcoming the paradox. Table 3 and diagram 1 provides an overview of the classification with classes put into a graphical metric.
Propositions
To better understand SMEs using open innovation in the LSH sector, we have to use the classification: the selective open innovator, the open innovation enthusiast and the true open innovator. This will provide insights how they manage the paradox of openness.
Classification
The selective open innovator
This class is based on the case of IQ products and Heamoscan. This class perceives the openness paradox to a fair extend. It uses open innovation mainly for commercialization and access to complementary assets. The way it manages the paradox is by selectively revealing knowledge and waiving secrecy for accessing certain complementary assets (Henkel, Schöberl & Alexy, 2013).
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academic publications. Another important source of external knowledge comes from intermediaries, supporting the finding of Lee et al. (2009).
The selective open innovator makes active use of several strong appropriabilitty strategies, like secrecy, contracting, first mover advantage, patents and lead time. These findings are consistent with the findings of Olander et al. (2009). The selective open innovator is very careful which inventions it patents and doesn’t make use of co-patenting. In terms of Laursen & Salter (2014) this class mainly uses hard openness.
The open innovation enthusiast
This class is based on the Biotransfer case and experiences the paradox the most vividly. It does know the benefits of open innovation for value creation and the role it can play through the combination of complementary assets for the commercialization of the innovation. But it also fears that opening up to for this can create the risk of unintended knowledge spillovers.
The open innovator enthusiast does admire to be an intermediary, in contrast with the selective open innovator. This in order to maximize the benefits of operating in an open innovation environment. Subsidies are deemed to be very important for creating value in the innovation process. Czarnitzki, Ebersberger & Fier (2007) point to the fact that subsidies require openness about the innovation. If a company wants to keep the innovation secret, they might not apply for a subsidy, which could lead to the termination of the development in worst case scenarios.
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This gives them two valuable outcomes in return: 1. Potential markets for application and 2. Very strong marketing in desired markets.
Lead time advantages are seen as the most important appropriability strategy followed by secrecy, patents and contracts. Co-patenting is non-existent in this class. Commentary assets are used for the commercialization of the innovation, but not to an extend in which the selective open innovator does this. In terms of Laursen & Salter (2014) this class mainly uses hard openness.
The true open innovator
This class is based on the Extra Cura case. It experiences the paradox the least amount of the three classes. This is mainly because of the way it copes with the tension between value creation and value appropriation. Imitation is encouraged to speed up the adoption of the solution in an almost open source approach (Prasad & Mahajan, 2003). This organization is not profit orientated, especially not on the short run. Thereby the analogies with Tesla Motors goes a long way (Elon Musk, June 2014).
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Hereby they are creating long lasting relationships and customer dependence. This results in the fact that lock-in is their strongest appropriability mechanism.
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Implications, limitations and future research
In this section I will discuss the theoretical, managerial and policy implications of this study. After that I will highlight the limitations of this study, together the implications and the limitations of this study provide avenues for future research, which will be discussed lastly.
Theoretical implications
This research has several theoretical implications, the main contribution being the fact that the paradox of openness is researched among SMEs, providing a classification to better understand their perception and management of the paradox.
Open innovation is used a lot for the commercialization of the innovation, in order to appropriate value from the innovation. Many of the value creation happens internally but often the complementary assets for the appropriation of the value from the innovation are outside the company.
External search for finances, like investments and subsidies, seem to increase the paradox of openness. This is consistent with the reasoning of Olander et al. (2009) who argue that knowledge has to be shared in order to get access to certain markets. This may cause companies’ loss of the competitive edge from their innovation. Because of this tension, companies can chose to abandon these investment intensive innovations altogether (Czarnitzki et al., 2007).
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paradox of openness is less perceived in this kind of collaboration, compared to other collaboration partners.
With the identification of ‘the true open innovator’ it adds to the conclusion of Laursen & Salter (2014) if the relationship of openness and appropriability is always conclave. The true innovator encourages coping in order to spread their way of looking towards business process management in the healthcare sector.
SMEs still find difficult what to share and what knowledge to protect, sometimes being overly protective. A clear decision analysis is not made, confirming the statement of Dahlander & Gann (2010) that SMEs lack the resources to structure this process. On top of that, SMEs seem to struggle with the complete implementation of open innovation business models, even companies that work together a lot for their innovation process. This is illustrated by the fact that ‘the selective open innovator’ still sees no value in pursuing innovations that are outside the current business model. Thereby it still uses a relatively closed view on innovations flowing in and out of the innovation funnel at every stage of the process (Chesbrough et al., 2006).
Managerial implications
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Zooming in towards the LSH-sector, managers could learn a lot from the different applications of the university-industry collaboration, the most new way seeming to be the applications of the ‘open innovation enthusiast’.
Implications for policymakers
The use of subsidies differs a lot when comparing the classes. Since lack of financial resources is one of the most important factors hampering SMEs to innovate, policy makers should look into models of making subsidy application easier. Subsidies often a prerequisite for a collaboration to occur. Lack of financial instruments is almost always the reason of lack of innovation.
This is especially important for Dutch policymakers since, the LSH-sector has been labeled as a ‘Top-sector’. This research and its classification helps to better understand this sector for policymakers, with regards to the SME representation in this sector. This can help policymakers to make better targeted policies in attempts to foster innovation in this sector.
The more diverse use of open innovation among SMEs in the LSH-sector provides some challenges for policymakers. Subsidies usually intended to stimulate the sector, could miss their purpose. Too specific rules make it difficult for SMEs to apply for government provided subsidies. The paradox of openness can also play a role when the application for a subsidy requires the SME to give up too much of its knowledge and by which it becomes public.
Limitations
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performances of each classification, due to lack of data in the initial survey of the innovation monitor. Quantitative analyses on performance after the classification was formed was because of that impossible.
The two mayor limitations would be the fact that this research only focusses on one specific sector, and the size of the companies was very small. Although research on very small firms in the open innovation literature is underdeveloped, some scholars argue that this represents in tire other group all together (Van de Vrande et al., 2009). Therefor it can be difficult to generalize these results for all SMEs within this sector and especially without the LSH sector.
The reason to only research the LSH sector was the fact that this sector is known for its use of open innovation in its business models, as explained earlier. Another property of the LSH-sector is the fact that most of the companies engage in a business-to-business market, making the results of this study only applicable to sectors with similar properties.
Future research
This study provides the perception and the mechanisms that SMEs in the LSH sector use to cope with the paradox of openness by delivering a classification for them. Future research could look at the effectiveness of these approaches at a more quantitative matter and might come up with an ideal set of approaches in a more normative matter. It could thereby form a typology of a set of ideal types for each classification by including financial performance measurements (Doty & Glick, 1994).
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the observed events would explain. The perceived paradox of openness is therefore greater than rationally would be logical. What causes this increased perception of the paradox?
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Acknowledges
I would like to thank my supervisor professor dr. Dries Faems who provided excellent guidance. Even during times I wasn’t sure how to proceed, he offered me input that gave inspiration for the next steps. Secondly I would like to thanks all the interviewees for their time and participation in my research. Thirdly I would like to thank the SNN and the RUG to provide the initial input for database from which I selected my cases. Finally I would like to thank my girlfriend, family and friends for supporting me during the process of writing my thesis. This meant a great deal to me during a sometimes, stressful period.
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Appendix I
Interview guide Introduction:
Thank you for participating and helping me finishing my master thesis. I’m currently obtaining my Master degree in Business Administration with a specialization in Strategic Innovation Management. With my topic I’m interested in how SMEs can obtain value from collaboration with external partners. Hereby I’m focusing on SMEs in the Life Science and Health sector. Before I start the interview I would like to ask you if it is possible to record this conversation? This recording will be confidential and will only be used to make my transcript as complete as possible.
General information:
Could you give a quick introduction of your company, what is it your company does? Creating value
From the survey you filled in, we can see that you work together with […]* in your innovation process. Could you give some examples of these different kind of collaborations?
* Collaboration choices in Appendix II.
What are the main challenges you face in working with these partners and how do you cope with these?
Which actions do you take to stimulate knowledge transfer between these partners?
Absorptive capacity.
53 Appropriate value
Does your company also use other forms of patenting like co-patenting? (If the company patents) Why do you (not) use this approach?
How do you try to stay ahead of the competition with your innovation? Does faster development than your competition play a part in this? Can your product/process be reversed engineered?
How does complexity of the product play a role in this? Do you work together in order to get a product on the market?
Which part do these collaboration partners play in the commercialization of the product? Are these collaboration agreements mostly formal or informal?
Open innovation
Slowly I would like to zoom in on the research area that I’m investigating. This area is called open innovation, which assumes that internal and external knowledge sources are equally important in the innovation process.
Is this also the case in your organization?
The open innovation literature assumes that ideas or products are not bound to the current business model of the company or even the company itself.
Do you agree with this view?
If so, could you name an example of such an approach?
The paradox of openness
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to acquire the value themselves and not another collaborating party. “The creation of innovations often requires openness, but the commercialization of innovations requires protection.” This is somewhat paradoxical, first being very open and in a later stage being more closed. It is this paradox of openness that I’m investigating.
Do you and your company perceive this paradox in the same way? If so, how does your company manage it?
Input from the Innovation monitor
Found in Appendix II Ending the interview
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Appendix II
Input form Innovationmonitor 2016 IQ Products
Collaborates with: 1. Customers 4. Competitors
5. Universities and other knowledge institutes 6. Companies from other sectors
Between 80 and 99 percent were so-called incremental innovations, mostly introduced by your company in the market. Could you elaborate on that?
Your company mostly focusses on explorative innovation projects. This seems contradicting with your focus on incremental innovations. Could you elaborate on this?
2% of your revenue is spend on external R&D, what does this consist of?
Your company does collaborate a lot, but you do not focus on creating new methods to collaborate. Could you elaborate on that?
Creative ways of working scores high for this company. Could you provide an example of that? The way of working is quite formal but with a high degree of adaptation. Could you elaborate on
this? Haemoscan Collaborates with: 1. Customers
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Your innovations are both new to the market and the company but are qualified as incremental. This seems contradicting, could you elaborate on this?
The survey reveals that you have implemented organizational changes, along with new methods for organizing external relations the last years. Could you elaborate in which way the company introduced these changes?
57 Biotransfer
External sources used: 1. Customers
3. Suppliers
5. Universities or other knowledge institutions and 6. Companies from other sectors
50% of the revenue is invested into R&D and 41% to external R&D. Could you explain why these numbers are so high?
Your company scores high on multidisciplinary collaborations but low on co-creation. Could you explain this difference and give examples of each?
Your company applied for a lot of subsidies. Why do you do this?
You state that rigid regulations prohibit the company’s innovation process. Could you elaborate on this and give an example?
To protect your innovation the survey states that you only use secrecy. Why is this the case? Why doesn’t your company use new business processes or methods for organizing external
relations?
Where does your 3% ‘new to the market’ products consist of?
Extra Cura
External sources used: 1. Customers
3. Suppliers
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The innovations of this company are rated both ‘new to the market’ and ‘new to the company’. Could you elaborate on this?
As inhibiting factors for the innovation process you selected: financial resources, subsidy possibilities and time to spend on innovation. Could you elaborate on this?
Why doesn’t your company use new business processes or methods for organizing external relations?
Your company doesn’t spend anything on external R&D activities. Why is this the case?
