Managing Open Innovation

Managing Open Innovation

Oliver Alexy and Linus Dahlander
The Oxford Handbook of Innovation Management
Edited by Mark Dodgson, David M. Gann, and Nelson Phillips
Print Publication Date: Jan 2014

Subject: Business and Management, Innovation, Operations Management
Online Publication Date: Oct 2013 DOI: 10.1093/oxfordhb/9780199694945.013.021
Abstract and Keywords
This article provides an overview of the literature on the management of open innovation.
Elaborating on what exactly ‘open’ innovation comprises, this article integrates efforts by
scholars who have studied this topic from a variety of perspectives. In doing so this arti
cle highlights that despite the virtues of openness having been stressed by much of the
literature in this field, many companies still struggle to be successful with their open in
novation strategies. A big question therefore for both theory and practice is under which
contingencies openness is beneficial, and the article reviews internal and external factors
that shape the rewards companies can derive. This results in a number of theoretical and
managerial implications and suggestions for avenues of future research.
Keywords: open innovation, contingencies, openness
Introduction
IN recent years, few terms have gained as much attention in innovation management as
open innovation. The concept was coined by Henry Chesbrough, who defines it as ‘the
use of purposive inflows and outflows of knowledge to accelerate internal innovation, and
expand the markets for external use of innovation, respectively. Open innovation assumes
that firms can and should use external ideas as well as internal ideas, and internal and ex
ternal paths to market, as they look to advance their technology’, (2006a: 1). Although it
has certainly made standalone contributions, the concept is also tightly related to previ
ous concepts of innovation, such as user innovation (von Hippel, 1988; Bogers and West,
2012) or cumulative innovation (Scotchmer, 1991; Murray and O’Mahony, 2007). Accord
ingly, for this chapter, we use a slightly different definition of open innovation: all flows of
knowledge across the boundary of the firm, independent of the form or direction, that are
deliberate and that aim to create and capture value for the firm. These knowledge flows
can be both inbound (arriving at the company) and outbound (leaving the company). Fi
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nally, they can involve both monetary exchange and more informal relationships
(Dahlander and Gann, 2010).
At the core of the open innovation concept is a simple yet gripping idea: knowledge flows
that transcend the walls of a company can allow firms to become more efficient and effec
tive, especially in their research and development efforts. This has several potential impli
cations for the management of innovation. First, it contests the assumption that the firm
should be the nexus of all innovation it eventually introduces to the market (see chapter 2
by Salter and Alexy). Second, opening up the innovation process has to be (p. 443) an
chored concomitantly in an overall innovation strategy that combines internal and exter
nal sources of innovation. Finally, implementing open innovation brings tremendous chal
lenges to people involved in R&D. It is not trivial to combine and integrate existing exper
tise within a company, and this challenge is further exacerbated when it also comes to
converting external knowledge to new products and services.
Whether or not open innovation is a new concept has been debated—after all, firms have
long used collaborative behaviour to improve the outcomes of their R&D efforts (see
chapter 23 by Dodgson). Both Allen (1983) and Nuvolari (2004), for example, have shown
that industries shared research findings and documents more than a hundred years ago.
Hargadon’s (2003) work on the Edison laboratory shows an intricate web of relations
across organizations. Freeman (1974) made a similar remark, suggesting that R&D labs
are not ‘castles on the hills’.
Even though the idea has a long range of precursors, two recent trends have drastically
increased the ease of collaborating across firm boundaries, rendering the topic of open
innovation potentially more important: globalization and the emergence of the Internet.
Both trends affect the ease of collaboration by reducing transaction costs, increase the
potential number of partners and the extent of the market, and lower barriers to commu
nication. Accordingly, in the last few decades, firms have been exposed to more options
for collaboration across their boundaries.
Importance of the Issue

Since its introduction in 2003, the term open innovation has left quite a mark on both the
business and the academic world. Ignoring academic volumes published on the topic (e.g.
Chesbrough, Vanhaverbeke, and West, 2006), Figure 22.1 plots the number of papers pub
lished annually in journals listed by Thomson’s ISI Web of Science, illustrating that the
number of papers has increased rapidly. In 2010, close to 100 papers were published on
the topic.
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Figure 22.1 Number of papers published on open in

novation
Note: The number of papers declines in 2011 as an

artifact of the construction of the database, which
was completed in October 2011.
This literature abounds with success stories of open innovation, but we have now moved
beyond anecdotal evidence. Recent research shows that a firm’s engagement in open in
novation positively affects its financial performance and market value (Stam, 2009;
Waguespack and Fleming, 2009). Also, it features prominently the need to include open
innovation activities strategically into larger business models—processes and practices
the firm employs to create and capture value—an issue central in Chesbrough’s original
conception (2006b) and extensions (Chesbrough and Appleyard, 2007), and built upon by
several subsequent authors (see chapter 21 by Massa and Tucci). Nonetheless, as we will
argue, there has been little scholarly work on the conditions under which open innovation
is a practical strategy, and how organizations can implement those practices. There are
clearly costs of both collaboration and coordination when a firm adopts open innovation
(Grant, 1996). Coordination costs stem from (p. 444) differences between partners when
innovation processes transcend organizational boundaries, and costs of competition arise
in protecting ideas from actors that can act opportunistically. It is therefore important to
consider both the advantages and the disadvantages of implementing open innovation, as
the tradeoffs reveal when this is the best strategy to pursue.
The concept of open innovation has also made a striking impact on the practitioner world.
For example, as a result of P&G’s renowned ‘Connect + Develop’ initiative, P&G nowa
days sources more than 50 per cent of innovations from outside its corporate boundaries.
GlaxoSmithKline’s ‘Centre for Excellence in External Drug Discovery’ manages a pipeline
of options on drugs in development by external parties that rivals its in-house pipeline in
size. Yet GSK has more than 10,000 employees in R&D; CEEDD has only about 20 (Alexy,
Criscuolo, and Salter, 2009).
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Research Themes
Even though the number of papers using the open innovation concept has increased, it
has been difficult to compare their findings because their interpretation of ‘open’ varies.
Dahlander and Gann (2010) extended the work of Gassmann and Enkel (2006), devising a
simple categorization based on the flow of knowledge and type of exchange, leading up to
the two-by-two matrix illustrated in Table 22.1. This table outlines two forms of inbound
innovation—Acquiring and Sourcing—as well as two forms of outbound—Selling and Re
vealing. (p. 445)
Table 22.1 Overview of types of openness
Inbound innovation Outbound innova

tion
Pecu Acquiring Selling

niary
Acquiring inventions and input to Out-licensing or sell

the innovative process through in ing products in the
formal and formal relationships market place
Non- Sourcing Revealing

pecu
niary
Sourcing external ideas and Revealing internal

knowledge from suppliers, cus resources to the ex
tomers, competitors, consultants, ternal environment
universities, public research orga
nizations, etc.
Source: Dahlander and Gann (2010).
Acquiring
Acquiring relates to buying inputs to the innovation process in the marketplace. Work in
this vein explores how openness can be understood by investigating how licensing and ac
quiring knowledge from outside constituents affect companies. The challenge is viewed
as one of combining the acquisitions of knowledge with internal expertise to search for
and evaluate potential inputs. In accordance with transaction cost economics (Williamson,
1975; Arora et al., 2001), firms will find that, sometimes, it might just be cheaper to li
cense or buy an existing and available outside technology than to develop it from scratch.
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Sourcing
Sourcing stems from how firms scan and use the external environment as input to the in
novation process. Scholars who use this lens focus on how firms explore their environ
ment as a complement to their internal knowledge production, which might in fact be lim
iting them in their quest for new ideas to use in innovation. First, a lack of assets, such as
skilled employees, cash, or machines and equipment, may constrain the solution space
from which the firm can choose (Chesbrough, 2003). Second, because of the evolutionary
nature of their knowledge base (Cohen and Levinthal, 1990; Kogut and Zander, 1992),
firms might look in vain in some areas for solutions which could be readily available in
others (Jeppesen and Lakhani, 2010), and their inclusion might be highly beneficial to the
firm (Rosenkopf and Nerkar, 2001). The story of the longitude prize provides a fitting ex
ample. A clockmaker beat astronomers, including Sir Isaac Newton, to the solution to the
measurement of longitude at sea (Sobel, 1995). Similarly, von Hippel’s work (1988, 2005)
shows that for a wide array of innovations, their functional source is not the focal firm
(manufacturer) but a downstream (user) or upstream (supplier) actor. In (p. 446) particu
lar, he notes the importance of lead users, pointing out how their foreshadowing general
market trends and developing of prototypes can assist corporations in designing new and
highly successful innovative products (see chapter 5 by Franke).
Laursen and Salter (2006) show that there are limits to the benefits from sourcing knowl
edge externally. They find that openness with respect to making use of external knowl
edge sources has a U-shaped effect on innovative performance. Their result highlights the
fact that openness may be advantageous to the firm but also raises the issue of the appro
priate degree of openness, by showing that both too little and too much sourcing from
outside may be detrimental to the firm.
Selling
This type of openness refers to how firms commercialize their inventions and technolo
gies through selling or licensing the resources they have developed to other companies.
Underlying this research is the idea that some companies have ‘Rembrandts in the attic’
that are unused (Rivette and Kline, 2000). By selling or licensing those through agree
ments, companies can increase their own profits while allowing technologies to be com
mercialized by someone more suitable. Some scholars argue that the potential of selling
technologies has not been fully exploited: Gambardella, Giuri, and Luzzi (2007) even sug
gest that the market for technology could be close to 70 per cent larger if some obstacles
could be overcome (see chapter 12 by Gambardella, Giuri, and Torrisi).
Revealing
Revealing proprietary knowledge will be beneficial if the firm can appropriate value from
its diffusion (von Hippel, 1988). In general, knowledge ought to be revealed selectively—
that is, only when it is advantageous to the firm (Henkel, 2004, 2006). Firms reveal
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knowledge strategically and at the same time appropriate the rents of other parts of their
business privately to gain advantages over their competitors (Chesbrough, 2006b).
Particularly for information technologies (Varian and Shapiro, 1999), sharing underlying
technological specifications is central to the generation of standards. The existence of a
standard might lead to an increase in the size of the market, thereby enlarging the pie
from which the firm can appropriate its piece (von Hippel, 1988; Varian and Shapiro,
1999; and see chapter 28 by Leiponen).
If the company defines (parts of) a standard—even if it is an open one—it is highly likely
that it includes parts that are beneficial to only that one company, either because only
this firm knows of them or because they are already optimally realized in the firm’s exist
ing products (Henkel, 2004). Spencer (2003) finds positive effects on the innovative per
formance of firms actively choosing to reveal some of their intellectual property (IP). She
argues in particular that a firm will do so in order to attract other organizations to
(p. 447) join its technological trajectory, which may help in both standard-setting and the
development of industry structure. Gawer and Cusumano (2002) observe similar behav
iour in Intel’s platform development strategy, which makes use of openness to establish
new markets and increase adoption of the PC platform in certain areas.
If one strong standard or a dominant one already exists, releasing related know-how can
make it part of the standard or at least increase compatibility of the standard with exist
ing intra-firm knowledge (Harhoff, Henkel, and von Hippel, 2003; Henkel, 2004). Such in
creased compatibility will create network effects that encourage diffusion and adoption
not only of the released know-how, but also of related innovations and second-generation
innovation built on it (e.g. Shepard, 1987; Farrell and Gallini, 1988). Information may also
be leaked strategically to commoditize layers of the product architecture in which the fo
cal firm is weak and to shift competition to layers where the firm has a competitive ad
vantage (Raymond, 2001; West, 2003).
Coupled Models: Combining Different Types of Openness
The preceding categorization distinguishes between types of openness, although they are
often combined in practice. But only a few studies have analysed how different types of
openness are interrelated (see e.g. Acha, 2007; van de Vrande et al., 2009), possibly be
cause of confusion about what openness entails. With a better understanding of different
types of openness, it is possible to discuss and analyse how they are interrelated in spe
cific initiatives that organizations adopt.
For instance, voluntarily revealing and sourcing ideas from the environment often go
hand-in-hand. Companies co-create new knowledge through forging and sustaining col
laboration with external partners. von Hippel (1988) argued that firms often trade knowl
edge to achieve mutual benefits if the rent a firm can expect from sharing is higher than
when it keeps the knowledge proprietary, especially when the knowledge holds little com
petitive advantage (Allen, 1983). This concept is formalized in Henkel’s (2005) model. It
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shows that when two firms voluntarily reveal developments of complementary technolo
gies, both firms’ profits and product quality can increase.
Furthermore, exchange of knowledge across organizational boundaries enables organiza

tions to benefit from the improvements made by other parties. Such inputs help organiza
tions to tailor existing and future products to the market, leading to faster product devel
opment and higher success rates (von Hippel, 1988; Dalle and Jullien, 2003). In addition,
if customers are allowed to make changes to products, they will be more likely to commit
fully to the product and to impactful improvements (von Hippel, 2001; Jeppesen and Fred
eriksen, 2006). In this way, the company receives knowledge that is often difficult to find,
transfer, or acquire otherwise, so-called ‘sticky information’ (von Hippel 1994). Also, peo
ple outside a company sometimes even do mundane tasks such as user support or docu
mentation (Lakhani and von Hippel, 2003). And finally, even in situations where the rele
vant knowledge is vital to the firm’s competitive advantage, (p. 448) know-how trading can
be beneficial. For example, two competitors, each of which needs the other’s technical
know-how, might decide to offer a joint bid for a government contract because they would
be unable to complete the respective technologies independently (von Hippel, 1988).
Companies often combine selling and acquiring as they seek to streamline their own R&D
processes. Unused technologies are sold to external partners that are better suited for
commercializing the technology, providing additional sources of revenue. On the flip side,
companies also acquire outside technologies they seek as inputs in the innovation
process. In all these cases the underlying rationale is to find the company most suitable
to commercialize a technology.
Contingencies of Open Innovation: When is it

Beneficial?
Managers pose the question about open innovation: Does it pay off? Researchers ask a re
lated question: Under what conditions is open innovation worth pursuing? The answers to
those questions require an understanding of contingent factors that affect whether and
when openness is beneficial for the organization. Some of these contingencies are inter
nal to the firm, others external, a distinction we use below.
Internal Contingencies
Cognitive Bias—Not Invented Here

To find the best seed for innovation is not easy because people who work in organizations
are subject to cognitive bias. People simply like what they are. Employees inside an orga
nization often reject innovations from the outside because they challenge established wis
dom inside the company: the ‘not invented here syndrome’ (Katz & Allen, 1982).
Page 7 of 22

The not invented here syndrome is often an outcome of repeated external collaboration
with unsatisfying outcomes (Alexy, Criscuolo, and Salter, 2012). In particular, firms at the
forefront in a technology often struggle to identify external parties who can add value to
their innovative efforts and consequently develop a negative attitude towards external
collaboration. In other cases, ‘not invented here’ is caused by a fear that working with ex
ternal partners will expose individual weakness, and that associated organizational
change will disrupt individuals’ work routines and even put their jobs at risk. In support
of this argument, Alexy, Henkel, and Wallin (2013) find that less-skilled employees exhibit
higher degrees of skepticism towards open innovation. Their reluctance implies that fur
ther educating people inside the company not only increases the (p. 449) human capital,
but also employees’ ability to recognize and work with important knowledge from the out
side.
Skillsets
Alexy, Henkel, and Wallin (2013) show that engagement in open innovation trickles down
to the micro-level of how people organize inside companies. Some tasks within the R&D
processes undergo significant changes in both the skills required to execute them and the
degree of control individuals have to share with outside actors. These changes are
strongest for people whose job roles are of ‘executing’ character, such as developers in
software, R&D engineers, and project managers. Consequently, companies intending to
engage in open innovation need to address potential concomitant employee concerns.
They may choose, for example, to adapt existing reward systems to reflect the different
nature of project planning and execution necessary to benefit from knowledge that stems
from outside the organization. Other organizations find it easier to adapt their HR poli
cies and hire external people with the necessary skills or train their internal staff to de
velop them.
Attention
Laursen and Salter (2006) depict open innovation as a search process. Companies can
use various sources; each of the search channels provides different sources of informa
tion but requires different norms of exchange. Thus, while each source brings novel infor
mation, accessing it comes at a cost. Companies that use more search channels are more
innovative, but some organizations spread the attention of the top managers and R&D ex
perts too thinly and thus perform worse (Laursen and Salter, 2006).
Many companies seek to tap existing outside knowledge by running so-called unsolicited
idea submission processes, but struggle because of attention-related issues. Specifically,
although such processes often succeed in attracting external ideas, existing company se
lection processes are overstrained by the increase, preventing any improvement in over
all innovation performance (Alexy et al., 2012). Simply put, while it seems as if open inno
vation answers the problems of limited reach and paucity of ideas available inside the
firm, it may only replace them with an equally complex problem of selecting the right
ideas.
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A potential solution may be to involve specialist intermediaries to decrease transaction

costs. Several authors describe how companies such as InnoCentive and NineSigma sup
port businesses by presenting their internal problems to a broad range of knowledgeable
outside parties and facilitating the transfer of only a selected number of highly probable
suggested solutions (Jeppesen and Lakhani, 2010). In doing so, they may also assist in
solving the issue of contamination described below.
Compatibility
One of the main sources of coordination costs stems from a lack of compatibility between
partners which can affect both content (matching solutions to problems) as well as struc
ture (different languages and norms of exchange).
Regarding inbound open innovation, the higher the content compatibility of exter
(p. 450)
nal knowledge—the better external knowledge fits current or anticipated future needs—
the higher its potential value to the firm. Thus, the general availability of an external
partner providing such matching knowledge (universities doing research in the area, for
example) is a mandatory precursor for inbound innovation to be valuable. Second, the
greater the structural compatibility—that is, the more closely aligned are the parties’ in
ternal and external structures and the language used to comprehend and describe certain
problems and solutions—the less effort the firm will need to invest in making external
knowledge usable and the higher will be the potential net benefit resulting from engaging
in open innovation.
For outbound open innovation, content and structural compatibility are important in iden
tifying firms who would be suitable recipients (i.e. buyers) of the firm’s internal knowl
edge. The better internal knowledge fits an external party’s needs and the smaller the
cost to them to make the knowledge usable for themselves, the more willing they should
be to adopt it, and the higher the price they should be willing to pay to acquire or license
it from the focal firm. Notably, if the focal firm realizes that no external party has a need
for its knowledge, or that costs of adoption are prohibitive, internal measures can be tak
en to increase the attractiveness of the to-be-opened knowledge to outside parties. Many
software firms, for example, provide additional documentation or toolkits together with
the actual software they open up in order to show potentially multifaceted applications of
their software to external parties and smooth the adoption process.
Boundary-Spanning and Internal Legitimacy

Much of the early work on boundary-spanning (Allen, 1977; Tushman and Scanlan, 1981;
Ancona and Caldwell, 1992) analysed how people within R&D labs forged connections ex
ternally. They found that ‘communication stars’ who were connected with people both in
side and outside the organization were better able to innovate. They gained fresh insights
from engaging with outsiders, while retaining credibility inside the organization, to bring
ideas to fruition.
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Cultivating broad networks within as well as outside an organization is not easy and has
the potential for people to spend more time on forging connections than getting work
done. Time is a scarce resource: seeking more external engagement can have unintended
consequences if it distances employees from their own company. Firms need to ensure
that knowledge and partnerships identified by their outside scouts are in fact being har
nessed by the internal organization, and then to build the necessary absorptive capacity
(Cohen and Levinthal, 1990).
Complementary Assets
Complementary assets are needed to commercialize an innovation, but they do not in
clude the assets directly tied to the innovation. They include access to distribution, ser
vice, and manufacturing facilities and often explain who profits from innovation (p. 451)
(Teece, 1986). In open innovation settings, complementary assets are particularly impor
tant because their ownership radically mitigates concerns about loss of intellectual prop
erty (Dahlander and Wallin, 2006; Henkel, 2006). Regarding outbound innovation, if a
firm holds complementary assets, releasing internal knowledge related to them might ul
timately be profitable.
Sometimes sharing internal knowledge fuels diffusion in such a way that the value of pos
sessing complementary assets increases more than the loss the firm incurs from leaking
to competitors. On the other hand, if a firm has weak complementary assets it may be
forced to enter relationships with partners enjoying stronger positions, evidenced by the
central importance of alliances in the biotechnology industry (between small biotechnolo
gy and big pharmaceutical firms). On the inbound side, firms holding strong complemen
tary assets may undertake systematic identification of external parties that need them to
increase the utilization and profitability of existing investments.
External Factors
Appropriability Regimes and the Problem of Contamination

Teece (1986) describes the appropriability regime as ‘environmental factors, excluding
firm and market structure….The most important dimensions of such a regime are the na
ture of the technology and the efficacy of legal mechanisms of protection’ (Teece, 1986:
287). Legal mechanisms in particular may be crucial in the establishment of formal rela
tionships. The more strongly enforced the legal mechanisms that define ownership over
intellectual property along clearly demarcated boundaries, the easier it will be for two
parties to contract over the exchange of innovation. Many firms even refuse to speak to
externals who have not filed for intellectual property protection, because their ideas may
‘contaminate’ internal R&D (Chesbrough, 2006b; West, 2006; Alexy, Criscuolo, and Salter,
2012).
The problem here is that if no documentation or boundary exists to delineate what exactly
the external has to offer, it will be difficult in the case where collaboration does not
proceed for the firm to prove in the future that the external knowledge did not influence
internal R&D. And in those situations where firms decide in favour of collaboration, IP
Page 10 of 22

rights are important to facilitating negotiations by mitigating the paradox of disclosure—

the problem that once valuable knowledge is disclosed to facilitate collaboration, its mar
ket price drops to zero—and to enable transfer of ownership by a simple trade of the IP
right for money.
Issues such as these clearly show that markets for technologies depend on the existence
of tradable assets demarcated and protected by IP rights. Nevertheless, some fields re
ject private ownership of knowledge, creating an issue of moral repugnance (Roth, 2008):
‘open science’ (Gans and Stern, 2010) and ‘open source software’ (p. 452) (O’Mahony,
2003) are spaces where some actors reject the establishment of tradable IP rights, mak
ing financially based transactions difficult to achieve.
Whereas strong IP regimes are typically positively related with pecuniary forms of ex
change, weak IP regimes can facilitate more informal means of interaction. von Hippel
and von Krogh (2003) submit that an inability to protect knowledge developed in-house
because of weak appropriability regimes may spur companies to identify strategies in
which the selective disclosure of such knowledge will be to their advantage.
Cumulative Nature of Knowledge

Most early work on open innovation focused on high-technology industries with a signifi
cant manufacturing component, and on the pharmaceutical and biotechnology industry.
This selection, as well as the general importance of collaboration in these industries, re
flects that the areas of technology they rest on build on a science base that is cumulative.
Invention is usually built on the current knowledge base, allowing inventors to ‘stand on
the shoulders of giants’ when they make progress.
These processes of knowledge production naturally lend themselves to joint inventive ac
tivity because knowledge flowing between actors with different but related knowledge
bases will lead to an increased likelihood of scientific advancement. The innovation
process is viewed as a box of Lego, where the child with the greatest diversity of pieces
can recombine them into the most novel outcomes.
More recent work has begun to shed light on open innovation in project-based industries
(Davies, Gann, and Douglas, 2009) as well as the services sector (Chesbrough, 2011),
highlighting that principles of open innovation should be applicable to more business sec
tors. When the knowledge frontier is less cumulative, it becomes more difficult to divide
tasks, resulting in significant coordination problems.
Technological maturity (Abernathy and Utterback, 1978) also plays an important role in
open innovation (Christensen, Olesen, and Kjær, 2005). The earlier in its life cycle a tech
nology is, the more likely that rallying a crowd behind one technology can give one com
pany a lead in establishing a dominant design—but sometimes an existing dominant de
sign is displaced through strategic engagement in open innovation (Varian and Shapiro,
1999). In turbulent technology environments, companies will often struggle to identify
partners on their journey. On the reverse side, when stormy seas have settled and tech
Page 11 of 22

nologies become well understood, recognizing suitable collaborators and establishing mu
tually beneficial partners will be relatively easy.
Type of Technological Advance

An extensive literature points to the fact that many, perhaps most, radical innovations
have been made not by established companies (Schumpeter, 1942), but by individual in
ventors, start-ups, or university researchers, or as part of government programmes. The
Internet is a popular example.
Existing companies, on the other hand, very often specialize in improving the technology
they already have in-house—to use March’s (1991) terminology, they (p. 453) exploit
rather than explore—and few companies have the skill to do both, especially at the same
time. Here, open innovation may be a useful pathway to allow companies to continuously
renew themselves through new technologies (Dodgson, Gann, and Salter, 2006). Practices
such as the lead user method (von Hippel, 1988) involve external actors in the design of
novel and imaginative products and services. GSK’s CEEDD milestone-based approach to
collaboration is a further design model to harness the environment as a source of radical
innovation (Alexy, Criscuolo, and Salter, 2009). And Intel has developed ‘Intel Research’
as an open-innovation-based sensor network to discover nascent trends around its Silicon
platform (MacCormack and Herman, 2004).
If designed appropriately, open innovation activities can also be used to sustain incremen
tal innovation. The continuous and joint development of open source software platforms
such as the Apache web server or the Linux operating systems, for example, allows com
panies such as IBM to save hundreds of millions of dollars each year.
Number of Partners Available

Implicit in much reasoning on open innovation is that potential partners are just ‘out
there’ ready and waiting to collaborate with other companies. Any company that has
sought to collaborate with other partners knows this is a cumbersome task. The focal or
ganization may not be an attractive collaboration partner, leading companies to invest in
internal R&D to gain a ‘ticket of admission’ to a collaboration network (Nelson, 1991).
One further problem is that companies often do not know who holds ‘matching’ knowl
edge (i.e. compatible in its content and structure), such as solutions to the problems they
are facing. Here, intermediaries have emerged to bring together two parties to their mu
tual benefit. In contrast, companies that have a rough understanding of where to look will
need to ask themselves what it is they are actually looking for when they are seeking ex
ternal knowledge. Is it one specific partner with certain assets or attributes? Or is it
rather the ‘crowd’, from which companies want to identify average opinions, general
needs, or market trends? Depending on these choices, extant research has made clear
that different patterns of interaction and IP protection will be mandated to achieve in
creased innovation performance (Alexy, Criscuolo, and Salter, 2009).
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Discussion
Open innovation promises to leverage internal R&D and allow organizations to benefit
from engagement with external partners. The question is why some companies are more
successful than others in implementing open innovation?
While the early literature on open innovation argued that being open was generally bene
ficial, more recent work has moved on to study under what specific conditions (p. 454)
openness can contribute to improving firms’ innovative performance. This literature has
looked at contingencies both internal and external to firms. In turn, these contingencies
will also determine their decision whether or not to engage in related practices. We have
built on related work on the topic and specified some of these contingencies, and it is our
hope that future work will refine them further.
Future Research on the Phenomenon
A logical next step is to improve our understanding of how firms active in this new, open
environment can be managed—specifically, which ‘standard’ management practices
(known from closed innovation) apply ‘as is’ and which do not work? Which can be adapt
ed? Which new ones have to be developed?
Incentives function differently for people outside an organization. These people are often
motivated to take part, but for reasons different from members of the focal organization,
suggesting that one cannot implement the same practices as used within organizations.
The role and effect of monetary rewards differ widely across varying types of arrange
ments. People solving problems for firms via the intermediary InnoCentive expect pay
ment, for example, and money may be seen as a prime motivator (Jeppesen and Lakhani,
2010). For problem-solvers in a similar intermediary, TopCoder, however, status within
the peer group is a far more important motivator (Boudreau, Lacetera, and Lakhani,
2011). In open source communities, financial rewards may even have negative effects un
der certain conditions (Alexy and Leitner, 2011). In short, providing incentives to people
outside the corporate boundaries is much more complex than to internal actors. It re
quires a lot of careful planning and deliberation—the same should apply to other ‘closed
innovation’ management practices.
The competitive dynamics of being open is poorly understood. Although existing work has
identified the crucial importance of this question (Christensen, Olesen, and Kjær, 2005),
the specific effect of being open today on a company’s future competitive position needs
further work. Although some research describes how companies seek to benefit in the
present from open and hybrid business models (Chesbrough, 2006b; Bonaccorsi, Giannan
geli, and Rossi, 2006), it is unclear how this translates to competitive advantage in the fu
ture. Competitive dynamics also surface between outside actors that participate in the fo
cal firm’s open innovation initiatives. Boudreau and Lakhani (2009), for example, show
that outcomes are substantially affected by whether open innovation activities are de
signed to facilitate collaboration or competition between contributors.
Page 13 of 22

Careful deliberation is important when one considers being more open. Although some
firms gain from opening up, it remains unclear that others can and will reciprocate such
moves. Opening up innovation processes promises to involve a broad range of external
people, speeding up innovation. But coordinating between external people with different
interests who are also beyond hierarchical reach is a challenge for many organizations.
To balance and reach agreement among a wide array of partners requires (p. 455) atten
tion and a deep understanding of each others’ needs. These challenges should not be triv
ialized, especially because alliances between companies, as well as interpersonal relation
ships between individuals, often wither and die (Burt, 2002; and see chapter 23 by Dodg
son).
More research is needed on the competencies and practices companies need to imple
ment in-house to benefit from being open. Questions arise about suitable models for al
lowing individuals and departments to collaborate externally, where the famous slack
models propagated by firms such as 3M or Google have caught the public’s attention, but
have not been scrutinized for their efficacy and efficiency. It is unclear whether these suc
cess stories translate into benefits for more ‘average’ companies. The expectations of job
and skill profiles are also changing in an open environment—how much should individu
als collaborate? What positions should they hold in their companies? How can these peo
ple bring externally acquired knowledge into the firm? And finally, there is the crucial is
sue of aggregation, linking to work on absorptive capacity (Cohen and Levinthal, 1990):
How does the external and internal engagement of all actors in the organization actually
combine to lead to beneficial outcomes for the focal organization?
Improving Management Theory
The number of papers on the topic has increased at a fast rate, but it does not constitute
a field on its own. It is therefore important to discuss how it links to other streams of lit
erature and find points of common interest (see Dahlander and Gann, 2010; Bogers and
West, 2012). We elaborated on contingencies that explain when certain open innovation
strategies are beneficial to a focal firm. A comprehensive explanation of when and to
what extent firms share valuable resources with others will enhance explanatory power.
Sustained and substantial engagement in open innovation may be somewhat counterintu

itive as firms increase the number of external actors they depend on for innovative suc
cess. Some recent research has, however, argued that the strategic use of open innova
tion allows changing the nature and potential impact of such external constraints (Alexy
and Reitzig, 2013). Other work describes solutions to the problem of competing institu
tional logics when open and closed innovation clash (Perkmann, 2009). We encourage
more research on questions such as how open innovation is shaped by institutional pres
sures, as well as how the strategic use of open innovation allows companies to shape in
stitutions around them.
Open innovation may be seen as a challenge to established classical theories of manage

ment. The resource-based view emphasizes that resources have to be rare, inimitable and
Page 14 of 22

non-substitutable to create competitive advantage (Barney, 1991; Grant, 1991). An impli

cation of open innovation is that many of the most essential inputs to the innovation
process are neither owned nor controlled by the firm. Yet some firms are able to reap re
wards from using novel ways of extending and leveraging their resource base. More work
is needed for scholars of open innovation to connect the idea to these theories of (p. 456)
management. Relatedly, transaction cost economies explains when activities will be orga
nized through market transactions or within the organization (Williamson, 1975). But
openness is more than extending the markets for technology and also includes informal
interactions with external participants (Dahlander and Gann, 2010). Continuing personal
interactions are often required to transfer complex knowledge in order to develop innova
tions. The literature on openness has been criticized for not paying enough attention to
its implications for other theories, and there are many opportunities to do this.
Managerial Implications
Open innovation places fundamental new requirements on the management of innova

tion. Firms that want to engage successfully in open innovation have to develop and hone
new capabilities or adapt and extend existing ones. First and foremost, managers need to
foster a culture of openness that accepts that the most important ideas for the company
often originate from the outside. Incentive structures and career paths have to be adapt
ed to encourage individual employees to look for external commercialization opportuni
ties for ideas that do not match the firm’s trajectory. For instance, in some companies em
ployees receive bonuses for the number of patents they produce without considering their
business relevance. As a result, many inventions are put on the shelf. This can potentially
be overcome by rewarding individuals for the revenues their inventions generate, even
from licensing to other organizations. Second, engagement in open innovation presents
companies with a plethora of options for collaboration. It is then critical for the company
to winnow down the harvest of opportunities by carefully selecting the most promising
ones. Having access to a broad range of external sources of innovation is only beneficial
to the extent that companies have the ability to focus on a few. Third, much research sug
gests that building and cultivating both internal and external networks is important to de
veloping innovations. Internal ties increase the awareness of the organization’s needs and
build legitimacy among colleagues, whereas external ones are more likely to tap into nov
el sources of knowledge (Dahlander et al., 2011). If organizations map the internal and
external networks of their employees (Criscuolo et al., 2007), they can be more systemat
ic about how they compose teams consisting of some individuals with strong internal and
others with strong external networks. On a final note, it is clear that open innovation can
disrupt the routines of managers and regular R&D employees. To ingrain the importance
of open innovation strategies in employees’ mindsets will require high upfront as well as
continuous smaller investments by the company.
Page 15 of 22

Conclusion
The coexistence of internal and external idea generation and selection and internal and
external commercialization of knowledge holds great promise for firms and other (p. 457)
contributors to innovation, whether they be individual inventors, universities, research
centres, or governments. As we have argued, this has implications for the management of
innovation, including our understanding of where innovation comes from, how it is
brought to practice, as well as managed on a daily basis. The questions of when and how
to engage in open innovation are interwoven with other aspects of the management of in
novation discussed elsewhere in this Handbook.
With ever-increasing interconnectedness between and among these different actors, we

would expect that open innovation will begin to permeate the activities of even more
firms. We would expect the greatest increase in ‘new’ users of open innovation practices
to come from small firms, from non-high-tech settings, and probably also from geographic
regions on which current academic work does not necessarily focus: the developing and
underdeveloped world. The last point in particular will raise new and interesting ques
tions with regard to the institutional environments and legal frameworks prevalent in
these countries, and how those might affect open innovation activities in turn. In short,
we remain convinced that there will remain ample opportunity to study interesting and
relevant questions about open innovation to gain valuable insights for theory and practice
about this important topic over the years to come.
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New York, NY: Free Press.
Oliver Alexy
Oliver Alexy, Professor of Strategic Entrepreneurship, School of Management, Tech

nical University of Munich.
Linus Dahlander
Page 21 of 22

Linus Dahlander, Associate Professor, European School of Management and Technol

ogy.
Page 22 of 22

Managing Open Innovation

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Print Publication Date: Jan 2014

Abstract and Keywords

Keywords: open innovation, contingencies, openness

Subscriber: University of Exeter; date: 22 January 2022

Importance of the Issue

Subscriber: University of Exeter; date: 22 January 2022

Figure 22.1 Number of papers published on open in­

Note: The number of papers declines in 2011 as an

Subscriber: University of Exeter; date: 22 January 2022

Table 22.1 Overview of types of openness

Inbound innovation Outbound innova­

Pecu­ Acquiring Selling

Acquiring inventions and input to Out-licensing or sell­

Non- Sourcing Revealing

Sourcing external ideas and Revealing internal

Source: Dahlander and Gann (2010).

Subscriber: University of Exeter; date: 22 January 2022

Subscriber: University of Exeter; date: 22 January 2022

Coupled Models: Combining Different Types of Openness

Subscriber: University of Exeter; date: 22 January 2022

Furthermore, exchange of knowledge across organizational boundaries enables organiza­

Contingencies of Open Innovation: When is it

Cognitive Bias—Not Invented Here

Subscriber: University of Exeter; date: 22 January 2022

Subscriber: University of Exeter; date: 22 January 2022

A potential solution may be to involve specialist intermediaries to decrease transaction

Boundary-Spanning and Internal Legitimacy

Subscriber: University of Exeter; date: 22 January 2022

Appropriability Regimes and the Problem of Contamination

Subscriber: University of Exeter; date: 22 January 2022

rights are important to facilitating negotiations by mitigating the paradox of disclosure—

Cumulative Nature of Knowledge

Subscriber: University of Exeter; date: 22 January 2022

Type of Technological Advance

Number of Partners Available

Subscriber: University of Exeter; date: 22 January 2022

Future Research on the Phenomenon

Subscriber: University of Exeter; date: 22 January 2022

Improving Management Theory

Sustained and substantial engagement in open innovation may be somewhat counterintu­

Open innovation may be seen as a challenge to established classical theories of manage­

Subscriber: University of Exeter; date: 22 January 2022

non-substitutable to create competitive advantage (Barney, 1991; Grant, 1991). An impli­

Open innovation places fundamental new requirements on the management of innova­

Subscriber: University of Exeter; date: 22 January 2022

With ever-increasing interconnectedness between and among these different actors, we

Subscriber: University of Exeter; date: 22 January 2022

Allen, R. C. (1983). ‘Collective Invention’, Journal of Economic Behaviour and Organiza­

bridge, MA: MIT Press.

Burt, R. S. (2002). ‘The Social Capital of Structural Holes’, in M. F. Guillén, R. Collins, P.

Chesbrough, H. (2006a). ‘Open Innovation: A New Paradigm for Understanding’, in H.

Subscriber: University of Exeter; date: 22 January 2022

Cohen, W. M., and Levinthal, D. A. (1990). ‘Absorptive Capacity: A New Perspective on

Farrell, J., and Gallini, N. T. (1988). ‘Second-sourcing as a Commitment: Monopoly Incen­

Grant, R. M. (1991). ‘The Resource-based Theory of Competitive Advantage: Implications

Subscriber: University of Exeter; date: 22 January 2022

Jeppesen, L. B., and Frederiksen, L. (2006). ‘Why Do Users Contribute to Firm-hosted

Jeppesen, L. B., and Lakhani, K. R. (2010). ‘Marginality and Problem-solving Effective­

Figure 22.1 Number of papers published on open in

Inbound innovation Outbound innova

Pecu Acquiring Selling

Acquiring inventions and input to Out-licensing or sell

Furthermore, exchange of knowledge across organizational boundaries enables organiza

Sustained and substantial engagement in open innovation may be somewhat counterintu

Open innovation may be seen as a challenge to established classical theories of manage

non-substitutable to create competitive advantage (Barney, 1991; Grant, 1991). An impli

Open innovation places fundamental new requirements on the management of innova

Allen, R. C. (1983). ‘Collective Invention’, Journal of Economic Behaviour and Organiza

Farrell, J., and Gallini, N. T. (1988). ‘Second-sourcing as a Commitment: Monopoly Incen

Jeppesen, L. B., and Lakhani, K. R. (2010). ‘Marginality and Problem-solving Effective

March, J. G. (1991). ‘Exploration and Exploitation in Organizational Learning’, Organiza

O’Mahony, S. (2003). ‘Guarding the Commons: How Community Managed Soft

Spencer, J. W. (2003). ‘Firms’ Knowledge-sharing Strategies in the Global Innovation Sys

West, J. (2006). ‘Does appropriability enable or retard open innovation?’ in H. Ches

Oliver Alexy, Professor of Strategic Entrepreneurship, School of Management, Tech

Linus Dahlander, Associate Professor, European School of Management and Technol