Wang and Islam Frontiers of Business Research in China (2017) 11:3

DOI 10.1186/s11782-017-0006-6
Frontiers of Business
Research in China

RESEARCH Open Access

Construction of an open innovation

network and its mechanism design for
manufacturing enterprises: a resource-
based perspective
Haijun Wang1,2* and Sardar M. N. Islam2

* Correspondence:
[email protected] Abstract
1
School of Management, Shenyang
University of Technology, Shenyang Innovation is the engine of development for enterprises, and there is an increasing
110870, China trend to adopt an open innovation strategy. However, how to manage external
2
Decision Sciences and Modelling resources in an open, collaborative and complementary manner, and in a shared
Program, Victoria University, Victoria
8001, Australia environment that will yield the greatest networking effects, it is a challenging task.
Because there is no such a satisfactory model for an open innovation strategy that
combine operational mechanisms with the management of, external resources. Thhis
article tries to fill the gap by adopting a resource-based perspective to construct an
overall open innovation (OOI) business model. In this model, external resources are
classified as industrial and non-industrial entities, to enable the identification of the
interaction methods between manufacturing enterprises and external resources. The
management of external resources involved in a Technology Open Innovation (TOI)
cycle is given particular attention that includes: 1) the classification of the external
resources of a TOI, 2) the general mechanisms extracted to promote qualified
resources in and unqualified resources out, and 3) a business model to conceptualize
the collaboration between enterprises and external resources. A case study of TOI is
also provided to empirically verify its feasibility. This paper contributes to the
literature by providing an original operational model and mechanism design for an
open innovation strategy that is capable of managing external resources effectively.
Keywords: Manufacturing enterprise, Open innovation, Resource dependence,
External resources, Mechanism

Introduction
With the advent of the internet age, manufacturing enterprises face new challenges
and opportunities in the competitive globalized local and global market. Driven by the
rapid development of market globalization, manufacturing enterprises must make
greater efforts to fulfil individual demands from the market by utilizing global
resources and through open innovation. Since (Chesbrough 2003) first presented the
concept of open innovation, the study of open innovation has become increasingly
popular amongst academics and practitioners alike. Open innovation is defined as the
process of strengthening the interaction and collaboration of multiple partners
involved in a business ecosystem, to jointly deliver an innovative product or solution.
© The Author(s). 2017 Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International
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Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 2 of 21

This means that successful open innovation partnerships will be useful for exploring
meaningful and innovative solutions to satisfy customers’ requirements. Moreover, the
sourcing, integration and development of products and business model innovations
through “win-win” external partnerships are of great interest to manufacturing enter-
prises, to capture the maximum commercial value of their investments (Muhdi 2011;
Nakagaki et al. 2012).
At present, a large number of manufacturing enterprises from different industries,
such as consumer goods, electronics, and equipment have benefited greatly from the
adoption of open innovation strategies to enrich their internal innovation processes
(Serrono and Fischer 2007). Many of these companies compete to win through the
implementation of an open innovation strategy, cooperating with various partners in a
value chain—including universities and institutes, and even other enterprises—by
flexibly opening up to external partnerships and placing increasingly reliance on their
collaborations with external resources (Etzkowita 2008; Leydesdorff 2003). A good
case in point is Procter & Gamble’s innovation practice (Huston and Sakkab 2006),
whose success is attributed largely to innovative collaborations with external
partners, whereby roughly 50% of Procter & Gamble’s new products now originate
from outside the parent company. Classifying innovative resources and integrating
them into an open innovation strategy has generally been considered too compli-
cated a problem for manufacturing enterprises, and hence, this issue has not been
adequately studied.
Therefore, the objective of this paper is to develop a new model for open innovation.
The research questions of this paper consist of (1) what types of external resources
could be identified to facilitate the development of open innovation? (2) what sort of
business model is needed to develop the collaboration between manufacturing
enterprises and external resources during an open innovation process? (3) how can a
manufacturing enterprise adopt a certain mechanism to manage those external
resources effectively?
This research makes several contributions to improve the modelling of an open
innovation strategy that can enhance the innovative capabilities of manufacturing
enterprises based on the existing research. First, a novel overall open innovation model
is constructed. Second, the technology open innovation cycle is discussed, including
the array of external resources and mechanisms to manage the external resources, and
a business model in conjunction with a case study is presented.
This paper is structured as follows: Critical literature review and motivation for the
study section discusses the research background and the motivation for the present
study; Theoretical foundation of an open innovation strategy section provides a
theoretical foundation for the proposed open innovation strategy. In Open innovation
business model section, a business model for the overall open innovation is presented;
while in Management of external resources in an open innovation system section,
external resources are firstly classified and the mechanisms used to manage these
external resources are then detailed. A business collaboration model of open innovation
technology is discussed in A business collaboration model of the TOI section. A case
study section presents a case study, focusing on the open innovation practice of a
typical Chinese manufacturing enterprise. The conclusions of the study are presented
in Conclusion section.
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 3 of 21

Critical literature review and motivation for the study

Open innovation is defined as any interaction and collaboration between a manufacturing
enterprise and its external resources. The pioneering open innovation perspective
indicates that open systems are currently more applicable than closed systems.
(Chesbrough 2003) suggests that closed innovation features no contact with any external
environment until the product developed by the closed innovation system eventu-
ally becomes no longer sustainable, and requires upgrading support from external
resources. Moreover, Chesbrough et al. (2014) describes the case study of Chez
Panisse implementing an open innovation strategy with stakeholders, in particular,
how the enterprise built a global ecosystem that shares knowledge, encourages
individuals’ growth, and embeds trust among participants. Because a new product
development is a process that links technology and customers’ needs (Dougherty
1992), it is necessary to unify the knowledge related to both the technology and
the customers. As far as we understand, open innovation activities occur at various
lifecycle phases of products and vary with regards to their content, the risk
involved in developing and manufacturing marketable products, and in the speed
of bringing such products to the market (Nambisan and Sawhney 2007). Therefore,
since marketplace dynamics have led to an increased interest in the “open
innovation” paradigm; enterprises are driven to accelerate their internal innovations
with the help of external resources (Chesbrough 2007).
Following Chesbrough’s contributions, there has been an increase in the literature on
open innovation; and in some of these works, scholars have analyzed the influence of
an enterprise’s R&D capacity on its motive to open up its innovation system (Todorova
and Durisin 2007). This indicates that an enterprise’s internal capabilities always deter-
mine the extent to which it opens up its innovation system and that enterprises with
higher R&D capabilities are more receptive to external resources (Zhou and Wu 2010).
Additionally, when it comes to looking for external resources, these enterprises are
more proactive, when compared to enterprises with lower R&D capacities. In contrast,
enterprises without such capacity have been hindered by their circumstances, and have
failed to open their innovation systems to external resources (Rothaermel and
Alexandre 2009). The results also indicate that the more innovative firms tend to be
more interested in collaborating with universities and research institutes. According to
Etzkowitz and Leydesdorff’s triple-helix model (2008; 2003), a university normally con-
centrates on the study and dissemination of scientific and technological knowledge
which is vital for industrial innovation. Moving forward, university-industry relation-
ships under an open innovation scenario are further studied (Ivascu et al. 2016;
Minshall et al. 2016), which helps answer how industries collaborate with universities
to deal with problems that cannot be solved individually. Nevertheless, external
resources and enterprises often have different perceptions pertaining to certain as-
pects of collaboration, which can lead to a lack of confidence and communication
problems.
In recent years, communication between various businesses/enterprises and those
undertaking academic studies have gradually extended the scope of open
innovation. IBM reportedly opened a supply chain innovation center in China
(IBM Press Room, 2008), collaborating with companies to develop new supply
chain solutions. Meanwhile, the center also showcases and leverages existing
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 4 of 21

industry solutions to help companies expand and grow their integrated supply
chain capabilities. (Sakamoto et al. 2012) discusses the use of open innovation and
collaborative networks as a resource to create value and increase competitiveness
in the supply chain. (Nelli 2013) studies the adoption of open innovation practices
during different value chain activities, and measures their effects on the product
and innovation processes of small and medium-sized manufacturing companies,
which expand the scope of open innovation beyond the focus of research and
development. A supplier is regarded as an important source of external resources
to accelerate open innovation. In particular, Early Supplier Involvement (ESI) is
regarded as a form of vertical collaboration between the supply chain partners, in
which a manufacturing enterprise integrates a supplier, with a qualified proven
performance history (defined as the strategic supplier in this article), at an early
stage of the New Product Development (NPD) process (Mikkola and Skjøtt-Larsen
2006). Moreover, the supplier, by being involved at the early stage of the R&D
process, can bring useful knowledge about how to improve the new product’s qual-
ity, facilitate its manufacturability, or suggest ideas that strengthen the performance
of the NPD process (Sivadas and Dwyer 2000; Zhao and Lavin 2012).
As far as the management mechanism for external resources is concerned,
(Zhang and Chen 2008) presents a resource management framework and suggests
that resources with innovative capacities be maintained and updated dynamically to
help create an innovation resource pool. Scholars have suggested that a future
research agenda should delve into enterprises’ incentives to exchange knowledge
(Erden et al. 2012; West et al. 2006). In particular, Gambardella and Panico
(Gambardella and Panico 2014) shows that these incentives can be restored by
empowering the weaker party to make decisions during the research process, and a
stylized model has been presented to formalize open innovation. In addition, he
studies the governance of collaboration, particularly how the parties allocate
property rights, and the rights to make decisions during the research process.
Regarding the mechanism design for the management of suppliers, (Laffont and
Tirole 1988) presents the pioneering incentive contract theory, and suggests that it
is necessary for a manufacturer to check the capability of a supplier to break the
supplier’s deliberate self-protection and avoidance of responsibility. Moreover,
(Laffont and Tirole 1993) points out that a quality guarantee deposit or penalty
could be asked for, to reinforce the constraint function towards suppliers. In many
situations, suppliers are not able to satisfy manufacturers’ demands due to short-
ages of materials, key parts and so on. Hence, capacity allocation mechanisms are
proposed, to deal with the gap between suppliers’ capacities and customers’ de-
mands (Cachon and Lariviere 1999a, b).
Despite a growing interest in the study of open innovation, the existing studies
have some limitations, such as concentrating largely on either the R&D or the
supply chain stage. Moreover, there is a scarcity of effective evidence supporting
the management of external resources to fuel manufacturing enterprises’ innova-
tiveness. The objective of this paper is to explore open innovation in a broad scope
based on a new model, using empirical studies to explore the mechanism for
managing external resources. Therefore, this paper makes a good contribution to
the literature on open innovation strategy.
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 5 of 21

Theoretical foundation of an open innovation strategy

Resource dependence theory
Resource Dependence Theory (RDT) has become one of the most influential
theories in organizational theory and strategic management. The need for exter-
nal resources, mainly covering funding, human resources, materials and informa-
tion, makes organizations potentially dependent on their external resources. RDT
characterizes a corporation as an open system, dependent on contingencies in
the external environment (Pfeffer and Salancik 1978). RDT recognizes the influ-
ence of external factors on organizational behaviour, and although constrained
by the context, executives can react to reduce any environmental uncertainty or
dependency. In particular, the behaviour of the external resources will be
constrained, so that they correspond to organizational effectiveness and the
organizational environment, which is similar to the control over vital resources
(Ulrich and Barney 1984). Given that organizations are not autonomous, as they
are constrained by a network of interdependencies with other organizations, the
external control of organizations shows them as being embedded in networks of
interdependencies and social relationships (Granovetter 1985; Pfeffer 1987).
This paper constructs its model of an open innovation network based on RDT,
in which, typically, the dependency relationship between industry and university
can be explained as follows: since manufacturing enterprises form the core of
the industry, they may obtain the necessary talent they require with relatively
low costs from open innovation. More importantly, universities can participate
in innovation activities based on their fundamental research advantages, since
these are rarely carried out by manufacturing enterprises. In the future, the
profitability of enterprises depends on their capability in obtaining innovative re-
sources and transforming them into something of commercial value (Chesbrough
et al. 2006). Conversely, universities need inputs from the industry to compen-
sate for their lack of actual resources, due to their reliance on government
funding in the past. Accordingly, universities need to comply with market logic
and proactively link with enterprises for their sustainable development. By join-
ing in the innovation loop, universities can obtain the application value for their
knowledge, which in turn brings benefits for their forthcoming innovation
research work.

Innovation ecosystem theory

Successful businesses are those that evolve rapidly and effectively, and they must
attract resources of all types, drawing in capital, partners, suppliers, and customers
to create cooperative networks (Moore 1993). By studying the co-evolution of
social and economic systems, especially in a changing competitive context, Moore
presented the business ecosystem concept, which is regarded as a dynamic network
of organizations featuring mutual support among its members, who co-evolve their
capabilities and roles around innovation and work cooperatively to create add-
itional value and improve efficiency. Moving forward, (Li et al. 2014) combine the
business ecosystem concept with innovation theory, and argue that the innovation
ecosystem has become a new paradigm (innovation 3.0).
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 6 of 21

Differing from the conventional innovation organization, network or alliance, the

innovation ecosystem has the following typical features:

(1) Core role of the leading firm: The responsibilities of the leading firm in an
innovation network consist of harmonizing the innovation objective/vision for the
other members, steering the development of the innovation ecosystem and being
responsible for the operational mechanism (Williamson and Meyer 2012). In
addition, the leading firm also has an obligation to bridge the innovative outcomes
with customers’ requirements, and distribute any benefits to the members in the
innovation ecosystem, based on their inputs.
(2) The winner-take-all logic is challenged: The innovation ecosystem is characterized
by its openness to the public, which means that the differentiation of resources and
complementary innovations are pursued. In the innovation ecosystem, members
make use of their complementary advantages to push the innovation. Meanwhile,
they are able to share resources in the innovation ecosystem to reach a “win-win”
result based on efficient interactions and internal benign competition. The more
qualified the innovation participants are who join in the ecosystem, the more value
is generated that fits customers’ requirements.
(3) Self-organization and co-evolution of an innovation ecosystem: Being a network
composed of multiple stakeholders, the innovation ecosystem features self-
organization, and co-evolution could enable an innovation strategy to shift from
simple cooperation to collaborative innovation (Eisenhardt and Martin 2000).
Moreover, the independent development of individuals gradually transforms into
the co-evolution of the group. In this regard, there should be some mechanisms to
ensure healthy operation of the innovation ecosystem. For instance, qualified
resources may have access to the ecosystem while un-qualified ones have no
opportunity to join in the innovation activity.

Open innovation business model

In this paper, we specify that Overall Open Innovation (OOI) should refer to a model
whereby all the different parts of an enterprise involve themselves in innovation activ-
ities with external resources, to jointly meet customers’ requirements. In this regard,
we have enlarged the scope of open innovation to include the whole end-to-end chain
of a manufacturing enterprise including marketing, R&D, testing, sourcing manufactur-
ing, after-sales, etc., in which corresponding departments have various innovation
requirements driven by the manufacturing enterprise’s business strategy.
Naturally, the above chain tends to integrate external resources in conjunction with
their detailed requirements based on corporate external resource platforms. Based on
the above-mentioned resource dependence theory and innovation ecosystem theory, an
OOI business model is presented here to describe the logical relationship between
manufacturing enterprises (shown in Fig. 1), end-users and external resources. The core
manufacturing enterprise plays the dominant role in acquiring and analyzing the
requirements of end-users; and it then integrates the relevant external resources to
deliver the right service/product to satisfy end-users. In order to ensure that only
qualified external resources are in the innovation loop, certain mechanisms for man-
aging external resources are built and executed, which accordingly form a self-rotating
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 7 of 21

Fig. 1 Business Model of OOI

resources optimization cycle. In this cycle, various external resources operate dynamically,
corresponding to their nature, to combine the relevant requirements of the manufacturing
enterprise’s business chains. In this regard, an open innovative ecosystem constituted by
different innovative participants and mechanisms can be created. In this ecosystem,
innovative participants collaborate with each other to create user value as the core.
Meanwhile, they share information dynamically through in-time interactions during the
process of innovation. In the internet age, networking tools constructing Clouds are
effective for in-time information communication between manufacturing enterprises,
external resources and end-users when carrying out open innovations.

Management of external resources in an open innovation system

External resources classification
Technology Open Innovation (TOI) refers to the innovative technological research and
new product development undertaken to satisfy customers’ requirements, and competi-
tive technological creations that pave the way for product marketability. This is the core
that both the enterprises and external resources seek to contribute to. A TOI aims to
produce competitive and marketable products through joint research and development.
Normally, the external resources involved in a TOI come from various areas, each of them
bringing an individual capacity that may aid the manufacturing enterprise when steering
the innovation project. During the course of an innovation project, the manufacturing en-
terprise has various requirements, such as knowledge, technology, inspections, manage-
ment, venture capital, consultation, and the supply of materials/components, which
means that the inputs from the external resources need to be in line with the actual
requirements at different stages of the TOI (concept & definitions, project planning,
design, prototype engineering, testing, etc.). The external resources are classified below.
Besides the core manufacturing enterprise in an open innovation network, we classify the
external resources into industrial entities and non-industrial entities as follows:

(1) Industrial entity: Those external resources classified as an industrial entity are
dedicated to helping the core manufacturing enterprise promote the
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 8 of 21

industrialization of innovative technologies, including their development, testing,

production and marketing promotion, etc. The external resources of an industrial
entity mainly cover suppliers, partner enterprises, small firms capitalized by the
enterprise, testing/certification institutions, industrialization agents, etc. As defined
above, a strategic supplier1 plays a vital role in open innovation, which is
indispensable nowadays for technological innovation and product upgrading of
enterprises. Strategic suppliers not only supply components but also bring unique
R&D capacities to the enterprise, and they may also have the ability to manage
normal suppliers.
(2) Non-industrial entity: Its roles in open innovation include individual feedback/
inputs, basic research, technology research and development, industry standards
development and market competition supervision, etc. Non-industrial entities
include individuals, universities, research institutions, consulting firms, law firms/IP
management agencies, industrial associations and standardization committees,
governments, etc.

More importantly, strategic suppliers with proven capacities are also indispensable
for their involvement in the early stages of a TOI. The benefit of this early connection
with strategic suppliers is that the enterprise gains access to and can utilize their
technological, production and inspection capacities to combine R&D innovations with
the supply chain. In our study, the commercialization of open innovation findings is
exceedingly difficult to realize substantially without the assistance of a supply chain.
The cooperation between the core manufacturing enterprise and its external
resources is diverse. For example, suppliers are not limited to the supply of materials or
components for the manufacturing enterprise, but they can also rely on their innovative
technology to get involved in the open innovation process; in this case, both sides are
expected to engage in strategic collaborations. As far as universities and research insti-
tutions are concerned, they can carry out fundamental research and joint development
of technology respectively, on terms specified by the core manufacturing enterprise.
Additionally, it is essential for any manufacturing enterprise and university to carry out
talent training projects together, while scholars or experts from academia/the university
can be hired by the manufacturing enterprise to strengthen cooperation with each
other (shown in Table 1).

Mechanism design for external resources

In order to integrate the above-mentioned external resources to reinforce the TOI, it is
essential to design a corresponding general mechanism so that qualified resources can
be screened, and to allow for collaborative and innovative relationships between the
manufacturing enterprise and its external resources to be maintained, and also to
enable the achievement of the expected innovation targets. Otherwise, the overall
collaborative work between the different participants would occur randomly because
the management of the external resources is not orderly.

Searching for external resources

On the one hand, manufacturing enterprises can establish an external collaborative
platform as a major outlet for requests of distribution and collection. On the other
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 9 of 21

Table 1 Interaction methods during open innovation between a manufacturing enterprise and
external resources
Center of open External resources Interaction methods
innovation during the open
Category Functionality Major resources
innovation process
Manufacturing Industrial To provide services for the Supplier Strategic collaboration
enterprise entity core manufacturing enterprise and Early Supplier
related to the industrialization Involvement (ESI) in
stage of the open innovation the R&D stage
process, such as engineering &
design ideas, material supply, Partner Set up joint-venture or
testing, etc. enterprise project and develop
innovative technology/
product
Small firm Allocated research
(capitalized and development
by the
manufacturing
enterprise)
Testing labs Allocated testing and
certification work for
testing labs, or set up
joint labs
Industrialization Venture Capital (VC) or
agent Direct Capital (DC) to
promote the
industrialization of the
innovation
OEM/ODM Allocated R&D or system
assembly project
Non- To provide services for the core Individuals Individuals have feedback
industrial manufacturing enterprise during or innovative inputs for
entity the open innovation process in the manufacturing
terms of basic knowledge enterprise
innovation, application
University University-firm
innovation, management
innovation, talent cultivation, collaboration in terms of
science & research
funding support, etc.
projects, talent cultivation,
etc.
Research Technology licensing or
institutes transfer, R&D
assignments/allocations
Innovation Commercial transactions
intermediaries in terms of the
distribution of requests
and collection of service
for the enterprise
Consulting firm Consultation services
mainly including
technology and
management innovation
Law firms/IP Provide lawsuit dispute/
management intellectual property
agency rights services as
requested by the core
manufacturing enterprise
Association Standards/regulations
development
Government Approve state key lab,
funding or tax
reductions/exemptions
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 10 of 21

hand, they can also adopt third-party innovation intermediaries to introduce more
external resources and commercial cooperative options. Accordingly, a manufacturing
enterprise can leverage its innovation intermediaries as partners for their innovative
solutions/services. In some areas, liaison offices could be set up to absorb global talent,
with the aim of solving innovation issues effectively.
Moreover, it does make sense for a manufacturing enterprise to search for potential
partners for a new project from among the suppliers and universities it collaborated
with on previous projects. For example, suppliers that have revealed innovative techno-
logical capacities during the supply process of materials/components in the past, should
be considered for the introduction of open innovation. There are some joint scientific
and research-funding projects approved by governments or directly undertaken by an
enterprise itself, and universities from past partnerships may also be granted an oppor-
tunity to contribute to open innovation.

Principles of managing external resources

Having the correct attitude when dealing with external resources is a priority for any
enterprise in its innovation cycle. We herewith give the following two principles:

(i.) Phase-in principle: No barrier should exist when dealing with the introduction of
outstanding external resources. In addition, the quantity of qualified external
resources candidates must be ensured for the purpose of healthy competition.
(ii.) Phase-out principle: This means that unqualified resources have no space in an
open innovation network. In this regard, cost and time spent on these resources
are likely to be reduced, which helps innovation efficiency and aids the
manufacturing enterprise in reaching its cost-down target during the
innovation process.

External resources screening procedures

External resources have opportunities to contribute to a manufacturing enterprise’s
innovation project as long as they have the required qualifications. The following
procedure is presented to help screen candidates as external resources and to select the
qualified resource(s) for a manufacturing enterprise, while excluding any unqualified
external resources.

Screening Round I: Set up the criteria regarding the requirements for the external
resources’ capacities, which are necessary for an innovation project so that the external
resources with interest in the innovation project can be organized for initial selection.
Hence, the qualified external resources (e.g. the ones with successful backgrounds) are
easily identified for further assessment.
Screening Round II: Whether or not an external resource can offer the right
services/solutions should be checked at this stage. A successful background does not
mean that a particular service/solution is consistent with the manufacturing
enterprise’s expectations. For example, Foxconn is a worldwide leading Original
Equipment Manufacturer (ODM), especially for assembling systems; however, it lacks
expertise in the design and manufacturing of certain electronic components. For
instance, Foxconn is the system assembler of Xiaomi’s smartphone Mi Note, featuring
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 11 of 21

a 5.7″ FHD display; however, the display panel, camera module, and application
processor are developed and supplied by Japan Display Inc. (JDI), Primax and
Qualcomm respectively, and Xiaomi contracts them for these resources rather than
Foxconn during the planning and design stage of the smartphone development.
Screening Round III: The next stage involves the performance evaluation procedure,
in which the external resources will have direct discussions with the manufacturing
enterprise about the detailed requirements. Only those external resources possessing
the correct and applicable solutions can proceed to this stage. At this stage, various
departments of the manufacturing enterprise, including marketing, R&D, procurement
and production will gather to carry out the comprehensive appraisal work.
Screening Round IV: This is the price and volume bidding stage. Generally, the price
an external resource charges will relate to the volume it must supply to the
manufacturing enterprise. For example, if the manufacturing enterprise only needs to
purchase a small batch of components from its strategic suppliers, the price would be
higher than if a larger volume of components is requested. Additionally, some
additional conditions that might include quality assurance and profit and risk sharing
would be discussed at this stage, to pave the way for the contract signing later on.

The selection of the external resources will be decided at this stage, after the above
procedures have been completed without incident. All the terms, including the scope,
obligations, deliverables, and payment terms should be listed in the contract to make
the collaboration legal.
According to the above principles, those external resources ruled out by the external
resource screening mechanism during the above competition and bidding stages will
still have opportunities for future access to the loop on the condition that they make
necessary modifications, while the selected external resources would face challenges
from other candidates. This indicates that the external resources rotate in a dynamic
process using this mechanism. Therefore, for the external resources, there exists
concurrent optimization work to establish a self-rotating cycle. This indicates that the
external resources with qualified capacities, including successful experience, desirable
solutions, competitive service performances and cost efficiency combined with produc-
tion volume warranties, could eventually be filtered out by this procedure.

General mechanism for collaborating with selected external resources

Asymmetric information is very likely to occur when a manufacturing enterprise inter-
acts with other external resources. Asymmetric information refers to situations where
two parties to a potential transaction do not have the same information (Feinstein
1995). The presence of asymmetric information often leads to an adverse selection of
partners in an open innovation activity, which in turn has certain effects when making
well-informed decisions. Therefore, it is necessary to consider what effective measures
are needed for the management of external resources in order to achieve the expected
results. The following general mechanisms are proposed to deal with the presence of
asymmetric information, and facilitate the cooperation between the manufacturing
enterprise and its external resources:

(i.)Global talent
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 12 of 21

In order to have qualified resources participating in the open innovation process

rather than staying in the traditional resources loop, it is essential for a
manufacturing enterprise to create a mechanism in which the qualified external
resources will have no barriers to their bidding and introduction into the open
innovation activities. Moreover, it is unwise to only choose local resources that are
near the manufacturing enterprise; rather, more globalized resources should also
have a fair opportunity and access to the open innovation process. In this case, a
manufacturing enterprise should have enough external resources candidates for
evaluation, allowing it to recruit the best resource(s). In addition, the interaction
methods between a manufacturing enterprise and its external resources need to be
diversified. Networking tools can be utilized to pave the way for in-time
communication during the bidding stages, especially for those external resources
dispersed around the world, and for whom it is sometimes not convenient, or easy,
to participate in face-to-face meetings.
(ii.) Participation constraints
Now that the qualified external resources have been recruited, it is necessary for
them to be able to operate in a positive environment so that the external resources
can yield the expected deliverables. Normally, a contract or agreement is assumed
to define the mutual benefits, as well as the responsibilities, between a
manufacturing enterprise and its external resources. Both sides should jointly carry
out the collaborative innovation project under legal circumstances, as this is
essential for 1) coordinating the objectives and strategies of both sides, 2)
controlling the milestones of the project, 3) jointly handling risks, and 4) sharing
profits from the project. However, it is unwise to have incoming external resources
in a location that is so out of reach that they do things independently, and are very
far away from the manufacturing enterprise’s oversight and expectaions. We call
this “if in, then do it well;” and in this regard, an open innovation team needs to be
organized effectively.
(iii.) Incentive compatibility
Incoming external resources are members of the open innovation organization; it
is impossible to achieve substantial innovation results during the process of
collaborative innovation regardless of what they think, or what they lack. A
manufacturing enterprise will not only utilize strategic supplier resources in terms
of their appraisal and rating, but will also improve their capabilities to reach a
sustainable cooperative relationship. More importantly, suitable incentive
measures, in terms of profit sharing commissions, also play a vital role in
encouraging them to devote their energies proactively.
Providing the best experiences for users is the core pursuit of a collaborative
innovation between a manufacturing enterprise and its external resources.
Consequently, further measures should be developed to stimulate their innovative
inputs in terms of the incentive compatibilities. For example, a manufacturing
enterprise drives strategic suppliers to put forward a technical solution based on
their product competitiveness, which means that the manufacturing enterprise
gives a commitment to the strategic suppliers in terms of its order size. Reversely,
the strategic suppliers contribute greatly to technological innovation by relying on
the comprehensive innovative capabilities from their R&D, production and quality
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 13 of 21

assurance departments. Obviously, a manufacturing enterprise could get more

benefits from this “big-to-big” collaboration, such as short “time-to-market” of a
new innovative product, low sourcing prices for the materials/modules needed, etc.
Under these circumstances, it is necessary for the manufacturing enterprise to
offer incentive measures to inspire the strategic suppliers in the open innovation
collaboration. For example, when strategic suppliers achieve or surpass set project
KPIs (Key Performance Indices) including cost reductions, yield rate increase etc.,
they should be given additional allowances or profit sharing by the manufacturing
enterprise. Moreover, strategic suppliers of good standing could have access to
more innovation projects. Strategic suppliers with outstanding contributions may
also enjoy the renewal of cooperation agreements for forthcoming innovation
projects, allowing them to bring in more profit during these projects.
(iv.) Dynamic optimization
Naturally, fixed external resources are rarely utilized by a manufacturing enterprise
during open innovation cycles. A manufacturing enterprise needs to develop
certain mechanisms to effectively manage the performance of its external
resources. For example, regular assessments or capacity ranking methods could be
used to push the external resources to improve their technological innovation
abilities. External resources are encouraged to proactively cooperate with
manufacturing enterprises to better satisfy end users’ demands. Meanwhile,
manufacturing enterprises may gradually cultivate strategic external resources, in
conjunction with their strategies. In this regard, both sides could have more
sustainable cooperation, and strategic external resources could manage the
upstream external resources accordingly, which may reduce the redundant
coordination work between a manufacturing enterprise and its other external
resources, and accelerate the collaboration’s innovation steps.

Consequently, a dynamic optimization mechanism could help rule out resources that
were previously qualified but are now un-qualified; on the other hand, external
resources with qualifications but that are outside the innovation loop due to the
comprehensive assessments will still have chances to qualify themselves, and replace
existing resources after making the necessary improvements. In this sense, the dynamic
operation of the external resources could be realized to boost sustainable open innova-
tions. When there is more than just one competitive solution in the market, or the
external resources in a collaboration do not make the necessary improvements within
the allocated time, the manufacturing enterprise should still have the right to choose
better external resources. Therefore, the external resources operate in a dynamic
optimization cycle, but only if the external resources continuously improve their in-
novative capabilities so that they can then be accepted by the manufacturing enterprise
for sustainable cooperation. Otherwise, other better candidates will replace un-qualified
or uncompetitive external resources in the innovation resource loop.

A business collaboration model of the TOI

For the purpose of this paper, we have divided the TOI into two aspects: basic research
innovation and application innovation. The former focuses on prospective and mid-to-
long term innovative technological research, while application innovation describes
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 14 of 21

product development to fulfill the market requirements in the near future. Normally,
basic innovation is supervised by the corporate research & development center in
charge of the general technology R&D, standardization and intellectual property
management, which is regarded as a corporate and strategic level department. An
application innovation is closer to a marketable product and may work better under
the management of a product research & development institute. However, both aspects
of the TOI should be rationally coordinated and combined, and share the external
resources to pursue the maximum value for the TOI.
As per the above classification, a business collaboration model focusing on a new
product R&D phase is given (shown in Fig. 2), in which the basic research innovations
and application innovations are managed in the product R&D process. This model can
be a reference for an enterprise to coordinate the phasing-in and phasing-out of exter-
nal resources of the TOI. All inputs/outputs via external/internal collaborations in the
business model will be evaluated dynamically according to the nature of the innovation
project; the result of such evaluations will lead to “Go/No Go” decisions on how to
proceed with the next step. For example, “Go” indicates that the corresponding activity
will continue as it is, or will continue but with considerations, while “No Go” would in-
dicate that the input/output of the activity is not in line with the evaluation criteria,
and should be suspended or should cease to release resources. To cultivate knowledge
management during the open innovation process, such decisions and follow-up actions
should be recorded and reflected in the forthcoming strategy and plan.

A case study
Haier Group is well regarded as a representative for Chinese manufacturing enterprises
in actively implementing open innovation strategies, particularly in that Haier inte-
grates global resources to enhance its technology innovation. Beside, one of the authors

Fig. 2 TOI Business Collaboration Model

Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 15 of 21

of this paper previously worked for Haier Group for many years, largely engaged with
the R&D and implementation portions of its open innovation strategy. Thus, Haier
Group can be considered as an ideal object for case study. In this paper, the TOI
practice implemented by Haier Group is utilized to further illustrate the feasibility of
the theory presented.
Established in 1984, the Haier Group is a global leader in consumer electronics and
was the leading home appliance brand, as ranked by Euromonitor International 2014.
With its assortment of products diversified towards the global markets, Haier has been
seeking more innovation potential to boost its manufacturing enterprise’s development.
Given limited internal resources, to say nothing of the severe competition in the mar-
ket, it is impossible for Haier alone to provide products/solutions for all its customers.
Consequently, Haier set a target to transform itself from a traditional manufacturer into
a comprehensive service provider, in which the manufacturing enterprise’s innovation
strategy is characterized by the saying, “the world is Haier’s R&D department.”
In our observation, we found that Haier is strengthening its R&D capacities not only
through its internal R&D investments, but also with its external collaborations. As per
the above situation, an Overall Open Innovation (OOI) strategy has been applied and
implemented by the Haier Group since the beginning of 2013, and the TOI of Haier
has since become the benchmark for China’s home appliance industries. As far as we
understand, Haier carried out the following TOI practices:

(1) Reconstruct its R&D system: Previously, there was no clear distinction between
technology R&D and the product R&D departments in Haier. In this case, Haier’s
corporate R&D center had some overlapping functions with its R&D institutes
regarding product lines, including refrigerators, washing machines, air-conditioner
units, etc., which led to several disputes and quarrels. With respect to its open
innovation, the corporate R&D center was put in charge of the generic technology
R&D, standardization and intellectual property management, etc., while concrete
products that entered the market were put within the scope of the product
development institutes. More importantly, an open innovation platform (discussed
hereunder) was created and operated by an open innovation operations team from
the corporate R&D center, and this team targeted the integration of global external
resources to satisfy the internal innovation requirements. Both of the above two
divisions utilized external resources via the open innovation operations team,
and the technology innovation transferring mechanism was used to link them.
During the process of entering the global market, Haier paid a great deal of
attention to its localization strategy, and further refined the R&D system built into
its global networks. Currently, Haier has its corporate R&D center located in
Qingdao, China, where it is in charge of the other 15 R&D institutes distributed
around the world (shown in Fig. 3). In recent years, Haier successively merged with
Sanyo (a Japanese brand) and Fisher & Paykel (from New Zealand) to strengthen its
brand influence in the home appliances industry. During its globalization process,
Haier is making great efforts to search for useful external resources. External
sources are both an indispensable part of Haier’s globalization, from its marketing
to manufacturing, down to its global R&D, and are vital pillars to improve Haier’s
global branding influence.
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 16 of 21

Fig. 3 Haier’s R&D system built into its global network (Source: interview with Haier Group)

(2) External resource integration in open innovation: During the process of

implementing its open innovation strategy, Haier utilized the relevant mechanisms
mentioned in Open innovation business model section (on how to manage
external resources), rather than rigidly negotiating with external resources case by
case. The external resources were managed dynamically, which demonstrates the
special role of these mechanisms in a self-rotating optimization cycle (Fig. 1). To
identify the nature of the external resources, Haier classified them respectively
into industrial (suppliers, partner enterprises, testing labs, etc.) and non-industrial
(individuals, universities, research institutes, etc.) entities; hence the corresponding
external resources with appropriate expertise could be integrated in order to
match Haier’s requirements for technological innovation. Moreover, Haier adopted
the “global talents” mechanism to ensure that qualified resources, without
boundary limits, could be absorbed into the innovation process under a controllable
system, namely the “participation constraint”, while unqualified resources were
excluded from the innovation activities by means of “dynamic optimization”.
According to the concrete requirements of technology innovation, some of the
selected external resources (such as the strategic suppliers) could be stimulated by
an “incentive compatibility” to yield extraordinary performances. In this regard, the
qualified resources could effectively contribute to Haier’s basic research innovation,
in combination with its product development innovation.
In our study, the following typical innovative products of Haier Group were
developed by the TOI (shown in Table 2), in which the corresponding selected
external resources are embedded in conjunction with their contributions.
(3) TOI platform operation. To facilitate the interaction and collaboration with
external resources, Haier set up a TOI platform (hope.haier.com, shown in Fig. 4)
with networking tools, which aims to provide a community for the public. The
TOI platform has also proven to be more efficient and accessible for external
resources that wish to join in the TOI activities. Our observations revealed that
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 17 of 21

Table 2 Haier’s typical innovative products developed by TOI

No. Innovative Description Major external Contributions of Remarks
product resources external resources
1 Wireless TV No cables; TV MIT (University, Provided wireless The marketing
operated through USA) technology and requirements
a wireless solutions with surveying the
charging function patents for Haier combined
commercialization
of wireless TV was
executed by Haier
Wireless Power Provided a Acquired WPC
Consortium platform for Haier certificate (Qi
(WPC, standard and other logo) to facilitate
consortium) members to future market
develop standards entry issues
for such a product
2 Waterless Uses new washing DOW (Strategic System design of P&G also joined in
washing media (micro ball) supplier, USA) waterless washing the development
machine instead of water; machine, and also and provided
saves water jointly developed solutions for
resources and the new washing increasing the
protects the media with Bayer washing capacity
environment. of the micro ball
Bayer (Strategic In charge of the 3 M (USA) also
supplier, Germany) development and sent samples for
supply of the Haier’s
micro ball consideration
China Academy of Mechanical design CAS is the leading
Science (CAS, and mechanical research institute
Research institute) analysis of the in China
washing machine
3 Networking The product was International Provided a There is a special
refrigerator designed not only Electrotechnical platform for Haier working group
as a storage Commission and other under the IEC
compartment (IEC, Standard members to Standard
but as a association) develop Management
communications international Body mainly in
terminal to product charge of smart
connect to other specifications home standards
home appliances combining
communications
standards
iTopHome Integrated supply The outcomes of
(Networking chains for iTopHome
appliances networking concerning
industry alliance, refrigerators to standards are in
China) develop China’s line with the
national standards requirements of
and promote its IEC standards
commercialization

more than 60% of the TOI ideas and solutions at Haier originated from the TOI
platform since its launch in 2010.
The working process of the TOI platform is as follows:
Step 1: Register one’s ID and wait for approval.
Step 2: Haier classifies and ranks the incoming external resources, then approves
relevant rights with different levels of access to its project database. For instance,
ordinary customers are only allowed access for posting ideas to the profiles of the
ongoing projects, while those with outstanding backgrounds and relevant
solutions could gain more access, allowing them to provide ideas/solutions and
greater content related to the ongoing projects.
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 18 of 21

Fig. 4 Haier’s technology open innovation platform webpages’ showcase. (Sources: a), b), c) and d) cited
from hope.haier.com; e) Interview with Haier Group)

Step 3: External resources present relevant ideas/solutions in conjunction with

innovation requirements posted by Haier.
Step 4: The relevant department will handle the ideas/solutions. If an idea/
solution is accepted, the external resource can move forward to the next stage;
conversely, the idea/solution could be refined for the forthcoming proposal.
Meanwhile, ideas/solutions presented by external resources will be stored in the
innovation knowledge database.
Step 5: Negotiations and signing of an agreement to formalize the cooperation.
Step 6: Execution of plan.
Since the release and operation of the technology open innovation platform at the
beginning of 2013, Haier Group has increasingly intensified its intimacy with
external resources, and the following figures showcase their achievements in the
implementation of this platform.
(i.) Participants or end-users/clients: 1,780,000
(ii.) Registered external resources: 120,000
a) Individuals: 108,500
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 19 of 21

b) Universities: 230
c) Partner research institutes: 417
d) Suppliers: 5280
e) Industrialization agents: 1331
(iii) Total innovative proposals: 5800
(iv) Finished/ongoing projects: 319
(4) Refining the interface between the R&D system and the supply chain system.
Empirically, whether the outcome of a TOI is successfully executed or not depends
on the internal collaboration of the manufacturing enterprise. However, a
marketable new product can be produced only if the interface between the R&D
system and the supply chain system can be refined to some extent. Accordingly,
delegates from the supply chain system join in the open innovation’s organization
and prepare in advance for the forthcoming sourcing and procurement work.
Furthermore, there is another corresponding system called the “module supplier
network” (l.ihaier.com), which was developed to attract global suppliers to deliver
modules or components in conjunction with the outcomes of open innovations.
(5) The novelty of the proposed open innovation strategy. From the theoretical
characteristics and the empirical case study, it can be argued that the proposed
open innovation strategy combining mechanism is novel, because it is operational
and capable of managing external resources efficiently and effectively.

Conclusion
Open innovation plays an increasingly vital role in supporting a manufacturing enter-
prise’s continued development. In order to integrate external resources more efficiently,
it is essential to classify the resources categories and build a relevant mechanism, under
which the optimization of the external resources can be executed in a self-rotating
innovation cycle.
Moreover, an overall open innovation business model is presented, to identify the
logical relationship between the manufacturing enterprise, and its end-users and
external resources. Additionally, a TOI is specifically discussed in this paper, in which
the classification of the external resources, and an external resources screening
mechanism are analyzed, and shown to help in selecting qualified resources and
excluding unqualified resources from the business model. The outcome could be a
reference for manufacturing enterprises to coordinate the phasing-in and phasing-out
of external resources during the TOI process. In addition, our paper indicates the
feasibility of the model proposed in this paper with the Haier Group TOI case study.
Therefore, this paper has provided a new model for open innovation, enabling the man-
agement of external resources, which is missing in the current literature. The proposed
open innovation strategy model can be useful in other enterprises for efficient manage-
ment of external resources and enhanced performance.
There are some limitations to be further studied including: (1) the authors focus on the
development of a generic mechanism framework; and it would be worthwhile to consider
a particular mechanism suitable for the management of a specific external resource; (2)
there is a need to explore more case studies from a variety of industrial backgrounds. In
this regard, the proposed open innovation strategy combined with the generic mechanism
framework could be further verified and may be of reference for other enterprises.
Wang and Islam Frontiers of Business Research in China (2017) 11:3 Page 20 of 21

Endnote
1
A strategic supplier is not only capable of supplying materials or components based
on demand, but participates in the open innovation activities depending on their
competitive technology. Generally, a strategic supplier’s important contribution to a
manufacturing enterprise’s innovation is in terms of its early supplier involvement with
the manufacturing enterprise’s product research and development process.

Acknowledgements
This study is supported by the China Social Science Foundation (15BGL007), and the authors herewith express their
appreciation for its support. The authors thank the valuable comments and suggestions from the annonimous
reviewers, and acknowledge the editorial assistance in revising this paper.

Authors’ contributions
Both authors read and approved the final manuscript.

Competing interests
The authors declare that they have no competing interests.

Received: 30 September 2016 Accepted: 9 February 2017

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