Externalities of openness in innovation

Stephen Roper,Priit Vahter,James H Love

doi:10.1016/j.respol.2013.05.006

Stephen Roper, Priit Vahter + Show 1 more

Open Access

https://doi.org/10.1016/j.respol.2013.05.006

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Abstract

Discussion of open innovation has typically stressed the benefits to the individual enterprise from boundary-spanning linkages and improved internal knowledge sharing. In this paper we explore the potential for wider benefits from openness in innovation and argue that openness may itself generate positive externalities by enabling improved knowledge diffusion. The potential for these (positive) externalities suggests a divergence between the private and social returns to openness and the potential for a sub-optimal level of openness where this is determined purely by firms’ private returns. Our analysis is based on Irish plant-level panel data from manufacturing industry over the period 1994–2008. Based on instrumental variables regression models our results suggest that externalities of openness in innovation are significant and that they are positively associated with firms’ innovation performance. We find that these externality effects are unlikely to work through their effect on the spread of open innovation practices. Instead, they appear to positively influence innovation outputs by either increasing knowledge diffusion or strengthening competition. Our evidence on the significance of externalities from openness in innovation provides a rationale for public policy aimed at promoting open innovation practices among firms.

Highlights

In this paper we identify a new externality which occurs as part of firms’ innovation activity and provide some preliminary evidence of its empirical significance
The implications of any shift in innovation practice towards open innovation have largely been considered at the level of the individual firm (Chesbrough, 2006; Dodgson et al, 2006; Laursen and Salter, 2006; Lichtenthaler and Ernst, 2009) leading to calls for further research to validate the private benefits of open innovation to firms in different operating contexts (Chesbrough, 2006)
Based on data from Ireland we conclude that firm-level indicators of openness are not a valid measure of spillovers of open innovation in Irish manufacturing industry

Summary

Introduction

In this paper we identify a new externality which occurs as part of firms’ innovation activity and provide some preliminary evidence of its empirical significance. These firm-level, strategic analyses may, be excluding potentially important and dynamic social benefits. We focus on a rather different issue arguing that the more widespread is the adoption of openness in innovation the greater will be the potential for knowledge diffusion through unplanned and/or informal, unpriced mechanisms If significant, these ‘externalities of openness’ – which result from firms’ openness rather than their R&D inputs or innovation outputs – suggest that the social benefits of widespread adoption of openness in innovation may be considerably greater than the sum of the achieved private benefits. Our findings highlight the social benefits of openness over and above the direct benefit of open innovation to firms’ own innovation productivity

Conceptual framework: externalities of openness in innovation

Data and methods

Econometric results

Extension – the channels of externality effects

Conclusions