Measuring Open Innovation Practices: How Openness Relates to Firm Performance

Abstract

Despite the popularity of open innovation in recent years, performance results from the practice of open innovation have been mixed. Previous empirical work on open innovation practices is usually done either in isolation, such as studying a single open innovation practice, or in aggregate, such as employing a proxy measure. To avoid the limitations of these approaches, we employ an unsupervised learning technique (i.e. topic modelling) that utilizes natural language processing to extract information on companies’ open innovation practices from their annual reports, creating an initial key-word basket for future development. We then evaluate the relationship between our derived open innovation practices and the business performance of firms. Our empirical results show that a firm’s use of open innovation practices is associated with its improved business performance. Our approach allows us to develop more granular practices within open innovation, and our results show that these practices vary in their impact on business performance. Open innovation practices regarding customer engagement have a particularly significant positive association with firms' growth potential, compared to other open innovation practices. The salience of these derived open innovation practices also varies by sector. We relate our results back to the mixed findings on open innovation and firm performance, and conclude that there is no One Size Fits All, or a uniform set of Best Practices, to practice open innovation.