The concept of open innovation captures the increasing propensity of firms to work across their traditional boundaries of operation. This phenomenon has largely been studied from the viewpoint of manufacturing businesses while services have received much less attention despite the predominant role they play in advanced economies. This paper focuses on open innovation in services, both as a subsector of the economy and as a component of the activities of manufacturing firms. We study the open innovation practices of business services firms and then consider the implications for open innovation of the adoption of a service inclusive business model by manufacturing firms. Our analyses are based on a unique dataset with information on open innovation activities amongst UK firms. Overall, engagement in open innovation increases with firm size and R&D expenditure. Business services are more active open innovators than manufacturers; they are more engaged in informal relative to formal open innovation practices than manufacturers; and they attach more importance to scientific and technical knowledge than to market knowledge compared to manufacturing firms. Open innovation practices are also associated with the adoption of a service inclusive business model in manufacturing firms and service-integrated manufacturers engage in more informal knowledge-exchange activities. The paper contributes towards a reconceptualisation of open innovation in service businesses and a deeper evidence-based understanding of the service economy. © 2013 The Authors

Although open innovation has become increasingly established in the management literature, comprehensive theoretical explanations of what drives firms to be open are sparse. Taking the perspective of the behavioral theory of the firm, we conceive of open innovation as a form of non-local search, arguing that firms will turn to open innovation when substantially under-or overperforming relative to their aspirations. We further enquire how this relationship is moderated by firm-specific innovation-related resources: human capital, R&D investment, and patents. Employing a representative survey of UK firms, we find some evidence of moderation, allowing us to present explanations of search through open innovation and contribute to the behavioral theory of the firm itself.

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Innovation requires a capacity to seek, absorb and utilize external knowledge, and an ability to develop, leverage or exchange internally-generated knowledge. Internally to the firm, it requires the structuring of information channels within and across hierarchical or divisional levels. Externally, it implies choices and costs in selecting and managing interactions and collaborations. The way in which these two types of organisational choices jointly contribute to firm performance has been substantially under-researched. Based on an original survey of open innovation practices amongst UK firms, this paper addresses the impact of external and internal openness, and the role of formal vs. informal knowledge sourcing practices (and their interaction) on the innovative performance of business services. Not only external but also internal openness positively affect the innovative performance of firm. Among different types of knowledge exchange mechanisms, informal practices are especially effective in business services. On the contrary, joint engagement in formal and informal activities decreases the firm's innovative performance, a result which points to the occurrence of diseconomies of scale and managerial attention constraints. In-depth analyses of different groups of firms generate further insights into how the benefits of openness vary substantially with firm size. Jelcodes:O30,L80

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