Open innovation is a powerful framework encompassing the generation, capture, and employment of intellectual property at the firm level. We identify three fundamental challenges for firms in applying the concept of open innovation: finding creative ways to exploit internal innovation, incorporating external innovation into internal development, and motivating outsiders to supply an ongoing stream of external innovations. This latter challenge involves a paradox, why would firms spend money on R&D efforts if the results of these efforts are available to rival firms?To explore these challenges, we examine the activity of firms in open source software to support their innovation strategies. Firms involved in open source software often make investments that will be shared with real and potential rivals. We identify four strategies firms employ -pooled R&D/product development, spinouts, selling complements and attracting donated complements -and discuss how they address the three key challenges of open innovation. We conclude with suggestions for how similar strategies may apply in other industries and offer some possible avenues for future research on open innovation.

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