Challenges of open innovation: the paradox of firm investment in open-source software

Abstract

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.

Deciding on Open Innovation: An Exploration of How Firms Create and Capture Value with Open Source Software

“…West and Gallagher propose that the combination of shared production and low cost of OSS has resulted in firms reconsidering their proprietary business models and that the fundamental question for a firm's business model is, how does the firm create value for the customer while simultaneously extracting some of the value for itself? However, it has been found that the use of open source by firms generally begins in ways that does not disrupt their fundamental business model, or comes at a time when their existing business model is so threatened that they are forced to make radical changes (West and Gallagher 2006). In general, the comprehension of issues surrounding OSS business models appear inadequate.…”

“…The result was that these firms maximized the returns of their innovation by concentrating on their own needs and then incorporating the shared browser technology into their own integrated systems (West and Gallagher 2006). Other companies like IBM have often used an inside-out approach as part of its OSS initiative that represented spinouts in the 1990s and, more recently, donated software patents to the OSS community (West and Gallagher 2006). In addition, the aforementioned companies have also integrated ele-ments of the coupled process by successfully cooperating with universities, research institutes, etc.…”

“…Indeed this accommodation with the commercial mainstream may be a harbinger of an end to the current dominance of a proprietary, closed source software model (Fitzgerald 2006). However, despite research carried by West and Gallagher (2006) and by West (2007), the use of OSS as part of an open innovation strategy is such a recent phenomenon that many unanswered questions still persist. Furthermore, existing research is based on the experiences of U.S. firms.…”

“…With the exception of West and Gallagher (2006) and West (2007), academic research on value creation, value capture, and value networks in OS strategies appears to be rather sparse. Furthermore, literature articulating the central characteristics of OSS that enable or hinder value creation and value capture is quite limited.…”

“…In order to understand value creation and value capture in the context of OSS, Helander and Laine (2006) argue that value needs to be defined in nonmonetary as well as monetary terms. Open innovation also both enables and builds on interorganizational collaboration, often referred to as a value network (West and Gallagher 2006) or ecosystem (Adner 2006). Dahlander (2004) proposes that in addition to interorganizational relations, it is relations with users and developers that constitute the OSS community that are important for the firm.…”