TECHNICAL UNIVERSITY OF MUNICH

Open Innovation:

A new paradigm for corporate R&D departments

Submitted To : Dr. Philipp Sandner

Submitted By : Prabesh Shrestha Matrikel-Nr. 03635429 Masters in Informatics

First Semester Tel.: + 49 017692139255

Submitted on: 20th June 2012

Abstract

The concept of Open Innovation advocates that companies can no longer keep innovating

without collaborating with other partners. The key to success is creating an open platform around your

innovations so your customers, your employees and even your competitors can build upon them.

Many companies are moving from closed innovation model to a more innovative open

innovation model. For some it has become necessity because of lack of essential knowledge. Others

have adopted the paradigm to benefit from distributed knowledge around the world. Many others have

done it to utilize their spillovers instead of piling up the spillovers in the shelves. Universities and

SMEs are showing up as a primary source or collaborator for big companies, hence also generating lots

of spillovers.

Together these findings show open innovation model is flourishing and is the best way to keep

innovating. Study also suggests that maintaining the absorptive capacity is difficult for some

companies.

Ehrenwörtliche Erklärung

Ich erkläre hiermit ehrenwörtlich, dass ich die vorliegende wissenschaftliche Arbeit

selbstständig und ohne fremde Hilfe verfasst habe. Ich habe keine anderen als die angegebenen

Hilfsmittel und Quellen benutzt. Die wörtlich oder inhaltlich aus Quellen jeglicher Art ubernommenen

Passagen habe ich in meiner Arbeit ausnahmslos als solche kenntlich gemacht.

Ich habe in keiner Weise versucht, die Ergebnisse im Rahmen der empirischen Erhebung oder

an anderer Stelle zu beeinflussen. Die statistischen Analysen habe ich nach bestem Wissen und

Gewissen durchgefuhrt und die zugrundeliegenden Daten in keiner Weise verändert, erweitert oder

verkurzt. Gegebenenfalls an den Originaldaten vorgenommene Modifikationen (z. B.

Transformationen, Datenbereinigung) habe ich ausnahmslos und in nachvollziehbarer Weise benannt

und begrundet.

Die Arbeit hat bisher nicht in gleicher oder ähnlicher Form oder auszugsweise dieser oder einer

anderen Prufungsbehörde vorgelegen.

Munchen, 20.07.2012

(Unterschrift)

TABLE OF CONTENT

Page

LIST OF TABLES .................................................................................... 1

LIST OF FIGURES .................................................................................. 1

LIST OF ABBREVIATIONS ................................................................... 1

1. INTRODUCTION ................................................................................ 2

2. THEORETICAL BACKGROUND ....................................................... 4

2.1 R&D …....................................................................................... 4

2.2 Innovation ................................................................................... 4

2.3 Closed Innovation ....................................................................... 5

2.4 Open Innovation ......................................................................... 5

2.5 Absorptive Capacity …................................................................ 6

3. MAIN PART …......................................................................................... 7

3.1 Distribution of Knowledge …....................................................... 7

3.2 University Collaboration ….......................................................... 9

4. LIMITATION, DISCUSSION AND CONCLUSION ….......................... 12

5. REFERENCES …..................................................................................... 13

LIST OF TABLES

Page

Table 1 R &D spending on top universities in US ................................. 10

Table 2 Share of total global R&D spendings based on country …........ 11

LIST OF FIGURES

Page

Figure 1.1 Closed Innovation ...................................................................... 5

Figure 1.2 Open Innovation ...................................................................... 6

LIST OF ABBREVIATIONS

IT Information Technology

VC Venture Capital

IP Intellectual Property

R&D Research and Development Department

SME ( Small and Medium Enterprises )

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1. Introduction

Innovation is a factor for change in the society. Companies have been innovating their unique

ideas by investing a lots of money and time in R&D Departments. Traditionally, industrial firms

developed new technologies for their own products internally (Ahlstrom, 2010; March, 1991; Wyld,

2010;Wyld & Maurin, 2009). Companies have been doing this successfully for decades. This has not

only made sure the companies profit but also that they have enough revenue to keep funding on good

researchers. But now the landscape of research and innovation has is changing with knowledge

distributed with numerous companies and institution around the world.

Essential knowledge is no longer limited to small number of big companies. New paradigms

are being searched for to keep up with innovative power to profit themselves and hence benefit the

society. Some companies are satisfied with creating the benchmarks and improving on it. But study

have shown it is not sufficient to overtake or own other competitors in the market. Researches must go

on and time is a factor for many companies. Lots of time and knowledge is missing during the

knowledge search or research. There is a need to bridge this gap to keep innovating. The problem

doesn't limit to this. The problem especially in industries like pharmaceutical is that patents are running

out. There is a high pressure to re-design the business model and encourage new researches.

With most of the companies choosing only few of the researches to actually go into

development lots of spillovers are being generated internally. Since research in today's world is very

expensive, companies are trying to find out the ways to get profit from these spillovers. If a company

cannot use it, others will use it to generate profit. So there seems no option but to collaborate with

others to keep the innovation going. A new paradigm, open innovation has got a lot of discussion which

addresses the above problems. As coined by Chesbrough (2003), it suggests external knowledge is

sitting in the shelf and should be used to fill the missing knowledge in research activities. Companies

should open at least their spillovers that do not fit main business to other companies through

collaboration or licensing . Spillovers are now considered consequences of doing research instead of

being a cost of doing a business. Instead of retaining the unused IP , Open Innovation encourages

companies to sale it to others and provides a rationale for why firms should be active buyers and sellers

of IP. It was previously perceived that Open Innovation is only for industries in high technologies.

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Research by Chesbrough (2003) shows that it has utility as a paradigm for industrial innovation beyond

high tech to more traditional and mature industries.

Universities traditional have been viewed as a source of fundamental research which are the

base for other researches. With commercialization and specialization in almost all the sector, this

tradition is being changed. Universities along with still being the primary source of fundamental

research is quickly becoming a place where other companies can establish partnership. Not only

universities in developed countries like USA and Europe, but all around the world specially Asian

countries like China and India have seen the increased quality of student researchers. Universities all

around the world are being funded for specific company needs and to generated external spillovers.

Even governments are encouraging this partnership which they have recognized as ultimately

increasing national innovative power and thus generating more income to the economy. To facilitate

this governments have made it easier to file patents for university researches. Although lots of free

articles and journals are still common from universities, specialized partnerships are increasing and in

demand from the industry. Crowd-sourcing and co-creation are other worlds increasingly used

nowadays. Companies are now looking to co-evolve through the introduction of innovative ideas

supplied externally through different organizations.Customers are providing ideas about discovering ,

developing and refining innovation. All these are leading towards a open innovative industry.

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2. Theoretical Background

2.1 R&D Department.

Research and Development department is one of the crucial part of any company for holding a

prominent position in market. According to wikipedia sources, this is where a company increases its

knowledge base, discovers new processes or products. This is necessary for every company because of

the continuous change in technologies/knowledge base, advances by its competitors and new demands

of the market . In absence of R&D department only option for a company will be acquisition which

more often is a length , risky and expensive business strategy. R&D activities generally refer to future

oriented and long term activities in science and technology. Wikipedia sources quotes that generally the

trend is that companies spend 2-5 percent of their total revenue in R&D department to stay competitive.

It says the observed figures could increase above 15 % depending the current status of a company and

its competitors. Also some companies could just start with R&D department and later focus on

marketing the output of R&D. A lot of university graduates and sometimes students as well are

involved in R&D departments. Some companies also have the trend of collaborative R&D, that is they

have a common R&D with another company or even hire research institutes for strengthening their

research activity.

2.2 Innovation.

Innovation is the process of creating something new that is useful for the society. This can occur

anywhere in the society, it can be a business setting, university, government or any other organization

or even an individual may be doing it. Innovation is not always about making the next big thing or

getting next billion dollar, it can be very simple. Innovation as a whole is more than work of one genius

inventor. Innovation is something that transforms the society from traditional thinking . It is not limited

to technologies. New ideas, processes that change the thinking of society are innovations. Innovation

drives the future of society so we need it everywhere like in education, healthcare, electricity supply,

energy , traffic etc .

If there is some invention but is unable to find anyone to produce and use, an invention remains

undiscovered to the world. For this invention to be considered an innovation it should be introduced to

the world and should improve their lives in some way.

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2.3 Closed Innovation.

This is the traditional paradigm followed by many companies around the world. In this

paradigm companies have total control on the R&D activities under the umbrella of a centralized

corporate organization. The belief here is successful innovation requires total control on R&D and

ownership of Intellectual property (IP). This is the only ways to bar competitors as they will have to

invest a lot for that innovation. Companies with this model don't have any choice but to always look to

hire the genius people for their R&D. After the investments all the research activities are done within

the organization . Numerous researches are done simultaneously in the hope that some ideas can be

changed to a real product that can have an effect in the market. Rest of the researches stop getting funds

and are kept in selves in a hope that it will be utilized by other within the company in the future.

Figure below shows the working of closed innovation model.

Figure 1.1 Closed Innovation (Source:http://gebyargebyur.files.wordpress.com/2010/10/closed_innovation_en.jpg)

2.4 Open Innovation.

This is a new paradigm evolving with R&D departments throughout companies in the world.

New ideas and innovation are happening all around the world not only in the large companies as it used

to be. Instead of trying to hire the genius people in the company this model assumes genius people

work for other companies and useful research happen outside the organization. Large number of

startups with new ideas are getting a lot of funding from venture capitalists. Universities around the

world are researching more and more. Flow of knowledge from outside the company and from the

company is required for a great innovation. Internal and external ideas are equally important in this

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model. Open Innovation model also assumes that internal ideas can be taken to the market through

external channels outside the main business of the firm generating additional profits.

In addition, internal inventions not being used in this model are not kept in the selves but are taken

outside the company through licensing, joint ventures or spin-offs.

Figure 1.2 Open Innovation (Source : http://beling.net/articles/about/Closed_innovation)

2.5 Absorptive Capacity.

Ability to absorb external knowledge is known as absorptive capacity. According to wikipedia

source it is defined as "a firm's ability to recognize the value of new information, assimilate it, and

apply it to commercial ends". Ability to absorb external knowledge has become a major driver for

competition(Andre Spithoven, Bart Clarysse, Mirjam Knockaert;2010). The concept of open

innovation in relation to absorcomptive capacity is relatively well understood for big companies but

little attention has been paid for small firms . They tend to operate in traditional sectors, engage in open

innovation activities. Prior to this companies only focussed on knowledge stock and knowledge flows.

But new studies suggests absorptive capacity is very important to be innovative.

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3. Main Part

Discussions from different journals, books and web resources have been used in this paper to

describe the emergence of Open innovation as a new paradigm in Innovation for R&D throughout the

corporate industry. Previous research papers have extensively focussed on distribution of essential

knowledge as one of the key factor for open innovation paradigm getting popular among industry R&D

Departments. The quality of researches around the world has also increased many folds which makes it

imperative for industry researchers to collaborate with universities. These two topics are discussed in

this research paper.

3.1 Distribution of knowledge

As documented by Chesbrough (2003), industries around the world have recognized the value

of knowledge and ideas from other source for innovation. Even big companies with large R&D

department and huge investments only represent a fraction in every field nowadays. Pharmaceutical

giant Merck realized this over a decade ago in their 2000 annual report. It says “Merck accounts for

about 1 percent of the biomedical research in the world . To tap into the remaining 99 percent, industry

researchers must actively reach out to universities, research institutions and other companies

worldwide to bring the best of technology and potential products. Innovation is far too complex for any

one company to handle all the research alone.”

Sharing of knowledge through open innovation is creating new kind of innovations which were

not thought of previously. Braden Kelley (2009) gives a good example of Mercedes and Swatch who

collaborated to produce the Smart car. When Mercedes wanted to produce an innovative town car they

did not choose another automobile manufacturer, they partnered with a fashion watch maker. Each

brought different skills and experiences to the team. He also explains that many leading companies,

including IBM, Proctor and Gamble, Google, BMW, Nokia have focused on open innovation as a way

of driving innovation. Open innovation replaces the vertical integration of processes within one

company with a network of collaborators working on innovation projects.Using outsiders can speed up

processes, reduce costs, introduce more innovative ideas and reduce time to market. Barry and

Kevin(2010) explains that Google has experimented with open innovation within its own organization

with well-known “70-20-10” rule, which directs engineers to spend 70 percent of their time on core

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business tasks and 20 percent on related projects, but allows them to spend 10 percent of their time

pursuing their own ideas.

In addition to open invention, open coordination has led to consensus building around issues

such as technology standards that have permitted whole business ecosystems to flourish (Chesbrough,

Melissa M. Appleyard, 2007). A business ecosystem represents the interplay between multiple

industries, so a decision to open up a segment of one industry can have widespread reverberations.

From the 1980s IBM’s decision to open up its personal computer (PC) architecture led to the rise of the

“clones” as companies such as Compaq emulated the IBM specifications. IBM’s architecture couple

with Microsoft’s operating system and Intel’s microprocessors became the de facto technology

standards in the PC industry. This is just another example where open innovation is successful because

of distributed knowledge.

An EU report states that “research is becoming more and more expensive, owing to its

increasing complexity: In twenty years the cost of developing a drug has more than doubled, and that of

a new microelectronic component has increased ten-fold the single track flow of innovation from basic

research to application research, development research, and commercialization has ended. There is a

need to establish flexible, multi-track and fast-paced innovation systems that encourage cross-

disciplinary research and development, and the feedback of the market needs into basic and application

research”

Chesbrough (2008) quoted Wynett from Procter & Gamble saying “ We invented not invented

here “. This seems to be a trend right now. Wynett said their brands were doing good in the market but

they were still not able to develop many new brands. To get new brands they opened up and teamed

with other SMEs ( Small and Medium Enterprises ).Chesbrough continues with the theory that SMEs

have less capability and less market power. Nevertheless innovative capacity are in abundance with

SMEs and these SMEs are distributed all around the world. This situation is flourishing the idea of

open innovation.

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3.2 University collaboration

Universities have always been able to provide a rich knowledge landscape for companies.

Researches from universities are more basic in nature which is the foundation of further research for

industry as opposed to applied researches done in the industry. University researches have been very

important and of larger impact than researches done in private firms . In recognition to this fact

governments in industrialized have launched numerous initiatives since 1970s. David & Bhaven (2010)

explains governments in industrial world are now trying to increase the rate of transfer of academic

advances to industry and facilitate the application of these researches in domestic firms as part of

broader effort to improve national economic performance. This has decreased the burden on the

governments at the same time has made universities more aggressive to collaborate and get fundings

from private firms.

Wim & Joel (2006) explains the study where industry researchers have explained the benefits of

collaborating with the universities. In a study of US industry researchers , respondents reported that

approximately 10 percent of their product and process innovations could not have been developed

without substantial delay in the absence of academic research inputs (Mansfield 1991, 1998).

According to Chesbrough, because universities are more concerned with fundamental researches, they

lack specialization in the creation of knowledge assets and commercialization. Industries have taken

this opportunity to collaborate with universities. By collaborating with universities industry researchers

are benefitted in terms of keeping abreast of university research and receiving general assistance with

problem-solving. Failure and success of researches in the university guides industry researchers in the

direction of most promising opportunity which is helping them avoid unfruitful areas thereby

increasing productivity of applied research. University research is very cheap for the industry in

comparison to its in-house research department. Even spillovers from universities are a good attraction

for industry.

Below is the statistics of research funds for some of the top universities in US.

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Table 1: R&D spending on top universities in USInstitutions 2007 Total Research x $1000 2008 Endowment Assets x $1000

Columbia University 545,995 7,146,806

Massachusetts Institute of Technology

614,352 10,068,800

Yale University 448,671 22,869,700

Johns Hopkins University 1,554,103 2,524,575

Harvard University 451,276 36,556,284Source: The Top American Research Universities(http://mup.asu.edu/research2009.pdf)

The concept of open innovation suggests that innovation is assisted or sometime even depend

on IP rights. IP right helped change the traditional behavior of university researches. Universities are

directly collaborating with different firms to research on applied science and focus on their

specialization instead of focussing on general researches. As no company wants to invest in an

university and see its investment use by other firms, introduction of IP rights in university researches

has assured them about the safety of their investment. With IP rights in place the trend of industry

investing in university research has grown . This has drastically increased the commercial application

of university research.

Lots of university research papers are still out for free in journal papers. University researchers

deliberately do this to get popular. Collaboration with company and generation of base knowledge for

the industry, both are happening from the university at the same time. Reports suggests that firms that

are more collaboratively connected to university scientists may be better positioned to exploit

university science .

Most research papers focuses in universities in US and shows the growing importance of

universities in open innovation and innovation as a whole. There are some papers which have done

similar research for universities in other countries. Calvert and Patel (2002) based on an examination of

slightly more than 22,000 papers reveals a threefold increase in co-authorship between UK industry

and university researchers during 1981-2000. Papers co-authored by industrial and university

researchers expanded from approximately 20% to nearly 47% of all UK scientific papers published by

industrial researchers during the 1981-2000 period.

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UK has always been one of the biggest contributor for global innovation. But Jeremy, Shu &

Ronnie (2012) suggest firms in the UK appear to lack the knowledge about what universities have to

offer them in terms of research and innovation. Even though this might be true , in past couple of

decades the landscape of research has been changing . Countries from Asia specially China is

contributing more than ever before. Table 2 shows the spending based on countries for 2010 to 2012 .

The trend shows R&D spending in Asia is growing rapidly and those researches are generating lots of

innovation. They are increasing becoming one of the important source of knowledge for innovation.

Table 2: Share of Total Global R&D Spendings

2010 2011 2012

Americas 37.8% 36.9% 36.0%

U.S. 32.8% 32.0% 31.1%

Asia 34.3% 35.5% 36.7%

Japan 11.8% 11.4% 11.2%

China 12.0% 13.1% 14.2%

India 2.6% 2.8% 2.9%

Europe 24.8% 24.5% 24.1%

Rest of World 3.0% 3.1% 3.2%Source: Battelle, R&D Magazine

In USA , Ivy league colleges have always been leading to contribute towards innovation. In

October 2009 China created C9 league comprising top nine universities. The main concept of its

formation is collaboration in researches. Twenty percent of total country journals are published by C9

league universities alone according to wikipedia sources. Researchers from universities in China are

innovating based on chinese consumers needs. This is helping to create new business models and

technologies in a very practical approach to the market. China as a whole is a great resource for

innovation but with most of its innovative populating in universities this is a great thing . Lots of

businesses are now trying to collaborate with chinese universities.

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4. Limitation, Discussion and Conclusion

This paper has some limitations which I would like to mention here. This paper has been

prepared with the study of other research papers, journals, books and references from internet sources

including blogs. No direct interview or surveys has been conducted while creating the paper. Inclusion

of direct survey and interviews with some senior R&D management would have been an added input

for this research paper. Emergence of open innovation in R&D is a very broad topic. Covering all the

sub topics was not possible for this paper.

Moving away from the limitations, I have discussed about the emerging type of innovation in

industry, that is open innovation. Some statistics have also been included in this research paper to show

the significance of the theory mentioned for open innovation. With the overview of open innovation ,

this research paper mostly focuses on the dependency of university for open innovation. I have also

mentioned the fact that knowledge is distributed right now. No single company or even country as a

whole can claim to have all the valuable knowledge. Google, IBM are some of the big companies

which have already started to implement open innovation in some forms. SMEs are generating more

innovation and hence Patents. This is changing the landscape of innovation. As mentioned in the paper,

universities have always been a foundation of industry research with fundamental knowledge discovery

and are continuing that trend with lots of journals and books. But the fact is also that now with

increasing commercialization universities are adapting to that. That is, universities are now increasingly

using IP rights to protect their innovation and specializing according to industry demand in

collaboration with the industry. With this collaborative universities are getting proper fundings for

further research. Few decades back this was happening only in US and Europe. But now the statistics

shows that emerging countries are increasingly contributing with new innovations.

With the statistics collected from web and reading through different research papers I can say

that even though closed innovation is required in some cases, most of the R&D should follow the new

paradigm, that is open innovation to keep on benefitting from others researches and utilize otherwise

unusable spillovers. Since they are also getting revenues for their spillovers, it is always better to have

it and keep funding on other researches. In near future, we can safely predict companies, universities

and SMEs will collaborate more and across the boundary of country.

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5. References

Henry Chesbrough, Wim Vanhaverbeke & Joel West (2006). Open Innovation: Researching a New Paradigm

Keld Laursen (February 2012). Benefits and costs of being open for innovations

Cormac Sheridan(2011). Industry Continues dabbling with open innovation modelsNature Biotechnology

Chesbrough, H.W. (2003), Open Innovation: The New Imperative for Creating and Profiting from Technology Cambridge, Mass.: Harvard Business School Press

Jeremy Howells, Ronnie Ramlogan, Shu-Li Cheng (2012). Universities in an open innovation system: a UK perspectiveInternational Journal of Entrepreneurial Behaviour & Research Vol. 18 No. 4, 2012

Favid C. Mowery, Bhaven N. Sampat . Universities in national innovation systems Retrieved from, http://innovate.ucsb.edu/wp-content/uploads/2010/04/Mowery-Sampat-Univ-National-Innovation-Systems.pdf

Henry Chesbrough(2009). Open Innovation: A new paradigm for Industrial R&D

Ulrich Lichtenthaler(2011). Open Innovation: Past Research, Current Debates and Future Directions

Andre Spithoven, Bart Clarysse, Mirjam Knockaert(2010). Building absorptive capacity to organize inbound open innovation in traditional industriesTechnovation Vol. 30, Issue 2, February 2010

Merck Annual Report (2000). Retrieved from, http://www.anrpt2000.com/innovation2.htm

Braden Kelley (2009). Innovation Collaboration :How Leading Firms Use Open InnovationRetrieved from, http://www.business-strategy-innovation.com/2009/07/innovation-collaboration.html

Chesbrough, Melissa M. Appleyard (2007). Open Innovation and StrategyCalifornia Management Review Vol. 50, No. 1 Fallcom 2007

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