TECHNICAL UNIVERSITY OF MUNICH             Open Innovation: A new paradigm for corporate R&D departments        Submitted ...
Abstract       The concept of Open Innovation advocates that companies can no longer keep innovatingwithout collaborating ...
Ehrenwörtliche Erklärung       Ich erkläre hiermit ehrenwörtlich, dass ich die vorliegende wissenschaftliche Arbeitselbsts...
TABLE OF CONTENT                                                                                                          ...
LIST OF TABLES                                                                                                            ...
1. Introduction       Innovation is a factor for change in the society. Companies have been innovating their uniqueideas b...
Research by Chesbrough (2003) shows that it has utility as a paradigm for industrial innovation beyondhigh tech to more tr...
2. Theoretical Background2.1 R&D Department.        Research and Development department is one of the crucial part of any ...
2.3 Closed Innovation.        This is the traditional paradigm followed by many companies around the world. In thisparadig...
model. Open Innovation model also assumes that internal ideas can be taken to the market throughexternal channels outside ...
3. Main Part       Discussions from different journals, books and web resources have been used in this paper todescribe th...
business tasks and 20 percent on related projects, but allows them to spend 10 percent of their timepursuing their own ide...
3.2 University collaboration       Universities have always been able to provide a rich knowledge landscape for companies....
Table 1: R&D spending on top universities in USInstitutions                     2007 Total Research x $1000  2008 Endowmen...
UK has always been one of the biggest contributor for global innovation. But Jeremy, Shu &Ronnie (2012) suggest firms in t...
4. Limitation, Discussion and Conclusion       This paper has some limitations which I would like to mention here. This pa...
5. ReferencesHenry Chesbrough, Wim Vanhaverbeke & Joel West (2006). Open Innovation: Researching a NewParadigmKeld Laursen...
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  1. 1. 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
  2. 2. Abstract The concept of Open Innovation advocates that companies can no longer keep innovatingwithout collaborating with other partners. The key to success is creating an open platform around yourinnovations 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 openinnovation model. For some it has become necessity because of lack of essential knowledge. Othershave adopted the paradigm to benefit from distributed knowledge around the world. Many others havedone it to utilize their spillovers instead of piling up the spillovers in the shelves. Universities andSMEs are showing up as a primary source or collaborator for big companies, hence also generating lotsof spillovers. Together these findings show open innovation model is flourishing and is the best way to keepinnovating. Study also suggests that maintaining the absorptive capacity is difficult for somecompanies.
  3. 3. Ehrenwörtliche Erklärung Ich erkläre hiermit ehrenwörtlich, dass ich die vorliegende wissenschaftliche Arbeitselbstständig und ohne fremde Hilfe verfasst habe. Ich habe keine anderen als die angegebenenHilfsmittel und Quellen benutzt. Die wörtlich oder inhaltlich aus Quellen jeglicher Art ubernommenenPassagen habe ich in meiner Arbeit ausnahmslos als solche kenntlich gemacht. Ich habe in keiner Weise versucht, die Ergebnisse im Rahmen der empirischen Erhebung oderan anderer Stelle zu beeinflussen. Die statistischen Analysen habe ich nach bestem Wissen undGewissen durchgefuhrt und die zugrundeliegenden Daten in keiner Weise verändert, erweitert oderverkurzt. Gegebenenfalls an den Originaldaten vorgenommene Modifikationen (z. B.Transformationen, Datenbereinigung) habe ich ausnahmslos und in nachvollziehbarer Weise benanntund begrundet. Die Arbeit hat bisher nicht in gleicher oder ähnlicher Form oder auszugsweise dieser oder eineranderen Prufungsbehörde vorgelegen.Munchen, 20.07.2012(Unterschrift)
  4. 4. TABLE OF CONTENT PageLIST OF TABLES .................................................................................... 1LIST OF FIGURES .................................................................................. 1LIST OF ABBREVIATIONS ................................................................... 11. INTRODUCTION ................................................................................ 22. 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 …................................................................ 63. MAIN PART …......................................................................................... 7 3.1 Distribution of Knowledge …....................................................... 7 3.2 University Collaboration ….......................................................... 94. LIMITATION, DISCUSSION AND CONCLUSION ….......................... 125. REFERENCES …..................................................................................... 13
  5. 5. LIST OF TABLES PageTable 1 R &D spending on top universities in US ................................. 10Table 2 Share of total global R&D spendings based on country …........ 11 LIST OF FIGURES PageFigure 1.1 Closed Innovation ...................................................................... 5Figure 1.2 Open Innovation ...................................................................... 6 LIST OF ABBREVIATIONSIT Information TechnologyVC Venture CapitalIP Intellectual PropertyR&D Research and Development DepartmentSME ( Small and Medium Enterprises )1
  6. 6. 1. Introduction Innovation is a factor for change in the society. Companies have been innovating their uniqueideas by investing a lots of money and time in R&D Departments. Traditionally, industrial firmsdeveloped 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 notonly made sure the companies profit but also that they have enough revenue to keep funding on goodresearchers. But now the landscape of research and innovation has is changing with knowledgedistributed with numerous companies and institution around the world. Essential knowledge is no longer limited to small number of big companies. New paradigmsare being searched for to keep up with innovative power to profit themselves and hence benefit thesociety. Some companies are satisfied with creating the benchmarks and improving on it. But studyhave shown it is not sufficient to overtake or own other competitors in the market. Researches must goon and time is a factor for many companies. Lots of time and knowledge is missing during theknowledge search or research. There is a need to bridge this gap to keep innovating. The problemdoesnt limit to this. The problem especially in industries like pharmaceutical is that patents are runningout. 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 intodevelopment lots of spillovers are being generated internally. Since research in todays world is veryexpensive, companies are trying to find out the ways to get profit from these spillovers. If a companycannot use it, others will use it to generate profit. So there seems no option but to collaborate withothers to keep the innovation going. A new paradigm, open innovation has got a lot of discussion whichaddresses the above problems. As coined by Chesbrough (2003), it suggests external knowledge issitting in the shelf and should be used to fill the missing knowledge in research activities. Companiesshould open at least their spillovers that do not fit main business to other companies throughcollaboration or licensing . Spillovers are now considered consequences of doing research instead ofbeing a cost of doing a business. Instead of retaining the unused IP , Open Innovation encouragescompanies to sale it to others and provides a rationale for why firms should be active buyers and sellersof IP. It was previously perceived that Open Innovation is only for industries in high technologies.2
  7. 7. Research by Chesbrough (2003) shows that it has utility as a paradigm for industrial innovation beyondhigh tech to more traditional and mature industries. Universities traditional have been viewed as a source of fundamental research which are thebase for other researches. With commercialization and specialization in almost all the sector, thistradition is being changed. Universities along with still being the primary source of fundamentalresearch is quickly becoming a place where other companies can establish partnership. Not onlyuniversities in developed countries like USA and Europe, but all around the world specially Asiancountries like China and India have seen the increased quality of student researchers. Universities allaround 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 ultimatelyincreasing national innovative power and thus generating more income to the economy. To facilitatethis governments have made it easier to file patents for university researches. Although lots of freearticles and journals are still common from universities, specialized partnerships are increasing and indemand from the industry. Crowd-sourcing and co-creation are other worlds increasingly usednowadays. Companies are now looking to co-evolve through the introduction of innovative ideassupplied externally through different organizations.Customers are providing ideas about discovering ,developing and refining innovation. All these are leading towards a open innovative industry.3
  8. 8. 2. Theoretical Background2.1 R&D Department. Research and Development department is one of the crucial part of any company for holding aprominent position in market. According to wikipedia sources, this is where a company increases itsknowledge base, discovers new processes or products. This is necessary for every company because ofthe continuous change in technologies/knowledge base, advances by its competitors and new demandsof the market . In absence of R&D department only option for a company will be acquisition whichmore often is a length , risky and expensive business strategy. R&D activities generally refer to futureoriented and long term activities in science and technology. Wikipedia sources quotes that generally thetrend 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 andits competitors. Also some companies could just start with R&D department and later focus onmarketing the output of R&D. A lot of university graduates and sometimes students as well areinvolved in R&D departments. Some companies also have the trend of collaborative R&D, that is theyhave a common R&D with another company or even hire research institutes for strengthening theirresearch activity.2.2 Innovation. Innovation is the process of creating something new that is useful for the society. This can occuranywhere in the society, it can be a business setting, university, government or any other organizationor even an individual may be doing it. Innovation is not always about making the next big thing orgetting next billion dollar, it can be very simple. Innovation as a whole is more than work of one geniusinventor. Innovation is something that transforms the society from traditional thinking . It is not limitedto technologies. New ideas, processes that change the thinking of society are innovations. Innovationdrives 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 remainsundiscovered to the world. For this invention to be considered an innovation it should be introduced tothe world and should improve their lives in some way.4
  9. 9. 2.3 Closed Innovation. This is the traditional paradigm followed by many companies around the world. In thisparadigm companies have total control on the R&D activities under the umbrella of a centralizedcorporate organization. The belief here is successful innovation requires total control on R&D andownership of Intellectual property (IP). This is the only ways to bar competitors as they will have toinvest a lot for that innovation. Companies with this model dont have any choice but to always look tohire the genius people for their R&D. After the investments all the research activities are done withinthe organization . Numerous researches are done simultaneously in the hope that some ideas can bechanged to a real product that can have an effect in the market. Rest of the researches stop getting fundsand 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 usedto be. Instead of trying to hire the genius people in the company this model assumes genius peoplework for other companies and useful research happen outside the organization. Large number ofstartups with new ideas are getting a lot of funding from venture capitalists. Universities around theworld are researching more and more. Flow of knowledge from outside the company and from thecompany is required for a great innovation. Internal and external ideas are equally important in this5
  10. 10. model. Open Innovation model also assumes that internal ideas can be taken to the market throughexternal 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 takenoutside 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 wikipediasource it is defined as "a firms ability to recognize the value of new information, assimilate it, andapply it to commercial ends". Ability to absorb external knowledge has become a major driver forcompetition(Andre Spithoven, Bart Clarysse, Mirjam Knockaert;2010). The concept of openinnovation in relation to absorcomptive capacity is relatively well understood for big companies butlittle attention has been paid for small firms . They tend to operate in traditional sectors, engage in openinnovation 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.6
  11. 11. 3. Main Part Discussions from different journals, books and web resources have been used in this paper todescribe the emergence of Open innovation as a new paradigm in Innovation for R&D throughout thecorporate industry. Previous research papers have extensively focussed on distribution of essentialknowledge as one of the key factor for open innovation paradigm getting popular among industry R&DDepartments. The quality of researches around the world has also increased many folds which makes itimperative for industry researchers to collaborate with universities. These two topics are discussed inthis research paper.3.1 Distribution of knowledge As documented by Chesbrough (2003), industries around the world have recognized the valueof knowledge and ideas from other source for innovation. Even big companies with large R&Ddepartment and huge investments only represent a fraction in every field nowadays. Pharmaceuticalgiant Merck realized this over a decade ago in their 2000 annual report. It says “Merck accounts forabout 1 percent of the biomedical research in the world . To tap into the remaining 99 percent, industryresearchers must actively reach out to universities, research institutions and other companiesworldwide to bring the best of technology and potential products. Innovation is far too complex for anyone company to handle all the research alone.” Sharing of knowledge through open innovation is creating new kind of innovations which werenot thought of previously. Braden Kelley (2009) gives a good example of Mercedes and Swatch whocollaborated to produce the Smart car. When Mercedes wanted to produce an innovative town car theydid not choose another automobile manufacturer, they partnered with a fashion watch maker. Eachbrought 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 wayof driving innovation. Open innovation replaces the vertical integration of processes within onecompany with a network of collaborators working on innovation projects.Using outsiders can speed upprocesses, reduce costs, introduce more innovative ideas and reduce time to market. Barry andKevin(2010) explains that Google has experimented with open innovation within its own organizationwith well-known “70-20-10” rule, which directs engineers to spend 70 percent of their time on core7
  12. 12. business tasks and 20 percent on related projects, but allows them to spend 10 percent of their timepursuing their own ideas. In addition to open invention, open coordination has led to consensus building around issuessuch as technology standards that have permitted whole business ecosystems to flourish (Chesbrough,Melissa M. Appleyard, 2007). A business ecosystem represents the interplay between multipleindustries, 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 couplewith Microsoft’s operating system and Intel’s microprocessors became the de facto technologystandards in the PC industry. This is just another example where open innovation is successful becauseof distributed knowledge. An EU report states that “research is becoming more and more expensive, owing to itsincreasing complexity: In twenty years the cost of developing a drug has more than doubled, and that ofa new microelectronic component has increased ten-fold the single track flow of innovation from basicresearch to application research, development research, and commercialization has ended. There is aneed 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 applicationresearch” Chesbrough (2008) quoted Wynett from Procter & Gamble saying “ We invented not inventedhere “. This seems to be a trend right now. Wynett said their brands were doing good in the market butthey were still not able to develop many new brands. To get new brands they opened up and teamedwith other SMEs ( Small and Medium Enterprises ).Chesbrough continues with the theory that SMEshave less capability and less market power. Nevertheless innovative capacity are in abundance withSMEs and these SMEs are distributed all around the world. This situation is flourishing the idea ofopen innovation.8
  13. 13. 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 forindustry as opposed to applied researches done in the industry. University researches have been veryimportant and of larger impact than researches done in private firms . In recognition to this factgovernments 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 academicadvances to industry and facilitate the application of these researches in domestic firms as part ofbroader effort to improve national economic performance. This has decreased the burden on thegovernments at the same time has made universities more aggressive to collaborate and get fundingsfrom private firms. Wim & Joel (2006) explains the study where industry researchers have explained the benefits ofcollaborating with the universities. In a study of US industry researchers , respondents reported thatapproximately 10 percent of their product and process innovations could not have been developedwithout substantial delay in the absence of academic research inputs (Mansfield 1991, 1998).According to Chesbrough, because universities are more concerned with fundamental researches, theylack specialization in the creation of knowledge assets and commercialization. Industries have takenthis opportunity to collaborate with universities. By collaborating with universities industry researchersare benefitted in terms of keeping abreast of university research and receiving general assistance withproblem-solving. Failure and success of researches in the university guides industry researchers in thedirection of most promising opportunity which is helping them avoid unfruitful areas therebyincreasing productivity of applied research. University research is very cheap for the industry incomparison to its in-house research department. Even spillovers from universities are a good attractionfor industry. Below is the statistics of research funds for some of the top universities in US.9
  14. 14. Table 1: R&D spending on top universities in USInstitutions 2007 Total Research x $1000 2008 Endowment Assets x $1000Columbia University 545,995 7,146,806Massachusetts Institute of 614,352 10,068,800TechnologyYale University 448,671 22,869,700Johns Hopkins University 1,554,103 2,524,575Harvard 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 dependon IP rights. IP right helped change the traditional behavior of university researches. Universities aredirectly collaborating with different firms to research on applied science and focus on theirspecialization instead of focussing on general researches. As no company wants to invest in anuniversity and see its investment use by other firms, introduction of IP rights in university researcheshas assured them about the safety of their investment. With IP rights in place the trend of industryinvesting in university research has grown . This has drastically increased the commercial applicationof university research. Lots of university research papers are still out for free in journal papers. University researchersdeliberately do this to get popular. Collaboration with company and generation of base knowledge forthe industry, both are happening from the university at the same time. Reports suggests that firms thatare more collaboratively connected to university scientists may be better positioned to exploituniversity science . Most research papers focuses in universities in US and shows the growing importance ofuniversities in open innovation and innovation as a whole. There are some papers which have donesimilar research for universities in other countries. Calvert and Patel (2002) based on an examination ofslightly more than 22,000 papers reveals a threefold increase in co-authorship between UK industryand university researchers during 1981-2000. Papers co-authored by industrial and universityresearchers expanded from approximately 20% to nearly 47% of all UK scientific papers published byindustrial researchers during the 1981-2000 period.10
  15. 15. 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 tooffer them in terms of research and innovation. Even though this might be true , in past couple ofdecades the landscape of research has been changing . Countries from Asia specially China iscontributing 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 ofinnovation. They are increasing becoming one of the important source of knowledge for innovation. Table 2: Share of Total Global R&D Spendings 2010 2011 2012Americas 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. InOctober 2009 China created C9 league comprising top nine universities. The main concept of itsformation is collaboration in researches. Twenty percent of total country journals are published by C9league universities alone according to wikipedia sources. Researchers from universities in China areinnovating based on chinese consumers needs. This is helping to create new business models andtechnologies in a very practical approach to the market. China as a whole is a great resource forinnovation but with most of its innovative populating in universities this is a great thing . Lots ofbusinesses are now trying to collaborate with chinese universities.11
  16. 16. 4. Limitation, Discussion and Conclusion This paper has some limitations which I would like to mention here. This paper has beenprepared with the study of other research papers, journals, books and references from internet sourcesincluding blogs. No direct interview or surveys has been conducted while creating the paper. Inclusionof direct survey and interviews with some senior R&D management would have been an added inputfor this research paper. Emergence of open innovation in R&D is a very broad topic. Covering all thesub topics was not possible for this paper. Moving away from the limitations, I have discussed about the emerging type of innovation inindustry, that is open innovation. Some statistics have also been included in this research paper to showthe 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 alsomentioned the fact that knowledge is distributed right now. No single company or even country as awhole can claim to have all the valuable knowledge. Google, IBM are some of the big companieswhich have already started to implement open innovation in some forms. SMEs are generating moreinnovation 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 discoveryand are continuing that trend with lots of journals and books. But the fact is also that now withincreasing commercialization universities are adapting to that. That is, universities are now increasinglyusing IP rights to protect their innovation and specializing according to industry demand incollaboration with the industry. With this collaborative universities are getting proper fundings forfurther research. Few decades back this was happening only in US and Europe. But now the statisticsshows that emerging countries are increasingly contributing with new innovations. With the statistics collected from web and reading through different research papers I can saythat even though closed innovation is required in some cases, most of the R&D should follow the newparadigm, that is open innovation to keep on benefitting from others researches and utilize otherwiseunusable spillovers. Since they are also getting revenues for their spillovers, it is always better to haveit and keep funding on other researches. In near future, we can safely predict companies, universitiesand SMEs will collaborate more and across the boundary of country.12
  17. 17. 5. ReferencesHenry Chesbrough, Wim Vanhaverbeke & Joel West (2006). Open Innovation: Researching a NewParadigmKeld Laursen (February 2012). Benefits and costs of being open for innovationsCormac Sheridan(2011). Industry Continues dabbling with open innovation modelsNature BiotechnologyChesbrough, H.W. (2003), Open Innovation: The New Imperative for Creating and Profiting fromTechnologyCambridge, Mass.: Harvard Business School PressJeremy Howells, Ronnie Ramlogan, Shu-Li Cheng (2012). Universities in an open innovation system: aUK perspectiveInternational Journal of Entrepreneurial Behaviour & Research Vol. 18 No. 4, 2012Favid C. Mowery, Bhaven N. Sampat . Universities in national innovation systemsRetrieved from, http://innovate.ucsb.edu/wp-content/uploads/2010/04/Mowery-Sampat-Univ-National-Innovation-Systems.pdfHenry Chesbrough(2009). Open Innovation: A new paradigm for Industrial R&DUlrich Lichtenthaler(2011). Open Innovation: Past Research, Current Debates and Future DirectionsAndre Spithoven, Bart Clarysse, Mirjam Knockaert(2010). Building absorptive capacity to organizeinbound open innovation in traditional industriesTechnovation Vol. 30, Issue 2, February 2010Merck Annual Report (2000).Retrieved from, http://www.anrpt2000.com/innovation2.htmBraden Kelley (2009). Innovation Collaboration :How Leading Firms Use Open InnovationRetrieved from, http://www.business-strategy-innovation.com/2009/07/innovation-collaboration.htmlChesbrough, Melissa M. Appleyard (2007). Open Innovation and StrategyCalifornia Management Review Vol. 50, No. 1 Fallcom 200713

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