Open innovation – hype v reality

Science|Business CEO and Editor Richard L. Hudson

In the marketplace for ideas, “open innovation” is one such success story. The term, first popularised by a Berkeley professor just five years ago, is now incorporated into hundreds of Powerpoint presentations, business plans, consulting reports and books. It has its own Web site. And in Copenhagen on 25 and 26 February, a conference on the subject – by the Organisation for Economic Co-operation and Development – focused more policy attention to it.

But what is it? The bluntest definition possible: open innovation is what happens when big companies collaborate on a large scale with outsiders – university researchers, suppliers, small tech start-ups – to get new products or services to market. Clearly, it’s important; in global markets, there is no such thing as doing it all yourself. It’s politically sensitive: Some might call it a form of outsourcing. And it’s evolving fast: from a few early adopters, such as Procter & Gamble and Kraft, it has now spread to hundreds of multinationals. Among the major beneficiaries: university researchers who, because of it, have a better shot at corporate funding than in the past.

The patterns vary wildly. According to the OECD, in Denmark about 14 per cent of all companies – large or small – collaborate on innovation with partners in other European countries, and about 5 per cent do so with partners outside Europe. For Italian companies, both figures are under one per cent. Big companies do it more than small ones; in Belgium, as many as 60 per cent of large companies collaborate internationally. The desired partners are obvious: universities, research institutes, suppliers and, in many cases, big customers (a particularly common approach for the IT industry.) A few examples:

• At French glass-maker Saint-Gobain, a 20-person “techno-marketing team” sits with the R&D people and has a mission to scour the globe for possible new applications, partners and markets. It has a corporate venture unit, to invest in promising tech partners. And it has a network of regular public-research partners. It’s mainly a French network; it has about 50 contracts a year with France’s CNRS and runs two joint laboratories with it. But it also includes Harvard, Lomonosov, Sao Paolo and IIT–Madras.
  
  
• At Swiss drug-maker Novartis, about 30 per cent of the $1.2 billion R&D budget is spent on collaboration with external partners. They include 120 biotech companies and 280 academic research centres. Collaboration in regional clusters helps; an important initiative for Novartis is its participation in BioValley, a cluster of four multinationals, four universities and about 400 small companies in the Alsace–Basel–Freiburg region.
  
  
• At IBM, it seems, everything from employee relations to customer development is swept up into the open innovation model. The company has involved 140,000 people around the globe in “Innovation Jams” – online chats and Webinars to brainstorm on new ideas. Its intellectual-property unit seeks out partners for its inventions, who are both co-developers and customers for the technology. It has a corporate venturing fund, and a profusion of university collaborations.

As the IBM example highlights, the line between marketing and R&D in open innovation can be very fuzzy. Indeed, IBM has the broadest collaboration when it’s trying to promote a particular technical standard through the market; then, collaborators become vectors for transferring the technology. The collaboration is more limited – closed – when the technology is unique and core to IBM’s own business. At Saint-Gobain, one of the aims is to bring marketing into product-development as early as possible – partly to help sales later on, but also to get early customer feedback so bad ideas can be killed cheaply.

But the case for open innovation – however defined – is mixed.

Some of the benefits: getting new ideas, finding hot new partners or employees, killing the “not invented here” syndrome, conducting some early market research, pre-selling before the product launch – and, of course, saving money.

But there are costs, too. A company can lose control of its own technology, as it leaks out to partners. It can make it less likely, rather than more, that a new product is genuinely new and original. It’s hard on employee relations; is it a prelude to outsourcing or bypassing? And collaboration can be anything but efficient.

 “We want to see more collaboration – but not at the expense of purpose,” notes Andrew Dearing, secretary-general of the European Industrial Research Managers Association. He adds that relatively few companies are actually good at open innovation. “There are a few leaders, and many followers.”

But good or bad, the trend is here and politicians need to reckon with it. Here’s my own list of policy implications (spurred partly by a set of questions posed by the OECD):

• Universities. In an open marketplace of ideas, the winner takes all. That means Harvard, MIT, Cambridge, ETH-Zürich, IIT and 100 other world-class universities will predominate even more than they do now. Any politician who tries to buck that trend with egalitarian funding policies is simply wasting money. Better to make their strongest research institutions even stronger, so that their countries will matter in the global science market. And better yet if that extra funding comes through stiff competitions for grants, such as those now run by the European Research Council (odds of winning an ERC grant, based on the first-round results: 3 per cent).
  
  
• Clusters. For the same reason, government policies should nurture business clusters to grow around the universities. They make the universities stronger, attract the multinationals, and form a natural membrane through which ideas and inventions can more easily flow into and out of the university. And they create jobs. Virtual networks are nice – but that’s what the multinationals are trying to create; local governments should be focusing on local assets.
  
  
• Jobs and growth. Brain drain, outsourcing and all those other problems – there is nothing to be done about it except to make the local clusters and markets so attractive that they’re winners, rather than losers, in the global balance.
  
  
• Big v little. Multinationals are the biggest players in open innovation, but that doesn’t make them the most important. Spin-outs, start-ups and other small companies matter also; so politicians are right to encourage small company formation and growth. The only problem is that the help shouldn’t take the form it often does: soft loans, subsidised services (e.g., incubators), vouchers to buy university research, or outright government grants. It should be in a form that makes the small companies strong enough to attract the multinationals as customers or partners: lower taxes, less regulation, more flexible labour policies, stronger (but cheaper) IP protection.