Open Innovation and Types of Innovation: A Policy Perspective

1. 2008 International Conference on Industrial Technology Innovation Taipei – August 21-22, 2008 Open Innovation and Types of Innovation: A Policy Perspective Shin-Horng CHEN Alice LIN, Pei-Ju YU & Pam WEN Chung-Hua Institution for Economic Research

2. Outline • Introduction • A Closer Look at Open Innovation • Open Innovation and Types of Innovation: Case Elaboration • Examples of Policy Programs Based on Open Innovation • Policy Implications, Especially for the DoIT

3. 1. Introduction • Open Innovation (OI) first coined by Henry Chesbrough, as an antithesis of closed innovation • Traditional innovation paradigm: One company, the owner of the innovation, in charge of the innovation process • The basic questions: What can the government do, except making the framework condition right and compatible to the OI model? • Key issue: How to interpret OI from a strategic perspective, drawing further policy implications? • Is OI just a better practice for the routine innovation process? • Are there some innovation activities than the other more prone to entail OI? • OI may involve both costs and benefits

4. 2. A Closer Look at Open Innovation

5. Back to the Basics (1/3) • Definition The use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively (Chesbrough et al., 2003) • Concept • Spanning firm boundary • Collaboration inside & outside the organization • Managing the external process of innovation • Inside • Employees across divisions, locations, functions • Outside • Suppliers • Customers • Consumers • Partners • Universities & research institutes • Retirees • Anybody Source: Henry Chesbrough （2003）

6. Back to the Basics (2/3) • From Innovation 1.0 to Innovation 2.0: Leveraging the value of peer to peer innovation from those you don’t control Source: Robson & Smith (2008)

7. Back to the Basics (3/3) • Antecedents to OI, to name just a few • Spillover effect (neo-classical) • Absorptive capacity aspect of R&D (Cohen & Levinthal) • Complementary assets for innovation (Teece) • Democratizing & user-driven innovation (von Hippel) • Outsourcing • In one way or another, internal innovation can benefit from external knowledge. • OI: in a systematic way • What else is new about OI? • Fredberg et al. (2008): OI increases both potential creativity and complexity of the innovation process. • A tradeoff between costs and benefits; more than just cognitive barriers (Robson & Smith, 2008) • How to identify: focusing on a few key words or statements as food for additional thoughts

8. higher mobility of capital, labor and knowledge • lowered entry barriers and increased opportunities • for firms that can innovate fast • The shorter product life cycle coupled with increasing • complexity of the R&D process. • Technologies are increasing morphing into new fusion fields, • more interdisciplinary cross-border required, no one firm can • innovate fast enough by themselves • With the rapid shift ofmany industry and technology borders, • newbusiness opportunities arise. • New allianceshave been formed for sharing of risks, thepooling • of complementary competencies, andthe realization of synergies. • Open sourcesoftware development encourages many specialized • knowledge workers to offer their service to different organizations • at the same time. • Instead of hiring thebest engineers internally, companies are • forced to act as knowledge brokers. 1. Globalization 2. Technology intensity & fusion 3. New business models 4. Knowledge leveraging Why - Open innovation • The forces for moving to open innovation model Open innovation models require systematic innovation processes that engage third parties for both idea generation and commercialization.

9. Open Innovation & R&D Globalization (1/2) • New Patterns • R&D offshoring, technology sourcing, offshore collaboration (esp. global innovation networks; GINs) • Particularly regarding developing host countries • Beyond technology transfer and adaptive R&D • R&D offshoring, technology sourcing • Software, basic research, new market insights • Possibility of “enclave”; absence of local linkages • offshore collaboration • Inter-organizational, cross-border collaboration for innovation, facilitated by modularization of product • Capitalizing on the local countries “external economies”, in terms of industrial networking

10. Open Innovation & R&D Globalization (2/2) • Rules changed? (in relative terms) • Disassociation of R&D and manufacturing in terms of location • Unlike the case of technology transfer & adaptive R&D • Some of developing countries as a source of R&D and innovation • Not just a technology recipient and late-adopter • Players in the developing world as a partner of collective innovation • Involvement at the early stage of the product life cycle • Richard Florida: “Spiky” global landscape of knowledge and technology

11. Key Words/Statements for Further thoughts • Chesbrough (2008) • OI processes combine internal and external ideas into architectures and systems. OI processes utilize business models to define the requirements for these architectures and systems. • OI explicitly incorporates the business model as the source of both value creation and value capture. This latter role of the business model enables the organization to sustain its position in the industry value chain over time. • OI treats spillovers as a consequence of the company’s business model. These spillovers need not be a cost of doing business, they are an opportunity to expand a company’s business model, or to spin off a technology outside the firm to locate a different business model.

12. Implications of the Key Words/Statements • Those innovations with a stronger flavor of architecture and system integration may be more prone to entail OI. • Types of innovation • With an appropriate business model, OI can facilitate a firm to sustain its position in the industry value chain over time, the unit of analysis is not necessarily limited to the firm, and may involve the industry and the value chain for a specific innovation, and even cross sectors. • Chesbrough, Vanhavebeke & West (2006); Herstand (2008): OI at different levels • How may OI facilitate the formation of the architectures and systems needed? • Policy design

13. 3. Open Innovation and Types of Innovation : Case Elaboration

14. A Definition of Systems and Architectures • Technical systems defined by Windrum (1999) • Inherently large, comprising a set of jointly consumed interdependent products • Innovation networks: Intensive interfaces between multiple actors with different knowledge & skills bases • Because of network effects and product compatibility • Product architecture • The scheme by which a product’s arrangement of functional elements, the mapping from functional elements to physical components, and the specification of the interfaces among interacting physical components is defined • Also applicable to service innovation • Not only does such innovation often result from the collective efforts of interrelated firms, but the value chain does not need to be completely internalized within individual firms.

15. Systemic Service Innovation Defined by the EU KISA • Co-creation can be the norm. Source：Kivisaari & Väyrynen (2004).

16. 【SSME】 Business NewInsights Social Development Technology A Four dimensional Model of Service Innovation by den Hertog Outside-in Source: den Hertog (2001).

17. Elements Needed for Systemic Service Innovation • Systematic innovation of services, entailing large-scale transformation of the services as well as goods involved • Four dimensions proposed by den Hertog • A platform upon which new services can proliferate, domestic services can be exported, the existing services can be improved • IT network: India’s surge in service exports; DoCoMo: imode • Reconfiguration of the process and interface • New technology, organization & way of interaction needed • For 3G operators, customized handsets needed • Redefinition of the role of the key actors involved and new value proposition • 7-11: From corner shop to convenience chain store with multipleservices via co-creation

18. The Rationale of Industrial Services (Service Strategy in Manufacturing) Transactional Economy Functional or Service Economy Servicizing Non-material Service Material Services (Product- based) Dematerialized Services Product Function Services ex. leasing Product Extension Services ex. warranties, maintenance agreement Source: Adapted from White (1999).

19. Main Thrusts of Industrial Services C & G (1989) Q, D & P (1990) V & R (1988) White et al. (1999) O & K (2003) • GE: Power by the Hour • DuPont: Chemical Management Services • Utilities: Demand Side Management • Xerox: Document Services Reiskin et al. (2000) From Product-focused to Service-focused Baines et al. (2007) Functionality /Use Provided Manufacture Toffel (2008) H &G (1999) Baines et al. (2007) Total Offering Customer Intimacy Mathieu (2001) Cohen et al. (2000) Kolter (2003) Go Downstream W & B (1999) Davies (2003)

20. Key Issues for Industrial Services • New value proposition • Inter-entity co-creation to enhance customer intimacy, often involving lead customers • New capabilities or platform technology • Based on which to redefine client interface and provide product extension services or total offering, with customization • New internal and external processes • In line with the new value proposition • New pricing and revenue model • Some involving revenue sharing with customers • New ownership of the goods in transaction • “Sale of use or function”, not “sale of product”

21. Features of EU Living Labs Network • Thematic inter-lab collaboration; a local hub to be engaged with the global network Local & int’lnetworking Systemic innovation • Involving users, application environment, infrastructure, experts to form innovation ecosystem Open innovation • An OI community, involving a variety of stakeholders • Mainly at the city scale, to form critical mass and promote innovation in the real world User-centric & involvement

22. Typical Living Lab Project in EU Who : stakeholders[enterprises, academia, public and civic bodies, customers] What : co-create[collaborative product development from ideation to market deployment] What : new products, services, businesses and technology [enterprises, academia, public and civic bodies, customers] Where : in real life environments [regions of with specific attributes – urban, suburban, rural, remote, …]and virtual networks [networks as regions in a virtual geography] When : in multi-contextual spheres [in all roles and phases of the customers’ use]

23. Common Grounds of the Three Types of Innovation • Not just technology needed • Outside-in + inside-out • System integration + new business model + industrial reconfiguration • Much more than the adoption of new technology and reverse product life cycle • Multidisciplinary collaboration + co-creation • Cross-fertilization, involving service science • Business model developed in an inter-entity context, calling for collaboration and early involvement of multi-stakeholders

24. 4. Examples of Policy Programs Based on Open Innovation

25. Objectives of BestServ Programme (Finland) • Business Objectives • Promote knowledge and case study sharing between forum members and others • Create mental mindset towards industrial service business • Define generic frameworks to help business transformation • Solution and life cycle business models • Business transformation process • Organizational change models (for service related mindset) • R&D Objectives • Establish research area for industrial service business • Activate and evaluate research and development activities • Assist to define industrial service oriented education and training activities to different levels • Define generic terminology for industrial services business

26. The BestServ Forum(Finland) • A network for knowledge sharing and learning between companies, researchers & consultants that are interested in industrial service business • The Forum aims to: • Support profitable service business with its activities • Support service business research Source: Tekes (2005).

27. Finnish Strategic Centres for Science, Technology and Innovation (SHOK) Researchinstitute Strategicpartners • Cooperatingcompanies • Universities • Researchorganisations Company Company SHOKs provide a new way of coordinating dispersed research resources to meet targets that are important for Finnish business and society. • Five SHOKS: • Energy and environment • Metal products and • mechanical engineering • Forest cluster • Health and well-being • Information and • communication industry and services R&D andinnovationprogram 1, 2of centre Centre A, B Internationalpartner Cluster Ltd. Companies Universities Researchinstitutes In the strategic centres • Companies, universities and research institutes willagree on a joint research plan. The plan will aim tomeet the application needs for practical applicationby companies within a 5-10-year period. • In addition to shareholders, public fundingorganisations will commit themselves to providingfunding for the centres in the long term. Technologytransfer Virtualresearch organisation

28. Finnish Metal Products and Mechanical Engineering SHOK • FIMECC Vision • To create new international research networks, new top science, and new application driven research contents. • The competence and knowledge in selected focus areas will be raised to globally leading position. • R&D with an ambitious target-orientation, openness, dynamics, and true internationality. Research leads to innovations

29. NESTA –Interdisciplinary Collaboration Programme Science Technology Art & Design Crucible Universities United Crucible 2008 Ideas Ideas • An interdisciplinary collaborations between • early- to mid-career researchers working • in diverse fields within science, technology, • and the social sciences. • Three collaborative workshops. • - e.g. Carbon Crucible • An interdisciplinary approach to innovation • in the universities sector. • Six facilitated collaborative workshops. • The ideas will be generated and fine- • tuned into commercial concepts.

30. A Living Lab led by Nokia Source: Nokia (2008).

31. 5. Policy Implications, Especially for the DoIT

32. Evolution of the R&D Programs by DoIT Catch-Up-Oriented Manufacturing-centric Mfg & Service Innovation 2015 Vision Multi-Stakeholders & Tracks Exploratory Research R & D Programs Int’l Networking NIS Integration Research Institute-centric Local Industry-centric

33. DoIT’s Multi-Stakeholder & Track Approach Service Innovation & Tech–based Biz Model Academia Exploratory Research Industrial Players & SMEs DoIT’s R&D Programs • Strategic Planning • Cultivation of Human Capital • Int’l Cooperation Research Institutes • Tended to be single actor-centric, technology-driven, and linear model.

34. Directions of Policy Reform (1/2) • Chesbrough et al., (2006): Policy issues for sectoral modes of OI • Designing specific policy measures for different types of industries • Horizontal policy coordination • Promotion cross-sector interaction & collaboration • Building up and using of external knowledge • Interdisciplinary collaboration • New Initiatives to be launched by the DoIT tend to be more OI-oriented • Industrial services, service innovation, living lab • Not possible to have business of policy design as usual

35. Directions of Policy Reform (2/2) • What’s needed • A framework for systematic and interdisciplinary collaboration • Not just collaboration per se • Guided by a well-articulated and –agreed roadmap • Dedicated forum to form a network for knowledge sharing and learning • POs to be equipped with such functions as strategic planning and horizontal policy coordination • Via both internal capacity and external networking • Studies of SSME not a stand-alone initiative • Addressing the issue in a specific context, in collaboration with the new initiatives

36. End of PresentationThank You for Your Attention

37. Appendix

38. Main Generic Policy Implications of OI • Government support to R&D and Innovation – Issues for Discussion • Should governments open up their national or regional R&D and innovation schemes more widely? How can they ensure benefits flow back to the country? • Given the important role large firms play in national and global innovation networks, is the distinction in policy between support for SME’s on the one hand and large firms on the other still relevant? policy implications • Integrating the global dimension in innovation support schemes. • - foster greater participation from abroad firms • Streamlining and simplifying access to government R&D and innovation schemes. • Promoting open source and open innovation practices in the public sector. • - promoting open source platforms • - government procurement strategies • Fostering technology foresight and road-mapping. • - Working together with firms to set priorities for research (e.g. European Technology • Platform, SHOK of Finland ) • Regional or local initiatives may play a greater role .

39. Main Generic Policy Implications of OI • Public Research Organisations – Issues for Discussion • How can policy makers encourage universities and public research organizations to play a more pro-active role in global innovation networks? • Are universities going too far in their approach towards commercialisation of research (via IPRs) and is this hindering open innovation? policy implications • Growing and opening up access to public research. • - Open science initiatives （e.g. the development of competence centres ) and build the • ICT-enabled platforms • Networking and network integration. • - Networking with public research allows firms to internalise knowledge spill-overs. • - Integrating different networks across fields, sectors and technologies. • Joint knowledge development. • - The public research sector must be better equipped and open to jointly develop • knowledge with firms. • Knowledge exploitation. (IPR） • Mobility.

40. Main Generic Policy Implications of OI • Implications for the broader environment for innovation: Getting the Framework conditions right • To what extent are globalization and open innovation making some framework conditions more important than others and which ones? • How can governments facilitate open innovation practices: by direct support measures? policy implications • Fostering Competition and Co-operation • Corporate Venturing. • Entrepreneurship for innovation. • - reducing barriers to firm entry and regulations on business start-ups. • - academic entrepreneurship • Consumer policy • - providing a framework through which consumers/users/suppliers can • participate in the innovation process • IPR to support open innovation • - to ease the use of IPR in open innovation through the simplification of • procedures and helping SMEs and universities better manage IP