Maarten Munster ��� a quick guide to open innovation (2011) A quick guide to open innovation This document gives a quick overview of open innovation and its characteristics. Chesbrough (2003) first coined the term open innovation as an emerging new paradigm in innovation research in his book Open Innovation (2003). He defined open innovation as: ���The use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology (Chesbrough, 2003).��� The general idea of open innovation is that a single organization cannot innovate in isolation. It has to engage with different types of partners to acquire ideas and resources from the external environment to stay ahead of competition (Chesbrough, 2003 Laursen and Salter, 2006). This is a paradigm shift from the traditional vertical integration model where internal R&D activities lead to internally developed products that are then distributed by the firm. In open innovation, firms use both internal and external pathways to exploit technologies and, concurrently, they scout different external sources of technology that can accelerate their innovation process. In addition to internal R&D, companies need to get access to external knowledge, such as start-ups, universities, suppliers, or even competitors to stay competitive in the long run. In open innovation, companies actively seek people of genius from both inside and outside the firm to provide fuel for the business model. In turn, open innovation suggests that inventive output from within the firm not be restricted to the current business model, but instead have the opportunity to go to market through a variety of channels (Chesbrough, 2006). The funnel-shaped diagram in figure 1 is a common representation of the open innovation process, exhibiting the in and outflow of knowledge to accelerate internal innovation and expand the markets for external use of innovation, respectively. Figure 1 open innovation process (Chesbrough, 2006)

Maarten Munster ��� a quick guide to open innovation (2011) Inbound and outbound open innovation Open innovation is based on two main pillars. On the one hand, open innovation stresses the importance to use external technologies to advance internal innovation projects. On the other hand unless a firm decides to commercialize the outcome of an internal innovation project via its own distribution channels, these ���on the self��� technologies should go to market via external pathways, see table 1. Inbound innovation Outbound innovation Focus Outside-in Inside-out Description - Knowledge and idea creation outside of the company - Customer /supplier integration - External technology sourcing - Commercialization of own ideas and technologies outside the company - Licensing of own IP - Multiplication of own technologies - Cross-industry innovation Capability Absorptive capability Multiplicative capability Table 1 : inbound and outbound innovation (Gassmann & Enkel, 2006) Inbound innovation The inbound innovation decision has traditionally addressed the firm's choice to either innovate internally or acquire technology from external resources (e.g. Kotabe, 1992 Noori, 1990). A firm then has to make a classical 'make' or 'buy' decision. However, the increasing complexity of this decision and the growing need for interdisciplinary R&D requires moving beyond the 'make' or 'buy' dichotomy (Swand and Allred, 2003 Howells, James and Malik, 2003). This type of openness refers to acquiring input to the innovation process through the market place. Following this reasoning, openness can be understood as how firms license-in and acquires expertise from outside. Chesbrough et al. (2006) claim that firms scan the external environment prior to initiating internal R&D work. If existing ideas and technologies are available, the firms use them. Accounts of corporate R&D laboratories show that they are vehicles for absorbing external ideas and mechanisms to assess, internalize and make them fit with internal processes (Freeman, 1974). To stimulate inbound innovation, Gasmann & Enkel (2006) argue that absorptive capacity is necessary. Absorptive capacity is the firm's "ability to recognize the value of new information, assimilate it and apply it to commercial ends" Outbound innovation This type of openness refers to how internal resources are revealed to the external environment. In particular, this approach deals with how organizations reveal internal resources without immediate financial rewards, seeking indirect benefits to the focal firm. It shows how organizations commercialize their inventions and technologies through selling or licensing out resources developed in other organizations. Arrow (1962) suggests the significant challenge involved in reaching agreements based on information, when two or more parties are involved. When an inventor is keen to license its information to a potential licensee, it is necessary to reveal some information to the potential customer. This ���disclosure paradox��� implies that the potential licensee receives the information without paying for it and could ��� in principle ��� steal the idea. Arrow argued that such problems cause market failures because they make inventors reluctant to reveal their technology or knowledge. Some other known challenges are: high transaction costs and difficulties anticipating the potential value of a technology. Also, Lichtenthaler and Ernst (2007) suggest that while many firms are open to licensing technologies, they lack a conscious strategy for bringing this into practice. ). To stimulate outbound innovation, Gasmann & Enkel (2006) argue that a multiplicative capability is necessary. Multiplicative capability is the firm's "ability to select strategic partners that are willing and able to duplicate its technologies outside their company"