Open Innovation and IPRs: Mutually Incompatible or Complementary Institutions?

Transcription

1 n. 596 Out 2017 ISSN: Open Innovaton and IPRs: Mutually Incompatble or Complementary Insttutons? Máro Alexandre Patríco Martns da Slva 1 1 Unversty of Porto

2 OPEN INNOVATION AND IPRs: MUTUALLY INCOMPATIBLE OR COMPLEMENTARY INSTITUTIONS? Máro A.P.M. Da Slva Unversdade do Porto Porto Portugal Emal: Tel.: Abstract In ths paper, we explan the analytcs of a partcular type of mechansm of Open Innovaton (OI), namely the management of non-pecunary exchange of nformaton, and address the relatonshp between Intellectual Property Rghts (IPRs), partcularly patent rghts, and OI usng a statc game-theoretc settng of Research and Development competton. We show that, surprsngly perhaps, a rse n the strength of patent protecton nduces the free sharng and dssemnaton of technologcal nformaton and other contrbutons to the OI development of nnovatons. Conversely, a fall n the strength of the patent system nduces the exercse of tradtonal IPRs by nnovatve frms to protect ther ntellectual assets. JEL classfcaton codes: O33 Technologcal change: choces and consequences; dffuson processes Keywords: Open nnovaton; IPRs; nowledge spllovers; R&D

3 1. Introducton We need to explan the nvolvement of commercal frms n Open Innovaton (OI) n several ndustres usng a varety of technologes. OI s defned by Chesbrough and Borgers (2014) as a dstrbuted nnovaton process based on purposvely managed nowledge flows across organzatonal boundares, usng pecunary and non-pecunary mechansms n lne wth the organzaton s busness model. Economsts need a better understandng of the ncentves of ntellectual property holders to ntate and partcpate n the development of OI. The new nnovaton model OI can relate to Intellectual Property Rghts (IPRs). IPRs, f properly managed, can be an enablng mechansm for nnovaton, as an nstrument to promote the open exchange of nowledge (Arora, 1995). In economc sectors n whch nnovaton occur rapdly and s ncremental and cumulatve by nature, the patent system may produce complex overlappng property rghts and patent tcet problems (Shapro 2000). In the software ndustry, for nstance, nnovaton tends to be hghly ncremental and cumulatve, n whch case, essental lcensng for usng a new nnovaton s more lely to nvolve many patents. Patents, whch are mportant tradtonal IPRs, create a temporary rght to exclude others from usng an nventon. In such crcumstances, the transacton costs of negotatng lcenses wth many dfferent patentees are farly hgh and therefore the allocaton of property rghts does affect economc effcency n the maretplace. Free and open development of software has the potental to elmnate such patent tcet problems, whch consttutes a maor threat to nnovaton (Isaac and Par, 2004). Franços Leteller advocates the dea that open source software s one of the most advanced forms of OI. In ths paper, we explan the analytcs of a partcular type of mechansm of OI, namely the management of non-pecunary exchange of nformaton, and draw conclusons concernng the relatonshp between IPRs and IO. IPR management under OI recognzes the value of nowledge exchange to ncrease the rate of nnovaton. We consder some economc ncentves that help explan OI usng a smple Research and Development (R&D) duopoly framewor. Game-theoretc aspects of R&D competton are possbly mportant n understandng OI ncentves. Here we address the relatonshp between IPRs, partcularly patent rghts, and OI usng a statc game-theoretc settng of R&D competton. We present arguments for the proposton that patent rghts complement OI rather than undermne t. The management of propretary nowledge, n partcular the manageral decson by a pro-proft competng frm, at the free revelaton and dssemnaton of technologcal nowledge stage, to ntate and partcpate n OI proects depends on how strong IPR nsttutons are n protectng new nventons. We show that, surprsngly perhaps, a rse n the strength of patent protecton ncreases the benefts to nnovaton n the OI sector, and so t nduces the free sharng and dssemnaton of technologcal nformaton and other contrbutons to the OI development of nnovatons. The IO communtes and commercal frms have therefore (at least) a reason to use the IPR nsttutons n place to protect ther nnovaton system. Conversely, a fall n the strength of the patent system decreases the protecton rghts aganst msappropraton by ndvdual nventors, worers, the rval frm and other users of the technology and hnders the nsurance

4 that frms nnovatons reman free and open, and so t nduces the exercse of tradtonal IPRs by nnovatve frms to protect ther ntellectual assets. The rest of the paper s organzed as follows. We present a theoretcal model n Secton 2, and establsh a number of analytcal results n Secton 3. In Secton 4, we offer some concludng remars, partcularly on the role of IPRs to promote nnovaton by OI communtes. 2. The model Here we descrbe a statc one-shot game of dsclosure and dssemnaton of technologcal nformaton to accelerate the rate of nnovate, whch allow us to consder a number of strategc aspects on the relatonshp between the strength of IPRs and the ntaton and partcpaton of pro-proft frms n OI proects. We assume that there are two pro-proft frms producng a fnal homogenous good, whch have separately engaged n n-house R&D n order to mprove ther own producton technology. By have been snng a gven R&D cost, frm ( ),, 1, 2,, has produced technologcal nnovatons x x ), whch can be used to reduce ts margnal producton cost by ( the amount x x ). Commercal frms and have sought patent protecton n order to ( safeguard ther ntellectual assets. IPRs are not necessarly perfect, and so a fracton [0,1 ] of ntal nnovatons x x ) of frm ( ) were placed n the publc doman. Parameter ( reflects the extent of nvoluntary nowledge spllovers from a frm to ts rval frm and ndvdual nventors, worers and other users of the technology. It s exogenously determned by the strength of IPR nsttutons to preclude the msappropraton of propretary nowledge, and the ablty of frms to eep ther nowledge secret. The manager of each pro-proft frm has to decde how to use ts propretary technology, specfcally porton 1 of new technology whch s actually protected by IPRs and thus can effectvely be controlled by ts legal owner. A frm s choces are restrcted to the control of non-monetary exchanges of technologcal nformaton. A frm may decde to eep ts propretary technology and use t n ts producton process. However, patented or copyrghted technology can also be free and open. Thus we assume away pecunary rewards ted to prces of patent sellng or drect flows of lcensng revenue. It s not an opton for a frm to commercalze new technology, say by lcensng the use of one s technology to an external partner n return for a royalty or a fee. Commercal frms may decde to ntate and contrbute to OI. Dfferent nnovators and partners contrbute resources to OI development wthout clamng any revenue-generatng patent rghts. Indvdual nventors, experenced worers and sophstcated users of technology mprove the nnovatons of commercal frms. The productvty effect 0 of the ont producton of nnovaton by frms and ndvduals s owng to an extensve pror nowledge base and a stoc of solved techncal problems. Follow-on nnovatons n the OI development tend to be creatve combnatons of pror nowledge avalable and prevous nown technques.

5 IO proects do not renounce use of IPR nsttutons. IPRs and technology lcensng help protect the ntangble assets of the IO communty aganst msappropraton and msrepresentaton. Technology lcensng contracts grantng use of technology wth restrctons and copyrght laws are not perfectly enforced, and so a fracton 1 of mprovements of ntal nnovatons made by external partners are not ept wthn the OI communty. In OI proects, dsclosure of orgnal technology s readly avalable and further modfcatons of technology reman free and open. Improvements of the technology by the OI communty are unrestrcted but the dssemnaton of mprovements s restrcted to eep them wthn the OI communty. We model two alternatve ways of frms controllng non-monetary exchanges of technologcal nformaton from nsde the frm out and from outsde the frm n. The frst verson of the model s the ntegrated management model of nflows and outflows of nowledge where each frm has a sngle control varable of external nformaton flows, [0,1 ]. The second verson s the separated management model of external nformaton flows n whch each frm chooses smultaneous the extent of nflows ( ~ ) and outflows ( o ~ ) of nowledge, ~ ( ) [0,1 ] and ( o~ ) [0,1 ], respectvely. Readly avalable dsclosure of ntal nnovatons and free dstrbuton of ncremental nnovatons mples that frms choose 1 n the frst verson of ~ the model, and ( o~ ) ( ) 1 n the second one. In ths paper, we do not address the motvatons of the OI communty at large to mprove and develop ntal nnovatons, and we assume that the costs of ndvdual members of the IO n the nnovaton process are zero. In some cases, namely the software ndustry, mportant ndvdual partcpants n FO development seemed to contrbute n response to altrustc and ntrnsc motvatons. Typcally n FO development, users of technologes were actvely nvolved n the nnovaton process (von Hppel 1988). Incremental nnovatons can be made at low cost by the users of the technology, whch may have a substantal hgher prvate valuaton. External nowledge s complementary to the technologcal nowledge resultng from R&D actvtes whch tae place wthn the borders of the frm. The dentfcaton and assessment of complementarty and usefulness of bts of nowledge become therefore unnecessary. Frms do no need to ncur n search and opportunty costs, that s, costs of nteractng wth other frms and agents to select those frms and agents wth whom technologcal communcaton and cooperaton can tae place. Frm s effectve cost reducton due to technologcal change n the part whch s determned by frms control of nformaton exchanges s, n the frst verson of the model, gven by X x 2 (1 ) x (1 ) x (1 ) (1) 1 l l and, n the second verson, gven by X x 2 ( o ~ )(1 ) x ( o ~ )(1 ) x ( ~ )(1 ). (2) 1 l l

6 These expressons do not show addtve terms of frm s technologcal progressveness whch are exclusvely dependent upon exogenous factors, x, x and. Ths procedure seems approprate gven that our analyss s about how frm management of nflows and outflows of propretary nowledge can ncrease nnovaton. The addtve terms of equatons (1) and (2) capture the dea that each commercal frm and external partners of the IO communty are worng on complementary nnovatons whch, together mprove the producton technology of the fnal homogeneous good and so can be employed producton actvtes to reduce the margnal cost of each frm. The multplcatve terms x of these equatons, whch are preceded by the summaton sgn, represent the noton that IO development s a creatve combnaton of heterogeneous nowledge and bulds both on new nventons and pror nowledge. These last terms are common to every X, 1,2, whch s an ndcaton of the symmetrc treatment n terms of benefts gven to ntators and contrbutors to IO proects. A frm s level of proft gross of nnovaton cost should nfluence how much contrbuton to external nnovatve partners, that s, how much dsclosure of nnovatons or dssemnaton of follow-on nventons the frm chooses to do. Frm management controls the nflow and outflow of technologcal nformaton n order to maxmze operatonal profts and assure the maxmum economc rent extracton possble by the frm. Duopolsts and compete a la Cournot n the fnal product maret. Thus frm s operatonal proft s an ncreasng functon of the followng dfference between effectve frms R&D efforts: 2X X 2 (1 ) x 2 (1 ) 1 x (1 ) x (1 ) (3) 2 1 l l n the frst verson of the model, and n the second verson, 2 ( o ~ )(1 ) x 2 ( o ~ )(1 ) x 2X X l ( o ~ )(1 ) x ( ~ )(1 ). (4) We also gnore the addtve terms of the dfferences of frms effectve cost reductons that are unquely dependent on factors exogenous to the ndustry where frms and operate. l 3. Equlbrum results In ths secton we derve suffcent and necessary requrements for equlbra n the duopoly game of revelaton and dssemnaton of technologcal nformaton. Ether expresson (3) or (4) of the obectve of frm 1, 2 s a lnear functon of both frms control varables of

7 nformaton exchanges, and so we should loo for corner solutons n the dervaton of equlbrum results n each verson of our model. We begn to establsh the suffcent and necessary condtons for an equlbrum where both frms and ntate and contrbute to OI. Innovatve development s consdered to be OI only f orgnal nnovatons are readly avalable from commercal frms and ther subsequent modfcatons by the dverse communty of ndvdual nventors, worers and users of technology are freely redstrbutable. In equlbrum, 1 f x 0, x 0 and 1 (5) 2(1 ) ~ ~ n the frst verson of the model, or ( o~ ) ( o ~ ) ( ) ( ) 1 f x 0, x 0 and 1 1 (6) n the second one. Gven the exclusveness of complementary nnovaton n the ndustry, ( ~ ) 1 s always an equlbrum strategy n the second verson of the model. Non-pecunary rewards can motve ntaton and partcpaton of commercal frms n OI proects f productvty effect s hgh enough. In OI, ntal nnovatons are fully dsclosed and follow-on ncremental nventons are freely redstrbuted n the OI development. A necessary condton for the nnovaton process to tae place n the OI sector, gven the degree of nnovatveness q of the IO communty, s that IPR protecton 1 should be strong enough so that appropraton of the value that s beng created by nnovatve frms and complance wth technology lcenses that permt propretary modfcatons but requre that modfcatons reman free and open are a real possblty. The restrcton of strategy choce to once-and-for-all commtments to dsclosure and dssemnaton,, 1, 2, maes the selecton of strateges of full-commtment to OI comparatvely more lely to occur n equlbrum. It s clear from the comparson between nequaltes (5) and (6) that the equlbrum requrement mposed on n the frst verson of the model s more strngent than the one n the second verson, as crtcal s hgher n the frst verson of the model. Now we establsh the requrements for equlbra when the OI and IPR sectors of nnovaton co-exst. The frst equlbrum of ths sort s 0, 1 n the frst verson of the model, ( o~ ) 0, ~ ~ ( o ) 1 and ( ~ ) ( ) 1 n the second one f x 0, x 0 and

8 1. (7) 1 The same equlbrum requrement mposed on the crtcal level of the productvty effect of co-creaton of nnovaton s derved n both versons of our model. In equlbrum, frm holds on to ts property rghts to approprate the value that t has created through nnovatons and frm s wllng to tae part n the OI development of those nnovatons. Ths outcome s more lely to be tae place n the economy the weaer IPRs are, that s, the hgher s, whch may seem somewhat odd. Apparently, ths result runs aganst the presumpton of conventonal ntellectual property arguments to foster nnovaton. The tradtonal economc ustfcaton of IPRs such as patents s that they mprove socal welfare by provdng the necessary ncentves for nnovaton. Multple equlbra are possble dependng on the expectatons held by each competng frm. Thus there s an IPR equlbrum 0 n the frst verson of the model for any, x, x and. In the second verson, an IPR equlbrum ~ ( ~ ~ ( o ) o) 0 and ( ~ ) ( ) 1 exsts f x 0, x 0 and nequalty (7) holds. There s another equlbrum of co-exstence of OI e IPRs, for another set of parameters, n the second verson of the model: ( ~ ) o 0, ~ ~ ( o ) 1 and ( ~ ) ( ) 1 f x 0, x 0 and nequalty (6) s satsfed. 4. Concluson Ths secton presents the man conclusons arsng from our smple model and concernng wth how IPRs can relate to OI. There a number of remars on the role of IPRs such as patents to foster nnovaton that can be made when IPR management strateges avalable to commercal frms are ether enforcng the legal rght gven by a patent to an nventor or patent owner to exclude others from commercally explotng the nventon or ntatng and partcpatng n IO proects. We have shown that IPRs, properly managed can enhance OI most lely under strong IPR regmes. Equlbrum behavor of commercal frms n OI proects s more lely to emerge when the enforcement of IPR rghts s strong. As a result, and tang a dynamc perspectve, scarce resources n a gven economc sector or ndustry should be dverted from the propretary sector to the OI sector of nnovaton. Moreover, equlbrum behavor n OI proects s more lely to be observed under the frst verson of the model than under the second one. Each frm s full commtment to OI proects, from start to fnsh, by tang a unque decson on the level of nformaton exchange from nsde the frm out and from outsde the frm n, possbly gves the frm an advantage to undertae OI proects and accelerates ts rate of nnovaton. However, OI development, f selected n equlbrum together wth the enforcement of tradtonal IPRs, could be possble under wea IPRs too. Wea IPR protecton should be of no maor concern for commercal frms plannng to engage n closed nnovaton when the opton

9 of OI s avalable to them. The dea that wea IPR protecton could successfully foster nnovaton may seem odd. Closed nnovaton refers to an earler nnovaton model n whch R&D s realzed wthn the boundares of the frm. The paradgm of closed nnovaton holds the vew that the generaton and dstrbuton of nnovaton requres control by nnovatve frms f there s to be successful nnovaton. REFERENCES Arora, A. (1995) Lcensng tact nowledge: ntellectual property rghts and the maret for now-how, Economcs of Innovaton and New Technology 4(1): Chesbrough, H. and Borgers, M. (2014) Explanng open nnovaton: clarfyng an emergng paradgm for understandng nnovaton, n H. Chesbrough, W. Vanhaverbee, and J. West (eds.), New Fronters n Open Innovaton, Oxford: Oxford Unversty Press. Isaac, A. and W. Par (2004) On ntellectual property rghts: patents versus free and open development, n E. Colombatto (ed.), The Elgar Companon to the Economcs of Property Rghts, Cheltenham, UK: Edward Elgar. Shapro, C. (2000) Navgatng the patent tcets: cross lcenses, patent pools, and standard settng, Innovaton Polcy and the Economy, 1, von Hppel, E. (1988) Sources of Inventon, Oxford, UK: Oxford Unversty Press.

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