Open innovation: potential risks and managerial countermeasures

Transcription

1 Open innovation: potential risks and managerial countermeasures Ulrich Lichtenthaler 1 1 lichtenthaler@whu.edu WHU Otto Beisheim School of Management, Burgplatz 2, Vallendar, Germany Many firms have recently opened up their innovation processes, but they are often reluctant to strongly open up these processes because of potential risks. While earlier research has deepened our understanding of the benefits from open innovation, the potential risks have been relatively neglected. Therefore, we relied on an exploratory research design and collected data from 48 interviews in 31 European industrial firms. Our findings illustrate the relevance of potential risks, which derive from excessively opening up technology exploration, retention, or exploitation. Interdependencies between these three tasks may further aggravate some of the risks. However, most firms have not experienced any negative effects because they have limited their open innovation activities in light of the potential risks. While most firms are aware of the risks, they are usually less aware of the possibilities to limit these risks up-front by establishing managerial countermeasures. In particular, a proficient management needs to take into account the dynamic characteristics of potential negative consequences, which often only materialize in subsequent periods. Accordingly, firms may profit from further opening up their innovation processes if they establish a proficient management, which contributes to avoiding the risks while capturing the benefits from open innovation.

2 1. Introduction Many industrial firms have traditionally focused on internally developing new technologies and applying these technologies inside the firm in new products and processes (Alexy et al., 2009; Fichter, 2009). Accordingly, most innovationrelated activities were performed in-house (Dittrich and Duysters, 2007; Dodgson et al., 2006). These innovation processes have been termed closed innovation processes because interactions with a firm s environment were relatively limited (Almirall and Casadesus-Masanell, 2010; Chesbrough, 2003). In recent decades, many firms have transformed their innovation processes to facilitate interactions with external partners (Keupp and Gassmann, 2009; Prügl and Schreier, 2006). In many cases, interfirm collaborations during the innovation processes constitute a requirement rather than an option (Laursen and Salter, 2006; Rohrbeck et al., 2009). Consequently, firms have opened up their innovation processes to the environment, and Henry Chesbrough has termed this new approach open innovation (Chesbrough, 2003). The greater openness in innovation is not a new trend. Many of the elements of the open innovation approach could be observed in the industrial research system of the United States in the late 19 th and early 20 th centuries (Mowery, 2009). However, some studies suggest that the importance of open innovation practices has further increased in recent years (Chesbrough and Garman, 2009; Lichtenthaler and Ernst, 2009; van de Vrande et al., 2009). These findings are consistent with the understanding of Chesbrough (2003), who points to the growing importance of some underlying drivers of open innovation, such as decreasing product lifecycles, increasing competition, and growing technological complexity. Thus, open innovation processes are not entirely new, but their importance seems to increase further (Spithoven et al., 2010; Vanhaverbeke et al., 2008). Consistent with earlier research (Chesbrough and Crowther, 2006; Lichtenthaler and Ernst, 2006; van de Vrande et al., 2009), open innovation is defined as systematically relying on a firm s capabilities of internally and externally performing the major technology management tasks, i.e., technology exploration, retention, and exploitation, throughout the innovation process. Thus, firms may open up their innovation processes in multiple ways. On this basis, open innovation has become increasingly popular in recent years, especially among some pioneering companies (Dodgson et al., 2006; Veugelers et al., 2010). An example is Procter & Gamble, which formulated an open innovation strategy in 2000 with the goal of acquiring 50 percent of all innovations from external sources (Huston and Sakkab, 2006). Consequently, Procter & Gamble s number of new product introductions has increased substantially in recent years, and its R&D productivity has grown by nearly 60 percent. In addition, the firm attempts to increasingly license its technologies because it only uses about 10 percent of its technology internally (Huston and Sakkab, 2006). Despite the benefits of some pioneering firms, however, many other companies are relatively reluctant to open up their innovation processes. This reluctance is primarily driven by the potential risks of open innovation (Lichtenthaler, 2009; Rivette and Kline, 2000). The risks of open innovation underscore the potential negative outcomes that may result from opening up the innovation process. If firms open their innovation processes towards inward technology transfer, for example, they may neglect to internally develop critical technological competencies (Cohen and Levinthal, 1990; Vanhaverbeke et al., 2002). As a result, the dependence on external technology suppliers may increase. With regard to outward technology transfer, open innovation may lead to strengthening a firm s competitors because of commercializing competitively relevant knowledge (Fosfuri, 2006; Rivette and Kline, 2000). As a result, a firm may face increasing competition in its product business, which is the core activity of most industrial firms. Thus, open innovation does not only offer major opportunities. Instead, it also entails considerable risks. These risks seem to keep many firms from actively opening up their innovation processes although the risks may likely be avoided by means of proficient management. However, many firms fail to profit from open innovation because they fear opening up their innovation processes in light of the potential negative outcomes (Lichtenthaler, 2009; West, 2006). Prior open innovation research has relatively neglected the risks of opening up the innovation process. Apart from some exceptions, many prior works have focused quite exclusively on the benefits from open innovation (Chesbrough, 2003; Gassmann, 2006). Most of these articles are purely conceptual or based on examining some pioneering firms in open innovation. In addition, some recent quantitative empirical studies have substantially detailed our understanding of the relevance of open innovation processes in practice (Lichtenthaler and Ernst, 2009; van de Vrande et al., 2009). In particular, we now have a better understanding of managerial mechanisms and tools for open innovation processes (Keupp and Gassmann, 2009; Lee et al., 2010). Because of this focus of prior research, however, our understanding of the risks of open innovation is relatively limited. This deficit of prior research is particularly remarkable as the risks of open innovation constitute one of the major barriers of the adoption of open innovation practices in firms (Lichtenthaler, 2009; Rivette and Kline, 2000). Accordingly, this issue is equally relevant for research and practice. It is therefore the aim of this paper to deepen our understanding of the risks of open innovation. We focus on the risks that result from excessively opening up the innovation process. Accordingly, we do not address potential managerial challenges that may result from the growing complexity in open innovation processes because these challenges are beyond the scope of this article. Specifically, we examine the risks of opening up the innovation process in medium-sized and large industrial firms based on exploratory interviews in European companies from multiple industries. On this basis, we identify major risks related to external technology exploration, retention, and exploitation. In addition, we identify potential managerial countermeasures, which may help firms to avoid the risks up-front. Accordingly, we attempt to provide managerial remedies which help firms to profit 1

3 from open innovation by circumventing potential negative effects. The remainder of the paper is structured as follows. Section 2 provides a brief overview of prior research. Section 3 describes the research design. In section 4, we present the results of the empirical study. In section 5, we discuss the theoretical and managerial implications and limitations of the study. The final section 6 provides a conclusion and outlook. 2. Past research The concept of open innovation has gained widespread acceptance in different lines of research, and it has had a major impact on both research and practice. For instance, Chesbrough s (2003) original book is heavily cited in different fields. Additional academic work that specifically addresses open innovation has only begun to emerge in recent years (e.g., Lee et al., 2010; van de Vrande et al., 2009). In particular, there have been several special issues of academic journals, which focus specifically on open innovation. Here, two special issues of R&D Management need to be highlighted (Enkel et al., 2009; Gassmann, 2006). Because of these recent works, we now have a somewhat clearer understanding of the current relevance of open innovation. In addition, we are beginning to better understand the managerial mechanisms and tools of open innovation practices. Moreover, there is substantial prior research into related fields, which does not specifically use the open innovation terminology, but which provides important insights. Examples are earlier studies into R&D alliances, absorptive capacity, technology transfer, and technology licensing (Cohen and Levinthal, 1990; Cummings and Teng, 2003; Fosfuri, 2006; Sampson, 2007). With regard to open innovation activities, recent work has distinguished technology exploration, retention, and exploitation as three critical processes to arrive at an integrative view of managing knowledge in the context of open innovation (Lichtenthaler and Ernst, 2006). All of these three processes can be organized either internally or externally, i.e., within a firm s organizational boundaries or together with external partners (Enkel et al., 2009). Internal technology exploration refers to the generation of new knowledge inside the firm, e.g., inventions resulting from research (Lin and Chen, 2005). External technology exploration relates to technology sourcing from external partners (van de Vrande et al., 2006). Internal technology retention stems from the need for storing technological knowledge over time (Díaz-Díaz et al., 2006). External technology retention refers to knowledge that is maintained in a firm s interorganizational relationships, such as alliances (Grant and Baden-Fuller, 2004). Internal technology exploitation describes the internal application of technology in a firm s own products (Linton and Walsh, 2004). External technology exploitation refers to outward technology transfer, e.g., licensing (Lichtenthaler, 2009). On this basis, open innovation involves both internal and external activities throughout the innovation process (Fichter, 2009; Keupp and Gassmann, 2009). If firms decide to open up their innovation processes, they rely more strongly on externally coordinating the major technology management tasks (Chesbrough, 2003; Gassmann, 2006). However, they do not completely replace the internal activities. Instead, the internal and external activities are usually complementary (Fosfuri, 2006; Veugelers and Cassiman, 1999). For instance, firms need to internally explore new technologies in order to have sufficient prior knowledge for successfully exploring external technology based on absorptive capacity (Cohen and Levinthal, 1990). Accordingly, the interdependencies of the internal and external activities are critical in open innovation processes. In particular, these interdependencies play an essential role with regard to the risks of open innovation. For instance, external technology exploitation may involve the outward transfer of technological knowledge which is critical for internal technology exploitation in a firm s own products. While an exclusively external exploitation of one particular technology may be beneficial, the interdependencies with internal technology exploitation may outweigh the potential positive effects (Arora et al., 2001; Rivette and Kline, 2000). Thus, opening up the innovation process towards external technology exploitation may result in a negative overall outcome because of deteriorating a firm s product business by means of transferring critical technology. This example illustrates the risks of open innovation. However, earlier research into these risks is relatively limited although the risks may derive from opening up the innovation processes towards all three major tasks, i.e., technology exploration, retention, and exploitation. With regard to external technology exploration, prior research has largely neglected potential risks although many earlier works emphasize the not-invented-here syndrome as a negative attitude towards acquiring external technology, which may stem from the underlying risks (Lichtenthaler and Ernst, 2006). Concerning external technology retention, research into related fields points to the relevance of risks which derive from being dependent on external partners (Becerra et al., 2008). With regard to external technology exploitation, earlier work has highlighted the profit dissipation effect (Fosfuri, 2006), which describes the danger of lower profits because of growing competition in a firm s product business. In sum, this brief overview of prior research has further emphasized that our understanding of the risks of open innovation is still relatively limited. While a few earlier works into related fields have addressed potential negative effects, prior research that adopts the open innovation perspective has largely ignored the risks. Consequently, we still lack an understanding of the risks of external technology exploration, retention, and exploitation. In addition, the existing insights concerning potential managerial 2

4 remedies for avoiding the negative effects of open innovation are limited. At the same time, earlier work indicates that this incomplete understanding of the risks and managerial remedies limits the adoption of open innovation practices in many firms (Lichtenthaler, 2009; Rivette and Kline, 2000). To reduce these research deficits, we have conducted an exploratory study, which is described in the following section. 3. Research design The empirical study focused on medium-sized and large industrial companies which conduct internal R&D activities. We have analyzed neither start-up firms nor R&D service providers. At the beginning of the research project, we conducted a thorough literature analysis. On this basis, we chose a research design to achieve high methodological fit (Edmondson and McManus, 2007). In this context, the relatively limited insights from prior research into the risks of open innovation indicated that a sufficiently detailed data collection procedure was needed. Therefore, we decided to pursue a qualitative research approach, which allowed for responding to the need for deep understanding, causal interference, and local contextualization (Miles and Huberman, 1994). This approach seemed to be best suited at the current state of research into the risks of open innovation. Because of the exploratory character of this study, we used the case study method. In light of the research object s high degree of complexity, the exploratory case study method enabled a flexible and comprehensive examination of the relevant topics. The process of performing case studies was based on the suggestions that have been given in seminal works on case study research, which have been frequently used in prior work (Eisenhardt, 1991; Yin, 2003). Accordingly, our methodological approach was consistent with the approaches of case study-based works that were recently published in R&D Management and other leading journals (Rohrbeck et al., 2009; Schweizer, 2005). At the start of the empirical study, we carried out five preliminary unstructured interviews. After these initial interviews, we used interview guidelines as a basis for semi-structured interviews. This approach allowed for an appropriate degree of comparability, and it provided ample opportunity for unobstructed narration. After the five preliminary interviews, we conducted semi-structured interviews in 31 companies. Furthermore, we studied additional documents, e.g., internal analyses of open innovation practices and external publications. In all firms, the head of R&D or a high-ranking technology manager was interviewed. In 17 firms, a second person was interviewed. By drawing on the insights of this second person, a more detailed understanding of the risks of open innovation could be gained. In 10 firms, this second informant is active in the marketing department. In 7 firms, this person is active in the business development or innovation management department. In sum, 48 persons were interviewed in 31 European industrial firms. The firms average R&D intensity is about five per cent. 12 of these firms are active in the automotive/machinery sector, 9 firms in semiconductors/electronics, and 10 companies in chemicals/pharmaceuticals. The choice of industries was influenced by prior work, which reported different innovation processes with regard to open innovation in these industries (e.g., Lichtenthaler, 2009). Apart from examining companies from multiple industrial sectors, the sample includes firms in which open innovation practices play very different roles concerning their relevance and management. Accordingly, the firms strongly differ in the degree of adopting the trend towards open innovation. This research approach allowed for gaining detailed insights into different perspectives on the risks of open innovation. In addition, this research design enabled us to examine multiple managerial responses to avoid these risks in firms from different industrial sectors. 4. Results The interviews underscored the relevance of potential risks of open innovation. However, only very few companies seem to have a systematic understanding and overview of the variety of risks of opening up the innovation process. In the interviews, different persons in the same firms emphasized different risks, and they often focus on different activities, e.g., external technology exploration or external technology exploitation. At the same time, many companies are reluctant to open up their innovation processes specifically because of these risks. Consequently, they primarily constitute potential risks, which usually have not materialized. As many firms have opened up their innovation processes only to some degree, the negative effects of excessively open innovation processes have mostly not occurred. Accordingly, the risks rather represent perceived or assumed negative effects that would result from excessively open innovation. The interviews have therefore highlighted the relevance of the potential risks, which constitute a major barrier to further opening up the innovation process in many firms. On this basis, firms need to develop a sound understanding of the variety of open innovation risks because a systematic overview of potential risks constitutes the foundation of profiting from open innovation by means of proficient management. 3

5 The essential role of a firm s management is another important finding of the study. Based on a clear understanding of the risks, firms may set up managerial countermeasures, which strictly limit potential negative effects of open innovation upfront. While most firms are aware at least of several of the risks, potential managerial remedies are understood far less clearly. Many firms have considered means to reduce potential complexity increases that may result from opening up the innovation process, e.g., deriving from additional interfaces with external partners. In contrast, the issue of addressing potential negative effects, which keep many firms from actively opening up their innovation processes, has received surprisingly limited attention. This low degree of attention can be explained by the fact that many firms still limit open innovation practices in the first place. Accordingly, the potential risks do not materialize. However, this behavior leads to the somewhat paradoxical situation that many firms do not actively consider managerial remedies for the potential risks of open innovation because they are reluctant to open up their innovation processes specifically as a consequence of these potential risks. On this basis, the possibilities of avoiding or at least reducing the risks up-front by means of proficient management receive insufficient attention. In the following, we therefore consider the potential risks and managerial countermeasures for the three major tasks of external technology exploration, retention, and exploitation. Concerning external technology exploration, most firms in the sample have opened up their innovation processes to some degree. In particular, technology exploration tends to be more open than technology exploitation. With regard to the potential risks of acquiring technology from external sources, the interviewees highlighted the limited internal development of critical technological knowledge, which may have a variety of negative effects. Firms may face lower possibilities to build up technological core competencies based on unique technological knowledge, which was developed internally and which their competitors lack. Furthermore, excessively open technology exploration processes may not only limit internal technology exploration, but they may also negatively affect future external exploration because of low absorptive capacity. If firms replaced internal exploration by external exploration instead of considering these two activities as complements, they could face the problem of lacking sufficient prior technological knowledge to identify external technology sources and to absorb knowledge from external partners. Finally, an overemphasis on external technology exploration might have negative effect on internal R&D because it may lower the motivation of a firm s internal R&D employees, which may perceive the open innovation practices as a threat for their own work. To limit these potential risks up-front, a firm may initiate several managerial countermeasures, which help avoid possible negative consequences of external technology exploration. In particular, nearly all interviewees highlighted the need for continuing with sufficient investments in internal R&D, which constitutes the basis for future internal and external technology exploration by providing essential technological knowledge. Accordingly, the interviews presented strong evidence for the complementary nature of internal R&D and external technology sourcing. Firms should continue to invest in internal R&D based on formulating a corporate-level technology strategy, which states specific objectives for both internal R&D and external technology exploration. This strategy further provides the basis for communicating the complementary character of internal and external exploration throughout the organization. Accordingly, a firm s top management needs to point out that open innovation practices are started in addition to and not instead of internal R&D projects. Moreover, firms need to thoroughly evaluate the managerial challenges of acquiring technology from external sources. For instance, external technologies often need to be adapted to match a firm s internal needs. These adaptation requirements seem to be underestimated in many cases, but they need to be specifically taken into account in decisions on external technology exploration. With regard to external technology retention, the interviewees pointed out several potential risks. An overemphasis on external technology retention indicates a strong focus on maintaining knowledge outside a firm s boundaries. This focus may result in limitations of a firm s internal knowledge base, which is critical for multiple activities throughout the company. In innovation activities, the importance of internal tacit and explicit knowledge can hardly be overestimated. However, the most severe potential risk of very strong external technology retention is the possible dependence on external partners in a firm s network. These relationships are not necessarily stable over time, and problems with external partners may slow down or even impede innovation projects. In particular, a firm s possibilities to control external partners regarding their contributions to joint innovation activities are limited. Although alliance contracts, for instance, can ensure a very close coordination or even supervision, the lower degree of control is a potential risk in comparison with internal technology retention. Finally, a strong emphasis on external technology retention may reduce a firm s possibilities to rapidly adapt the direction and focus of innovation processes, for example in response to environmental changes in a firm s markets. Despite these potential risks, firms may take several managerial countermeasures to limit possible negative effects before they occur. In particular, firms need to maintain a strong internal knowledge base, which is critical to profit from relationships with external partners. Thus, the interviews underscored the complementarity of maintaining a large internal knowledge base and extending this internal knowledge with external knowledge, which is maintained in interfirm relationships over time. In particular, there may be important interdependencies of intrafirm and interfirm learning processes, which illustrate the need for maintaining a strong internal knowledge base. Specifically, firms may use their internal knowledge bases to keep sufficient flexibility in highly dynamic environments. An example is resource slack which may help to quickly extend and strengthen a firm s internal knowledge base if collaborations with external partners do not proceed successfully. Moreover, firms 4

6 need to thoroughly analyze the possible dependence on particular external partners. An alternative could be the collaboration with multiple partners in one specific field of technology to diversify the risks of a single collaboration. In addition, the interviewees highlighted the benefits from establishing long-term relationships with preferred external partners to facilitate the development of mutual trust and to enable an effective collaboration. These arguments underscore that technology-related interfirm ties do not represent arm s length transactions, but more complex relationships. Concerning external technology exploitation, the interviews have shown that the extent of opening up the innovation process towards technology exploitation is relatively limited in comparison with external technology exploration. On this basis, the interviewees did not report any negative effects from outward technology transfer because most firms strictly limit their activities in this field because of the following potential risks. In particular, the firms fear transferring corporate crown jewels, i.e., valuable and competitively relevant technological knowledge, to external recipients. Consequently, a firm s relative technological position may deteriorate. This potential deterioration does not only refer to a firm s current competitors, but it also extends to potential competitors that could enter one of a firm s markets based on the new technological knowledge. Therefore, all companies proceed very carefully in external technology exploitation because they fear strengthening current or potential competitors. In the end, this increase in competition may lead to profit dissipation effects in a firm s product business. These negative effects may outweigh the immediate positive effects, e.g., generating licensing revenues, so that the overall effect of external technology exploitation could become negative. To avoid these negative effects, most firms are very reluctant to transfer technology. Even if pursuing an active technology transfer practice, however, firms may circumvent potential negative outcomes based on the following important managerial countermeasures. In particular, a firm s top management may define several core technology fields for which external technology exploitation is limited to exceptional situations, e.g., the need for cross-licensing to ensure a firm s freedom to operate, which is typical in the electronics industry. Moreover, a firm needs to formulate a long-term strategy at the corporate level, which establishes specific guidelines for individual decisions on externally exploiting one particular technology or not. In addition, a firm has to ensure a comprehensive analysis of potential risks and opportunities before deciding on each single technology transfer project. In these decision processes, a close coordination of the corporate and business unit interests is of utmost importance. The business units are usually responsible for a firm s activities in the product markets, and they are best positioned to estimate potential profit dissipation effects in these markets. At the same time, corporate-level influence is critical to ensure that the technology exploitation activities are designed to achieve a firm-level optimum rather than a local optimum for each individual business unit, which would often strictly limit technology transfer activities because of the business units focus on the product markets. Besides the potential risks that may derive from each of the three major tasks of strategic technology management, i.e., exploration, retention, and exploitation, there may be some risks which only gain importance in the interplay of the three processes. Accordingly, an integrated perspective is needed which considers potential risks that may result from opening up the innovation process in multiple directions and not only for one process, e.g., technology exploration. For instance, firms may decide to increasingly source external technology and also actively license their own technology. The risks in each activity may be limited, but the interaction of the multiple activities may aggravate some the potential negative effects. In particular, excessively opening up the innovation process in multiple directions may gradually deteriorate a firm s competitive position relative to its major competitors in different markets. In addition, firms may have difficulties to develop critical complementary assets, e.g., production and marketing capacities, which may be needed for multiple activities in different parts of the company. These limited complementary assets may further restrict a firm s strategy space with regard to its future opportunities and development path. By actively acquiring and commercializing technology outside organizational boundaries, a firm may over time lack the necessary internal resources to grasp potentially promising opportunities. Accordingly, a firm needs to put particular emphasis on defining and possibly transforming its core business to remain competitive over time. This may also include adaptations of a firm s business model. In this context, it needs to be highlighted that several of the potential negative effects do not materialize immediately. For instance, the combination of excessive external exploration, retention, and exploitation may not instantly have negative effects. Instead, it may be a gradual process, whose effects will be strongest after some years. These arguments underscore that a dynamic perspective is paramount to gain a deep understanding of the potential risks of open innovation. Transferring proprietary technology to other firms will usually have some immediate benefits, e.g., licensing revenues. However, it may negatively affect a firm s product business in subsequent periods. These potential negative effects may be particularly strong if a firm simultaneously limits its internal technology exploration processes along with actively sourcing external technology. The combination of opening up different processes may provide particular benefits. For instance, cross-licensing activities may strongly enhance a firm s competitive position, and these activities include at least external technology exploration and exploitation. At the same time, however, firms need to consider particular risks when opening up the innovation process in multiple directions. Above all, a dynamic analysis of a firm s future development path and strategy space is critical. To circumvent the risks of opening up multiple innovation-related activities, firms may initiate particular managerial countermeasures. In particular, a central coordination of open innovation activities at the corporate level is beneficial to ensure an 5

7 integrated perspective on technology exploration, retention, and exploitation. This central coordination does not imply that all relevant activities are centralized at the corporate level. Instead, it only entails an overseeing control function to capture the benefits while avoiding the risks of open innovation. Specifically, this coordination function allows for developing a long-term and dynamic perspective in strategic planning, which considers the competitive interdependencies in a firm s different markets. On this basis, firms may pay particular attention to the role of complementary assets in profiting from further developments and completely new technologies in the future. Finally, firms may develop particular organizational capabilities which allow for proficiently managing the major tasks of open innovation processes. An example is absorptive capacity for external technology exploration. These organizational capabilities will further help companies to identify potential risks and set up appropriate managerial countermeasures. Table 1 provides an overview of the potential risks and managerial countermeasures for external technology exploration, retention, and exploitation and for an integrated view of the three major tasks of strategic technology management in the context of open innovation. Finally, the data have underscored the need for gaining a deep understanding of the variety of risks of open innovation which provides the basis for avoiding them up-front. Many firms are aware at least of several potential risks although they have hardly materialized because most firms are still reluctant to strongly open up their innovation processes. Consequently, the potential negative effects of excessively open innovation processes can hardly be observed in the firms in our sample. Instead, the firms that actively pursue open innovation tend to profit substantially from their open innovation practices. However, many firms could benefit much more from open innovation if they realized that the potential risks can be handled proactively. This understanding is lacking in many firms, and this often leads to an overemphasis on the potential risks and to lost opportunities concerning open innovation. Although there is a clear trend towards open innovation, many firms are still relatively reluctant to open up their innovation processes. However, the potential risks hardly materialize because most firms still have a tendency towards closed innovation unless the benefits from open innovation are very clear. Moreover, the potential risks can be circumvented up-front by means of appropriate management, which is critical for profiting from open innovation. 5. Discussion The exploratory empirical study has important theoretical and managerial implications. In particular, it has shown the relevance of potential risks of open innovation. The interviewees agreed that these potential risks limit their firms efforts to further open up their innovation processes. Accordingly, this study has identified the potential risks of open innovation as a major barrier in the trend towards opening up the innovation process. Many firms see major benefits that could result from further opening up their innovation processes (Lee et al., 2010). At the same time, however, many firms see potential risks, which keep them from intensifying their open innovation practices. Although most firms do not have a systematic overview of potential risks, they are aware of several potential negative effects of open innovation. However, even more important is the finding that the firms only see potential risks of open innovation. Accordingly, the negative effects that are reflected in these risks have not materialized. The firms in our sample have not made negative experiences with regard to excessively open up their innovation processes. Instead, most firms have limited the openness of their innovation processes to categorically avoid any potential negative consequences. On this basis, the interviews have shown that most firms do not have to fear negative effects of opening up their innovation processes in light of the relatively limited extent of open innovation in many firms. While the firms have not experienced any negative outcomes of strongly open innovation processes, they have experienced the managerial challenges of the transformation towards more open innovation processes (West and Gallagher, 2006). Accordingly, the firms have realized that open innovation poses different managerial challenges than closed innovation (Enkel et al., 2009). Despite acknowledging the importance of proficiently managing open innovation, most firms have not yet become aware of the possibilities to avoid or at least reduce potential risks up-front by proactively establishing managerial countermeasures. The interviews have provided important insights into ways to limit the potential negative consequences of opening up the innovation process in multiple directions. Concerning external technology exploration, firms especially need to ensure sufficient investments in internal R&D (Cohen and Levinthal, 1990). Regarding external technology retention, companies have to thoroughly examine the potential dependence on external partners in the first place (Becerra et al., 2008). Concerning external technology exploitation, a close coordination of corporate and business unit interests in the decision to license technology is particularly important (Arora et al., 2001). If firms establish appropriate managerial mechanisms, they may reduce the potential risks of open innovation to an acceptable level. Accordingly, the findings from our interviews provide qualitative evidence which allows for recommending firms to further open up their innovation processes. Most firms in our sample are still relatively reluctant to adopt open innovation practices. Most firms have opened up technology exploration at least to some degree because they are unable to develop all 6

8 relevant technologies in-house. However, the firms are more hesitant to open up technology retention and, above all, technology exploitation. While the acquisition of external technology has become relatively commonplace in many firms (van de Vrande et al., 2006), the exploitation of technology outside a firm s boundaries is still considered less actively in most companies (Lichtenthaler, 2009). In light of the relatively limited extent of open innovation in many companies (Chesbrough and Crowther, 2006), our interviews suggest that firms may often profit from further opening up their innovation processes. The potential negative effects of open innovation have not materialized, and the risks are primarily perceived as potential risks of open innovation. As most firms are very careful in establishing open innovation practices, they should be encouraged rather than discouraged to further open up their innovation processes. In particular, firms need to realize that the potential risks of open innovation, which keep them pursuing relatively closed innovation processes, may be strictly limited by means of proficient management. Above all, a proficient management of open innovation processes will consider the interdependencies of opening up technology exploration, retention, and exploitation. These interdependencies further highlight the importance of the coupled process, which connects external technology exploration and exploitation (Enkel et al., 2009). In addition, the interviews have shown that external technology retention also plays an important role in many interfirm relationships that follow the coupled approach to open innovation. While opening up the innovation processes in multiple directions may provide enormous benefits, it also entails specific risks, which may exceed the risks of opening up a single activity, e.g., technology exploration. However, firms may also limit these additional risks by establishing managerial countermeasures. Above all, firms need to adopt a dynamic perspective in order to avoid the particular risks of opening up the innovation process in multiple directions. Many potential negative effects of open innovation do not materialize immediately. Thus, it could be argued that the firms in our sample have not experienced any negative effects because these negative effects have not materialized yet. However, many of the firms pursue at least somewhat open innovation processes for many years. This finding reflects recent arguments that open innovation is not an entirely new trend, but could already be observed in earlier decades (Mowery, 2009). Nevertheless, our study supports earlier work in finding that the trend towards open innovation has intensified in recent years (Chesbrough et al., 2006). In light of these findings, our interviews clearly show that the firms have not experienced any negative effects because they did not further open up their innovation processes. However, they could easily continue to open up their processes if they establish appropriate management mechanisms that accompany the open approaches. By ensuring a long-term dynamic view on open innovation s risks, firms can avoid achieving short-term benefits while sacrificing their longterm competitiveness, e.g., by means of transferring critical technology to potential competitors. Thus, R&D managers need to specifically focus on the effects of open innovation in subsequent periods. Finally, a few limitations of our exploratory empirical study are worth noting. Above all, the sample size is relatively small, and this limits the generalizability of our findings. It further needs to be highlighted that the sample comprised mediumsized and large industrial firms with internal R&D. Consequently, the risks of opening up the innovation process in small firms have not been considered. In many cases, small firms have no other choice than opening up their innovation processes because of limited internal complementary assets. In addition, the study has concentrated on European firms, and anecdotal evidence from prior managerial work suggests that some US firms are pioneering in opening up their innovation processes. Accordingly, there is a need for large-scale empirical efforts, which may contribute to deepening our understanding of the benefits and risks of open innovation. Specifically, we encourage mixed methods studies, which combine qualitative and quantitative data collection. This type of studies may be an essential direction for future work because it enables researchers to gain a thorough understanding while still providing quantitative evidence of complex phenomena, such as the potential risks of open innovation. 6. Conclusion Our interview data have provided strong support for the relevance of the risks of opening up the innovation processes, which constitute an important barrier to the further adoption of the trend towards open innovation. These risks derive from excessively opening up technology exploration, retention, or exploitation, and interdependencies between these activities may aggravate some of the risks. However, most firms have not experienced any negative effects from open innovation because they have not excessively opened up their innovation processes in light of the potential risks. Accordingly, these risks are primarily regarded as potential negative consequences, which have not materialized. While most firms are aware of the risks of open innovation, they are usually less aware of the possibilities to avoid or at least limit these risks up-front by establishing managerial countermeasures. Accordingly, the results of this exploratory study suggest that firms may achieve additional benefits if they further open up their innovation processes along with establishing a proficient management of the open innovation processes. In particular, a proficient management needs to take into account the dynamic characteristics of many of the risks, which often only materialize in subsequent periods. Based on our findings, we therefore encourage further research to examine the 7

9 dynamic effects of open innovation. Moreover, a deeper understanding of the interactions of external technology exploration, retention, and exploitation is needed. Empirical research into these topics will provide new insights into the benefits and risks of open innovation. A clearer understanding of these issues is equally important for research and practice because it constitutes the foundation of formulating relevant research questions, giving helpful managerial recommendations, and designing superior innovation processes. In particular, future studies could examine small firms, which may be forced to open up their innovation processes because of limited complementary assets. Another promising avenue for further work is a study of the managerial challenges that firms perceive in opening up the innovation process. As much remains to be explored, there are great opportunities for further research into the benefits, risks, and management of open innovation processes. In particular, additional case studies and quantitative analyses may provide results that are equally relevant to academics and practitioners. 8

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