INTRODUCTION
Open innovation approach is a paradigm for sharing the new technologies resulted from research and development by collaborators and partners. This approach treats research and development as an open system and assumes that firms can and should use both external and internal ideas as they advance their technology (Chesbrough, 2003a). The shift from closed to open innovation is a result of many changes occurring in the today's business world. These changes include the increasing availability and mobility of skilled workers, the growth of the venture capital market, the external options for ideas sitting on the shelf, and the increasing capability of external suppliers (Chesbrough 2003b).
From a risk perspective, the paradigm of closed innovation assumes that successful innovation requires control. Traditionally, companies would protect their own ideas during all stages of the new product development cycle: research, development, production, as well as marketing, distribution, servicing, financing, and supporting. The closed innovation approach leads companies to create their own research and development departments to be able to control their innovation process. Google is an example of understanding the risk-averse nature of closed innovation. Google does not share details about its search algorithms, "which is the single most important body of code at the company" (Gralla, 2010). Simultaneously, Google understands the significance of open innovation. Jonathan Rosenberg, Google's Senior Vice President for Product Management noted in a recent memo about "the meaning of 'open' as it relates to the Internet:
Open systems win. This is counter-intuitive to the traditionally trained MBA who is taught to generate a sustainable competitive advantage by creating a closed system, making it popular, and then milking it through the product life cycle. The conventional wisdom goes that companies should lock in customers to lock out competitors ... A well-managed closed system can deliver plenty of profits--but eventually innovation in a closed system tends towards being incremental at best ... Complacency is the hallmark of any closed system (Rosenberg, 2009).
On the other side, anxiety is the hallmark of any open system. In an attempt to gain advantages of new technologies at lowest possible cost and shortest possible time, firms which implement an open innovation approach have to take additional risks. There is always less control and more uncertainty when scientific community outside an organization becomes involved in the research and development of the organization's potential next technology. Open innovation approach is no longer designed around self sufficient "islands" to produce all the components of a final product. Instead, open innovation firms allow other firms to start producing some of the components that are required in their final product. Open Innovation approach is a development process that is highly open to ideas from many players and at all stages (Orszag and Holdren, 2009).
In his book about open innovation Henry Chesbrough (2003a, p. 13) compares the process of developing new technologies to a poker game. He quotes the phone interview with James McGroddy, an IBM research director:
When you're targeting your technology to your current business, it's like a chess game. You know the pieces; you know what they can and cannot do. You know what your competition is going to do, and you know what your customer needs from you in order to win the game. You can think out many moves in advance, and in fact, you have to, if you're going to win. In a new market, you have to plan your technology entirely differently. You're not playing chess anymore; now you're playing poker. You don't know all the information in advance. Instead, you have to decide whether to spend additional money to stay in the game to see the next card.Open innovation assumes that ideas, products, or technology can be easily transferred inward and outward. This is an inherently risky process. Companies assume a certain risk when they cannot afford to rely entirely on their own research and instead decide to buy or license processes or patents from other companies. Also, companies assume less control and more risk when they decide to take their internal ideas outside the company through licensing, joint ventures, spin-offs.
RISKS INVOLVED IN OPEN INNOVATION
For the purpose of this paper, we define a risky event as the one that is low in probability and high in consequence (Wenk, 1982). Risk in a system can exist when one or more components in the system are risky, or it can result from components that are themselves relatively safe, but interact in ways that increase risk (Perrow, 1984). As discussed in the previous section, open innovation paradigm possesses a greater risk for the organizations because there are more external and internal partners involved in the research, development, and production process. The relationship between these partners is based on limited collaboration with significant amount of limited information. Next, we summarize three major sources of risk in open innovation as discussed in the previous research: Arrow Information Paradox (Arrow, 1971), Contamination Risk (Chesbrough, 2006), and Not Invented Here Syndrome (Nash, 2004).
THE ARROW INFORMATION PARADOX
Kenneth Arrow defined the Arrow information paradox (Arrow, 1971) as a problem that companies face when managing intellectual property across their boundaries. The risk associated with the paradox occurs when companies seek external technologies for their business or external markets for their own technologies. The paradox is paraphrased below:
A potential purchaser of the technology needs to know the technology and what it does in sufficient details as to understand its capabilities and decide whether or not to buy it. Once the customer has this detailed knowledge, however, the seller has in effect transferred the technology to the customer without any compensation (Arrow, 1971).
In order to avoid the risks associated with the Arrow information paradox, many open innovation firms use intermediary companies to match innovation seekers and suppliers (Anthes, 2004). Some innovation network companies include InnovationNet, InnoCentive, NineSigma Inc., and YourEncore Inc.. Alph Bingham, vice president at Lilly Research Laboratories describes how a third player, such as InnoCentive, helps reduce the risk associated with the Arrow information paradox:
A company like Lilly traditionally would look on the outside for the very best person--perhaps even a Nobel laureate--to solve a hard research problem. But it might pay that person $50,000 for six months of work and still not get a solution. InnoCentive pays its award money--typically between $5,000 and $100,000 per problem--only when someone comes up with a workable solution.... I don't pay the $50,000 until I know the problem was solved (Anthes, 2004).
THE CONTAMINATION RISK
Contamination risk usually occurs when large companies are approached by smaller companies or even individuals for cooperation in a new product or service. Entrepreneurs, startups, and individual inventors often seek to bring a new product or service to a corporation for licensing or acquisition face. Chesbrough (2006) describes contamination risk as a David versus Goliath battle, where the jury might be sympathetic to a small company although the large firm may be working in the same area and might imitate the small company's value without directly infringing on its protected intellectual property. Chesbrough (2006, p. 136) raises the following question:
The desire to avoid contamination causes both large and small companies to adopt numerous practices to minimize the risk. These practices also, however, reduce the ability to leverage Open Innovation. How can companies identify potentially valuable external ideas, and how can they access those ideas without compromising their own internal development activities within the general area?
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