Mario Kafouros and Nicolas Forsans examine in their research paper ‘The role of open innovation in emerging economies: Do companies profit from the scientific knowledge of others? The paper details the impact of external scientific knowledge on company profitability and more generally the role of open innovation in emerging economies, often where often technology less advanced in comparison to developed economies. Chesbrough describes open innovation as “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 the firms look to advance their technology”. Previous research in this field has, in fact, suggested that open innovation demonstrates that external scientific knowledge can be more beneficial than internal knowledge in certain cases.
More specifically, Kafouros and Forsans contribute to the understanding of how the varied strategic decisions of a firm to acquire external scientific knowledge affects financial performance as well as the firm’s own in-house R&D capabilities. Moreover, the paper demonstrates that the use of external knowledge and technology affects performance in considerably different fashions depending on whether the knowledge source is foreign or domestic. Kafouros and Forsans reported that domestic knowledge sources provide negligible results for financial performances and adversely impacts in-house R&D, whereas foreign sources provide greater performance results and help firms to achieve their innovation potential.
Open innovation is a relatively new approach inherently presenting a challenge to previous, traditional approaches to innovation management and is considered by many in the field to be a trending and important topic. Open innovation research as a whole and more specifically Kafouros and Forans’ paper have several important implications for the world of international business. The research has extremely beneficial potential for practical use in firms, especially in the technology industry where innovation is key to staying ahead of the competition and becoming a key player in the market. In addition to this, innovation is considered to be a vital source of competitive advantage in an ever-increasing competitive environment. Most notably, this research is a contemporaneous issue for firms operating in emerging economies, where open innovation could be a breakthrough concept to bridge the divide in technological innovation between developed and emerging economies .
There has been a wealth of research conducted into the topic of open innovation since its conceptualisation by Chesbrough. It has attracted great attention from academics and is considered important in the context of industry due to the way it has reshaped innovation management thinking. The paradigm has been defined in literature as “the purposive inflows and outflows of knowledge to accelerate the internal innovation and expand the markets for external use of innovation, respectively” (Chesbrough, Vanhaverbeke & West, 2006). Open innovation underlines the importance of using external pools of information for firms to improve their innovative and inventive capabilities and processes. Moreover, it highlights that internal innovations can also be brought to market and exploited through external channels in order to increase the market value of the firm.
Chesbrough notes that firms have traditionally employed a closed innovation strategy which prioritises the use of internal capabilities and resources to enhance the management of their in-house R&D activities. However, with his conceptualisation of open innovation, he believes that external sources of knowledge and technology are becoming increasingly valuable, and that closed innovation is no longer a sustainable approach for firms to maintain and improve their competitiveness and profitability. Furthermore, the open innovation approach endorses the development of internal capabilities to be able to profit from external sources of knowledge and technology. However, Hossain et al. argue that despite the popularity of the open innovation research there is still a large need for further research to be conducted before it can replace the closed innovation approach.
The open innovation model has been employed in numerous different industries, the majority of which being high tech industries such as the pharmaceutical and chemical industries. Chesbrough underlines that external sources of knowledge are becoming increasingly valuable for firms, especially for those which operate in high-tech industries. Regarding various economic advantages achieved through open innovation, there has been significant evidence found in support of the paradigm. For example, Procter and Gamble increased their product success rate by 50% as well as R&D efficiency by 60% as a result of their employment of the open innovation paradigm. Although the vast majority of studies focus on the role of open innovation in large firms which operate in high tech industries, there are still some case studies which examine open innovation in small-to-medium sized enterprises. Most studies conducted on open innovation in SMEs tend to use secondary data sources and very few employ primary data. Van de Vrande et al. noted that Dutch SMEs employ open innovation heavily and the adoption of the paradigm has increased incrementally since its first use. Furthermore, a small number of studies have analysed the role of open innovation on SMEs using primary data sources. Therefore, through the collection and use of primary data sources when analysing open innovation in SMEs more information which specifically applies to these firms can be gathered. Thus, more accurate and reliable results can be obtained which in turn would provide a more stable platform for further research to be conducted.
Through the acquisition of intellectual property from other organisations Chesbrough highlights that a firm can increase and consolidate their internal innovative and inventive capacities. On the other hand, licencing core competencies to other organisations can provide bilateral benefits. For example, the licensee may use the core competencies and prove its worth and the licensor may receive a fee in return as well as learn from the external use of its ‘product’. In addition to this, Spithoven et al. highlight the importance of absorptive capacity, which is the ability to recognise the value of new information and assimilate it to generate commercial value. They note that appropriate absorptive capacity is essential for open innovation to take place effectively.
However, Chesbrough’s open innovation concept has received both criticism and praise by some scholars in this field. Trott and Hartman and Hossain et al. argue that open innovation is not a new concept and that Chesbrough has instead created a false dichotomy in his argument that open innovation is the only alternative to the closed innovation approach. Moreover, Houssain et al. highlight the serious concern that has been raised over the lack of empirical evidence pertaining to the benefits of open innovation. In addition to this, Elmquist et al. examine the tendency by scholars to give open innovation a broad definition as well as critical views of the paradigm. The article identifies that quite often the innovation process doesn’t take place uniquely within the firm, rather it is spread across numerous external actors. Moreover, Lichtenthaler provided a comprehensive review of the available definition, noting that there is a clear need for a better understanding of the characteristics of open innovation and most importantly there is a need for an improved theoretical foundation. Moreover, Lameras et al. underline that the notion of open innovation is often conflated with open source innovation and therefore there is perhaps a lack of clear understanding of the definition of open innovation.
The research paper conducted by Kafouros and Forsans highlights that being open to external knowledge sources brings with it both positive and negative consequences for the firm’s performance and in-house R&D. With this in mind, the paper serves to examine previously untested theories on open innovation and also add to existing frameworks by demonstrating that the impacts of external knowledge vary significantly depending on the source. Therefore, this paper contributes to the understanding of the different factors which form the ability of firms to profit from the use of open innovation. In addition to this, the research findings establish a platform upon which further research can be conducted into the available and now tested theoretical propositions.
Furthermore, the study found that foreign technologies and knowledge sources improve a firm’s financial performance, whereas, domestic sources of knowledge provide insignificant results. The implications of this subject for International Business research are important because it suggests that is not sufficient to simply encourage the use of external knowledge sources without considering the strategic decisions employed by the firm to open its boundaries to this knowledge. Moreover, from the management perspective it is important to consider the balance between foreign and domestic knowledge sources as it may impact firm performance and profitability considerably.
The exemplified indirect effects of external knowledge also have important implications for open innovation research and International Business research as a whole. The paper found that whilst the direct effects of openness are insignificant, the indirect impacts (which are the exploration benefits of using external knowledge) are both economically and statistically significant. Thus, previous research which has focused exclusively on direct effects may not offer a complete account of the implications of openness and further research must be done to analyse the indirect effects.
Additionally, the findings of this paper challenge the view that emerging economies such as India, will remain the global manufacturing workshop for developed economies. In fact, the paper suggests that firms from emerging economies are able to embrace technological possibilities successfully and further improve the impacts of their own research and in turn their competitiveness. Moreover, Chesbrough and Crowther recognise the necessity of external knowledge and technology acquisition for firms to be able to defend their core business and survive in an increasingly competitive, global environment.
Regarding emerging economies, very few studies and articles have researched the role of open innovation on firms which operate in these countries. Scholars of open innovation tend to be located in the USA and Europe and represent a lack of geographical scope, not only in terms of their location but also the focus of open innovation. Therefore, by focusing research on India, an emerging economy, Kafouros and Forsans are increasing the geographical scope of existing research and have deepened the pool of knowledge available. From a management perspective research into open innovation is crucial as often firms do not have the capabilities and resources to do everything in-house and are required to look externally for knowledge and technology in order to survive and thrive.
On the other hand, there are also several limitations and weaknesses in this research paper. In particular, with regards to the sample chosen and the focus of the research. Firstly, the sample used consists only of firms operating in the chemical industry in India, which is subject to strict intellectual property laws. Thus, the results obtained from the research are specific only to the Indian chemical industry in which knowledge can be very protected. Therefore, this could lead to inaccuracies in the results if they were to be applied to all firms operating in all industries in the country as the importance and need for intellectual property laws differ from industry to industry. In addition to this, the chemical industry is highly technology dependent and therefore open innovation may have a more significant role to play in the industry in comparison to other lower technology dependant industries. As a result, the findings of the paper may not be generalisable to other industries within India. Furthermore, the results may also be uniquely specific to India and not to all emerging economies. For example, another emerging economy may yield significantly different results compared to the results from the Indian chemical industry. Consequently, it is unlikely that the findings of this research paper can be applied to all emerging economies and further research will have to be conducted to confirm the findings. Similarly, these findings may only relate to emerging economies and a similar analysis must be done in developed economies as there a possibility that the analysis may, again, yield different results.
Furthermore, the paper examines a theoretical proposition which has previously been untested and therefore the results pertaining to the theory have limited use at present without further testing being conducted. Another limitation of the study is the focus on the effects of inbound innovation and the neglect of outbound activities. Enkel et al. believe that inbound and outbound innovation activities are “coupled processes” and therefore should be given equal importance and focus when examining open innovation in order to gain more accurate results and a deeper understanding of the role open innovation. Furthermore, in Schroll and Mild’s analysis of 30 articles pertaining to open innovation, there was limited analysis made on outbound innovation whilst the majority focused on inbound. Therefore, as Kafouros and Forsans omit analysis of outbound activities from their study the results may not yield a complete account and thus, the accuracy and reliability of results may be called into question.
To improve this study the sample in question should be extended to include analysis of the role of open innovation in firm performance and profitability at various levels; the firm level, the industry level and national level. In doing so, one would hope to gain a deeper pool of knowledge pertaining to open innovation and improve the reliability and accuracy of the finidngs. Specifically, Kafouros and Forsans have chosen quite a restrictive sample which only includes firms operating in the Indian chemical industry, which is subject to very strict intellectual property laws.
Therefore, in order to counter the lack of generalisable results, the study should include firms operating in different industries within India which perhaps are equally subject to strict intellectual property laws in order to gather more accurate and reliable results. Most early research has focused on high tech industries, such as Kafouros and Forsans’ paper which only examines firms in the chemistry industry. However, Chesbrough and Crowther assert that the open innovation paradigm can be used in other industries as well. Therefore, further research should be done to ascertain the role of open innovation from a multi-industry standpoint and should not be limited to high tech industries. Moreover, as intellectual property laws in other emerging economies may be more or less protectionist than in India a further analysis should be conducted into the chemical industries of other emerging economies, such as Brazil and China. Consequently, this would address the limitation of the study which highlights that focusing solely on India would not provide accurate and generalisable results for all emerging economies. Furthermore, the findings of this paper, if they can be transferred to all emerging economies, may not be relatable to developed economies such as the United Kingdom or the United States of America. Thus, a similar analysis should be conducted into firms operating in similar industries in these economies to increase the knowledge and findings of open innovation’s role in effecting performance and profitability.
Finally, the research paper neglects to examine the role of outbound open innovation activities and as such by not analysing both inbound and outbound activities the paper does not offer a complete account of the implications of open innovation on firm profitability and performance. Thus, further research should be conducted into the “coupled processes” of inbound and outbound activities in order to provide a more holistic view of open innovation’s impact on firm profitability and performance. Moreover, in order to extend current theorising about the implications of open innovation on firm performance, further research should incorporate different forms of knowledge acquired from university sources into a consolidated conceptual and empirical framework. Perkmann and Walsh provided insight into the use of the open innovation paradigm within an industry-university context but, as Kafouros and Forsans note, the role of knowledge gathered by public and private institutions may enable further development of the paradigm.
In conclusion, open innovation quickly became a hot topic among researchers and firm level management alike and after a review of literature on this topic found that open innovation research has had a tremendous impact on research and practice since its conception. Hossain et al. highlight that open innovation is gaining a foothold on the global stage and, despite a pool of research having been conducted already, there are plenty of avenues open for future research. Therefore, whilst there are numerous limitations to the study conducted by Kafouros and Forsans, such as the lack of generalisable results and perhaps accurate results, it does provide a platform for further research to be conducted into each of these different areas in order to further the understanding and knowledge of open innovation. Despite the limitations, the paper contributes greatly to existing research and confirms previously suggested hypotheses which represent an important development in the field. Furthermore, the paper also challenges previous thinking that emerging economies will remain the manufacturing house of the world and suggests that with the successful employment of open innovation firms can survive and thrive in a hyper-competitive global market. Overall, the paper contributes to the existing pool of research, extends and challenges previous thinking in the International Business field and has opened a plethora of avenues for further research.