Open or Closed Innovation? Problem Solving and Governance Choice

Abstract

Scholars have recently highlighted the promise of open innovation. In this paper we treat open innovation — in it’s different forms and manifestations — as well as internal or closed innovation, as unique governance forms with different benefits and costs. We discuss how each organizational form, whether open or closed, is essentially an instrument for accessing a) different types of communication channels for knowledge sharing, b) different types of incentives, and c) different types of property rights for appropriating value from innovation. We discuss the “problem” as the central unit of analysis for deciding among different forms of governance, whether open or closed, examining in particular the varying capacities of governance forms for supporting alternative forms of solution search. In all, the goal of this paper is to provide a comparative framework for managing innovation, where we delineate and discuss four categories of open innovation governance forms (markets, partnerships, contests and tournaments and user or community innovation) and compare them with each other and with two internal or closed forms of innovation governance (authority and consensus-based hierarchy).

Keywords: open innovation, governance choice, theory of the firm, strategy, organizational boundaries, problem solving

JEL Classification: O31, O32, D23, L1, L2