Does Opening a Platform Stimulate Innovation? The Effect on Systemic and Modular Innovations

Abstract

The question of whether opening a new technology to secondary developers stimulates innovation is central to public policy and firm strategies in many high-tech industries. Yet there is scant systematic evidence on this relationship. This paper analyzes how opening handheld computer platforms to multiple outside hardware developer firms affected the rate and direction of product innovations. I introduce a novel data set covering multiple measures of product innovation and the extent to which platforms were opened. Consistent with past research, systemic innovations clearly benefitted from tight, integrated control. In relation to modular hardware innovations, I find that incremental shifts in control devolved to hardware developers were far less important than the extent to which hardware developers were allowed or encouraged to enter. The response of platform innovations to changes in openness was far more ambivalent. Guided by a formal characterization of the innovation process, I interpret the results as suggesting that innovators need to choose both the extent and mode of their openness if they are to manage the tradeoffs between creating a diverse supplier pool, managing suppliers' investment incentives and ensuring effective coordination. Thus, opening with the intent of influencing technical change is far more nuanced than doing so to simply promote diffusion of a technology.

Keywords: rights, licensing, platforms, systemic and modular innovation

JEL Classification: O3, L1, L2, L63