[ieee 2005 ieee international engineering management conference, 2005. - st. john's,...

4
Open innovation management and the allocation of technological innovation resources: a case in China Jin Chen Professor, School of management, Zhejiang University 38, Zheda road, Hangzhou, China Yu-fen Chen Ph.D. student, School of management, Zhejiang University Teacher in Zhejing Gongshang University 149, Jiaogong road, Hangzhou, China Abstract - In this paper, we use the open innovation paradigm brought forward by Henry Chesbrough for reference. Open innovation can speed innovation, reduce the uncertainty of technology and market. The paper does some research on the mechanism of open innovation and the mechanism of integrating internal and external innovation resources in enterprises. The paper finds that internal R&D isn’t the overall technological innovation capabilities, but the fundamental factor under open environment. Integrating internal and external innovation resources are the key points for open innovation. It will be more reasonable that we substitute total innovation inputs for R&D inputs to measure the level of technological innovation. Open and integrated innovations are the direction for Chinese companies to implement innovations. The paper also syncretizes the successful open innovation practice of Shanghai Baosteel Corporation to expatiate. Keywords open innovation; total innovation inputs; the allocation of innovation resources . INTRODUCTION Technological innovation is an activity full of risk with high inputs and high rate of failure. With the more intense competition, companies that don’t innovate will die. But most innovations fail. How to innovate is the key problem. The task of managing innovation is vital for companies of every size in every industry. Innovation is a very difficult process to manage [5]. In Chinese enterprises, the inner drive force of technological innovation is quite deficient and innovation capability is laggard. The innovation inputs are ubiquitous low and R&D activities in enterprises are usually inactive. Therefore there is lack of high-technological and original innovation in Chinese enterprises. Key technology and equipments always rely on abroad in most industries. And the assimilation and absorptive capacity of external technology are quite low, lacking the integration and synthesis capability for those introduced technologies. Moreover, the technological innovation mode is closed in China. The research projects in universities and research institutions are separate from new products developments in enterprises. Collaborations between enterprises are also few. The ratio of output to R&D inputs is very low and there exist great problem about the utilization of limited S&T resources. Some experts have been aware that the difference on technological innovation mode impacted the innovation capabilities more than the difference on innovation inputs. Enterprises have to face the global economic circumstance. The increasingly intense market competition is challenging the technological innovation capability in Chinese enterprises rigorously. The great change of market rule, the rapid development of global economic integration, thus lead to the radical change of enterprises’ survival environment. Facing the new challenge and new rule, only through innovation can enterprises create new opportunity to exist well. Innovation might make mistakes, but without innovation enterprises will die. The technological innovation capabilities in Chinese enterprises make persons worrying. In industry technology field, the number of invention patents in China only accounts for one thirtieths of the United States and Japanese. It is urgent for enterprises to advance the technological innovation capabilities. This paper will focus on the problem how to keep away from the dilemma through effective innovation management and good allocation of innovation resources. Thereby advance the technological innovation capability and competitiveness for enterprises. Ⅱ.LITERATURE REVIEW Outside sources of knowledge are often critical to the innovation process, whatever the organizational level at which the innovating unit is defined [14]. Technological innovations should pay attention on external environment and the integration of internal and external resources. The ability to exploit external knowledge is thus a critical component of innovative capabilities [14]. Michael Porter emphasized the importance of external environment to the acquisition of competitive advantage for enterprises [10]. Porter considered that the primary determinants of firm’s success rested on characteristics of industry structure. Knowledge-based view considered whether the resources are internal or external, as long as they can help advance the innovation capability for enterprises, we should bring them into the enterprise competence system and take the exploitation [6] [12]. Most innovation resulted from borrowing rather than invention [14]. The core competitiveness of enterprises depends on knowledge scouting, knowledge creation and continuous innovation [15]. Therefore, besides the internal resources, the decisive 0-7803-9139-X/05/$20.00 ©2005 IEEE. 756

Upload: lyhuong

Post on 10-Feb-2017

214 views

Category:

Documents


2 download

TRANSCRIPT

Open innovation management and the allocation of technological innovation resources: a case in China

Jin Chen

Professor, School of management, Zhejiang University 38, Zheda road, Hangzhou, China

Yu-fen Chen Ph.D. student, School of management, Zhejiang University

Teacher in Zhejing Gongshang University 149, Jiaogong road, Hangzhou, China

Abstract - In this paper, we use the open innovation

paradigm brought forward by Henry Chesbrough for reference. Open innovation can speed innovation, reduce the uncertainty of technology and market. The paper does some research on the mechanism of open innovation and the mechanism of integrating internal and external innovation resources in enterprises. The paper finds that internal R&D isn’t the overall technological innovation capabilities, but the fundamental factor under open environment. Integrating internal and external innovation resources are the key points for open innovation. It will be more reasonable that we substitute total innovation inputs for R&D inputs to measure the level of technological innovation. Open and integrated innovations are the direction for Chinese companies to implement innovations. The paper also syncretizes the successful open innovation practice of Shanghai Baosteel Corporation to expatiate.

Keywords open innovation; total innovation inputs; the allocation of innovation resources

Ⅰ. INTRODUCTION

Technological innovation is an activity full of risk with high inputs and high rate of failure. With the more intense competition, companies that don’t innovate will die. But most innovations fail. How to innovate is the key problem. The task of managing innovation is vital for companies of every size in every industry. Innovation is a very difficult process to manage [5].

In Chinese enterprises, the inner drive force of technological innovation is quite deficient and innovation capability is laggard. The innovation inputs are ubiquitous low and R&D activities in enterprises are usually inactive. Therefore there is lack of high-technological and original innovation in Chinese enterprises. Key technology and equipments always rely on abroad in most industries. And the assimilation and absorptive capacity of external technology are quite low, lacking the integration and synthesis capability for those introduced technologies. Moreover, the technological innovation mode is closed in China. The research projects in universities and research institutions are separate from new products developments in enterprises. Collaborations between enterprises are also few. The ratio of output to R&D inputs is very low and there exist great problem about the utilization of limited S&T resources. Some

experts have been aware that the difference on technological innovation mode impacted the innovation capabilities more than the difference on innovation inputs.

Enterprises have to face the global economic circumstance. The increasingly intense market competition is challenging the technological innovation capability in Chinese enterprises rigorously. The great change of market rule, the rapid development of global economic integration, thus lead to the radical change of enterprises’ survival environment. Facing the new challenge and new rule, only through innovation can enterprises create new opportunity to exist well. Innovation might make mistakes, but without innovation enterprises will die. The technological innovation capabilities in Chinese enterprises make persons worrying. In industry technology field, the number of invention patents in China only accounts for one thirtieths of the United States and Japanese. It is urgent for enterprises to advance the technological innovation capabilities.

This paper will focus on the problem how to keep away from the dilemma through effective innovation management and good allocation of innovation resources. Thereby advance the technological innovation capability and competitiveness for enterprises.

Ⅱ.LITERATURE REVIEW

Outside sources of knowledge are often critical to the innovation process, whatever the organizational level at which the innovating unit is defined [14]. Technological innovations should pay attention on external environment and the integration of internal and external resources. The ability to exploit external knowledge is thus a critical component of innovative capabilities [14].

Michael Porter emphasized the importance of external environment to the acquisition of competitive advantage for enterprises [10]. Porter considered that the primary determinants of firm’s success rested on characteristics of industry structure. Knowledge-based view considered whether the resources are internal or external, as long as they can help advance the innovation capability for enterprises, we should bring them into the enterprise competence system and take the exploitation [6] [12]. Most innovation resulted from borrowing rather than invention [14]. The core competitiveness of enterprises depends on knowledge scouting, knowledge creation and continuous innovation [15]. Therefore, besides the internal resources, the decisive

0-7803-9139-X/05/$20.00 ©2005 IEEE. 756

resources of an enterprise can acquire through the relation with all kinds of business units outside completely. And also bring considerable rental and competitive advantage for enterprises [7]. Enterprises can acquire all kinds of resources they needed from outside and further advance the innovation capabilities and competitiveness based on these.

With the global economic and the fast development of science and technology, no enterprise can develop innovation activities successfully with their own limited resources. Outsourcing was taken granted as a kind of disadvantage before, but now it has been the key factor of successful operation for the enterprise [1]. Enterprise becomes open, cooperative, dynamic integration more and more to make full use of resources internally and externally.

Chesbrough brought out the new innovation paradigm: open innovation [4]. Open innovation means that companies can and should use external ideas as well as internal ideas, and internal and external paths to market as well. Open innovation emphasize the role of other departments besides internal R&D department, emphasize R&D collaboration with outside business units, emphasize integrating internal and external knowledge, and also emphasize outside distribution to market.

Open innovation may show the advantage of free fluxion of new ideas. Through open the internal R&D process to outside agency such as users, suppliers, even competitors systematically to promote the fluxion of the new creative ideas. In virtue of the market-opening, enterprises are able to speed innovation, reduce the cost of innovation, and enhance the competitive advantage.

But open innovation is just not so easy to carry out. How to come out the high wall to search for new good ideas? How to speed the intercommunication of notions? How does this affect the internal R&D function? How to allocate the limited innovation-related resources more reasonably to make the best of them and advance technological competitiveness?

Ⅲ. OPEN INNOVATION: THE NEW INNOVATION PARADIGM

In the open innovation paradigm, the boundary of enterprise is vague. Innovative ideas originate from R&D department mainly or other departments. And they can also come from outside. Internal innovative ideas may seep out of firm either in the research stage or later in the development stage through the diffusion of knowledge and mobility of personnel [4]. Enterprises must observe the instantaneous change of the market and technology synchronously, and make the reaction quickly.

On the base of intensive internal R&D activities, companies should scan and track external technologies closely, absorb and use external knowledge adequately to fetch up the vacancy. They can reduce the uncertainty of technology through integrating internal and external knowledge. New ideas and new products can be taken to the market through external channel, outside the current business of the firm to generate additional value and reduce the uncertainty of market. Therefore, open innovation can reduce the uncertainty of technology and market. Thereby avoid the dilemma of

innovation. With regard to the real conditions of innovation in China,

the open innovation paradigm provides a good opportunity to improve technological innovation capabilities and competitiveness. However, open innovation does not just happen. It requires changes in corporation culture and must be driven from the top.

In most enterprises high leaders underrate the innovation potentials of common employees. In reality employees have more penetrating observation about the operation conditions and user needs. The importance to innovative performance of information originating from other internal units in the firm, outside R&D lab, such as marketing and manufacturing is well understood [14]. To stir up the innovation enthusiasm of common employees is good for creating value for users. Therefore innovation can not be limited in internal R&D departments and some elites only. Higher leaders should try to embed innovation into each cell in the overall organize and make all employees have the responsibility of bringing forward new ideas [11].

Manufactures must accurately understand user needs in order to develop successful products. However it is often a very costly and difficult work because of the stickiness of users’ need-related information. Inviting users to participate in the NPD process directly, product manufactures can combine users’ need-related information with their own information on technological solution possibilities. Manufactures can speed the innovation and reduce the uncertainty on market. Manufactures can also speed innovation with suppliers’ participation in the early design and development process. Establishing iterative and long-term contact with users and suppliers can make full use of external resources and establish more flexible process of NPD.

In the open innovation paradigm, resources that technological innovation needed are diversified. No company possesses all resources inside completely. Even the best companies with the most extensive internal capabilities can’t undertake technological innovation activity alone [5]. Great technology and ideas can be found in companies of all sizes. The ability to exploit external knowledge is a critical component of innovative capabilities in open innovation paradigm. Open innovation draws on technologies from networks of universities, research institutions, and even competitors. Because of the ubiquitous low level of technology in Chinese enterprises, industry-university collaboration may be an important mode.

But open innovation doesn’t mean that internal R&D is unimportant. Mowery emphasized the role of partner’s technological capabilities and moderate technological overlap for partner choice in interfirm collaborations [2]. If enterprises want to collaborate with others on key and core technologies to pursue radical innovation solutions, they should have extensive R&D capabilities as a presupposition. Moreover, the ability to evaluate and utilize outside knowledge is largely a function of the level of prior related knowledge. The dual role of R&D means that internal R&D will not only advance the firm’s innovation capabilities but also enhances the firm’s

0-7803-9139-X/05/$20.00 ©2005 IEEE. 757

absorptive capacity [13]. Internal R&D capabilities will decide the capabilities of scouting, identifying and assimilating external source of innovation. Internal R&D capabilities will decide the accumulation of its future technological capabilities. Therefore, internal R&D capabilities are the key points for open innovation (Fig.1.). Under open environment, internal R&D isn’t the overall technological innovation capabilities, but the fundamental factor. Just as Mehregany’s warning of possible confusion: “Open innovation does not mean outsourcing R&D, nor does it mean closing down internal R&D. It is a strategy of finding and bringing in new ideas that are complementary to existing R&D projects.” [8]

Internal R&D is still in core positions under open

environment. Companies must intensify internal R&D and upgrade the positions of employees outside R&D department, users, suppliers, intellectual property workers simultaneously. The ability of using and integrating external knowledge is a headspring for enterprises to acquire competitive advantage. Companies can acquire technology through R&D cooperation, purchase technology licensing, technology acquisition and reduce the cost and risk of innovation. Lead users and suppliers full of innovation spirits will be important headspring and participants. See as figure 2.

Ⅳ. THE OPEN INNOVATION MODE IN BAOSTEEL CORPORATION

Shanghai Baosteel Corporation has the strongest

competitiveness in Chinese steel industry. The annual output is about 20 millions tons and the annual revenue in 2003 reached $14.548 billions. Baosteel listed No. 372 among world’s top 500 enterprises in 2003.

Baosteel decided to develop relying on technology progress at the beginning of its construction in 1978. It insists on open innovation combining with indigenous innovation. At the beginning of its construction the technology level of metallurgy in China lagged behind developed countries about 20 years. In Phase ⅠConstruction, design assignment were all contracted out to Nippon Steel Corporation. Production equipments were introduced in basically and the ratio of national equipments was only 12%. Baosteel shortened the gap with advanced metallurgy in the world through assimilation and mastery the introduced technology. Phase Ⅱ construction took the collaboration mode. The ratio of national equipments accounted for 61% and design assignment were done by their own. In phase Ⅲ Construction, metallurgy systems were all designed by their own and the ratio of national equipments accounted for above 80%.

Baosteel Corporation advocates the notion of “all employees are innovator” and encourages everyone to participate in the innovation activities. In Baosteel, high leaders try to stir up the enthusiasms and wisdoms of employees and the mass technological innovation activities are very active. In 2002, employees put forward rationalization suggestions 44371 pieces altogether and were all put into practice, creating economic performance 6.77 hundred million yuan. Now, about 1180 pieces of rationalization suggestions are put into practice every day and 9 technology secrets are formed every ten days averagely in Baosteel Corp.

Baosteel adopted the cooperation mode as “be in harmony with up- and down-stream domestic and international enterprises”. Baosteel try to establish good relationship with users, developed multi-aspect collaboration with users and changed the “after-sales service” to “before-sales service”. Through direct and open research cooperation with users, bridge close interaction of technological innovation between Baosteel and its users. Thus Baosteel can quicken the development of new products according to different needs of manufactory. Baosteel also insists on research cooperation with suppliers. They co-establish R&D group and develop concrete projects so as to communicate effectively and timely.

Baosteel insists on R&D collaboration with universities, research institutions and international enterprises. Baosteel implement “borrow brains” activity widely and make full use of the social technology power. Baosteel try to develop international R&D collaboration with the biggest steel group in the world Arcelor Corp. and Nippon Steel Corp. Baosteel has established global R&D cooperation with more than 50 universities. It has co-established the Electromagnetic Process Research Center and the Vacuum Spraying Metallurgical Lab with partnering universities and institutions, and jointly conducted a number of advanced, high-level and leading technological researches. In August 2000, Baosteel and NSFC

Internal R&D Activities

Fig.1. The mechanism of integrating internal and external innovation resources

efficiency of R&D Collaboration

Innovation performance

Absorptive capacity

Partner choice

Technology acquisition

Employees outside R&D depart.

New Market and Business Model

Research

Fig.2. The open innovation model

Venture investing

Lead users suppliers

Internal R&D

Current Market and Business Model

Solutions

Innovation projects

Technology in-licensing

Development

Cooporation R&D

External research projects

Boundary of the firm

0-7803-9139-X/05/$20.00 ©2005 IEEE. 758

(National Natural Science Foundation of China) co-founded nationwide-oriented Iron & Steel United Foundation to fund basic research programs in iron and steel related fields. The establishment of technological innovation networks based on trust and cooperation strengthen the R&D capability in Baosteel greatly.

Open innovation provided Baosteel the chance of access to knowledge and technologies that would take years and millions of dollars to develop in-house. This mode make Baosteel catch up the international advanced level quickly. They obtain prominent achievements; improve the technological innovation capability and market competitiveness quickly in a short time. Baosteel established new notions of absorption and innovation, combining “initiative choice” with “indigenous R&D”. Baosteel has strong ability of using and integrating S&T resources, and thus realizes to advance indigenous innovation capabilities finally. The number of patent applications increased 20% annually since the establishment of Baosteel Group Corporation. Until the end of 2004, Baosteel acquired the total number of 1996 items of patent applications, 1199 items of patent authorizations and 3339 items of technology secret accumulatively. Some of the patent technologies in Baosteel have been exported to Malaysia, France, Germany and other overseas enterprises. Accumulatively technology trade contracts of 250 millions dollars have been already signed.

Ⅴ. THE ALLOCATION OF TECHNOLOGICAL INNOVATION RESOURCES

Open innovation is a new mode; it needs to integrate recourses in many aspects. Open innovation paradigm will accept more innovative factors, and form the multi-agency innovation mode based on numerous beneficiaries. It has great influence to the allocation of S&T resources.

Traditionally the performance of innovation is decided by intensity of R&D inputs and the number of R&D personnel, which are regarded as important indictors by companies to measure the level of technological innovation. In the open innovation paradigm, the technological innovation is an integrated model with multi departments and multi business units’ collaboration. Therefore, besides R&D inputs, investments used for improving the technological innovation capabilities in enterprises should also contain non R&D inputs. They include preparative inputs for producing new products, expenditures on marketing new products and expenditures on technology learning for employees. Investments used for improving the technological innovation capabilities should also include external knowledge inputs. They include expenditures on users and suppliers’ participation in innovation, and expenditures on technology acquisition.

Internal R&D inputs, non R&D inputs and external knowledge inputs make up of total innovation inputs. It will be more reasonable and complete so that we can use the indictor total innovation investments to measure the level of technological innovation.

Ⅵ. CONCLUSION

Open innovation brings many benefits to advance innovation capability and to fuel growth. It provides access to more ideas than could be developed in-house. By leveraging the discoveries of others, companies can produce spectacular results. It is critical that companies establish appropriate mechanisms for monitoring and sourcing innovation.

Internal R&D is still in core positions under open environment. Internal R&D capabilities will impact partner choice greatly and it will also decide the absorptive capacity. Therefore, internal R&D isn’t the overall technological innovation capabilities, but the fundamental factor under open environment. Integrating internal and external innovation resources are the key points for open innovation.

Open and integrated innovations are the direction for Chinese companies to implement innovations. High leaders should build up the widespread cognition of innovation in enterprise and make all employees be innovators. Companies must intensify internal R&D and upgrade the positions of all employees, users, suppliers, and intellectual property workers simultaneously. Companies should absorb all kinds of innovative factors completely and integrate internal and external knowledge synthetically to create overall innovation capability continuously.

REFERENCE

[1] A.F. James, R. Stoner, E. Freeman, R. Daniel, and Jr. Gilbert, Management, edition 6, Prentice-Hall International, Inc., 1996.

[2] D. Mowery, J.E. Oxley, and B.S. Silverman, “Technological overlap and interfirm cooperation: implications for the rsource-based view of the firm.” Research Policy, 27, 507-523, 1998.

[3] E. von Hippel, “Perspective: user toolkits for innovation.” The Journal of Product Innovation Management. 18, 247-257, 2001.

[4] H. Chesbrough, Open innovation, the new imperative for creating and profiting from technology, Harvard business school press, 2003.

[5] H. Chesbrough, “Reinventing R&D through open innovation,” Available at www.utdallas.edu, 2003.

[6] I. Nonaka, “A dynamic theory of organizational knowledge creation,” Organization Science, 5, 14–37, 1994.

[7] J.H. Dyer, “Specialized supplier networks as source of competitive advantage: evidence from auto industry.” SMJ, 17, 187-201, 1996.

[8] J. Teresko, “Open innovation? rewards and challenges.” Available at www.industryweek.com, 2004.

[9] K. Stark, “External R&D is driving new product technologies,” Available at www.ninesigma.com/recentarticles, 2004.

[10] M. Porter, The competitive advantage of nations. Beijing: Huaxia press, 2002.

[11] R. B. Tucker, Driving growth through innovation, Berrett-Koehler publishing, 2002.

[12] R. M. Grant, and F. Barden, “A knowledge-based theory of inter-firm collaboration,” Academy of management best paper proceeding, 1995.

[13] W.M. Cohen, and D.A. Levinthal, “Innovation and learning: the two faces of R&D.” The Economic Journal, 99, 569-596, 1989.

[14] W.M. Cohen, and D.A. Levinthal, “Absorptive capacity: a new perspective on learning and innovation.” Administrative Science Quarterly, 35, 128-152, 1990.

[15] W.W. Powell, “Learning from collaboration: knowledge and networks in the biotechnology and pharmaceutical industries,” California Management Review, 40, 228–240, 1998.

[16] Y. Caloghirou, I. Kastelli, and A. Tsakanikas, “Internal capabilities and external knowledge sources: complements or substitutes for innovative performance?” Technovation, 24, 29-39, 2004.

0-7803-9139-X/05/$20.00 ©2005 IEEE. 759