New product development
Joining forces or going it alone
How, why, and when open innovation is beneficial or detrimental for new product development?
Research by Mario Rese, former professor, ESMT
On March 5, 2013, former ESMT Professor, Mario Rese, passed away suddenly. Professor Rese had been a member of the ESMT faculty since its founding in 2002. His death, at such a young age, was a huge shock to staff and students at ESMT. The business school has since dedicated the Best Teacher Award for its Executive MBA and Full-time MBA programs to the Mario Rese Best Teacher Award, in remembrance of the exceptional contribution that Professor Rese made to the learning environment at ESMT. His research paper “Joining forces or going it alone? On the interplay between external collaboration partner types, inter-firm governance modes, and internal R&D” will be published posthumously in the prestigious Journal of Product Innovation Management.
Companies competing in today’s fast-moving global markets increasingly look outside their internal R&D capabilities to join forces with a wide range of external factors, such as customers, suppliers, competitors, universities, and other research organizations to create new products. There is little doubt as to the positive role that this so-called open innovation approach can play in contributing to new product development. While the benefits of gaining new knowledge from a mix of internal and external sources has been a prevalent assumption for many years, the theory and evidence remains ambiguous as to whether external innovation collaboration and internal R&D activities in fact complement each other, or rather act as substitutes. Furthermore, the contingency factors that influence the effectiveness of the focal firm’s open innovation activities are for the most part unknown.
In a research paper by former ESMT Professor Mario Rese called “Joining forces or going it alone? On the interplay between external collaboration partner types, inter-firm governance modes, and internal R&D” Professor Rese and his coauthors, Judith Gesing, David Antons, Erk P. Piening, and Torsten Oliver Salge, question the assumption that the positive returns from open innovation collaboration accrue per se. This article adds to the emerging literature stream advocating a contingency view on open innovation. The authors of this paper seek to answer the questions, how, why, and when open innovation is beneficial or detrimental for new product development. They shed light on the complex interplay between collaboration partner types (market-focused, e.g., customers, and science-focused, e.g., research institutes), governance modes (informal, self-enforcing, and formal contractual collaboration governance), and internal R&D.
Concerning the collaboration partners, these differ in their potential contribution to the firm’s innovation processes, given differences in their resources and knowledge. Market-focused innovation partners, such as suppliers and customers, can provide a better understanding of potential applications of technologies, market opportunities, or how to serve markets. Science-focused innovation partners such as universities and research institutes are particularly valuable for assessing unique technological knowledge. Furthermore, the choice of the governance mode, that is, how relationships with external partners are managed, is likely to influence the collaboration as it not only influences transaction costs, but also the behavior of the partner, including their willingness to share knowledge. Two main approaches are discussed: informal governance emphasizing trust and reciprocity, and formal governance emphasizing well-specified contracts and control. Regarding the interplay between external collaboration and internal R&D, the literature is still conflicted with countervailing arguments. On the one hand it might be beneficial to exert both, as internal R&D is a prerequisite to attracting competent partners, and to understanding and absorbing their knowledge. On the other hand, substitution effects may arise due to the Not-Invented-Here-Syndrome, amongst employees in the focal firm.
An empirical investigation among 2,502 German firms reveals a general performance-enhancing effect of external collaboration partners in new product development. In more detail, the findings reveal that formal governance mechanisms have the potential to enhance the direct benefits reaped from open innovation for both partner types, that is, market-focused and science-focused. Meanwhile, informal governance turns out to be a better safeguard from internal employees’ resistance against the external knowledge. Thus, innovation managers need to actively tailor governance mechanisms to the respective company’s surrounding, in order to leverage the success of an open innovation strategy.