The role of patents in Open Innovation
Introduction:
The term ‘open innovation’ was first coined by Henry Chesbrough[1] in 2003, when he defined the term as ‘the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively’. Open innovation is assumed to be a platform that uses both internal and external ideas, available beyond the firm’s boundaries, that will contribute to the advancements in the technology. This system treats the R&D as an open system and differs from the open source model in incorporating the business model as the source of both value creation and value capture[2]. The traditionally practiced closed innovation model where the firm’s ideas and research were used for the development of the company’s products and services, is being replaced by open innovation[3]. Examples of companies that have adopted open innovation include IBM, Microsoft Intel, Procter & Gamble and Astra Zeneca[4].
Intellectual Property (IP) systems are a bundle of rights that protect a firm’s intellectual assets from unauthorised exploitation. Patents in particular, protect inventions of commercial value by giving exclusive rights to the owner and prevent its exploitation by others. Thus the three main functions of IP is to incentivize knowledge, accumulate knowledge in culture, and protect a distinct identity[5].
At the outset, patents may contradict the open innovation model in that patents protect inventions from unauthorised exploitation by competitors whereas the open innovation model purports to allow the access of these intellectual assets by competitors to promote the advancement of technologies.
Open Innovation in Pharmaceutical/Biotech Industries:
Adopting the open innovation model can help address some of the challenges faced by industries such as the pharmaceutical industry; these include stagnant drug pipelines, pharma patents nearing expiry, competition from generic companies and the rising costs of research and development[6]. Unlike other industries, patents play an integral part of the industry as it is one of the few intangible assets of a company that can drive investments and funding for its R&D projects[7]. The popularity of this model began to grow when companies realised they could not singlehandedly develop technologies[8] required to meet the healthcare demands. Merck identified the need to look outside the firm’s boundaries for the advancement of technologies in its annual report in 2000,
Merck accounts for about 1% of the biomedical research in the world. To tap into the remaining 99%, we must actively reach out to universities, research institutions and companies worldwide to bring the best of technology and potential products into Merck. The cascade of knowledge flowing from biotechnology and the unravelling of human genome – to name only two recent developments – is far too complex for any one company to handle alone[9].
It is claimed that in an open innovation model, there is a greater number of research projects entering a potential innovation pathway[10] than in the closed innovation model where projects can be terminated at various stages in the pathway leading to innovation. One of the arguments raised by authors is that patents considered to be of low value to businesses (patents that protect terminated projects) might not be exploited. In contrast, with open innovation where these patents are open for other competitors and other businesses to exploit can bring additional revenue to the business models and can encourage entry into new businesses.
Experts believe that firms that fail to exploit external R&D may be at a severe competitive disadvantage as suppliers and consumers. Universities, the government and private laboratories, competitors and other nations are the main sources of external knowledge[11]. A development in the life science industry that highlights the growing importance of sharing is the open source model that once again utilises external knowledge. While both models share the common denominator of exploiting external sources for value creation, open innovation utilises the business model as the source of both value creation and value capture[12].
However, Professor Bronwyn H. Hall points out that sceptics would argue that IP given up by large firms might not be valuable to them and therefore open innovation provides a convenient outlet for adopting others’ ideas without parting with their own valuable ideas[13]. Firms may deliberately waive some of their IP rights to create a new dimension of competition. But selective revealing has both advantages and risks involved, particularly for industries such as pharmaceuticals which are characterised by tight IP protection. It should also be pointed out that the two most important dimensions of appropriability regime are IPRs and secrecy and innovators’ choices regarding their use or waiving of these mechanisms. How firms have handled these issues and transitioned to the open innovation model remains unclear.
Other factors that influence the performance of the open innovation model
Henry Chesborough in his paper identified eight points of differentiation[14] between open innovation and prior theories on innovation. With respect to pharmaceutical industries there is the underlying knowledge landscape where useful knowledge is widely distributed and often resides in external sources of knowledge. Currently in the case of biotechnology firms, an alliance or network approach is employed where strategic alliances are used to exploit outside knowledge. When collaborations form as an integral part of the open innovation model, it is suggested that appropriating the IP that arises out of such collaborations can be challenging for the partners involved contributing to the ‘paradox of openness’ in innovation. Studies on co-patenting have shown that there is a negative relationship between the share of co-patents in a firm and its financial performance[15]. But such challenges may heavily depend upon the type of partners involved in such collaborations[16]. For example, when the partner is a university, standard procedure involves the contractual negotiations that universities do not have the right to license the co-owned knowledge to competitors, therefore it is unlikely to hamper appropriation[17]. The study also shows that pharmaceuticals are one of the most frequently assigned sectors in which the assignees of co-owners of patents operate[18] citing the example of Eli Lily and Shionogi and Company, where both firms have pharmaceuticals as their main sector. Such partnerships are referred to as intra-industry partnerships where it was found that IP sharing might affect its appropriation which may depend on the size of the partner firm[19].
The author reiterates that these issues can be overcome by the effective management of IP in structuring collaborations, negotiating cross licenses to exploit complementary technologies and other models employed by companies such as Intel in promoting university research and Millennium Seed Bank[20]. The financial performance of a company with open innovation partnerships may depend on the project management methods used. The study which was based on only one company, has identified that science-based partnerships are seen as an inexpensive and low-risk source of specialist knowledge. But project management may play a significant role in translating the university partnerships into financial performance. At the R&D level, this identification can be helpful in understanding the performance of open innovations[21]. In addition, IP are tangible assets for pharmaceutical companies used for securing funding for their research projects. Therefore the author is of the view that open innovation is not necessarily mediated by IP licensing in all industries[22]. Furthermore, such collaborations have also given rise to intermediaries in the markets[23] where parties can negotiate transactions at stages. These significant developments help to understand the new paradigm shift to open innovation.
Other factors that can contribute to the success of an open innovation partnership in the life sciences industry depend on allocation of the property (not restricted to intellectual property) and decision making rights or ownership[24]; for example, between a firm and a research unit such as between an established pharmaceutical company collaborating with a biotech company. The latter would benefit from the financing or the knowledge resource of the drug company. Therefore, decision rights over research can be an instrument that affects the extent to which biotech firms can enjoy the benefits of the collaboration. Some of these rights, that may become contractual obligations of such collaborations, include patenting the outcome of the collaboration, the right to sublicense, the right to terminate the alliance, the right to manufacture or market the products. These rights are explained by citing the example of research contracts between Pfizer and a small biotech research specialist, Coley. According to the contract, Coley has the right to use Pfizer’s library of compounds, the right to conduct research or to take several decisions regarding assets owned by Pfizer. This according to the authors, suggests that the partner with the contracting power does not necessarily choose the allocation of rights that can create highest innovation value or efficiency. Thus the potential for open innovation to produce high innovation value suffers from the fact that established firms do not let their research partners direct activities that involve use of their assets. However, more research into how collaborations between pharma firms and biotech firms is required. The authors thus sum up that ‘research labs of pharmaceutical firms not directed by biotech companies’ may pose a serious impediment to exploit the benefits of open innovation[25].
Conclusion:
While many researchers and experts agree on the need to look externally for beneficial ideas, the role of IP or how IP can be effectively managed to strengthen the performance of open innovation models continues to be debated. The original concept of open innovation which was coined in 2003, has achieved significant progress with respect to evaluating the process, strategies and firm choices and appropriability. Experts however suggest that more research is needed to understand the management and economic factors involved in open innovation studies. It is hoped that in the future greater appreciation for open innovation can help us understand and fill the gaps effectively.[26]
Bibliography
- AstraZeneca, ‘Why Open Innovation? <http://openinnovation.astrazeneca.com/about-us/why-open-innovation/> accessed on 10 March 2015
- Atterfos H and Farneman S, ‘The role of open innovation: focus on the pharmaceutical industry’ <https://gupea.ub.gu.se/bitstream/2077/29595/1/gupea_2077_29595_1.pdf> accessed on 10 March 2015
- Belderbos R, Cassiman B, Faems D, Leten B, Van LooyB, ‘Co-ownership of intellectual property: Exploring the value-appropriation and value-creation implications of co-patenting with different partners’ (2014) Research Policy 43 (841-852)
- Belderbos R, Faems D, Leten B, Van Looy B. ‘Technological activities and their impact on the financial performance of the firm: exploitation and exploration within and between firms’ (2010) 27 Journal of Product Innovation Management 869–882
- Chesborough H, ‘Open Innovation: a new paradigm for understanding industrial innovation’ (2006) Oxford University Press
- Du J, Leten B and Vanhaverbeke W, ‘Managing open innovation projects with science-based and market based partners’ (2014) 43 Research Policy 828–840
- Euchner J, ‘The uses and risks of open innovation’ (2013) Research-Technology Management 49-54; Ibid 1
- Hall B, ‘Open Innovation & Intellectual Property Rights: The Two-edged Sword’ (2010), Japan Spotlight, Jan/Feb issue, 18-19
- Hossain M, ‘Open Innovation and Intellectual Property – the double-edged sword’ (2012) <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2170988> accessed on 10th March 2015
- Lambert R, ‘Lambert Review of Business-University Collaboration Final Report’ (2003) <http://www.eua.be/eua/jsp/en/upload/lambert_review_final_450.1151581102387.pdf> accessed on 10 March 2015
- Mina A, Bascavusoglu-Moreau E, Hughes A, ‘Open service innovation and the firm’s search for external knowledge’ 43 (2014) 853–866
- Open Innovation Community, ‘AstraZeneca reinforces pipeline with open innovation’ (2014) <http://www.openinnovation.net/featured/astrazeneca-reinforces-pipeline-with-open-innovation/> accessed on 10 March 2015
- West J, Salter A, Vanhaverbeke W, Chesbrough H, ‘Open Innovation: the next decade’ (2014) 43 Research Policy 43 (2014) 805–811
[1] Henry Chesborough, ‘Open Innovation: a new paradigm for understanding industrial innovation’ (2006) Oxford University Press
[2] Ibid 1
[3] Mokter Hossain, ‘Open Innovation and Intellectual Property – the double-edged sword’ (2012) <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2170988> accessed on 10 March 2015
[4] AstraZeneca, ‘Why Open Innovation? <http://openinnovation.astrazeneca.com/about-us/why-open-innovation/> accessed on 10 March 2015
[5] Ibid 3
[6] Henric Atterfos and Sofie Farneman, ‘The role of open innovation: focus on the pharmaceutical industry’ <https://gupea.ub.gu.se/bitstream/2077/29595/1/gupea_2077_29595_1.pdf> accessed on 10th March 2015
[7] Ibid 5
[8] Open Innovation Community, ‘AstraZeneca reinforces pipeline with open innovation’ (2014) <http://www.openinnovation.net/featured/astrazeneca-reinforces-pipeline-with-open-innovation/> accessed on 10th March 2015
[9] Sir Richard Lambert, ‘Lambert Review of Business-University Collaboration Final Report’ (2003) <http://www.eua.be/eua/jsp/en/upload/lambert_review_final_450.1151581102387.pdf> accessed on 10th March 2015
[10] Ibid 1
[11] Ibid 1
[12] Jim Euchner, ‘The uses and risks of open innovation’ (2013) Research-Technology Management 49-54; Ibid 1
[13] Bronwyn H. Hall, “Open Innovation & Intellectual Property Rights: The Two-edged Sword” (2010), Japan
Spotlight, Jan/Feb issue, 18-19
[14] Ibid 1; Eight points of differentiation for open innovation are: 1. Equal importance given to external knowledge, in comparison to internal knowledge. 2. The centrality of the business model in converting R&D into commercial value 3. Type 1 and Type II measurement errors in evaluating R&D projects 4. The purposive outbound flows of knowledge and technology 5. The abundant underlying knowledge landscape 6. the proactive and nuanced role of IP management 7. The rise of innovation intermediaries 8. New metrics for assessing innovation capability and performance.
[15] R Belderbos, D Faems D, B Leten, B Van Looy B. ‘Technological activities and their impact on the financial performance of the firm: exploitation and exploration within and between firms’ (2010) 27 Journal of Product Innovation Management 869–882
[16] Rene Belderbos, Bruno Cassiman, Dries Faems, Bart Leten, Bart Van Looy ‘Co-ownership of intellectual property: Exploring the value-appropriation and value-creation implications of co-patenting with different partners’ (2014) Research Policy 43 (841-852)
[17] Ibid 11
[18] Ibid 15
[19] Ibid 15
[20] Ibid 11
[21] Jingshu Du, Bart Leten and Wim Vanhaverbeke, ‘Managing open innovation projects with science-based and market based partners’ (2014) 43 Research Policy 828–840
[22] Ibid 13
[23] Ibid 1
[24] Ibid 5
[25] Ibid 20
[26] Joel West, Ammon Salter, Wim Vanhaverbeke, Henry Chesbrough, ‘Open Innovation: the next decade’ (2014) 43 Research Policy 43 (2014) 805–811