The Optimal Level for Open Innovation Investment is 34%

A large number of papers, books, and blogs have touted the value and amount of investment devoted to Open Innovation. The focus has been the latest types of programs, case studies on particular companies, and “best” practices. However, a recent study has tried to measure the R&D performance from Open Innovation activities.

The paper, “Towards an open R&D system”[1] collected data on the innovation performance of companies (2,537 of them) that were engaging in different levels of Open Innovation practices. Although the sample is geographically restricted and focused on Small and Medium sized Enterprises (SME) the study still provides a great overview of how different investments into internal vs. external R&D practices (i.e. Open Innovation) have contributed to the launch of innovative products. The data was sampled over a 10-year period using multiple surveys and a measurement of innovative product launches as determined by the “share of turnover from new or significantly improved products”. The study provides a powerful story about the role of Open Innovation in enhancing the performance of R&D.

Firms thus face a challenge of not only choosing the absolute levels of R&D investment but the balance between internal and external R&D activities. Understanding how to optimize the knowledge supply chain and the role of increasing diverse mechanism associated with Open Innovation is critical for maximizing the returns from R&D. The study findings indicate that:

1) Firms that invest in significant external R&D activities have better performance than those that only invest internally.

2) The optimal investment percentage into external R&D for an average firm is 34%; increasing the share of external R&D activities beyond this can reduces a firm’s innovative outcomes.

3) Increasing the levels of external R&D can successfully substitute for lower R&D capabilities up until about 50% of R&D investment, after which, the organization can longer successful absorb or benefit from the external efforts.

These measures suggest the critical importance of both R&D capability and Open Innovation as a tool to maximize innovation outcomes. Interesting, it also indicates that core elements of Open Innovation such as joint partnerships, contract research, research grants, and other research sourcing activities have long been embedded processes of R&D activities. Although each firm must judge the value and percentage of activities on a greater number of factors, the study provides a reasonable range for the balance of Open Innovation investment given current R&D capabilities.

Wellspring, like the author, assert that understanding the influence of industry sectors, nature of the R&D collaboration, and diversity of investment is critical for any realistic R&D performance optimization. However, it is abundantly clear that the management of the Knowledge Supply Chain and a firm’s Open Innovation programs have a huge impact on performance.  We contend that having stronger research activity coordination and reduced barriers for information sharing will make it possible to optimize the use of Open Innovation and truly maximize a firm’s R&D performance.

 

[1] Luca Berchicci. “Towards an open R&D system: Internal R&D investment, external knowledge acquisition and innovative performance”, Research Policy V. 42, 2013