Three essays on open innovation and markets for technology
- Autores: Araksya Ayvazyan
- Directores de la Tesis: Eduardo Melero Martín (dir. tes.), Kurt Desender (codir. tes.)
- Lectura: En la Universidad Carlos III de Madrid ( España ) en 2020
- Idioma: español
- Tribunal Calificador de la Tesis: Andrea Fosfuri (presid.), Neus Palomeras Vilches (secret.), Katrin Hussinger (voc.)
- Programa de doctorado: Programa de Doctorado en Empresa y Finanzas / Business and Finance por la Universidad Carlos III de Madrid
- Materias:
- Enlaces
- Tesis en acceso abierto en: e-Archivo
- Resumen
This thesis comprises three empirical studies examining topics in the field of innovation and technology management. These topics broadly concern firms’ practices of open innovation and their engagement in markets for technology.
Chapter 1 (titled “What’s there to Gain? Outbound Openness and Markets for Technology,” co-authored with Said Matr), focuses on the outbound type of open innovation, in a setting, where the firm makes its knowledge (or part of it) for free to the outside parties (i.e. outbound open innovation), and investigates its implications for the focal firm. Specifically, it addresses the question of “Why do corporate firms adopt an outbound open approach in their intellectual property (IP) strategy, especially without direct financial gains in exchange?” and suggests two main mechanisms that the firm may use to capitalize on such a practice. These channels primarily concern strategic openness’ facilitating inward and outward knowledge flows, which in turn, induces the focal firm’s engagement in markets for technology, in terms of transactions for IP rights. This may give rise to potential externalities for the opening up firm.
An important element in our theoretical arguments is that outbound openness reduces transaction and negotiation costs, as well as litigation threats (Wen, Ceccagnoli, & Forman, 2016). Due to the decrease in access costs and litigation risks, other firms get encouraged to become more involved (Boudreau, 2010) and subsequently build more knowledge. Further, the focal firm can respond to the advances in innovation in different ways: by selectively buying innovations, that other firms have developed via relying on the liberated knowledge, or by making further internal developments through combining its expertise with the new knowledge created by others in a specific technology. At the same time, because strategic openness indirectly enforces the outsiders’ commitment to the liberated knowledge and technologies, as they create more complementary assets, thereby increasing their demand for the subsequent knowledge, the focal firm gets more opportunities for selectively selling its other internally developed knowledge.
We test our predictions on patent data, making use of IBM’s patent pledge of 2005 as a shock to the level of openness in the IP strategy of IBM (Wen et. al, 2016). Having the sample period from 1999 to 2010 allows us to implement a difference-in-differences approach to explore the consequences of the openness decision on the firm’s engagement in markets for technology and the degree to and channels through which IBM utilizes the follow-on spillovers. In particular, we conduct analyses at two different levels. The first set of analyses includes the level of knowledge domain, represented by technological classes, according to The United States Patent Classification (USPC). We use these class-level analyses (with class-year type of observations) to explain the temporal variation outcomes of patent trading (i.e. selling and buying) activities, using a score of openness for each technological class. We identify the treated group of technological classes, if the class includes any of the patents that IBM pledged in 2005. The classes without any pledged patent, to which IBM had significantly contributed up until 2005, serve as the control group of technological classes.
In the second set of analyses, we use data at the patent-level (with patent-year type of observations). The goal of these analyses is to track the effect of the patent pledge on patent trading in a more detailed and direct manner and to test the impact on building upon the subsequently created external knowledge, by examining the pledged patents and their spillovers, e.g. citing patents, in comparison to similar non-liberated patents and the latter’s spillovers. In these difference-in-differences analyses, we compare the pledged patents, i.e. initial treated group, to a selected group of similar patents, i.e. initial control group, which we construct by matching each pledged patent with other patents using a text matching algorithm to measure technological similarity, following Arts, Cassiman, & Gomez (2017). We extend these initial treated and control groups of patents by their corresponding direct or indirect forward citations.
Altogether, our results show that after 2005, IBM buys and sells more patents, proportionally to the level of openness in its IP strategy. However, we find stronger evidence for increased selling, rather than buying activities by IBM. We also find that IBM continues to create further knowledge developments, building upon external sources of subsequent knowledge more than on its own subsequent knowledge. The results are robust to integrating the launch of Open Invention Network (OIN), – an organization, established by major players in the software market to support the Open Source Software (OSS) community in advancing OSS programs, by offering patents for royalty-free licenses, – in 2005, in our analyses. Additional checks on the effect of openness over time reveal that the impact takes some time to show up in the firm’s patenting and IP trading activities and fades away after a few years. Overall, our results provide support for the proposed mechanisms.
The second chapter (titled “How Outbound Open Innovation Strategies Affect the Subsequent Innovation Process in the Technology Field: Evidence from IBM’s Patent Pledge,” co-authored with Said Matr) investigates the knowledge-domain-level consequences of a firm-level decision to open up its IP strategy for no direct financial benefits in exchange. Though many of the prior works have tried to explain its determinants and the potential firm-level consequences (e.g. Levin et al., 1987; West, 2003; Alexy & Reitzig, 2013; Contreras, 2015; Alexy et al., 2018; Matr & Ayvazyan, 2019), whilst discussing channels of appropriation from such decisions, there has been quite little empirical analysis of the plausible implications at a more aggregated level than the firm, the knowledge domain level. And these “systems” (i.e. fields of knowledge), in which firms are embedded, are likely to be affected, with the switch toward more freely accessible knowledge available for external actors (West, Vanhaverbeke, & Chesbrough, 2006).
In this chapter, we aim at filling in this gap and in addition to asking (i) whether more knowledge is subsequently created, we ask whether (ii) more radical knowledge is developed, (iii) more participants innovate in or enter the opened-up knowledge fields, and whether (iv) more trading activities occur in the markets for technology. These are all closely relevant questions, the analysis of which at the level of the knowledge area, can improve our understanding of the strategic value of outbound open innovation in terms of its proclivity towards innovation advancement and innovation management.
Empirically, we test our hypotheses for the sample period of 1999-2010 via a “difference-in-differences” approach, utilizing the patent pledge of IBM in 2005 as a shock for outbound openness. In this pledge, IBM made 500 of its patents covering various fields of knowledge available for free to the OSS community and assured not to pursue anyone for the usage of the opened-up knowledge for infringement (IBM announcement, 2005). We believe this provides an appropriate context for testing our hypotheses for three main reasons. First, the multiple coverage of knowledge domains of the pledged patents allows us to observe heterogeneity of the effects over the sample period. Second, the shock was plausibly exogenous for the external actors in the market; it is hardly likely that they could have predicted it. Finally, the selected opened-up patents do not seem to have drastic differences with the kept-proprietary ones (Wen et al., 2016; Matr & Ayvazyan, 2019), the opposite of which could have been problematic, since the construction of the sample, treated and control groups, depends on the pledged set of patents. We perform our main analyses at the knowledge domain level, represented by technological classes, according to the USPC. We explore through these analyses the temporal variation in outcomes, such as the inventive output and radicalness, new-to-the-field entries to the area of knowledge, and knowledge trading activities, using the openness level of the knowledge field, following the method from Matr & Ayvazyan (2019).
Our findings suggest that the larger IBM’s contribution to the knowledge fields is (i.e. the higher the level of “openness” of the knowledge fields is), the more knowledge, thereafter, is created in these domains and that this new knowledge tends to be more radical in nature. The plausible cause behind the surge in generating new knowledge is related to the increased demand for further knowledge developments and the reduction in the access costs due to outbound openness (e.g. Chesbrough, 2003; Boudreau, 2010; Wen et al., 2016; Matr & Ayvazyan, 2019). In the same vein, our results support the conjecture that openness encourages other entities to get more involved in the opened-up areas of knowledge, which, in turn, gives rise to more possibilities for knowledge recombination, hence, more radical knowledge creation (Nelson & Winter, 1982; Fleming, 2001; Ahuja & Lampert, 2001; Jung & Lee, 2016). The trend, however, is channeled through an increase in the involvement of existing actors, since the number of new contributors into the knowledge field does not seem to be significantly altered. We explain this finding from the perspective of the need of having certain “absorptive capacities” (Cohen & Levinthal, 1989, 1990; Zahra & George, 2002) to be able to develop on the opened-up knowledge. Finally, we show that transactions of intellectual assets in the markets for technology increase proportionally to the level of openness in the areas of the liberated knowledge, pointing to a greater reliance on external technological solutions for (at least) some industry players. We build on the argument that outbound openness likely reduces the uncertainty of the commercial value of the liberated and related technologies, through a combination of increased inventive output and increased engagement from market actors in developing follow-on knowledge. Overall, among other contributions, the first two chapters of this thesis establish a link between outbound openness and markets for technology at different levels of analysis.
Finally, Chapter 3 (titled “Board Independence and Acquisitions of External Knowledge: Overcoming the NIH Syndrome”, co-authored with Eduardo Melero and Kurt Desender) addresses the question of what mechanisms may help mitigate firms’ underutilization of external knowledge incorporation, and connects the literatures on markets for technology with the one on corporate governance to propose an answer. While the benefits of incorporating outside knowledge into firm’s innovative trajectories have been well acknowledged by both academics (Teece, 2006; Chesbrough, 2003; Cassiman & Veugelers, 2006, Laursen & Salter, 2006; Arora & Gambardella, 2010) and practitioners (Huston & Sakkab, 2006), examples of organizations inefficiently resisting externally developed ideas abound.
This bias against external knowledge, labeled as the “Not Invented Here” (NIH) syndrome is present in many organizations (Antons & Piller, 2015) and may ultimately result in suboptimal performance and superfluous effort in creating duplicative innovations (Katz & Allen, 1982; Allen et al., 1988). Though NIH syndrome is particularly well documented in the prior literature at the level of R&D workers and teams (Katz & Allen, 1982; Kathoefer & Leker, 2012; de Araújo Burcharth, Knundsen, & Søndergaard, 2014), it can also span across all the other organizational levels, including the R&D managers and CEOs. Accordingly, the NIH syndrome may induce organizations to reject potentially valuable pieces of external knowledge (Agrawal, Cockburn & Rosell, 2010; Hussinger & Wastyn, 2016), leading to a slower and less efficient development of technological solutions.
In this chapter, we examine whether the presence of independent directors in the board of technology-intensive companies boosts outside-knowledge acquisitions by mitigating the problem of NIH. This syndrome can be interpreted as an agency issue (Antons & Piller, 2015), where individual agents (e.g. CEOs and R&D managers) bear important personal costs in adopting unpopular decisions or taking actions to change attitudes and thus end up acting opportunistically (Eisenhardt, 1989). Prior research has shown that greater board independence, which brings in increased monitoring on managers and advising, helps to solve the agency problem, primarily through its supervisory function. Besides, the structural independence of these directors suggests that their greater presence on the board leads to a better control of managerial decisions made on behalf of the firm’s shareholders (Fama & Jensen, 1983). Since outside directors are not subordinate to (and therefore, their careers do not depend on) the CEOs, they are more likely to confront managerial decisions that can potentially put the interests of the shareholders at risk. Rather, these directors have the credibility to fire the CEOs after a poor performance (e.g. Williamson, 1983).
Recent research has also shown that due to their monitoring role, independent directors influence the amount and type of the innovations internally developed by companies (Balsmeier, Fleming, & Manso, 2017). The authors primarily draw on career concerns perspective when interpreting the findings of increased innovative output delivered by firms and enhanced performance along known innovative trajectories. They explain that managers become more risk-averse and more inclined to put managerial effort to yield innovative outputs, due to increased board independence. Relatedly, we examine in this chapter if independent directors can operate as a mechanism to overcome the NIH syndrome and spur the acquisition of external knowledge. An important element in our theoretical arguments is that the strengthened monitoring and advice from these directors will push managers to recognize opportunities and exploit outside knowledge through markets for technology. Accordingly, we hypothesize that a higher presence of independent directors is associated with a higher probability of acquiring outside knowledge and that the association is strengthened in contexts where the NIH syndrome is more likely to be present.
We test our hypotheses for the sample period of 1996-2010, using data from several sources. For information on board independence, we rely on data from the Investor Responsibility Research Center (IRRC) database that has been widely used in the literature on board independence (e.g. Duchin et al., 2010; Balsmeier et al., 2017, etc.). For tracking external knowledge acquisitions, we use data from The USPTO Patent Assignment Dataset (PAD), which identifies changes of ownership in the U.S. patents. Finally, we use data from Compustat, as well as from Arora, Belenzon & Sheer (2019) to account for controls in our analyses.
The main results from the Linear probability model point at a positive association between board independence and the buying probability in markets for technology. Our complementary difference-in-difference analysis using the passage of Sarbanes-Oxley act (SOX) in the U.S. in 2002 as an exogenous shock in the presence of independent members in boards of directors (Faleye, Hoitash, & Hoitash, 2011; Balsmeier et al., 2017) suggests that the relationship is likely to be causal. Furthermore, we provide evidence indicating that the positive impact of independent directors on the acquisition of external knowledge is stronger for companies with more stable R&D teams, where the NIH syndrome is more likely to be present. Finally, our results also indicate that the impact of independent directors is less intense in corporate contexts where the CEO has more power, suggesting that the process is driven by the monitoring role of independent directors rather than their advisory role. Overall, the evidence provided by this collection of findings suggests that the presence of independent directors in corporate boards favors the incorporation of external knowledge by inducing managers to take actions to overcome the NIH syndrome.
Our study makes a contribution to the field of organizational strategy by connecting the consequences of actions at the corporate governance level to organizational outcomes that are to a large extent driven by individual and group processes. Past research on potential remedies to the NIH syndrome has pointed at the structure of intra-organizational communication patterns and the incentive system (Merwald, 1999; Pay, 1995; as cited in Antons & Piller, 2015). Our results suggest that any action in these (or other) aspects of organizational structure aimed at reducing resistance against external knowledge may impose personal costs on managers and, thus, needs to be encouraged at the highest corporate level. Our findings also contribute to the corporate governance literature on the role of independent members of boards of directors. Independent directors are typically seen as providers of counsel and oversight to top managers. Our evidence indicates that their impact on external acquisitions of knowledge diminishes with the position of the power of the CEO. While this result does not necessarily neglect the advisory role of independent directors, it underlines the relevance of their monitoring function. Finally, we also contribute to the line of literature on the factors that lead to under-investing in external technology acquisitions (see Arora & Gambardella, 2010). This research, compared to other factors like firm’s capacity to identify and assimilate external knowledge flows (see, e.g., Volberda, Foss, & Lyles, 2010; Zou, Ertug, & George, 2018), has paid relatively less attention to the role of the attitudes of the members of the organization towards external pieces of knowledge.
