1. TECHNICAL UNIVERSITY OF MUNICH
Open Innovation:
A new paradigm for corporate R&D departments
Submitted To : Dr. Philipp Sandner
Submitted By : Prabesh Shrestha
Matrikel-Nr. 03635429
Masters in Informatics
First Semester
Tel.: + 49 017692139255
Submitted on: 20th June 2012

2. Abstract
The concept of Open Innovation advocates that companies can no longer keep innovating
without collaborating with other partners. The key to success is creating an open platform around your
innovations so your customers, your employees and even your competitors can build upon them.
Many companies are moving from closed innovation model to a more innovative open
innovation model. For some it has become necessity because of lack of essential knowledge. Others
have adopted the paradigm to benefit from distributed knowledge around the world. Many others have
done it to utilize their spillovers instead of piling up the spillovers in the shelves. Universities and
SMEs are showing up as a primary source or collaborator for big companies, hence also generating lots
of spillovers.
Together these findings show open innovation model is flourishing and is the best way to keep
innovating. Study also suggests that maintaining the absorptive capacity is difficult for some
companies.

3. Ehrenwörtliche Erklärung
Ich erkläre hiermit ehrenwörtlich, dass ich die vorliegende wissenschaftliche Arbeit
selbstständig und ohne fremde Hilfe verfasst habe. Ich habe keine anderen als die angegebenen
Hilfsmittel und Quellen benutzt. Die wörtlich oder inhaltlich aus Quellen jeglicher Art ubernommenen
Passagen habe ich in meiner Arbeit ausnahmslos als solche kenntlich gemacht.
Ich habe in keiner Weise versucht, die Ergebnisse im Rahmen der empirischen Erhebung oder
an anderer Stelle zu beeinflussen. Die statistischen Analysen habe ich nach bestem Wissen und
Gewissen durchgefuhrt und die zugrundeliegenden Daten in keiner Weise verändert, erweitert oder
verkurzt. Gegebenenfalls an den Originaldaten vorgenommene Modifikationen (z. B.
Transformationen, Datenbereinigung) habe ich ausnahmslos und in nachvollziehbarer Weise benannt
und begrundet.
Die Arbeit hat bisher nicht in gleicher oder ähnlicher Form oder auszugsweise dieser oder einer
anderen Prufungsbehörde vorgelegen.
Munchen, 20.07.2012
(Unterschrift)

4. TABLE OF CONTENT
Page
LIST OF TABLES .................................................................................... 1
LIST OF FIGURES .................................................................................. 1
LIST OF ABBREVIATIONS ................................................................... 1
1. INTRODUCTION ................................................................................ 2
2. THEORETICAL BACKGROUND ....................................................... 4
2.1 R&D …....................................................................................... 4
2.2 Innovation ................................................................................... 4
2.3 Closed Innovation ....................................................................... 5
2.4 Open Innovation ......................................................................... 5
2.5 Absorptive Capacity …................................................................ 6
3. MAIN PART …......................................................................................... 7
3.1 Distribution of Knowledge …....................................................... 7
3.2 University Collaboration ….......................................................... 9
4. LIMITATION, DISCUSSION AND CONCLUSION ….......................... 12
5. REFERENCES …..................................................................................... 13

5. LIST OF TABLES
Page
Table 1 R &D spending on top universities in US ................................. 10
Table 2 Share of total global R&D spendings based on country …........ 11
LIST OF FIGURES
Page
Figure 1.1 Closed Innovation ...................................................................... 5
Figure 1.2 Open Innovation ...................................................................... 6
LIST OF ABBREVIATIONS
IT Information Technology
VC Venture Capital
IP Intellectual Property
R&D Research and Development Department
SME ( Small and Medium Enterprises )
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6. 1. Introduction
Innovation is a factor for change in the society. Companies have been innovating their unique
ideas by investing a lots of money and time in R&D Departments. Traditionally, industrial firms
developed new technologies for their own products internally (Ahlstrom, 2010; March, 1991; Wyld,
2010;Wyld & Maurin, 2009). Companies have been doing this successfully for decades. This has not
only made sure the companies profit but also that they have enough revenue to keep funding on good
researchers. But now the landscape of research and innovation has is changing with knowledge
distributed with numerous companies and institution around the world.
Essential knowledge is no longer limited to small number of big companies. New paradigms
are being searched for to keep up with innovative power to profit themselves and hence benefit the
society. Some companies are satisfied with creating the benchmarks and improving on it. But study
have shown it is not sufficient to overtake or own other competitors in the market. Researches must go
on and time is a factor for many companies. Lots of time and knowledge is missing during the
knowledge search or research. There is a need to bridge this gap to keep innovating. The problem
doesn't limit to this. The problem especially in industries like pharmaceutical is that patents are running
out. There is a high pressure to re-design the business model and encourage new researches.
With most of the companies choosing only few of the researches to actually go into
development lots of spillovers are being generated internally. Since research in today's world is very
expensive, companies are trying to find out the ways to get profit from these spillovers. If a company
cannot use it, others will use it to generate profit. So there seems no option but to collaborate with
others to keep the innovation going. A new paradigm, open innovation has got a lot of discussion which
addresses the above problems. As coined by Chesbrough (2003), it suggests external knowledge is
sitting in the shelf and should be used to fill the missing knowledge in research activities. Companies
should open at least their spillovers that do not fit main business to other companies through
collaboration or licensing . Spillovers are now considered consequences of doing research instead of
being a cost of doing a business. Instead of retaining the unused IP , Open Innovation encourages
companies to sale it to others and provides a rationale for why firms should be active buyers and sellers
of IP. It was previously perceived that Open Innovation is only for industries in high technologies.
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7. Research by Chesbrough (2003) shows that it has utility as a paradigm for industrial innovation beyond
high tech to more traditional and mature industries.
Universities traditional have been viewed as a source of fundamental research which are the
base for other researches. With commercialization and specialization in almost all the sector, this
tradition is being changed. Universities along with still being the primary source of fundamental
research is quickly becoming a place where other companies can establish partnership. Not only
universities in developed countries like USA and Europe, but all around the world specially Asian
countries like China and India have seen the increased quality of student researchers. Universities all
around the world are being funded for specific company needs and to generated external spillovers.
Even governments are encouraging this partnership which they have recognized as ultimately
increasing national innovative power and thus generating more income to the economy. To facilitate
this governments have made it easier to file patents for university researches. Although lots of free
articles and journals are still common from universities, specialized partnerships are increasing and in
demand from the industry. Crowd-sourcing and co-creation are other worlds increasingly used
nowadays. Companies are now looking to co-evolve through the introduction of innovative ideas
supplied externally through different organizations.Customers are providing ideas about discovering ,
developing and refining innovation. All these are leading towards a open innovative industry.
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8. 2. Theoretical Background
2.1 R&D Department.
Research and Development department is one of the crucial part of any company for holding a
prominent position in market. According to wikipedia sources, this is where a company increases its
knowledge base, discovers new processes or products. This is necessary for every company because of
the continuous change in technologies/knowledge base, advances by its competitors and new demands
of the market . In absence of R&D department only option for a company will be acquisition which
more often is a length , risky and expensive business strategy. R&D activities generally refer to future
oriented and long term activities in science and technology. Wikipedia sources quotes that generally the
trend is that companies spend 2-5 percent of their total revenue in R&D department to stay competitive.
It says the observed figures could increase above 15 % depending the current status of a company and
its competitors. Also some companies could just start with R&D department and later focus on
marketing the output of R&D. A lot of university graduates and sometimes students as well are
involved in R&D departments. Some companies also have the trend of collaborative R&D, that is they
have a common R&D with another company or even hire research institutes for strengthening their
research activity.
2.2 Innovation.
Innovation is the process of creating something new that is useful for the society. This can occur
anywhere in the society, it can be a business setting, university, government or any other organization
or even an individual may be doing it. Innovation is not always about making the next big thing or
getting next billion dollar, it can be very simple. Innovation as a whole is more than work of one genius
inventor. Innovation is something that transforms the society from traditional thinking . It is not limited
to technologies. New ideas, processes that change the thinking of society are innovations. Innovation
drives the future of society so we need it everywhere like in education, healthcare, electricity supply,
energy , traffic etc .
If there is some invention but is unable to find anyone to produce and use, an invention remains
undiscovered to the world. For this invention to be considered an innovation it should be introduced to
the world and should improve their lives in some way.
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9. 2.3 Closed Innovation.
This is the traditional paradigm followed by many companies around the world. In this
paradigm companies have total control on the R&D activities under the umbrella of a centralized
corporate organization. The belief here is successful innovation requires total control on R&D and
ownership of Intellectual property (IP). This is the only ways to bar competitors as they will have to
invest a lot for that innovation. Companies with this model don't have any choice but to always look to
hire the genius people for their R&D. After the investments all the research activities are done within
the organization . Numerous researches are done simultaneously in the hope that some ideas can be
changed to a real product that can have an effect in the market. Rest of the researches stop getting funds
and are kept in selves in a hope that it will be utilized by other within the company in the future.
Figure below shows the working of closed innovation model.
Figure 1.1 Closed Innovation (Source:http://gebyargebyur.files.wordpress.com/2010/10/closed_innovation_en.jpg)
2.4 Open Innovation.
This is a new paradigm evolving with R&D departments throughout companies in the world.
New ideas and innovation are happening all around the world not only in the large companies as it used
to be. Instead of trying to hire the genius people in the company this model assumes genius people
work for other companies and useful research happen outside the organization. Large number of
startups with new ideas are getting a lot of funding from venture capitalists. Universities around the
world are researching more and more. Flow of knowledge from outside the company and from the
company is required for a great innovation. Internal and external ideas are equally important in this
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10. model. Open Innovation model also assumes that internal ideas can be taken to the market through
external channels outside the main business of the firm generating additional profits.
In addition, internal inventions not being used in this model are not kept in the selves but are taken
outside the company through licensing, joint ventures or spin-offs.
Figure 1.2 Open Innovation (Source : http://beling.net/articles/about/Closed_innovation)
2.5 Absorptive Capacity.
Ability to absorb external knowledge is known as absorptive capacity. According to wikipedia
source it is defined as "a firm's ability to recognize the value of new information, assimilate it, and
apply it to commercial ends". Ability to absorb external knowledge has become a major driver for
competition(Andre Spithoven, Bart Clarysse, Mirjam Knockaert;2010). The concept of open
innovation in relation to absorcomptive capacity is relatively well understood for big companies but
little attention has been paid for small firms . They tend to operate in traditional sectors, engage in open
innovation activities. Prior to this companies only focussed on knowledge stock and knowledge flows.
But new studies suggests absorptive capacity is very important to be innovative.
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11. 3. Main Part
Discussions from different journals, books and web resources have been used in this paper to
describe the emergence of Open innovation as a new paradigm in Innovation for R&D throughout the
corporate industry. Previous research papers have extensively focussed on distribution of essential
knowledge as one of the key factor for open innovation paradigm getting popular among industry R&D
Departments. The quality of researches around the world has also increased many folds which makes it
imperative for industry researchers to collaborate with universities. These two topics are discussed in
this research paper.
3.1 Distribution of knowledge
As documented by Chesbrough (2003), industries around the world have recognized the value
of knowledge and ideas from other source for innovation. Even big companies with large R&D
department and huge investments only represent a fraction in every field nowadays. Pharmaceutical
giant Merck realized this over a decade ago in their 2000 annual report. It says “Merck accounts for
about 1 percent of the biomedical research in the world . To tap into the remaining 99 percent, industry
researchers must actively reach out to universities, research institutions and other companies
worldwide to bring the best of technology and potential products. Innovation is far too complex for any
one company to handle all the research alone.”
Sharing of knowledge through open innovation is creating new kind of innovations which were
not thought of previously. Braden Kelley (2009) gives a good example of Mercedes and Swatch who
collaborated to produce the Smart car. When Mercedes wanted to produce an innovative town car they
did not choose another automobile manufacturer, they partnered with a fashion watch maker. Each
brought different skills and experiences to the team. He also explains that many leading companies,
including IBM, Proctor and Gamble, Google, BMW, Nokia have focused on open innovation as a way
of driving innovation. Open innovation replaces the vertical integration of processes within one
company with a network of collaborators working on innovation projects.Using outsiders can speed up
processes, reduce costs, introduce more innovative ideas and reduce time to market. Barry and
Kevin(2010) explains that Google has experimented with open innovation within its own organization
with well-known “70-20-10” rule, which directs engineers to spend 70 percent of their time on core
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12. business tasks and 20 percent on related projects, but allows them to spend 10 percent of their time
pursuing their own ideas.
In addition to open invention, open coordination has led to consensus building around issues
such as technology standards that have permitted whole business ecosystems to flourish (Chesbrough,
Melissa M. Appleyard, 2007). A business ecosystem represents the interplay between multiple
industries, so a decision to open up a segment of one industry can have widespread reverberations.
From the 1980s IBM’s decision to open up its personal computer (PC) architecture led to the rise of the
“clones” as companies such as Compaq emulated the IBM specifications. IBM’s architecture couple
with Microsoft’s operating system and Intel’s microprocessors became the de facto technology
standards in the PC industry. This is just another example where open innovation is successful because
of distributed knowledge.
An EU report states that “research is becoming more and more expensive, owing to its
increasing complexity: In twenty years the cost of developing a drug has more than doubled, and that of
a new microelectronic component has increased ten-fold the single track flow of innovation from basic
research to application research, development research, and commercialization has ended. There is a
need to establish flexible, multi-track and fast-paced innovation systems that encourage cross-
disciplinary research and development, and the feedback of the market needs into basic and application
research”
Chesbrough (2008) quoted Wynett from Procter & Gamble saying “ We invented not invented
here “. This seems to be a trend right now. Wynett said their brands were doing good in the market but
they were still not able to develop many new brands. To get new brands they opened up and teamed
with other SMEs ( Small and Medium Enterprises ).Chesbrough continues with the theory that SMEs
have less capability and less market power. Nevertheless innovative capacity are in abundance with
SMEs and these SMEs are distributed all around the world. This situation is flourishing the idea of
open innovation.
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13. 3.2 University collaboration
Universities have always been able to provide a rich knowledge landscape for companies.
Researches from universities are more basic in nature which is the foundation of further research for
industry as opposed to applied researches done in the industry. University researches have been very
important and of larger impact than researches done in private firms . In recognition to this fact
governments in industrialized have launched numerous initiatives since 1970s. David & Bhaven (2010)
explains governments in industrial world are now trying to increase the rate of transfer of academic
advances to industry and facilitate the application of these researches in domestic firms as part of
broader effort to improve national economic performance. This has decreased the burden on the
governments at the same time has made universities more aggressive to collaborate and get fundings
from private firms.
Wim & Joel (2006) explains the study where industry researchers have explained the benefits of
collaborating with the universities. In a study of US industry researchers , respondents reported that
approximately 10 percent of their product and process innovations could not have been developed
without substantial delay in the absence of academic research inputs (Mansfield 1991, 1998).
According to Chesbrough, because universities are more concerned with fundamental researches, they
lack specialization in the creation of knowledge assets and commercialization. Industries have taken
this opportunity to collaborate with universities. By collaborating with universities industry researchers
are benefitted in terms of keeping abreast of university research and receiving general assistance with
problem-solving. Failure and success of researches in the university guides industry researchers in the
direction of most promising opportunity which is helping them avoid unfruitful areas thereby
increasing productivity of applied research. University research is very cheap for the industry in
comparison to its in-house research department. Even spillovers from universities are a good attraction
for industry.
Below is the statistics of research funds for some of the top universities in US.
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14. Table 1: R&D spending on top universities in US
Institutions 2007 Total Research x $1000 2008 Endowment Assets x $1000
Columbia University 545,995 7,146,806
Massachusetts Institute of 614,352 10,068,800
Technology
Yale University 448,671 22,869,700
Johns Hopkins University 1,554,103 2,524,575
Harvard University 451,276 36,556,284
Source: The Top American Research Universities(http://mup.asu.edu/research2009.pdf)
The concept of open innovation suggests that innovation is assisted or sometime even depend
on IP rights. IP right helped change the traditional behavior of university researches. Universities are
directly collaborating with different firms to research on applied science and focus on their
specialization instead of focussing on general researches. As no company wants to invest in an
university and see its investment use by other firms, introduction of IP rights in university researches
has assured them about the safety of their investment. With IP rights in place the trend of industry
investing in university research has grown . This has drastically increased the commercial application
of university research.
Lots of university research papers are still out for free in journal papers. University researchers
deliberately do this to get popular. Collaboration with company and generation of base knowledge for
the industry, both are happening from the university at the same time. Reports suggests that firms that
are more collaboratively connected to university scientists may be better positioned to exploit
university science .
Most research papers focuses in universities in US and shows the growing importance of
universities in open innovation and innovation as a whole. There are some papers which have done
similar research for universities in other countries. Calvert and Patel (2002) based on an examination of
slightly more than 22,000 papers reveals a threefold increase in co-authorship between UK industry
and university researchers during 1981-2000. Papers co-authored by industrial and university
researchers expanded from approximately 20% to nearly 47% of all UK scientific papers published by
industrial researchers during the 1981-2000 period.
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15. UK has always been one of the biggest contributor for global innovation. But Jeremy, Shu &
Ronnie (2012) suggest firms in the UK appear to lack the knowledge about what universities have to
offer them in terms of research and innovation. Even though this might be true , in past couple of
decades the landscape of research has been changing . Countries from Asia specially China is
contributing more than ever before. Table 2 shows the spending based on countries for 2010 to 2012 .
The trend shows R&D spending in Asia is growing rapidly and those researches are generating lots of
innovation. They are increasing becoming one of the important source of knowledge for innovation.
Table 2: Share of Total Global R&D Spendings
2010 2011 2012
Americas 37.8% 36.9% 36.0%
U.S. 32.8% 32.0% 31.1%
Asia 34.3% 35.5% 36.7%
Japan 11.8% 11.4% 11.2%
China 12.0% 13.1% 14.2%
India 2.6% 2.8% 2.9%
Europe 24.8% 24.5% 24.1%
Rest of World 3.0% 3.1% 3.2%
Source: Battelle, R&D Magazine
In USA , Ivy league colleges have always been leading to contribute towards innovation. In
October 2009 China created C9 league comprising top nine universities. The main concept of its
formation is collaboration in researches. Twenty percent of total country journals are published by C9
league universities alone according to wikipedia sources. Researchers from universities in China are
innovating based on chinese consumers needs. This is helping to create new business models and
technologies in a very practical approach to the market. China as a whole is a great resource for
innovation but with most of its innovative populating in universities this is a great thing . Lots of
businesses are now trying to collaborate with chinese universities.
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16. 4. Limitation, Discussion and Conclusion
This paper has some limitations which I would like to mention here. This paper has been
prepared with the study of other research papers, journals, books and references from internet sources
including blogs. No direct interview or surveys has been conducted while creating the paper. Inclusion
of direct survey and interviews with some senior R&D management would have been an added input
for this research paper. Emergence of open innovation in R&D is a very broad topic. Covering all the
sub topics was not possible for this paper.
Moving away from the limitations, I have discussed about the emerging type of innovation in
industry, that is open innovation. Some statistics have also been included in this research paper to show
the significance of the theory mentioned for open innovation. With the overview of open innovation ,
this research paper mostly focuses on the dependency of university for open innovation. I have also
mentioned the fact that knowledge is distributed right now. No single company or even country as a
whole can claim to have all the valuable knowledge. Google, IBM are some of the big companies
which have already started to implement open innovation in some forms. SMEs are generating more
innovation and hence Patents. This is changing the landscape of innovation. As mentioned in the paper,
universities have always been a foundation of industry research with fundamental knowledge discovery
and are continuing that trend with lots of journals and books. But the fact is also that now with
increasing commercialization universities are adapting to that. That is, universities are now increasingly
using IP rights to protect their innovation and specializing according to industry demand in
collaboration with the industry. With this collaborative universities are getting proper fundings for
further research. Few decades back this was happening only in US and Europe. But now the statistics
shows that emerging countries are increasingly contributing with new innovations.
With the statistics collected from web and reading through different research papers I can say
that even though closed innovation is required in some cases, most of the R&D should follow the new
paradigm, that is open innovation to keep on benefitting from others researches and utilize otherwise
unusable spillovers. Since they are also getting revenues for their spillovers, it is always better to have
it and keep funding on other researches. In near future, we can safely predict companies, universities
and SMEs will collaborate more and across the boundary of country.
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17. 5. References
Henry Chesbrough, Wim Vanhaverbeke & Joel West (2006). Open Innovation: Researching a New
Paradigm
Keld Laursen (February 2012). Benefits and costs of being open for innovations
Cormac Sheridan(2011). Industry Continues dabbling with open innovation models
Nature Biotechnology
Chesbrough, H.W. (2003), Open Innovation: The New Imperative for Creating and Profiting from
Technology
Cambridge, Mass.: Harvard Business School Press
Jeremy Howells, Ronnie Ramlogan, Shu-Li Cheng (2012). Universities in an open innovation system: a
UK perspective
International Journal of Entrepreneurial Behaviour & Research Vol. 18 No. 4, 2012
Favid C. Mowery, Bhaven N. Sampat . Universities in national innovation systems
Retrieved from, http://innovate.ucsb.edu/wp-content/uploads/2010/04/Mowery-Sampat-Univ-National-
Innovation-Systems.pdf
Henry Chesbrough(2009). Open Innovation: A new paradigm for Industrial R&D
Ulrich Lichtenthaler(2011). Open Innovation: Past Research, Current Debates and Future Directions
Andre Spithoven, Bart Clarysse, Mirjam Knockaert(2010). Building absorptive capacity to organize
inbound open innovation in traditional industries
Technovation Vol. 30, Issue 2, February 2010
Merck Annual Report (2000).
Retrieved from, http://www.anrpt2000.com/innovation2.htm
Braden Kelley (2009). Innovation Collaboration :How Leading Firms Use Open Innovation
Retrieved from, http://www.business-strategy-innovation.com/2009/07/innovation-collaboration.html
Chesbrough, Melissa M. Appleyard (2007). Open Innovation and Strategy
California Management Review Vol. 50, No. 1 Fallcom 2007
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