Embracing open innovation

By David Crane

The future of Canadian innovation policy is likely to depend greatly on the findings of the Council of Canadian Academies, which is why the Council should pay close attention to the changing ways in which businesses innovate. There has been concern for some time that Canadian companies, generally, are innovation laggards, which would help explain our disappointing productivity performance. So the federal government has asked the Council to answer a series of tough questions to find out why.

The questions include: "How should the innovation performance of Canadian firms be assessed? How innovative are Canadian firms, and what do we know about their innovation performance at a national, regional and sectoral level?"

And there are more: "Why is business demand for innovation inputs (for example, research and development, machinery and equipment, and skilled workers) weaker in Canada than in many other OECD countries? What are the contributing factors, and what is the relative importance of these contributing factors?"

Coming up with good answers won't be easy. Yet if Canada is to advance as an innovation nation the answers are important.

But in its work, it is also important for the Council to take into account how the shift to a new business model, based on "open innovation" may require different kinds of public policies. In this, the Council can draw on the ongoing research of the OECD on globalization and open innovation.

It can also look at the Netherlands' report of the Council on Science and Innovation, which last year presented a set of recommendations on how to help Dutch companies make the transition to open innovation.

The concept of open innovation is relatively new. The term was coined by Henry Chesbrough of the University of California Berkeley, who has written several books on the subject, including Open Business Models: How to Thrive in the New Innovation Landscape.

His thesis, which is at the centre of the OECD project, is that how and why leading businesses innovate has radically changed. In the past, he argues, businesses tended to innovate and commercialize internally, relying on their own R&D departments to develop new products. If an R&D project delivered a new idea, but it didn't fit with the business goals, then it simply sat on the shelf.

Now, Chesbrough says, companies rely on outside innovation to meet many of their goals for new products, and at the same time, are much more active in licensing or selling results of their own R&D they cannot use.

Several companies provide strong examples of the open innovation model. One is IBM, which moved to an open source, open-network strategy several years ago, making 500 of its patents freely available to the entire software community in order to accelerate development of the Linux operating system. IBM calls this "a community-driven approach to problem solving where people work across geographical and organizational boundaries to confront today's most pressing challenges."

IBM has also joined with other companies, including Novell, Philips, Red Hat and Sony, to incorporate Open Innovation Network to acquire patents and license them free to any company or organization that agrees it will not assert its patents against the Linux operating system. Earlier this year, Oracle licensed all of its patents and last month Google became a licensee as well.

Procter & Gamble is not always seen as a high-tech company. But it too is highly dependent on new ideas for products, processes and packaging, and has also embraced open innovation. It made the decision in 2001 that it would seek to obtain 50% of its innovations from outside the company, compared to about 20% at the time. It worked on a totally new business model which looked increasingly outside the company for new ideas, while also maintaining a strong internal R&D department. It also has 75 "technology scouts" who scour the world for new ideas.

Its Connect and Develop program opened the company up to new ideas from around the world while P&G adopted a strategy to out-license or sell its own patents which it could not use. Today the company is getting close to 50% of innovations from external sources, though not many from Canada. One P&G official called Canada "a white space" for P&G. It had expected more.

Nokia also pursues an open innovation strategy, with its peer production system for software development, including an electronic platform. This allows 2.5 million registered members to access standards, IP and systems architecture, so Nokia can move faster to find new solutions. It also has what it calls "knowledge-sharing agreements" with about 100 universities, including the University of British Columbia, Simon Fraser University, University of Victoria, BC University of Technology, and University of Toronto.

So open innovation means that companies see all the expertise beyond their walls as a source of ideas, or as advocates put it, "not all the world's smart people work for your company." Collaboration and sharing are powerful new tools, driven by the increasing cost of innovation, the intense pressures for innovation in a much more competitive global economy, and the shrinking shelf-lives of many new products.

This means companies are scouring the world's start-ups, venture capitalists, licensing of technologies, alliances with universities, mergers and acquisitions, partnerships and venture investments in new companies. This has been described as realizing value through "the wealth of networks."

From a public policy point of view, this means strengthening universities as sources of new knowledge, encouraging entrepreneurship and start-ups, supporting technology "hot spots", ensuring that IP laws are not barriers to open innovation, recognizing the value of a competitive environment as a spur to innovation, helping businesses learn how to manage the new business models, and facilitating a financial system that finances new companies and business arrangements.

It is the package of policies, not a single policy that matters. There are risks and concerns, one being that countries will have to find better ways to capture domestically the benefits from public investments. But as R&D and new knowledge spread around the world, and companies are pushed to innovate faster, open innovation is the business model that our own policies must respond to.

David Crane (crane@interlog.com) is a writer and advisor on innovation strategy. His column appears on Sundays in The Toronto Star.