The debate over IPRs is often set as proprietary vs. free, or closed vs. open. In the forthcoming book Open Innovation: Researching a New Paradigm (Oxford, 2006), Henry Chesbrough (UC Berkeley), Joel West (San Jose State), David Mowery (UC Berkeley) and others propose a new framework for understanding innovation. “Open Innovation” refers to the industrial organization of current high-technology innovating activity. The authors define Open Innovation as regarding: "R&D as an open system... that valuable ideas can come from inside or outside the company and can go to market from inside or outside the company as well.” CH1 2. Open Innovation "assumes...that even the most capable R&D organizations must identify, connect to, and leverage external knowledge sources as a core process in innovation.” CH1 3.

The book is important because it places information sharing, cross-firm R&D collaboration and distributed peer production (items popularized by the free software and open source movements as their hallmark indicators) within the broader context of industrial organization. Open Innovation has implications on issues such as patent trolls, by showing how non-manufacturing entities that invest in R&D and then license their IP merely partake in vertically dis-integrated business operations. By explaining how intermediate markets are important in today’s high-tech economies, the book also accomodates entities such as Nathan Myhrvold's Intellectual Ventures, and their role in facillitating the dissemination and diffusion of innovation. Finally, Open Innovation helps explains why copyrights and patents are crucial for many innovating activities commonly associated with open source in the modern innovation economy.

To clarify a crucial point, the term “open” describes “the use of purposive inflows and outflows of knowledge” and “expan(sion) (of) the markets for external use of innovation” beyond firm boundaries." However, Open Innovation” does not imply “open source.”

There are some concepts that are shared between the two (Open Innovation and open source), such as the idea of greater external sources of information to create value… Open Innovation explicitly incorporates the business model as the source of both value creation and value capture… While open source shares the focus on value creation throughout an industry value chain, its proponents usually deny or downplay the importance of value capture. CH1 2.

But what does “Open Innovation” really mean and is it a new paradigm for industrial innovation in the high-tech economies? Chesbrough and his collaborators even admit that questions remain on the concept of Open Innovation. However valuable Open Innovation is as an innovation paradigm to understand high-technology industries its departure from “industrial age” thinking where firms were vertically integrated, undertaking each phase of the research and commercialization process internally, carries insightful observations.

The closed process of R&D and commercialization within a single firm was part of an industrial age business model that grew out of concerns with the problems of appropriating any rents created by new technologies. Today we are observing a broad shift away from this business model towards a new set of business models characterized by a variety of different strategies and institutional arrangements such as venture capital, start-ups, spin-outs, and proactive IPR licensing. CH8 17.

Example of pre-Open Innovation era companies include the ingrated “mainframe” IBM. CH6 6. The old Xerox also fits into this category, as it did not capitalize on its R&D, which often found the market through other means. CH2 13. Today, IBM fits into the Open Innovation model, with its adoption of open source strategies and extensive patent licensing. CH2 24. Cisco’s strategy of acquiring start-ups to compete with the enormous R&D spending of Lucent and its Bell Labs years ago marked it as pursuing Open Innovation. CH1 24. Intel is also a major Open Innovation company. CH9 25.

Main implications of the book...

Open Source in Open Innovation
After the distinquishing between Open Innovation and open source, open source is given its due in the new innovation paradigm.

…we concluded that most firm involvement in open source fits the Chesbrough definition of Open innovation, in which firms both use a broad range of external sources for innovation and seek a broad range of commercialization alternatives for internal innovation. However, we would not mean to suggest that all open source software is an example of Open Innovation– or for that matter, that all open innovation in the IT industry relates to open source software. CH5 27.

…open source is only Open Innovation if it has a business model. There are tens of thousands of open source projects created and run for non-pecuniary motivations- such as the work done with Project GNU, which is motivated by a strong ideology...AOL’s exit strategy with Mozilla, which reflected the failure of the sponsor to create a viable business model, leaving the foundling innovation abandoned to whoever is willing to nurture it. CH5 28.

IP in Open Innovation
More importantly, Open Innovation holds a pivotal role for IP: Formal appropriability by and large depends on IP laws, and certain types of Open Innovation are only possible through such IP. CH6 2.

IP represents a new class of assets that can deliver additional revenues to the current business model, and also point the way towards entry into new businesses and new business models… Rembrandts in the Attic, proclaimed that companies needed to dust off their IP and offer it for sale to others. However, it did not provide an explanation for why those others would buy the IP. Open Innovation supplies a coherent rationale for why companies should be both active sellers and active buyers in IP. CH1 5.

...(Open Innovation)...include(s) exploiting knowledge spillovers and consulting with venture capitalists, while also using both inbound and outbound licensing of key technologies. Although earlier frameworks acknowledged the role of external knowledge and accidental internal discoveries, it is the systematic encouragement and integration of these issues couple with creative exploitation of IP... CH5 4.

This (patent) incentive will clearly be especially important for firms that cannot easily access or acquire the complementary assets required to profitably commercialize their inventions... patents play an important role in promoting vertical specialization in R&D by limiting the hazards faced by specialized technology developers... CH8 18.

Given the commercial aim of proprietary technologies, the extensive IP licensing efforts of companies like IBM, HP and Microsoft, and the variety of business models facillitated by IP assets, perhaps IP will prove more conducive to "Open Innovation" than open source.

CH1- Henry Chesbrough. Open Innovation: A New Paradigm for Understanding Industrial Innovation.
CH2- Henry Chesbrough. New Puzzles and New Findings.
CH5- Joel West and Scott Gallagher. Patterns of Open Innovation in Open Source Software.
CH6- Joel West. Does Appropriability Enable or Retard Open Innovation?
CH8- Tim Simcoe. Open Standards and IPRs.
CH9- Stuart Graham and David Mowery. The Use of IP in Software: Implications for Open Innovation.