Paola Criscuolo, Toke Reichstein and Ammon Salter Tanaka Business School, Imperial College London Keld Laursen DRUID, Department of Industrial Economics and Strategy, Copenhagen Business School The Winning Combination: External Sources, Complementarities and Product and Process Innovation

Structure of talk Theoretical and empirical background Hypotheses Empirical methods Results Discussion and conclusions

The role of external sources in the innovation process Jewkes, Sawers and Stillerman (1958) Freeman (1974) Rosenberg (1969) Rothwell and the ‘Project Sappho’ (1976) Von Hippel – ‘lead users’ (1976), ‘sources of innovation’ (1990), and ‘democratic innovation’ (2005) Lundvall and Freeman – ‘innovation systems’ (1988) Cohen and Levinthal – ‘absorptive capacity’ (1990) Powell and others – ‘networks of innovators’ ( s) Coombs, Harvey and Tether (2003) – ‘distributed innovation systems’

The Closed Innovation Model Many innovative firms now spend little on R&D and yet they are able to successfully innovate by drawing in knowledge and expertise from wide range of external sources The decline in the strategic advantage of internal R&D is related to the increased mobility of knowledge workers, making it difficult for firms to appropriate and control their R&D investments Source: Chesbrough, 2003

The Open Innovation Model Open innovators commercialise external ideas by deploying outside (as well as in-house) pathways to the market Firms become more porous and embedding it loosely-coupled networks of different actors, collectively and individual working toward commercialising the new knowledge Firms that are too focused internally are prone to miss a number of opportunities because many will fall outside the organization’s current business or will need to be combined with external technologies to unlock their potential Source: Chesbrough 2003

Closed vs. Open Innovators

Innovative search Ahuja & Katila (2002)/Katila (2002) – based on USPTO citations Innovative search strategies impact on performance –Search depth (re-use of existing knowledge) –Search scope (explores new knowledge) Our focus External search strategies – the use of external sources of knowledge for innovation –Combinations of sources – looking ’winning’ combination for inducing differnet types of innovation

Hypotheses Hypothesis 1a: The openness of a firm to external sources of knowledge in its search for innovative ideas is conducive to that firm achieving a new product innovation. Hypothesis 1b: A firm that searches too broadly in its search for new innovative ideas will be less likely to develop a new product innovation than those firms who focus on several key sources Hypothesis 1c: Firms who achieve a process innovation use fewer external sources of knowledge than firms who achieve a product innovation.

Hypotheses Hypothesis 2: There are complementarities among external sources which lead to a higher success rate with reference to innovation

Hypotheses Hypothesis 3a: Drawing knowledge from suppliers increases the ability of a firm to achieve a process innovation Hypothesis 3b: Drawing knowledge from lead users increases the ability of a firm to achieve a product innovation

Search strategies Focus on 15 external sources of information and knowledge of innovative activities (removed consultants) Aggregated these 15 into six source ‘bundles’ –Suppliers –Clients and Customers –Competitors –Institutional (universities, government research org., private research institutes, etc.) –Conferences (professional conferences, meetings, trade associations, fairs, exhibitions, etc.) –Specialized (standards and regulations) Each were converted into binomials leaving us with 64 (2 6 ) combinations Identifying the most popular combinations (at least 50 observations) 12 strategies emerged

The popular search strategies BundlesABCDEFGHIJKL Suppliers Clients and Customers Competitors Institutional Conferences Specialised Number of observations Percentage of observations Source: UK CIS 3

Analysis Multiple logistic regressions Dependent: new for the firm product/process innovation Innovation search variable –Each strategy compared as a dummy (66 regressions for each type of innovation) Control variables –Log of firm size (number of employees) –R&D intensity (% of sales) –Market orientation (local, regional, national, or international) –Innovation co-operations (0/1) –9 industry dummy

Results (product innovation) 2.81 *** *** 4.26

Results (process innovation) 3.08 *** *** 3.35

Hypotheses Hypothesis 1a: The openness of a firm to external sources of knowledge in its search for innovative ideas is conducive to that firm achieving a new product innovation. –Supported: no external sources is the least effective strategy Hypothesis 1b: A firm that searches too broadly in its search for new innovative ideas will be less likely to develop a new product innovation than those firms who focus on several key sources –Partly supported: u sing all six source bundles not the most effective strategy (especially for process innovation) Hypothesis 1c: Firms who achieve a process innovation use fewer external sources of knowledge than firms who achieve a product innovation. –Supported: 1) t he winning combinations for process innovation holds less sources than those for product: 2) using all six source ranks higher for product that for process innovation

Hypotheses Hypothesis 2: There are complementarities among external sources which lead to a higher success rate with reference to innovation –Supported: not only need firms to combine sources, but they need to combine the right sources customers and regulations for process innovation suppliers and regulations for product innovation

Hypotheses Hypothesis 3a: Drawing knowledge from suppliers increases the ability of a firm to achieve a process innovation –Supported: lowest ranking strategies are those without suppliers when considering process innovation Hypothesis 3b: Drawing knowledge from lead users increases the ability of a firm to achieve a product innovation –Supported: five out of the top six ranking strategies when considering product innovation includes customers as an external sources

Limitations and future research Limitations –Imperfect measure of search – rough proxy –Dependent variable is very simple –Firms indicated that they draw knowledge from the sources, we do not know when, how and why they did so –We need more about the relationship the combinations and other innovative activities, such as R&D –No control for complexity of the innovation Future research –What is the winning combination in services? –Movement in the use of external sources over time (CIS 3 to CIS 4) –Other performance variables – market share, survival and growth with ONS linked data