Innovation Intermediaries: Not All They’re Cracked Up to Be, Study Says
A recent article in the Creativity and Innovation Management journal (March 2008) takes on internet marketplaces for technology such as yet2.com and Innocentive, and shows that there’s still a bumpy road ahead for totally open innovation. Specifically, the success rate has been far lower than expected.
In their study of 25 large Swiss and German firms (on average, 8 457 employees and 2 135 million € in revenue), Ulrich Lichtenthaler and Holger Ernst find that markets for technology have remained imperfect, resulting to high transaction costs and limited adoption by industry incumbents. Although all the firms surveyed were aware of different service providers, and several firms had invested substantial time and resources to decide on their technology offerings, the maximum number of transactions for a single company was only one out-licensing and one in-licensing agreement.
It might be no wonder, therefore, that most industry experts interviewed by Lichtenthaler and Ernst “have relatively reserved attitudes towards these marketplaces”. Only two out of 25 firms wanted to give the internet marketplaces another chance in the short to medium term, while the rest are presumably waiting for the markets to shed their imperfections. Thus, a vicious circle is set up: firms do not want to spend their resources on imperfect markets, while markets remain imperfect as long as firms do not participate more actively.
According to the authors, the most severe deficit is that the commercialization of technology through internet marketplaces constitutes a relatively unsystematic and passive approach. Specific technology needs or customers are not addressed, and problems and solutions are communicated very broadly. This makes matching technologies with buyers difficult, and numbers tell the rest of the tale: in 2004, yet2.com, with its 90 000 registered users, concluded only 10 technology transfers. Companies also tend to publish only relatively unattractive, residual technologies that have limited value, further weakening the attractiveness of using the marketplace. Although marketplaces have been improving rapidly, especially by focusing on a more active and consultative approach towards technology sourcing, the primary problem might well prove to be intractable: if a firm thinking about out-licensing a technology is able to describe the possible applications of the technology, it in all probability already has a fair idea of potential customers to that technology.
As offering technologies on sale over the internet requires substantial presentation to generate interest, resources used in these presentations might very well be better utilized by concentrating on existing, more proactive channels, of which particular importance are informal inter-company ties. The result is that internet marketplaces do not really decrease the transaction costs in licensing, and may actually bring about unexpected transaction costs; for example, if no agreement is reached for licensing, the potential licensor is likely to continuously observe the potential licensee for any signs of possible infringement, aggravating both rational and irrational outbursts of Not Invented Here syndrome.
However, there’s some light at the end of the tunnel. If much of the hype that recently surrounded internet marketplaces is removed, what remains is an useful addition to tools a firm has at its disposal when considering in- or outlicensing. Although lack of specifity in marketplaces is a problem, it can also be an opportunity, as
“a main strength to internet marketplaces is their cross-industry character (Johansson, 2004; Chesbrough, 2006). Leading companies such as IBM can also create their own, focused marketplaces to enlarge and intensify their offline networks, thus helping to combine personal contacts with the advantages of web-based tools.” (Lichtenthaler and Ernst, 2008)
The recent trend is that marketplaces for technology are moving from passive database approach to more active and consultative approach, when the marketplaces have realized that the complexity of technological knowledge requires a more active approach to exchanging technology. They are, in effect, becoming technology brokers instead of databases.
An interesting finding regarding users of marketplaces is that chemical and pharmaceutical, as well as electronics and semiconductor companies have found internet marketplaces as less than useful, while automotive and machinery industries find the potential of marketplaces surprisingly high. This is in contrast with much of previous research (and my own theoretizing, by the way) which predicted that because licensing is important in pharmaceutical/chemical industries, because they already have mechanisms in place for licensing, and because their technological problems are often of convergent type (ie. there’s usually a very limited number of easily described best solutions, in contrast of divergent, where there are many ways of achieving the same result, as in most mechanical engineering), they would benefit more from innovation marketplaces. In hindsight, this is very probably because large, established players in chemical and pharmaceutical industry already have extensive networks and thus internet marketplaces are relatively less useful.
The authors also point out to an interesting observation, originally by Arora, Fosfuri and Gambardella (2001), that stronger intellectual property rights may actually enhance the efficiency of technology transfers, and hence encourage the diffusion of technology, including parts of the technology that patents do not protect. (As an anecdote, I recently had a discussion with Sami Viitamäki of FLIRT crowdsourcing model fame, and we observed that the stronger IP protection afforded by Japanese system might be partly responsible for local spread of fan-made versions of Manga comics; in the Western jurisprudence, a copyright holder usually has to defend the copyright against all infringements or risk losing it, and therefore is compelled to take action against its fans.)
Finally, the authors have six propositions that help firms to enhance their benefits from relying on intermediaries in the markets of technology:
- Use integrated service offerings with a consultative element, not just databases, to exchange technology
- Complement intermediary services with internal activities (using knowledge distributed across the organization to link technologies and applications) instead of substituting internal activities with intermediaries
- Complement intermediary services with inter-firm networks, using knowledge embedded in formal and informal networks
- Develop dynamic capabilities of co-ordinating intermediary services, e.g. capabilities for preparing effective and thorough technology offers
- Support actively the technology transfers, as technological knowledge is often relatively complex to transfer
- Align the intermediary services with appropriability regimes, ie. use intermediaries for technologies and industries where there is less possibility of appropriability problems (for example, in chemical industry, where patents protect technologies relatively effectively).
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