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Why could a firm give up exclusivity rights over its knowledge?

Datum:09 september 2022
Knowledge becomes more and more valuable
Knowledge becomes more and more valuable

Over the past years, the practice of giving up of intellectual properties to the public has become increasingly popular among big firms in the software, semiconductors, pharmaceuticals, and automobile industries. Prominent examples are Johnson & Johnson’s innovation lab in La Jolla, California, IBM’s industry solution lab in Zurich Rüschlikon, or patent pledges of Red Hat (2002, 2017), IBM (2005), Google (2013), and many others. According to Linux Magazine, the 500 patents pledged by IBM “cost $10,000,000 to obtain (just in the U.S.) and are worth an unknown amount in licensing revenue”. Interestingly, many such voluntary commitments to openness, called “outbound” open innovation, require no formal agreements to use the unlocked knowledge, meaning that outsiders can freely access it, without giving anything in return.

Firms’ tendency toward making their knowledge available for free to outsiders in traditionally intellectual property intensive industries represents a “departure in strategy to say the least”. Indeed, the conventional premise strongly associates resource ownership with the ability of a firm to appropriate value. Thus, by granting free access to proprietary assets firms may risk losing competitive advantage over rivals. Then, why do corporate firms engage in outbound openness, without getting direct financial gains in exchange?

Firms can have various possible incentives to grant free access to their proprietary assets. These incentives comprise creating and obtaining returns from standards and their development, advancing collective innovation, increasing the demand for proprietary assets that are complementary to the opened-up ones and saving costs, or pursuing social goals. One of the expected reactions in the market is that the firms will get more involved and committed to the liberated knowledge, which results into more knowledge to be created. There is little research on whether and how the focal firms capitalize on and incorporate into their innovation processes the newly created knowledge by others.

In one of my recent studies, coauthored with Araks Ayavazyan, we proposes two channels, through which a firm can capitalize on the decision of adopting an outbound open approach in its intellectual property strategy for no direct financial benefits in return. The first channel involves selling subsequent intellectual assets in markets for technology to meet the demand resulting from the increased engagement of third parties in the liberated knowledge. The second one refers to bringing the subsequent external knowledge in-house via buying intellectual assets or building upon it internally. In conclusion, this may give rise to potential externalities for the opening up firm.

Author: Said Matr - s.j.s.matr@rug.nl

References:

Ayvazyan, A. and Matr, S., 2019, July. Sharing is Caring: Outbound Open Innovation and the Subsequent Innovation Process. In Academy of Management Proceedings (Vol. 2019, No. 1, p. 18182).