Open innovation is when a firm uses ideas and knowledge from outside its walls, or shares its own, in order to innovate. It can be paid for, through licences and contracts, or free, through prizes, pledges and open source.
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Types of open innovation
- Inbound: a firm brings in outside ideas, by sourcing them free or buying them.
- Outbound: it licenses, sells or gives away ideas it doesn’t use itself.
- Coupled: it does both at once, working with partners on shared projects.
Key factors
- Absorptive capacity. A firm can use outside knowledge only if its own staff can spot it, judge it and put it to work.
- Clear rules on ownership. Patents and contracts often make sharing possible, because partners know who owns what before they talk.
- Fit with the business model. Small firms in particular struggle when their way of making money doesn’t match that of the partners they innovate with.
- Capacity to choose. Wide calls for ideas bring in more than a firm can review, so selection becomes the bottleneck.
Examples
LEGO. Through LEGO Ideas, fans submit designs for new sets. A design that gains 10,000 supporters goes to review, and if LEGO makes it, the fan earns 1% of net sales. The 2022 set based on Van Gogh’s Starry Night began as a fan design, a case of inbound open innovation.
Toyota. In 2019 Toyota made almost 24,000 of its patents for hybrid and electric vehicle technology free to use until 2030. It also offered paid technical support to carmakers using them. Toyota hoped more firms would build hybrids and buy its systems to do it.
Frequently asked questions
What is the difference between open innovation and co-innovation?
Co-innovation is partners jointly building a missing piece that a shared offer needs. Open innovation covers any planned flow of ideas into or out of a firm.
Who coined the term open innovation?
Henry Chesbrough, of the University of California, Berkeley, in his 2003 book Open Innovation. He contrasted it with closed innovation, where firms rely on their own research labs alone.
Does open innovation work?
On balance, yes. A 2023 review of 139 studies found it raises innovation output, and that firms combining inbound and outbound flows gain more than those using one direction alone.
Is open innovation the same as open source?
No. Open source is one form, where code is shared under a licence anyone can use. Open innovation also covers paid licensing, joint ventures, start-up programmes and prizes for solving set problems.