Richard Lloyd

Open innovation and IP have a complicated relationship. An adherence to the former can be regarded as a rejection of the strictures imposed by the latter. But according to Michael Locascio, who leads IP strategy for a Fortune Global 500 chemical company, that is too simple a reading of the relationship between the two. In this blog he explains why IP protection plays an important role in encouraging and facilitating open innovation. It’s well worth reading.

Although many people erroneously believe open innovation is synonymous with early stage ideation involving multiple entities, in reality it can and often does encompass every level of development from initial concept to commercialisation. At its essence, it describes an alternative to the established innovation methodology that’s accomplished within a single, usually integrated firm. Instead, open innovation proponents posit that more profound innovations are achieved at an even greater rate by leveraging new insights into market needs, alternative problem solving approaches, and through the expertise and research capabilities between firms. In effect, open innovation breaks open the confines of introverted and insular companies and, instead, engages in cooperative arrangements between institutions in order to foster innovation.

Detractors of intellectual property rights typically refer to software when making their critiques and are quick to cite open source software platforms, such as Linux, Android and Apache among others, as examples of successful and moreover preferable modes of open innovation that would be hampered by IP. Many critics also call for a greater degree of government involvement to develop technologies open to all without any IP encumbrances. Specifically, they point to the nature of IP as designed to exclude others from using protected inventions as inimical to open innovation that at its core relies on a willingness to share knowledge. However, a cursory analysis will dispel those myths.

It is important to note that the software industry is far from monolithic. Software developed and used for industrial controls, aircraft avionics, communication technologies, medical imaging and a myriad of other applications are vastly different in terms of complexity, robustness, and longevity in the marketplace than more consumer oriented social media, mobile applications and other forms of “consumer software”. Critics of robust IP rights are usually referring to the latter and not the former when building their critique as the former more clearly falls within the conventionally understood need for IP protection.

But even with respect to consumer oriented software, such as that found in social media developed through open innovation, it is important to recognise (although it is not always acknowledged) that many ostensibly open sourced firms do not always make the critical Application Programming Interfaces (APIs) needed for value capture publicly available. Although not usually patented, the intellectual property of APIs is almost always kept as a trade secret and immune from tinkering by other developers.

So why is it then that open sourced software is pointed to as an example of valuable development without IP rights? One answer is that those in opposition to IP rights may conflate the value drivers, particular to consumer oriented software, with software in general and other technologies more broadly. Although consumer software is often described by the moniker “technology”, in fact many if not most of the pervasive forms of consumer software don’t derive value from technological superiority (nor physical capital) at all, but rather on the size of the network of their users. Because the network effect is a non-linear phenomenon, scaling speed is by far the most important industry driver.

Open source is designed to achieve that scale and speed by encouraging the parallel development of multitudinous applications and permutations to publicly available source code. The protection of development efforts with IP is in some situations, but by no means always, overshadowed by the real need for speed. However, because most industries, including many types of software, do not rely on network effects, open source is not generally representative and cannot be relied upon to exemplify the disutility of IP to innovation.

Government funded technology development has its own issues rendering it unsuitable to replace private innovation and the need for IP. Because governments don’t have to provide returns to investors and have long time horizons they are particularly well suited to fund and often conduct basic research and development of early stage technologies with unknown commercial value and product launch time horizons far beyond what would be tolerable for a private firm. Indeed, many technological wonders, particularly those linked to the military - including aerospace, internet and semiconductors - attest to that fact.

However, the flip side is that because governments do not have the same competitive pressures as the private sector, are not responsive to pricing and other market signals, but are subject to encumbering bureaucratic rules, they are inherently and notoriously slower and weaker in developing products of commercial value. Private enterprise is almost always required to commercialise products of value to actual consumers even when based on innovation funded or directly developed by government.

Commercialisation, of course, is no easy task and almost always requires investments in additional research and development efforts to produce a salable product. Often, this effort unsurprisingly needs protection, using IP rights, from those willing to copy. Note that even in the rare circumstance where virtually no further technological developments are required, the considerable risk associated with investments in production capital and marketing and sales usually requires some form of IP protection to assure that opportunity risks represented by cost of capital hurdles are surmountable. In short, government R&D is a poor substitute for private enterprise to develop commercially valuable innovation and in no way obviates the need for IP rights.

Although open source software is not representative of all industry, it does demonstrate that there are circumstances where IP is not required for open innovations; specifically when network effects are key. It is also true that – if prohibitively high – capital investments, certain regulatory environments, or branding (in the case of certain classes of consumer goods) can provide sufficient entry barriers to circumvent the need for IP protections. But none of this actually shows when, if ever, intellectual property IS required for open innovation.

In a free-market system, it is irrational for any participant to provide resources without a reasonable risk-adjusted expectation of a return on investment. Although intra-corporate research does not require IP related agreements, as any and all IP is owned by the firm and subject to its established parties, joint R&D programmes between firms and/or individuals, or between public research institutions and private firms is altogether different. Given the constraints described above, it is a basic requirement for any successful open innovation programme to establish the principles of value capture up front. If at least one of the parties involved cannot protect its investment by direct payment for development services rendered or if there are network effects or high capital, regulatory or branding hurdles, then the value capture paradigm must be described in the form of an agreement pertaining to the allocation of the IP or use thereof generated through the course of the open innovation programme (or to the eventuality that the cooperative effort dissolves prior to anticipated conclusion).

Just as important is the delineation of the existing intellectual property belonging to each contributor prior to the cooperative programme that is not subject to counterparty ownership claims, for the obvious reason that neither party wants the other to have a legal claim on a preexisting asset. As such, IP is the critical requirement needed to define what was preexisting, and what is to be created through cooperation. Without that understanding, it would be irrational and irresponsible to proceed with any cooperative innovation effort.

In conclusion, intellectual property is the key requirement to effectively promote and execute an open innovation development effort in the absence of either direct payment or effective barrier to entry for all parties in the form of network effects, capital hurdles, branding and other barriers. IP detractors either have only narrow experience in sectors with market barriers that circumvent the need for IP or maintain the delusion, in spite of considerable historical evidence, that non-market actors can more effectively provide commercially viable innovation than the private sector. 

Michael LoCascio is responsible for IP strategy at a Fortune Global 500 company. The opinions expressed herein are solely those of the author and are not to be attributed in any manner to his employer or related entity.