Open Innovation And Its Economic Implications



How many of you have heard of Open Innovation? If you work for a company that practices it, or pretends to practice it, you may know what it is. But for the rest of you, I feel it’s best to begin this article by explaining the term: Open Innovation refers to a process through which companies rely on outside sources to provide them with ideas that they can use to improve their products, or create entirely new products. To contrast this with “closed” (traditional) innovation, in Open Innovation a company does’nt rely as much on hiring top researchers and lawyers to come up with ideas and protect copyrights and patents.

While in Open Innovation, a company still has R&D staff, they are more involved in evaluating ideas (the development of the ideas are left to outside sources, such as customers and suppliers) and turning ideas into products that can be brought to the market. The idea here is that 1) customers and suppliers have an interest in your company doing well, so they’ll be happy to provide you with ideas on how you can improve your products (and/or services) 2) Those who actually buy and use your products (your customers) can better provide you with ideas on how to improve them – the outside perspective is the most important perspective of all when it comes to innovation.

Whether Open Innovation works is hotly contested – it has followers as well as detractors. But, it is none the less gaining in popularity. Therefore, I think it’s time we consider the economic implications of Open Innovation; both the innovation in economics, and the implications for economics. I’ll explain the difference in a minute.

The first thing that would happen, if every company (or a significant share of them) were to adopt Open Innovation, is that growth theory would have to change. Currently, the growth model most economists use is called the Romer model. Simplified, the Romer model states that in order to have a high long-term growth rate, you need to have a high birth rate, and a certain proportion (ideal proportion is still debated) of your population needs to work in R&D. Your population growth rate and the growth rate among the people working in R&D is assumed to be the same (ie, population increase 1 % = number of R&D workers increase 1 %). Note, this is a very simplified version of the Romer model, but we don’t have to get more technical than that. Economists know that the only source of long-term growth of GDP per capita is technology, so we’re understandably quite interested in finding out where technological progress comes from. Having people work in R&D, and having a high growth rate (which you’ll get, if your population is growing fast) of R&D workers, should mean more innovations and a higher long-term growth rate. Basically, we assume that more researchers = more innovation.

Open Innovation is a problem to the Romer model: The correlation between “amount of innovations done” and “number of researchers” is here diluted. A company with 5 R&D workers, using the Open Innovation approach to innovation, may do as much or more research as a company with 10 R&D workers which uses a closed approach. I’m not saying Open Innovation is always superior to closed, but of course it is in general better to have your R&D personell working on developing ideas, instead of spending their precious time coming up with them. It’s just more efficient that way.

On a macro scale, let’s say one country has 1 % annual population growth rate while another country has a population that grows at 2 % per year. The second country should have a higher long-run growth, according to Romer (as they will have more researchers). With Open Innovation however, the growth rate of technology doesn’t depend as much on the number of researchers, so this doesn’t have to be true. The general idea is still going to be correct of course, but there will be more exceptions from the rule.

Now, let’s turn inwards: How can Open Innovation change economic research? What can it do for economics?

In just about one week, I’ll begin to study for a master’s degree in behavioral economics. There are several reasons why I’m interested in this subject, but one of the main reasons is because I think it’s time economic researchers start to look beyond economics. We seriously need to study adjacent fields, such as sociology, psychology, political science and management, and incorporate their findings into our models.

I seriously believe that the era of mathematical economics is nearing its end. Mathematical economics, while it has made some contributions to economic knowledge (such as giving us the solow-swan model), is nearing the point where it will have taught us everything it can teach us. To use economic terms; there is a strongly decreasing marginal return on investment in mathematical economic research. The areas which still has an increasing marginal return on investment are behavioral and experimental economics. Behavioral economics is all about incorporating knowledge of human behavior and the human mind that psychologists and other social sciences has discovered, and applying that knowledge in a way that helps us understand the economy.

What I want to see in the future is for economists to take an Open Innovation approach: Don’t just sit in your offices and try to think of new ideas. Talk to people! Academicians, entrepreneurs, managers, regular blue-collar workers – don’t assume that just because you have a PhD, all the great ideas have to come out of your head. People who live in the economy might have something useful to say as well. Several of my research ideas have been inspired by conversations that I’ve had with “civilians” (non-economists). Of course, in order to really develop and test a research idea you need an education in economics. But the “idea generation” part of innovation can definitely be left to those outside of academia, and/or those within academia who are not economists. It’s just more efficient that way. This is not entirely unheard of (there is something called “open science”), but I want it to become the norm. The economy is far too important to be left in the hands of any one single group.

There is another angle to this as well: Researching areas that people want researched. Being in academia means you don’t have to worry very much about what research is in demand; as long as there is a journal that will publish whatever research you’re working on, you’ll be fine. However, I think it’s time we as economists understand that we have a responsibility that the lesser social sciences (I’m looking at you, sociologists) don’t have: Our research has the potential of changing the world. It has changed the world several times in several ways (see my post on the matter), and I’m certain that it will continue to do so. But we have to stay relevant! The “problem” with economics is that it is so broad that there are millions of topics to choose from when deciding what to do research on. Maybe in this kind of situation, we should take a hint: What people want most right now is a solution to the unemployment crisis. Sure, as economists we can study trade between pigeons (yes, this has been done), but maybe we should focus on this for a while? Even if you’re the kind of economist who thinks pigeon economics is the most interesting thing in the world (and if you do, please get help), maybe right now it’s your responsibillity to use your talents and knowledge in a way that will actually help the taxpayers who, after all, are paying your salary?

Academia easily becomes an ivory tower. If you’re a professor who’s had tenure for 20 years, it can be hard to relate to the pain of the blue-collar worker who is about to lose his job through no fault of his own, and it can be hard to see why you should stop working on that theoretical model on pigeon-trading and instead focus your time and energy on coming up with a solution that may help the blue-collar worker keep his job. This doesn’t mean we all have to do macroeconomic/fiscal policy research, but it’s not too much asked that we focus a little bit and put the pigeon-economic research on ice until the economy has improved. Because, frankly, for an economist to do meaningless economic research at a time when meaningful economic research has never been more needed is to mock all the taxpayers who are paying the economists salary and who is counting on him to help them.

We always talk about private companies “giving back” to their communities. Maybe we should start talking about academia doing the same? We complain when private companies cut back on staff during recessions, but we say nothing when academicians waste their time studying pigeons. We complain when companies only think about their profits, but we say nothing when academicians only think of what they themselves find interesting to research at the moment rather than what questions society as a whole needs to have answered.

I’m not saying that research priorities should be decided strictly by means of democratic vote; but the needs and wants of the taxpayers who are after all funding our research needs to be taken more into account than it so far has. Especially in a time like this.

Finally: Economics is an influential field, more influential than any other social science. It’s time we realize that with great power comes great responsibility.

Thanks for reading.

Connect with Caffeinated Thoughts!

  • http://twitter.com/Acabiz Acabiz

    Great article, dear John; both informative and with valuable “non-main stream” thoughts! Unfortunately, the majority of both the academic world and companies (particolarly SMEs) don’t share the same vision!
     
    As for us, at Acabiz, we are doing something in the Open Innovation field: Acabiz.com facilitates the collaboration between academics and the finance community. It is a channel through which investors can tap into the valuable knowledge of leading academics around the globe. Importantly, it is also a way for academics to stay tuned with practical issues, assuring a certain degree of “research relevance”.
     
    We created acabiz.com with the Open Innovation model in mind, so that businesses could have a simple tool to collaborate with academia.
     
    Thank you for your insights and if you would like to write a guest-post on our Blog, we would of course be delighted!
    Guido

    • http://www.facebook.com/people/John-Gustavsson/786860575 John Gustavsson

      Hello! I’m glad you liked my article. Your website seems very interesting! I really like the idea behind it. I’d be happy to write a guest post on your blog. Just give me your email adress and I’ll write it over the next couple of days (my email is gustavsson_john@hotmail.com).