Carliss Y. Baldwin and Eric von Hippel have produced a useful synthetic report explaining why user-led open innovation is displacing producer led innovation, why the former is beneficial for social welfare, but held back by regulations and IP protections dating from an era where only the second form was deemed functional.
Report: Modeling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation. By Carliss Y. Baldwin and Eric von Hippel, December 1, 2009. HBS Working Paper Number: 10-038
“New knowledge is a non-rival, partially excludable good (Romer, 1990). The use of a design by one person does not inherently preclude its use by others. With rare exceptions such as the design of dangerous goods, society benefits if designs are public goods, available to anyone to use or study at no charge (Machlup and Penrose, 1950; Nelson, 1959; Arrow, 1962). However, from the time of the Enlightenment, many have held the view that providing inventors with incentives in the form of property rights to their “writings and discoveries” would induce them to invest in the creation of useful new ideas, i.e., innovations. This theory was expressed in the U.S. Constitution, which sanctioned the creation of intellectual property: “[Congress shall have the power] — To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Abraham Lincoln, himself the holder of a patent, approved: “The patent system … added the fuel of interest to the fire of genius, in the discovery and production of new and useful things.” (Lincoln 1858).
Of course, it was also known that grants of intellectual property rights would create undesirable monopolies. Producers create deadweight losses when they exploit intellectual property rights to reap monopoly profits and spend money to protect or extend their monopoly positions. Indeed while a system of intellectual property rights was enshrined in the U.S. Constitution, patent systems were extremely controversial in Europe during the second half of the 19th century. (Machlup and Penrose, 1950; Penrose, 1951; MacLeod, 2007.)
The work in this paper and that of many others, suggests that this traditionally-struck ‘devil’s bargain’ may not be beneficial. First, there is increasing evidence that intellectual property protection does not increase innovation. As we saw in section 2.2, studies carried out over 40 years do not find that firm managers are inclined to increase their innovation investments due to the availability of patent grant protections. There are also many examples in which strong intellectual property rights may have impeded subsequent progress (Dosi, Marengo and Pasquali, 2006; Merges and Nelson, 1994). Indeed, recent empirical work has actually shown a negative relationship between patenting and subsequent progress in both biotechnology (Murray and Stern 2007) and software (Bessen and Meurer 2008). Second, the ascendent user and open collaborative innovation models that we have discussed in this paper mean that alternatives that are open by participants’ free choice – and to the economic benefit of those participants – are now ascendent alternatives to the traditional, closed producer innovation model. And openness, as we noted above, increases social welfare, other things equal.
Implications for government policy
If open collaborative innovation and open innovation by single users are indeed social welfare-enhancing relative to closed producer innovation and closed user innovation, an important question for policymakers then immediately emerges: Are government policies currently at least even-handed with respect to these innovation models? Or do they on balance encourage closed innovation relative to open user and open collaborative innovation? We suspect the latter is the case.
Essentially all governments have invested heavily to create the intellectual property rights infrastructure needed for innovators to either maintain exclusivity in the use of their innovations or to sell them for a fee. Indeed, even today there is an impetus in public policy in many countries to strengthen intellectual property rights in order to foster innovation. (See Blaxill and Eckardt, 2009, Chapter 8, on efforts to strengthen intellectual property rights in China, India and Japan.)
Beyond such infrastructural investments, governmental incentives and exhortations to obtain and use intellectual property rights are endemic. For example, departments of the US government allow – one might even say encourage – firms and individuals to retain title to inventions developed with government funds, in order to “promote commercialization of federally funded inventions” (NIH 2003). Government-funded business assistance programs also invariably teach that acquiring intellectual property rights is the sensible, business-like thing to do. Thus SCORE, a non-profit business advisory organization funded by the U.S. Small Business Administration advises: “5 Tips on Patents If your company has an invention that you think is patentable, take steps at once. You may lose your right to patent it if you offer it for sale or disclose it publicly without patent protection.” (SCORE 2008)
The roots of this apparent bias in favor of closed, producer-centered innovation are certainly understandable – the ascendent models of innovation we have discussed in this paper were less prevalent before the radical decline in design and communication costs brought about by computers and the Internet. But once the welfare-enhancing benefits of open single user innovation and open collaborative innovation are understood, policymakers can – and we think should – take steps to offset any existing biases. Examples of useful steps are easy to find.
First, as was mentioned earlier, intellectual property rights grants can be used as the basis for licenses that help keep innovation open as well as keep it closed (O’Mahony 2003). Policymakers can add support of “open licensing” infrastructures such as the Creative Commons license for writings, and the General Public License for open source software code, to the tasks of existing intellectual property offices. More generally, they should seek out and eliminate points of conflict between present intellectual property policies designed to support closed innovation, but that at the same time inadvertently interfere with open innovation. Second, as design costs fall, many more innovations will originate with single users.
Unlike participants in open collaborative innovation projects many single users have no institutionalized system for sharing. They share or do not share ad hoc. Policymakers should therefore develop systems to encourage and support free revealing of innovations by single user innovators. They could, for example, institute a system of tax credits analogous to R&D tax credits for innovators that freely reveal well-documented results of their private innovation developments. Documentation of qualifying innovations might take a form analogous to a patent, vetted for novelty by patent office examiners, and then granted “open patent” status.
Third, just as in the case of single user innovators discussed previously, it would be useful to create policies that reward openness by sponsors of collaborative projects. Many collaborative innovation projects exist in which the innovation-related information generated is closed rather than open. How is this possible? Basically there are two reasons why the outputs generated by a collaborative innovation project are open rather than closed. In the first place, when project participants are users of project output, open access to that output is an incentive that induces them to participate (see the analysis in section 3.5 above). In the second place, when effective problem-solving requires contributors to know and understand the solution being developed, open access is the low-cost default solution.
Sponsors of collaborative projects can close and own the innovative output of a collaborative project if they can create a project that escapes these two constraints. To escape the first, sponsors can create incentives that will attract non-user contributors to their project. For example, they can offer payment, or process-related rewards such as learning or fun (Raymond, 1999; Lerner and Tirole, 2002; Lakhani and Wolf, 2005; Benkler 2006). To escape the second constraint, project sponsors can employ an extreme form of modularity in which no participant knows (or needs to know) what the others are doing, and only the sponsor sees everything.
Finally, open collaborative innovation projects thrive, as we have seen, upon low communication costs. In recent history, these low costs have resulted from steady advances in Internet distribution capabilities in conjunction with open standards. A lack of policy attention to these critical infrastructural factors can threaten or reverse this progress. For example, a firm that owns both a channel and content (e.g., a cable network) may have strong incentives to shut out or discriminate against open content in favor of content it owns. The transition from the chaotic, fertile early days of radio in the United States when many voices were heard, to an era in which the spectrum was dominated by a few major networks—a transition pushed by major firms and enforced by governmental policy making—provides a sobering example of what can happen (Lessig 2001). It will be important for policy makers to be aware of this kind of incentive problem and address it—in this case perhaps by mandating “net neutrality,” or that ownership of content and ownership of channel be separated, as has long been the case for other types of common carriers (Zittrain 2009).
We conclude by observing again that we belive we are in the midst of a major paradigm shift: technological trends are causing a change in the way innovation gets done in advanced market economies. As design and communication costs exogenously decline, single user and open collaborative innovation models will be viable for a steadily wider range of design. They will present an increasing challenge to the traditional paradigm of producer-based design – but, when open, they are good for social welfare and should be encouraged.”