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ИННОВАЦИИ № 7 (141), 2010
Markets for Technology in an Emerging Economy: Case of St. Petersburg Russia
Irina Savitskaya,
e-mail: irina.savitskaya@lut.fi
Marko Torkkeli,
e-mail: marko.torkkeli@lut.fi
Kouvola Research Unit, Lappeenranta University of Technology, Finland
Open innovation as an empowering model for knowledge economy has changed the world of innovation management. Apparently, as Russia is in transition towards innovation based economy, its companies could not escape opening up their innovation process according to western patterns. The paper presents the results of case studies on open innovation implementation in St. Petersburg, Russia. The research
approaches open innovation at the firm level and highlights motives to embrace open innovation approach with regards to certain industry specific features. The paper contributes to a better understanding of open innovation implementation and demonstrates that beside big multinational companies the value from open innovation can be captured as well by small and middlesized enterprises.
Keywords: open innovation, Russia, SMEs, trade in technology.
1. Introduction
Business cannot escape the influence of the change in the operating environment: competition is becoming more intensified, knowledge diffuse wider and faster, R&D investments grow and at the same time the life-cycles of products and technologies are shortening. In order to optimize product development and fit it into shortened time frames, the firms need to be able to utilize multiple (external as well) knowledge sources, and apply new approaches to management of intangible assets. (Miller and Morris 1999)
During the last decade the intensified global competition resulted in emergence of new approaches to cooperation for innovation. “Do-it-by-yourself” mentality became outdated. The rapid development of information and communication technologies has enabled integration of customers and suppliers into innovation process despite of physical distances between them. The propensity to cooperate and open up the company borders came intensified in 1990s (Gassmann 2006) and the movement towards open innovation have started, reaching its peak when Chesbrough (Chesbrough 2003b) raised the issue of whether open innovation is “the new imperative for creating and profiting from technology”. Since that the open innovation related practices of the companies have attracted great attention (Gassmann and Enkel 2004; Herstad 2008; Laursen and Salter 2006; Huston and Sakkab 2006).
Traditional closed innovation model do not anymore meet the needs of companies operating in fast changing environment. However, it should be stressed that the transition of certain industries to open innovation model does not seem to be justified, hence, open innovation implementation has certain industry specifics (Chesbrough 2003b; Chesbrough et al. 2006; Laursen and
Salter 2006). At the same time with increasing relevance of external knowledge sources (Gassmann 2006; Van de Vrande et al. 2006), emerge the understanding of benefits of disseminating previously shelved internal knowledge and ideas (Chesbrough 2003a; Lichtenthaler 2009).
We study the status of open innovation implementation in SMEs in St. Petersburg, Russia. Russia has a long tradition of technology development and innovation. Nevertheless, its innovation system as well as a whole economy is still in transition. St. Petersburg is the second main scientific region in Russia. With Russia having one of the most educated populations in the world, St. Petersburg, has a total of 8% of Russian students (having 3.4% of total population of the country) and 15 % of total amount of country postgraduate students (Vertjachih 2007).
The knowledge creation is intensive in the region, which leads to an assumption that the knowledge flow between innovation actors may be intensified through application of open innovation model for collaboration between innovation actors. This paper studies open innovation practices in Russia by means of case study research of four SMEs, and aims at answering the questions of what motivate companies in transition economy to embrace open innovation approach and what kind of industry-specifics may exist for open innovation. The paper starts with theoretical overview on open innovation paradigm, further on the features of open innovation implementation in Russia are described and finally the results of case studies are discussed.
2. Theoretical background
Open innovation paradigm can be viewed as a symbiosis of such its antecedent trends as: globalisation
of innovation (Gassmann and von Zedtwitz 1998), happening due to modern information and communication technologies providing virtual work opportunities and access to new markets and resources (Gassmann and von Zedtwitz 1998; Gassmann and von Zedtwitz 2003); outsourcing of R&D, applied due to cost saving, speeding up innovation process and limited proprietary resources (Katz and Allen 1982; Pisano 1990); vertical and horizontal integrations with suppliers (Hagedoorn 1993; Hagedoorn 2002; Tidd et al. 2005) and users (von Hippel 1986; von Hippel 2005; Keupp and Gassmann 2009) to name just a few. Additionally, the resource based view of the firm can advocate the appearance of open innovation paradigm as e. g. absorbed external knowledge while integrated with valuable and rare proprietary resources may generate the unique product, that is difficult to imitate or substitute (Kock and Torkkeli 2008). Although open innovation is not a new theory as such (being built on existing concepts); it urges to create interconnections between innovation and strategy, rational resource management, networking and many other existing concepts (Butler 2004; Chiaroni et al., 2007; Vanhaverbeke and Trifilova 2008).
Hence, the core of open innovation idea lies in the assumption that firms open their boundaries to let the externally existing knowledge flow in and the internally unsuitable knowledge flow out to be utilised outside the company with mutual benefits for sender and receiver (Chesbrough 2003a, b, 2006; Chesbrough et al. 2006; Lichtenthaler 2009, van de Vrande 2006). Vanhaverbeke (Vanhaverbeke and Trifilova 2008) stresses that open innovation is a well-directed effort of organisations for knowledge inflows and outflows aiming at increasing their innovation activities. The word organisations is used to underline that not only firms are involved into open innovation — universities, research laboratories, users and intermediaries are the main partners within open innovation framework (Vanhaverbeke and Trifilova 2008).
Open innovation can be described in terms of blending two differently directed processes: inbound and outbound. Inbound process stands for in-sourcing external knowledge through licensing in, spinning in, acquisition (in order to get valuable technology, personnel etc.) and collaboration alongside value chain. The latter can be illustrated at the example of Procter & Gamble, who cooperate with customers, suppliers, competitors and other institutions to pursue ideas, which can be utilised in the process of new product development (Huston and Sakkab 2006). Outbound process stands for external utilisation of internal knowledge. The ‘surplus’ of research, not fitting to current business model, used to sit on the shelf within close innovation model (Chesbrough 2003b). This means that the company had to fiercely protect this surplus by intellectual property rights in order not to lose it (as even the employees of the company could utilise the surplus for establishing own business with venture money). Open innovation approach states that the surplus can be used for realising some potential value through selling it away to the other company, which could utilise it better within its resource base and business model (Chesbrough 2003a,b).
Open innovation can be viewed both as a business model (Chesbrough 2006) and as a strategy development
tool (Vanhaverbeke and Trifilova 2008). Hence, open innovation can be announced by company as a strategy towards collaboration, openness etc.; on the other hand open innovation can be actively implemented in low-technology industries for invention of new business model allowing to enter new market segments (Chesbrough 2006, Chesbrough and Crowther 2006).
3. Open innovation in Russia
The attention to innovation activities in Russia was attracted relatively recently, when Russia announced refocusing its economy from natural resource dependency to more competitive spheres. The base for innovation development in Russia is quite strong: the inherited from Soviet Union scientific base and strong university education facilitates the knowledge creation (OECD 2005). However the knowledge flow is not that well regulated, the linkages between innovation actors are very weak and the public-private partnership is not that well developed (Dezhina and Zashev 2007).
This situation makes the open innovation research in Russia very important, as it demonstrates the implementation of open innovation approach in country in transition and can be viewed also at a regional level as a strategy to activate missing linkages between innovation system players.
The research on open innovation in Russia is currently at its seed stage. The first results were presented by Torkkeli et al. (Torkkeli et al. 2008; 2009) who conducted a survey of 158 R&D oriented enterprises in Russia. One of the major outcomes of the research is the assumption that Russian companies have week connections with stakeholders and weak relationship networks. At the inbound side, companies are rather active, as 60% stated that they acquire external technologies regularly or from time to time. At the outbound side, only 27% of surveyed companies are active in searching for surplus buyers. The surplus is usually sold as patents and licenses. The conclusion was drawn that the Russian companies are not very active in open innovation implementation, and are open mainly in terms of utilization of external knowledge.
To understand better how the open innovation implementation is possible in Russian companies, few case studies were undertaken aiming to distinguish in details the R&D processes in companies, their attitudes to opening up and the incentives and barriers on their ways.
4. Methodology
Multiple case-study method was applied to this study, implemented through in-depth interviews with companies’ representatives in charge of either company strategic decisions or R&D and general management. As the companies are rather small, in average two persons per company were interviewed. The interviews were following semi-structured open questions and lasted in average 90 minutes. Additional information on the studied companies was obtained though official releases at their corporate web pages, exhibitions and mass media publications related to the companies. The selection of companies was done on a random basis from the list of participants of Ist St. Petersburg Innovation Forum.
ИННОВАЦИИ № 7 (141), 2010
ИННОВАЦИИ № 7 (141), 2010
5. Four cases from St. Petersburg
5.1. Companies’ description
Med-byte is a very small company of about 5 employees specialized on development and production of medical devices for diagnosis and cure of diabetes. The first two generations of its products are actively sold in Russia and some EU countries. However the production of next generation requires higher investment in the device development hence currently company is in the process of finding a partner from telecommunication industry to offer their blood sugar tracking solution as an application to mobile phones.
Arcadia is a middle-size, IT outsourcing specialized company. It belongs to those companies, who develop technologies (here software) for external organizations. However, their development process is from time to time built on technology in-sourcing and always built on certain licensed-in platform (what is rather common for IT companies).
Digital Design (DigDes) is another IT specialized company, having two directions in its business: development of technologies (software) for external companies and selling own program — IT solutions for business management. The company is rather big — 360 employees; however it defines itself to be a middle-size company.
Speech Technology Centre (STC) is a middle-size company, specialized on speech technologies and voice recognition programs’ development. Its main competence lies within Russian language codification and recognition, which allow offering many security programs based on voice recognition for Russian speaking consumers. The importance of the speech technologies is demonstrated by the fact that STC has cooperation within state criminalist projects.
5.2. Open Innovation in case companies
Case companies have demonstrated a certain level of open innovation implementation, however not at the strategic level. The knowledge of companies about open innovation concept is limited or in some cases absent. However companies’ have formed suitable for them model of operation which on closer examination has a resemblance to open innovation model. Companies have demonstrated active involvement into inbound innovation processes as licensing in, technology in-sourcing, joint research and development with such organizations as universities, non-straight competitors, suppliers, research institutions and in some cases users.
Nevertheless the outbound element of innovation processes is almost absent — only one of case companies has tried to sell the surplus (in a form of patent) but failed as it had no competence of finding the buyer for it. In general, companies state that the research surplus selling out is hindered by certain innovation system incompleteness, including lack of innovation intermediaries and understandable ‘rules of game’ at technology market; lack of financial and time resources for developing surplus into sell-ready form and certain industry specifics. Such element of outbound process as company acquisition for reaching required technology
or/and competence is not applied by any of the studied companies, what can be to certain extend explained by their relatively small size.
5.2.1. Motivation and barriers
In the environment where innovation system is still not functioning properly and the general level of openness among innovation players remains rather low, the understanding of what motivate firms to embrace open innovation approaches becomes crucial.
For such companies as Arcadia and Digital Design, operating in the IT field, the integration of their vendors into innovation process is essential and unquestionable. It follows the widespread model of software development on the platforms provided by vendors as Microsoft and others. Hence, one of the reasons to embrace open innovation approach lies in industry and business specifics. Most of the clients of Arcadia are located in either USA or Nordic countries, and some of the clients are active in open innovation implementation. This means that for these clients cooperation with Arcadia goes not only in terms of technology outsourcing but also inside the open innovation model. Hence, Arcadia is involved into global open innovation processes through its clients. Digital Design in its turn has partnership relations with such a famous company operating within open innovation model as IBM.
Accordingly, another reason for embracing open innovation approaches may lie in the partner/client relationships with the active open innovation users.
The reason for technology in-sourcing for these two companies may lie in cutting time and financial costs for development as well as project overload, which need attracting additional people. Arcadia has a few constant partners, whom they engage in case of need. For Digital Design collaboration with universities is more relevant.
On the other hand there are certain barriers which prevent companies from more profound open innovation process embracement, including e.g. business-model specifics, as outsourcing involves at certain extend non-disclosure agreements with clients. Non-disclosure agreement prevents some kinds of involvement of third parties into development process as e.g. utilization of open source can be done only after approval from client.
The intellectual property (IP) rights always belong to the client and this imposes some restrictions on the surplus, which can be created during the development process. Consequently, surpluses are usually left without further development to avoid IP disputes.
For Med-Byte the main reason and barrier to embrace open innovation is its size. Company of five employees has no own R&D and production facilities, and these processes are conducted with partners at their sites. The partnership relations of Med-Byte are rather strong; every partner plays an important role in the innovation process. Among partners are such innovation players as universities, medical research institutions and hospitals, IT and manufacturing companies. Without high involvement of suppliers and other partners the operations of the company would be complicated if at all possible.
However, the small size of the company hinders the possibility of selling out the research surplus as there is no special personnel to be engaged into search for technology
buyers and the technology intermediary services are not developed in the region.
For STC one of the main motives to embrace open innovation processes is to get access to certain competences, which somebody possesses. For example they collaborate with universities and specifically with departments of Russian language studies, who provide for STC certain Russian language bases etc. The industry of operation imposes certain barriers to both inbound and outbound processes, but the industry specifics are to be more details described further.
In general, three of four case companies are very active in collaboration with universities, motivated by the low average level of current university education in certain fields in Russia. The outdated university technical base and separation of education from real business creates a gap between business demand and university ‘supply’ of employees. To minimize this gap and to capture further employees the case companies are tightly connected to certain city universities and participate in their educational processes.
5.2.2. Industry-specifics
As was mentioned above, certain barriers and motives for open innovation evolve from industry peculiarities. So, what kinds of variations in open innovation adoption does industry impose?
For IT outsourcing the implementation of open innovation is stimulated by partner/client involvement into open innovation practices. The nature of IT products, which are easy to transfer across the distances, allow the tight collaboration of e.g. USA and Russian companies and knowledge and information transfer between developed and developing countries. Hence, the influential innovations are disseminated faster. However, the specificity of client-executor relations in the sphere of technology development for the external company creates barriers to integration of additional participants into innovation process (as described above).
The medical equipment industry creates certain preconditions for international collaboration. Every produced lot of medical device is subjected to certification when imported to EU from non-EU countries. In case of Med-Byte this leads to licensing out of few major products to European competitors, who were turned into partners by these licensing agreements. Further joint research has been undertaken together with these European companies.
The speech technology industry is hardly developed in Russia. This creates such situation for STC as almost total absence of national companies to collaborate with.
Another influence of industry is in low technology trade within it. STC explains it by the peculiarities of speech technologies — the trade in this market happens with companies and not with technologies. This happens due to the inseparable nature of technology from the company, who has developed it. The way STC chooses in such environment is close collaboration with the ones, who can add to STC own research and competences to develop needed technology, rather than acquiring existing technologies through the company buyouts.
6. Conclusions
The paper presented certain examples on what can motivate SMEs to embrace open innovation processes and be actively involved in ‘trade’ at technology markets; which kind of barriers they meet and how does the belonging to certain industry influence the level of involvement into technology exchange.
The conclusion can be made, that application of certain elements of open innovation model is company size specific. However this assumption need further empirical testing and further research.
Additionally it can be assumed that the level of openness may depend on company business model as e.g. production of technology for external companies as a main business involves companies from the very first days into open innovation chain.
As a concluding remark on open innovation in Russian companies can be stated, that the firms’ involvement into this process is more resource driven, than strategic; this may have emerged from innovation system incompleteness in order to compensate its failures.
The paper demonstrated few examples rather than gave an answer on motivation factors and industry influence at embracement of open innovation approach by companies and their inclination to be involved into technology trade relations. Further research of a bigger sample is needed in order to be able to generalize results. The empirical quantitative research would be preferable in this case, as the research on open innovation still lacks the statistical proof.
The paper contributes to the research on open innovation, providing results from Russia as a transition economy and from SMEs companies, which are not yet widely covered in literature.
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Markets for Technology in an Emerging Economy:
Case of St. Petersburg Russia
И. Савицкая, исследователь в Лаппеенрантском технологическом университете.
М. Торккели, доктор наук, профессор технологических и бизнес инноваций в Лаппеенрантском технологическом университете и директор исследовательского центра в г. Коувола, Финляндия.
В последние годы модель открытых инноваций радикально изменила представление об инновационном менеджменте, являющимся основой экономики знаний. Несомненно, в период перехода России к инновационной экономике, российские компании не могли не поддаться влиянию западных тенденций и начали переход к более открытым инновационным процессам. Данная статья представляет собой результаты исследования кейс-компаний в Санкт-Петербурге на предмет применения ими модели открытых инноваций. Исследование рассматривает открытые инновации на уровне фирмы и подчеркивает мотивы перехода к данной модели с учетом особенностей отдельных отраслей промышленности. Представленное исследование привносит вклад в понимание методов применения открытых инноваций и демонстрирует, что не только крупные транснациональные компании могут извлечь пользу из использования подхода открытых инноваций, но также и средний и малый бизнес найдут свои выгоды.
Ключевые слова: открытые инновации, Россия, малые и средние предприятия, торговля технологиями.
