Horizontal Open Innovation: Opportunities from “Operational” Inputs

A key contribution of the open innovation literature is the notion that firms need to access outside sources of ideas and complementary assets. A literature has blossomed that details a variety of open innovation modes. But emergent phenomena, including “outward open innovation” in which firms give away valuable intellectual property (IP), defy easy categorization. Moreover, because rivals could benefit, this type of open innovation activity flouts a central concern of the literature, appropriability: other firms might use the IP to enter the focal firm’s market. This raises the question, when can firms co-develop IP with rivals? We term this horizontal open innovation and argue that rivals can co-develop operational inputs, inputs that do not affect the cost or quality of a firm’s output. By contrast, vertical inputs, which affect the cost or quality of a firm’s products, are used to differentiate a firm’s products from rivals. Operational inputs are important infrastructure for an industry. When firms work together to establish the infrastructure, it can have a profound effect on the existence and size of a market. The taxonomy of open innovation modes should extend to include a theory of operational inputs and horizontal open innovation. Doing so explains observed patterns of successes and failures in the literature.