Patents optimize information disclosures---it enables innovative collaboration but prevents free-riding.

Julien & Daniel, 2018, "Patents and Open Innovation: Bad Fences Do Not Make Good Neighbors," Cairn.info, https://www.cairn.info/revue-journal-of-innovation-economics-2018-1-page-57.htm

Open innovation is a relatively new term depicting an older reality. Innovation is an interactive process, as innovators are no longer isolated and self-reliant, but collaborate with upstream and downstream actors to benefit from increasingly complex knowledge flows (Chesbrough, 2003). The functioning of open innovation can take various forms, from in- and out-licensing, spin-ins and spin-outs, co-conception and co-development, research joint ventures, to crowdsourcing, community innovation and online market places. The main link between these forms is that open innovation entails flows of knowledge between different actors, and on both sides of the market (Chesbrough, Euchner, 2011). The literature distinguishes three faces of open innovation according to the different possible direction of the knowledge flows: i) “outside-in”, when a firm absorbs knowledge coming from outside (for example when a firm relies on crowdsourcing); ii) “inside-out” when a firm releases to others knowledge that it has developed internally (for example when it grants a patent license to another firm), and “coupled” when knowledge flows both from inside to outside, and from outside to inside (such as in an inter-firm partnership, for example). Consequently, opening up the innovation process brings risks, the importance of which depends first and foremost on the direction of knowledge flows, but also on the actors involved and the type of knowledge exchanged.

This is why, in most cases, intellectual property rights (IPR), and patents specifically, are considered to play an important role in open innovation (Pénin et al., 2011; Laursen, Salter, 2014; Zobel et al., 2016). Firms that actively include patents in their open innovation strategy can enhance the returns on their R&D efforts (Alexy et al., 2009). Although this seems strange, the marriage between open innovation and patents can be explained by the multiple roles that the latter can play in an innovative environment (see Veer, Jell, 2012 for an overview). Table 1 summarizes the multiple roles that patents can play in open innovation.

First, patents are a tool to codify and protect knowledge, and as such have an impact on how knowledge is disseminated (Grindley, Teece, 1997; Pisano, Teece, 2007; Pries, Guild, 2011). As open innovation revolves around knowledge-sharing, patents can be used to transfer knowledge between actors in the open innovation environment, while preventing the involuntary spillover of information (Cassiman, Veugelers, 2002; Lawson et al., 2012; Laursen, Salter, 2014). Second, even though patents mainly provide exclusion rights, this does not automatically imply that firms will use them to this end. This is the principle behind the out-licensing and co-licensing of technologies, where the possibility to exclude carries more value than exclusion itself (Arora et al., 2001). Moreover, some innovators are interested in the rapid adoption of their invention rather than minimizing spillovers, and patents can help in this case too (West, 2006). Third, openness is not synonymous with innovation without protection. Rather, firms engaging in this process are usually looking to maintain a large degree of control over their inventions. This implies that, while the innovation process is open—i.e. firms interact with each other—it is still possible that the outcome of the process is protected by patents, and for its owner to capture profits. For example, firms can open up their innovative activity by including suppliers, customers, research centers, etc., while keeping competitors away. In this case, protecting their inventions with patents is paramount, not only to diffuse information to collaborators, but also to reduce the risk of imitation.

Teece (1986) had posited that firms’ ability to profit from their inventions without needing to internalize the entire innovation process—from R&D to commercialization—depends primarily on appropriability. More recently, the link between open innovation and appropriability has been tested in numerous empirical studies (Anand, Khanna, 2000; Laursen, Salter, 2006; West, 2006; Gambardella et al., 2007; Laursen, Salter, 2014). Some types of open innovation are shown to only be possible when IP protection is strong, as formal appropriability depends on IP regulation (West, 2006). Strong patents spur the creation of markets for technology, which support R&D and commercial collaborations, and also technological transfer (Arora et al., 2001). Well-functioning technology markets have created specialized innovators, thus increasing innovation quality and welfare (Spulber, 2008; De Rassenfosse et al., 2016).

The ability of patents to play multiple roles in innovation stems from two important properties: they can both disclose and protect information simultaneously (Olander et al., 2010; Cohendet, Pénin, 2011). By disclosing information about the inventor and her/his invention, patents first act as signals to possible investors, licensees, or collaborators (Long, 2002; Veer and Jell, 2012; Hoenig and Henkel, 2015; Henttonen et al., 2015; Hottenrott et al., 2015). They make up public catalogs of know-who and know-how, which are then used to find up- and downstream partners to bring inventions to market. They are especially important in industries characterized by high numbers of small and heterogeneous firms, as they facilitate interaction between them by enabling technological transfer through licensing, and by framing non-market alliances (Hagedoorn, Ridder, 2012).

In markets for technology, patents enable knowledge trading (Arora, Ceccagnoli, 2006; Branstetter et al., 2006; Gans et al., 2008) by solving Arrow’s paradox (Arrow, 1962). They do so by disclosing information, which allows technology sellers to signal their products’ value, while at the same time protecting them from free-riding by competitors and technology buyers (Arora et al., 2001; Arora, Gambardella, 2010). In these markets, patent quality or strength boosts the volume of licensing transactions, as it allows the correction of information asymmetries between buyers and sellers through signaling, and it increases the appetite for innovation by preventing free-riding (De Rassenfosse et al., 2016). Moreover, patents may also enhance the transfer of tacit knowledge. Licensing contracts often contain clauses for transferring tacit knowledge, such as technical assistance, which are not included in the patent itself and thus remain private (Pénin, 2005). Patents can thus transfer both patented and unpatented rights between licensor and licensee (Foray, 2004).