Keeping patents is necessary for open innovation – the plan creates a goldilocks approach

This article posits the following analysis: The theory of Open Innovation advocates that established firms can improve their innovative output by purchasing ideas from outside firms. Third-party innovators will participate in Open Innovation when incumbent firms possess the complimentary assets and customer relationships necessary to commercialize their innovation. Open Innovation models best yield breakthroughs when innovations from technically distant fields are incorporated into incumbent products. Innovations can only be transferred across such technical distances when parties exchange tacit know-how. Know-how transfer is fraught with risks, which are exacerbated by the bargaining power that the incumbent enjoys over the innovator. The innovator, therefore, requires patent protection in order to provide legal leverage over the incumbent. Patent protection weakens when innovations are licensed over technical distances because there is a greater likelihood that a blocking patent may be obtained on the final product. Therefore, private, reputation-based mechanisms are required to foster breakthrough Open Innovation systems.