Horizontal innovation networks: open source software and surfing

Eric von Hippel, Horizontal innovation networks - by and for users, 2002, MIT Sloan Working Paper

Von Hippel's horizontal innovation networks are in many ways modern day versions of collective invention. He examines various networks of users engaged in the production, distribution and consumption (use) of innovations.

Even as the intellectual property rights discussion is heating up, the evidence suggests that patents (or copyright) and licensing aren't optimal ways of appropriating returns, except in the chemicals and pharmaceuticals industries -- and, therefore aren't the best way of encouraging innovation. One frequently mentioned alternative to patent regimes is the open-source movement, an example of von Hippel's horizontal networks. So, when might such horizontal innovation networks work?

User networks can function entirely independently of manufactureres when
(1) at least some users have sufficient incentive to innovate;
(2) at least some users have an incentive to voluntarily reveal their innovations, and
(3) diffusion of innovations by users is low cost and can compete with commercial production and distribution.
When only the first tow conditions hold, a patten of user innovation and trial and improvement will occur within user networks, followed by commercial manufacture and distribution of innovations that prove to be of general interest.

Non-users might also contribute to these networks (e.g. suppliers, producers of complementary products). However, this isn't necessary for them to work.

While user innovation in open source software is well known, it is not a unique case. Von Hippel's second example is high performance windsurfing. Here, users experiment with new equipment designs and techniques which are traded in the windsurfing community, mainly at competitive events where the core of the community regularly meets.

One question that often comes up in large-scale innovative collaboration is whether participants in an innovation network need to feel a sense of community. Von Hippel argues that windsurfers are members of a community (which forms the basis of trust and sharing), whereas open source programmers aren't. However, even in open source projects there may be communal norms, such as "generalized reciprocity" at work.

He cites a different concern: level of competitiveness. The effect of competition on willingness to free reveal has recently been documented by Franke and Shah (2002) in their study of four communities of sports enthusiasts ... They found that a statement regarding free revealing of innovations ... was significantly less agreed with by innovating members of the more rivalrous communities than by innovators within the less rivalrous communities ... They also found that assistance provided by one community member to another during the innovation development process was significantly less within the more competitive communities.

An interesting question raised by von Hippel at the end of the paper is whether there might be "life cycle" patterns, e.g. that user innovation is stronger in the early stages of a product's life cycle and weaker as it reaches maturity.


First, von Hippel explains why users innovate in the first place:

- In some product categories users may reasonably expect a higher reward from innovating than can manufacturers. For example, if a user firm develops a new process machine for in-house use that enables it to produce a major new product line, and keeps its innovation secret while benefiting from it, it may make more profit from that machine than would a manufacturer-innovator that must reveal the machine in order to sell it.

- Second, user innovation costs can be significantly lower than manufacturer innovation costs when the problem-solving work of innovation developers requires access to "sticky" -- costly to transfer -- information regarding user needs and the context of use. cf. Ogawa (1997)

Often lead users will be the first to innovate. Given that lead users experience needs in advance of the bulk of a target market, the nature, risks, and eventual size of that target market are often not clear to manufacturers. This lack of clarity can reduce manufacturers' incentives to innovate, and increase the likelihood that lead users will be the first to develop their own innovative solutions for needs that later prove to represent mainstream market demand.

However, even when users innovate, they need not necessarily reveal their innovations to a larger public that includes collaborators, competitors, and free riders, essentially making them a public good. Why do they?

Empirical studies show innovating users often choose to freely reveal details of their innovations to other users and to manufacturers as well. ...Free revealing can be the dominant way innovations are diffused in some fields and under some conditions. This happens when the benefits from free revealing exceed the benefits that are practically obtainable from licensing or secrecy:

- obtaining patents and licensing intellectual property may be impossible, too costly, or not an effective form of protection,

- similarly, maintaining a trade secret may be too costly or impractical once a product is on the market,

- faced with the choice between voluntary free revealing now and involuntary free revealing later, innovators may have more incentive to free reveal voluntarily, (which is what happened in Allen's study of collective invention in 19th century iron furnaces),

- in addition to Allen's findings, Harhoff et al find that an innovator may have an interest in rapid diffusion since an innovation that is freely revealed and adopted by others can become an informal standard that may preempt the development an/or commercialization of other versions of the innovation,

- as in the case of collective invention, innovators may be able to benefit through reputation increases among peers and potential employers (and firms may benefit from a reputation of being employers of contributors to open source and similar projects),

- there may be intrinsic benefits in terms of enjoyment and learning that arise from participation in horizontal innovation networks,

- finally communal norms, e.g. "generalized reciprocity," may also play a role.

Even if users free reveal, it is not clear that they will be able to diffuse the innovation. What does this depend on?

Often innovation streams that have a large cumulative impact are likely to be made up of relatively small individual innovations. We have also seen ... that benefits to innovators from free-revealing, while higher than benefits they could expect from licensing or secrecy, may well be low. On this basis we speculate that most innovations diffused via a user innovation network are likely to be of relatively low benefit to both diffusers and adopters, and so must be diffused at a low cost if they are to be diffused at all.

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