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.

Summary

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.

Collective invention

Collective invention, R. C. Allen, 1983, Journal of Economic Behavior and Organization

All too often R&D and innovation are used interchangeably. Obviously, innovation doesn't always happen in a lab, under a dedicated budget or even with the explicit intention of increasing profits.

Allen describes an alternative way of organizing innovation: collective invention.

Allen focuses on the iron industry and the development of blast furnaces in the 19th century. He finds that competing firms freely exchanged information on improvements to the design of their furnaces through a) informal networks and b) engineering societies and their publications. This meant that current and potential competitors could easily acquire knowledge of best practices. The first firm to experiment with a new design would carry the risk that the change would increase production cost. Subsequent adopters of the design could then benefit from the first firm's experience and data. This let firms "leapfrog" each other and led to a high rate of innovation.

Why would firms share valuable information so freely with their competitors and even potential entrants to the industry? Allen identifies several reasons:

- Design improvements were incremental and didn't legally qualify as "novel," i.e., they couldn't be patented.Under circumstances of competition and non-approbriablility, an individual inventor or a firm allocating resources to invention could expect an economic return far less than the social value of any invention.

- Once a new furnace was built, it was very costly if not impossible to keep the design changes secret since industry consultants and many (poorly paid and easily bribed) workers were involved in setting it up and running it.

- Since returns on design improvements couldn't be appropriated, there was nothing to be gained from keeping the innovations secret. Yet, there could be some gains in making it available.

- There was no R&D budget -- any design improvements were tested and implemented when a new furnace was built, severely limiting the pace of innovation that any single firm could achieve. Firms expected that their sharing of information would be reciprocated so that they would benefit from industry-wide experience and best practices when they built the next furnace. By spreading costs and risks among firms, collective invention meant that competitive industries could have high rates of invention even if the enventions were not patentable.

- Managers of the firm often had professional ambitions that could be advanced by releasing information about the operation of their firms. Under those circumstances the profits of the firm might be sacrificed and information released.

- Firms seem often to have engaged in competitions in advancing size or output. ... Since you cannot win the contest unless you reveal valuable information, these competitions fostered information release.

- Another reason that firms might have released technical information is that that behaviour might have been profitable. Hirschleifer (1971) has argued that inventors can be compensated for their efforts if they successfully speculate in assets that appreciate in value due to the invention. ... The characteristics of the situation that made collective invention profitable were the specificity of the resulting technical progress to lacal conditions and the fact that the Cleveland industry was only a small part of the world industry so that the price of iron could be regarded as exogenous. Under these circumstances, the owners of the natrual resource would actively foster information propagation since they could not lose by it and might well gain.