Self-regulation of Degree of Openness in Cumulative Innovation

Abstract: Successful innovation processes involve knowledge transfer, cross-pollination of ideas and other aspects of cumulative innovations. As a consequence, successful innovative environments incorporate a degree of openness in disclosure and possibility of reuse of the new knowledge. The degree of openness might range from only final disclosure (as in patent systems) to the immediate full disclosure of all intermediate results (as in open-source software). Empirical evidence suggests that the degree of openness affects tradeoffs in incentives vs follow-on reuse and in wide exploration vs directed focus search of solution approaches. The paper suggests a theoretical framework incorporating endogenous determination of the degree of openness by firm's decisions on their “information-flow proximity” to their competitors. As a result, the best of both worlds can be achieved: Directed focus search in innovative activities in clusters with intermediate disclosure is complemented with wide exploration of other approaches by more distant firms (or different clusters of firms).