Building Your Business
Exploring the Benefits of Open Innovation in SMEs

1 August 2014

By Pooran Wynarczyk

Over the past few decades, the global trade and competitive landscapes have faced some dramatic changes. As a result, innovation has evolved from being the ‘creative destruction’ of a lone entrepreneur or solely an internal process within firms (closed innovation), to becoming an interactive process between firms and/or in collaboration with knowledge-creating institutions (open innovation). The 'open innovation model' suggests that firms should combine internal and external ideas and technologies in order to speed up the innovation and new product development process as a more effective pathway to market.

In knowledge-based economies, SMEs are increasingly viewed as a key source and driver of innovation and new technologies. However, research has continuously demonstrated that out of the total population of SMEs, only a fraction are responsible for the majority of innovation, new product development, R&D, export and therefore employment and wealth creation. Even among innovative firms, only a small proportion has the desire, capacity and opportunity to actively and successfully pursue growth, expansion and diversification beyond their domestic market. In general, SMEs, particularly new and fledging small firms, lack the necessary internal absorptive capacity and accesses to external technology, knowledge and finance needed to develop and diversify their product portfolio, invest in R&D and pursue opportunities for commercialisation and internationalisation.

It has been argued that open innovation has a wide spectrum of potential opportunities for significantly improving the innovative performance of SMEs. Open innovation practices, for example, can offer alternative and more viable strategies by which growth-oriented SMEs can access inter-firm resources at a lower cost, addressing obstacles such as technological and internal financial and human resources that hinder new product development and the ability to enter new markets. Additionally, open innovation could enable greater access to information, technologies and laboratory facilities that could take years and require significant R&D investment to acquire in-house.

There are three broad ways through which SMEs can participate in open innovation, namely, ‘in-bound’, 'outbound' and ‘coupled’ processes. The ‘inbound open innovation’ (outside in) process entails the acquisition and transfer of external technologies, ideas and knowledge into the firm through, for example, R&D contracts, university collaborations, and in-licensing. Through this process, SMEs can utilise technology developed elsewhere to fill in their internal technological gaps that potentially exist as a result of their narrow focus on developing specialised technologies. As the externally acquired technology is tried and tested already, it can increase both the speed and quality of innovative activity.

The ‘outbound open innovation’ (inside out) process involves the transfer of technology, ideas and knowledge to external firms and their commercial exploitation through, for example, selling the innovative idea or invention, out-licensing and venture spin-outs. This process enables firms to reap the benefits of innovative ideas or inventions at the initial and conception stage, as opposed to attempting to advance and translate the idea into new products.

In the ‘coupled’ process, firms combine ‘inbound’ and ‘outbound’ activities to co-develop, co-commercialise and co-capitalise on innovation, sharing risks and benefits with other firms. If SMEs apply open innovation through collaboration with external partners, they can compensate for the lack of internal resources and competences and so access a wider range of market opportunities.

Participation in open innovation is partly dependent upon whether the prevailing climate and environment are supportive or hostile to enterprise, and whether the balance of forces enables or stifles the possibilities for collaboration. The degree of economic benefit from open innovation could be influenced by the wider innovation system and government policies that surround the firm. One of the key components of open innovation is that of SME-university collaboration. In knowledge-based economies, universities in general are an integral component of the innovation supply chain.

In the UK, for example, the importance of SME-university collaboration has been widely recognised, hence the development of numerous policy initiatives and schemes, including the Technology Strategy Board (TSB) collaborative R&D grant and a £200m investment in a network of Catapult centres. However, the anticipated collaboration faces major challenges due to the lack of awareness and commitment by SMEs. It should be noted that open innovation is not the preserve of large and multinational firms. Research shows that open innovation does exist and is practised in companies of all sizes. In order to gain and hold a competitive position in the global market, SMEs also need to develop and implement strategies of open innovation in their business models in order to speed up, advance and commercialise their technologies, and to access relevant finance, foreign markets and government grants to enhance their overall innovation capability and growth.

In the current global climate, a huge amount of R&D takes place to the extent that one company could not cope in isolation. The international competitiveness of the firm depends upon the speed and promptness with which innovative or technological ideas are transformed into new and novel products and then brought to market. Existing research demonstrates that the international competitiveness of SMEs is highly dependent upon the cumulative effects and interrelationship between two key internal components – R&D capacity and ownership/management structure and competencies – coupled with open innovation practices and the firm’s ability to attract government grants for R&D, product development and internationalisation activities. One of the key motivations for individuals setting up their own business is the independence and autonomy that ‘being your own boss’ offers.

Independence and autonomy are admirable traits of entrepreneurs, however, the desire to retain control can inhibit development of the firm, particularly when it results in under-capitalisation. Those firms that operate in isolation are generally less entrepreneurial and less growth-oriented than those that take a more outward-looking stance. The motivation and aspiration of entrepreneurs, their managerial capacity and human capital resources (both technical and non-technical) are preconditions and prerequisites in SMEs for exploring open innovation practices and their successful implementation.

Professor Pooran Wynarczyk, Newcastle University Business School

See more at:

  • Cavan
  • Louth
  • Meath
  • Monaghon