Business Models for Open Innovation : From Collaboration to Incorporation Authors

The paper describes five open innovation business models collaboration, outsourcing, licensing, trading and incorporation defined on the basis of open revenues and costs, new investments and divestments in intangibles. A sample of 271 companies from bio-pharmaceutical and technology hardware & equipment industries is investigated, and their annual reports for the three years period 2010-2012 are analysed. Results show that for biotech companies open innovation represents a characteristic activity, with most of them having high values of revenues deriving from joint development projects. On the other side, for pharmaceutical firms open innovation is somehow ancillary: even if most open innovation activities are widespread, their values are not really significant if compared to the total business volume. As to the technology hardware & equipment industry, the use of spin-ins as a mean for incorporating external knowledge is the most frequent open strategy. This work contributes to the research on open innovation by defining the business models that R&D intense companies may adopt to foster open innovation. From a managerial point of view, the framework can be used by companies for assessing the status of their own open strategies, also allowing the benchmarking with competitors.


Introduction
The paper aims at analysing the business models adopted by R&D intense companies in order to embrace the open innovation (OI) paradigm.______________________________________________________________________________________________________________ ______________ Francesca Michelino, Antonello Cammarano, Emilia Lamberti and Mauro Caputo (2015), Journal of Innovation & Business Best Practice, DOI: 10.5171/2015.347216 in influencing the business of companies in monetary terms, this dimension was neglected by almost all the contributions.In order to fill such a gap, we adopt an accounting perspective for analysing the open behaviours of firms, by investigating the operational and financial open transactions in both inbound and outbound processes.The research question we aim at answering is: how do companies implement OI within their business models, in order to incorporate external technologies and exploit internal innovative outputs on external markets.In order to define the OI business models of companies we analysed OI transactions through accounting data of 271 world top R&D spending companies in biopharmaceutical and technology hardware & equipment industries for the three years period 2010-2012, for a total of 813 consolidated annual reports analysed.Both the framework applicability and its explicative power and usefulness were validated.In what follows, after reviewing literature contributions on OI adoption models, methodology is presented and applied to the selected sample, results are discussed and conclusions will close the work.

Literature Review
The theme of how companies are implementing OI is largely investigated in literature and a number of different OI business models are described.
The most acknowledged taxonomy distinguishes inbound from outbound OI (Gassmann and Enkel, 2004) -the former addressed to enrich the knowledge base of companies through relationships with external sources of knowledge, the latter to bring internal ideas to external marketsand different scholars adopted the inbound vs. outbound approach to define OI business models.Podmetina et al. (2011) classified companies in nine clusters, from "no buy, no sell", i.e. a total closed behaviour, to "active buy, active sell" when both inbound and outbound activities are relevant.Gianiodis et al. (2010) defined four models for open firms: "innovation seekers" who buy technology from outside, "innovation providers" selling their own technology, "intermediaries" between the first two categories and "open innovators" being capable to act as both innovation seekers to fill technology gaps and innovation providers to divest a particular technological trajectory.Dahlander and Gann (2010) add to the inbound vs. outbound dimension the pecuniary vs. nonpecuniary nature of OI activities, defining two forms of inbound innovationacquiring and sourcing -and two types of outbound innovation -selling and revealing.
Several contributions focus on the practices that companies adopt for pursuing OI (Bianchi et al After the definition of Laursen and Salter (2006), different studies outlined open models by analysing OI breadth and depth, the former being the number of external sources of knowledge, the latter the degree of use of such sources.Keupp and Gassmann (2009) identified three clusters of open companies: "professionals" collaborating both broadly and deeply, "explorers" with a medium to large breadth and a medium degree of depth, "scouts" with a medium to large breadth and a low degree of depth.Idrissia et al. (2012) define "open" the companies with high breadth and depth, "user" the companies with high breadth and low depth, "interactive" the ______________________________________________________________________________________________________________ ______________ Francesca Michelino, Antonello Cammarano, Emilia Lamberti and Mauro Caputo (2015), Journal of Innovation & Business Best Practice, DOI: 10.5171/2015.347216firms with low breadth and high depth.Lazzarotti and Manzini (2009), even if adopting a breadth vs. depth perspective, provide different definitions of the two terms: the former being the number of different typologies of partners, the latter defined as the different innovation process phases in which the company opens to external contributions.After these definitions, the authors find three OI models: "specialized collaborators" characterized by high breadth and low depth, "integrated collaborators" with low breadth and high depth and "open innovators" characterized by high levels of both.
A different approach for investigating inbound models is distinguishing between collaboration and outsourcing activities.Teirlinck and Spithoven (2008)

Methodological Framework
From the analysis of companies' annual reports, four kinds of transactions can be found in the OI market related to inbound vs. outbound processes having an operational vs. financial nature: costs and revenues are respectively inbound and outbound operational transactions disclosed in the income statement of companies, while additions and disposals are the new investments and divestments in intangibles, disclosed in the balance sheet, which respectively represent inbound and outbound financial transactions.A comprehensive description of our measurement framework for OI can be found in Michelino et al. (2014), where the openness of a company is summarized by comparing open costs, revenues, intangible investments (additions) and divestments (disposals) to its total costs, revenues and intangibles: In As to operational transactions, three different underlying logics can be defined, from an increase of knowledge for both the parties, through the delivery of a black box, to the concession of a right without the transfer of ownership.As regards financial transactions, two different logics can be defined as well.When a separate acquisition occurs, a focalized interest on an intangible, e.g. a specific patent, can be outlined.On the contrary, within business combinations, mergers and acquisitions (BCMAs), the acquiring company can be interested not only on the recognized intangibles, but also in the skills of human resources working in the acquired firm.Such a distinction makes it important to consider the goodwill arising from BCMAs as a proxy for intellectual capital, consistently with literature (Boekestein, 2009;Brännström et al., 2009).Thus, five business models for OI can be defined: collaboration, outsourcing, licensing, trading and incorporation (Table 1).The first four have both, inbound and outbound components, while the fifth can be defined only inbound since, when an incorporation occurs, the incorporated company does not exist anymore and no annual report is written off for it.The biotechnology segment is characterized by the highest values of openness.Collaboration revenues and outsourcing costs are characteristic activities since they are both intense and continuous over time.Further, licensing and outsourcing revenues as well as collaboration and licensing costs can be considered ancillary given their lower intensity but still high continuity over time.Actually, in this segment OI strongly characterizes the income statement of the companies.As a matter of fact, biotech companies, being still in the development phase, do not sell products, but rather enter into agreements with other biopharmaceutical companies for joint R&D projects and earn from licensing their intellectual property.Thus, most part of the EBIT of companies derives from OI transactions.In particular, OI revenues are widespread in more than half of the companies of the segment, while OI costs can be detected in about one third of the sample.
On the contrary, trading and incorporation strategies are less continuous over time.In particular, incorporation is exceptional since, even if spin-ins are seldom performed by biotech companies, their influence on the total business is very high, while trading is negligible since the separate acquisition or disposal of intangibles does not increase or decrease the total value of intangibles in a significant way.Additions are more widespread than disposals all over the segment, with 45% to 53% companies performing the former and 29% the latter.

Figure 1: Open innovation strategies for biotechnology companies
OI is much less characterizing the pharmaceutical segment, if compared to the biotechnology one.Actually, even if all OI activities are quite continuous over time, their relevance is always limited when compared to the total volume of their business, so that the whole OI phenomenon can be defined ancillary for pharmaceutical companies.Actually, while biotech firms are typically focused on R&D, pharmaceutical companies have the commercialization of drugs as the core business and OI is only a complementary activity.Further, even if the open transactions in the segment can be relevant, their intensity, when compared to the total business of companies, is typically low, given their large dimension.
Just like biotech firms, the most intense and continuous activity for pharmaceutical companies is outbound collaboration, which is also quite frequent in the segment (50%), but the most frequent strategy in the sample, even if with a low intensity, is trading, with 65% companies selling and 81% acquiring intangibles.In particular, companies in the pharmaceutical segment show a dynamic management of their brand portfolio, by acquiring and selling trademarks.The results obtained since now can be summarized by the definition of the relevance of each component for each segment (Table 5): • the most relevant strategy for biotech companies is outbound collaboration, followed by outbound licensing and inbound outsourcing;

Open innovation strategies for telecommunications equipment companies
The results obtained since now can be summarized by the definition of the nent for each most relevant strategy for biotech companies is outbound collaboration, followed by outbound licensing and inbound • in the pharmaceutical segment, outbound collaboration is followed by incorporation; • in all the segments of the technology hardware industry, incorporation is the primary and most relevant strategy.Such findings were also confirmed through regression analyses performed using the different components as explicating variables for openness: using a stepwise method we can define the components which better explain openness for ing their entry order.
In We found that in the bio-pharmaceutical industry the most significant open transactions have an operational nature and, thus, for the companies in this industry, OI strategy is far more oriented to revenues and costs.These results are consistent with literature, which reports increasing trends of collaborative relationships between biotech and pharmaceutical companies in the last years (Hagedoorn and Roijakkers, 2002;Powell et al., 2005).As a matter of fact, large and long established pharmaceutical companies behave as innovation seekers acquiring R&D services from small and young biotech firms (Powell et al., 1996)

Conclusion
The paper examines the business models adopted by companies in order to embrace the OI paradigm: collaboration, outsourcing, licensing, trading and incorporation.The work is based on the analysis of consolidated annual reports of 271 R&D intense companies operating in bio-pharmaceutical and technology hardware & equipment industries: open costs and revenues, new investments and divestments of intangibles are analysed for the three years period 2010-2012.In the bio-pharmaceutical industry outbound strategies based on open revenues are very frequent, with higher intensity in the biotechnology segment than in the pharmaceutical one; within technology hardware & equipment companies, the most characterizing strategy is the inbound incorporation of other firms.Through this analysis, both the framework applicability and its explicative power and usefulness were validated.
The paper addresses the need for operative, practical instruments, which can help managers to monitor and control their innovation strategies after an openoriented approach.Given the availability and objectivity of annual report figures, defining OI models through the analysis of financial statements can help decisionmakers to assess the status of their own open strategies and compare it over time and space, also allowing the benchmarking with competitors.

Figure 2 :
Figure 2: Open innovation strategies for pharmaceutical companies

Figure 3 :Figure 4 :
Figure 3: Open innovation strategies for computer HW & office equipment companies Companies in the technology hardware & equipment industry are less open than pharmaceutical ones.Most open activities are either ancillary or negligible, i.e. the value of open transactions is small if compared to the total business of companies.In all the three segments of the industry, most open revenues and costs are quite infrequent denoting niche behaviours.The only exception is given by outsourcing revenues which can be detected in more than 50% of the companies for more than 2,5 years over 3, even if their intensity is close to zero revenues are linked to R&D tax For all the companies in the industry, the most frequent open strategy is

Table 1 : Open innovation business models Model Inbound components
If we have a sample of N companies with n ≤ N of them having a specific item, we can define its frequency as: A third variable can be used to define the pervasiveness of a business model within a ______________________________________________________________________________________________________________ ______________ Francesca Michelino, Antonello Cammarano, Emilia Lamberti and Mauro Caputo (2015), Journal of Innovation & Business Best Practice, DOI: 10.5171/2015.347216given set of companies, e.g. an industry or a segment: frequency.