Open Innovation practices and challenges among Indian SMEs

Sumukh S. Hungund*, Kiran K. B.

Department of Humanities, Social Science and Management,

National Institute of Technology, Karnataka -575 025, India.

Address for Correspondence

1. Sumukh S.Hungund

Research Scholar

Department of Humanities, Social Science and Management

National Institute of Technology, Karnataka

Surathkal

e-mail:sumukh.hm13f03@nitk.edu.in

2. Dr. K.B.Kiran

Professor

Department of Humanities, Social Science and Management

National Institute of Technology, Karnataka

Surathkal

e-mail: kbheem@nitk.ac.in

Abstract

Ideas are the most important input in an innovation process. Innovation is the key to maintain

competitive advantage in a market and to gain leadership. Innovation has long been considered

as a prominent growth engine to brace competitiveness of the firm in the market. Innovation also

plays an important role in the sustainability and growth of the firm. But still firms are not clear

about the type of innovation management practices that need to be adopted for generating an idea

and developing a product. A firm needs to choose between Open innovation practices and closed

innovation practices for its sustainable development. Small and medium segment of Information

Technology industry in India have adopted innovation practices to the extent of fifty seven

percent. Open Innovation has become one of the hottest topics in innovation management. Open

innovation is a pioneering mechanism with increasing number of studies in the literature.

However, there is lack of studies on open innovation in India. In addition, there are still number

of issues unclear in open innovation theory due to its wide concept. Therefore, the paper aims to

critically review the existing literature and develop a conceptual framework to establish a

relationship between Inbound open Innovation practices, SME sector characteristics, Business

eco-system and sustainable growth. Further the study intends to test the developed conceptual

framework with respect to Indian software product industry. The study intends to identify the

awareness level of Open Innovation among small and medium segment of Indian Software

Product Industry. Also the study examines the practices and challenges faced by firms with

respect to Inbound open innovation practices. The methodology adopted to study the proposed

objective is a mix research approach i.e. exploratory, descriptive and explanatory. The data is

collected through both primary and secondary sources. The primary data is collected by means of

a structured interview with participants of software product organization. The secondary data is

collected through industry reports and journals. The participants of the study are limited to the

decision makers of organization. The study is restricted to the organizations of Indian origin. The

results act as guiding tool for government and industry association to frame up suitable policy

with respect to innovation.

Key Words: Open Innovation, Software Product Organizations, Sustainable growth and SME

1.0 Introduction

The term Innovation is widely accepted by industry and academic professionals as an essential

competitive enabler for any enterprise to sustain growth (Drucker, 1985). Innovation is viewed

as the main driver for companies to prosper, grow and sustain high profits (Drucker, 1988).

Innovation is the key to maintain competitive advantage in a market and gain leadership

(Abulrub & Lee, 2012).Innovation has long been considered as a prominent growth engine to

brace competitiveness of the firm in the market. Both large and small and medium firms use

innovation practices to sustain a competitive advantage (Yifeng, 2011; Pavan, 2008, Mashilo &

Iyamu 2012,). Innovation is claimed to be the driver of success but is said to be difficult for

small firms to implement innovation practices (Iakovleva, 2013). The Organization for

Economic Cooperation and Development (OECD) has said that innovation is the primary factor

that determines a country’s long-term economic growth and increases in productivity, and that

innovation is even more important to an economy than either capital or labor resources alone

(OECD, 2008). National Knowledge Commission report (2007) reveals that innovation has the

most significant impact on competitiveness for large firms while for SME’s innovation has the

most significant impact on increase in market share. The innovation process is undergoing

profound changes in the way it is managed (Chesbrough, 2003). Innovation Management also

faces new paradigms, such as globalization and technological intensity (Chesbrough, 2003;

2004; Chesbrough and Schwartz, 2007). Open innovation has become one of the hottest topics in

innovation management (Wang and Tang, 2013). The open innovation approach has been

flaunted by the area of innovation management and technology (Mazini et al., 2013).Open

innovation is defined as systematically encouraging and exploring a wide range of internal and

external sources for innovation opportunities, consciously integrating that exploration with firm

capabilities and resources, and broadly exploiting those opportunities through multiple channels

(Cohen and Levinthal, 1990). Open innovation, which was named and defined by Chesbrough as

the “purposive inflows and outflows of knowledge to accelerate internal innovation, and expand

the markets for external use of innovation, respectively”. Open Innovation can be useful in

reducing costs of research and development and can create new opportunities for growth. Open

innovation leads to business growth (Huang et al. 2010). Open innovation models emphasizes

using a broad range of knowledge sources for a firm’s innovation and invention activities by

including customers, competitors, and academicians to exploit the firm’s IP (West and

Gallagher, 2006). Open innovation boosts the probability that firms will achieve business growth

by evolving new products or production technologies (Freel 2006). Open Innovation emphasizes

that the collaboration with technology partners takes place mainly to build new internal

(technological) competences (Vanhaverbeke, 2013). Open Innovation is characterized by the

involvement of all company functions, at different stages of the innovation process, not just

R&D. Companies may involve in two types of open innovation i.e. inbound open innovation and

outbound open innovation (Chesbrough and Crowther, 2006). A general barrier to open

innovation in an SME is said to be the perception that open innovation will be too time

consuming to get access to a knowledge base of external partner (Iakovleva, 2013).

1.1MSME in India

The micro, small and medium enterprises (MSME) sector contributes significantly to the

manufacturing output, employment and exports of the country. MSME sector accounts for about

45 percent of the manufacturing output and around 40 percent of the total export of India. The

MSME sector is estimated to employ about 101.26 million persons in over 44.77 million units

throughout the country. The MSME contributes about 9 percent of the GDP of the country.

Further, this sector has consistently registered a higher growth rate compared to the rest of the

industrial sector. There are over 6000 products ranging from basic commodities to highly

specialized products /services, which are being manufactured by the MSMEs in India (MSME

Annual report 2012-13). Indian MSMEs have moved up from the manufacture of traditional

goods including leather, gems and jewelry, agricultural goods to much more value addition in the

manufacturing sector to its entry in the value added services as well (FICCI-MSME Report

2012).

The growth of MSME sector in India is noticeable since 2003. The fig.1.1 shows about the Share

of SME in India’s GDP in last decade. From the figure it seen that the share of SME in India’s

GDP is increasing exponentially. During the period 2002 to 2006 the share of SME in India’s

GDP has seen an incremental growth. Later from 2006 onwards the share of SME in Indian GDP

has been increasing exponentially. This indicates that SMEs play a key role in the development

of the Indian economy.

Fig 1.1: SME share in GDP Source: mospi.nic.in

1.1.1Innovation among Indian MSME

The innovation report of FICCI on MSME gives a great insight about how the different industrial

sectors in MSME have come up with adoption of innovation. The fig 1.2 gives the percentage

share of innovation adoption and innovative products. The high technology industries such as

Information Technology (IT), Electronic products and the like have adopted innovation to a large

extent as compared to traditional industrial segments like Gems & Jewellary, Textiles and the

like. The IT segment has the highest share in adoption of innovation practices. Around 57% of

the companies in IT product category have adopted innovation practices and deliver innovative

products.

Fig 1.2: Innovation status Source: FICCI MSME SUMMIT REPORT 2012

Importance of Open Innovation

The changing business environment which is typified by globalization and technological

advancements has been challenging to several organizations. Due changing environment,

organizations are looking out to adopt an open innovation strategy. Organizations cannot depend

only on its internal Research & Development division to innovate in a widely distributed

knowledge world (Jonathan Ye and Atreyi K, 2013). Today, the boundary between a firm and its

environment has become so permeable that innovations can easily transfer inbound and

outbound. Organizations that are “focused too much internally” may miss a number of

opportunities and need to combine with external technologies to unlock their potential

(Chesbrough, 2003). The high costs of internal R&D are very high and product life cycles are

tending to be short. Thus there is a great financial risk of innovation that firms can barely solve

by depending on internal measures (Keupp and Gassmann, 2009). Licencing-in or co-creation of

innovation with outside partners can be an attractive option to diversify risk and share

uncertainty. Organizations are unlikely to undergo radical changes instantly in order to nurture

an atmosphere for innovation. The more obstacles to innovation companies’ face internally, more

likely they tend to rely outside for innovations (Keupp and Gassmann, 2009). Thus gradually

companies rely more and more on external sources of knowledge to promote and sustain

innovation, to enhance their performance for competitive advantage (Laursen and Salter 2006;

Lichtenthaler, 2009; Jonathan Ye and Atreyi K, 2013).

Benefits and challenges of Open Innovation

In a vibrant market, where consumer preference of a product or service is highly varied or not yet

well understood, and approaches of innovation for a particular products or service have to be

customary and opening up the innovation to the external world has a considerable advantages

(Jonathan Ye and Atreyi K, 2013).

The benefits of Open Innovation are:

1. By licencing-in or co-creating technology or intellectual property with external

collaborators, companies can quickly attain advanced technology for their production

and thus can complement internal innovation activities (Lichtenthaler, 2008).

2. By taking part in strategic joint ventures or alliances, companies can spread the risk of

innovation and share uncertainty with external partners (Keupp & Gassmann, 2009).

Strategic alliances allow firms to leverage innovation competencies that are not

accessible internally and reduce the risk of short product life cycles. Thus by sourcing

knowledge externally and incorporating the same into their internal innovations, firms

can lessen their cost and unbolt the potential of internal innovation (Chesbrough, 2006).

3. By including customers, suppliers and other sources of knowledge, firms can achieve

continuous innovation, and improve its customer acceptance (Von Hippel, 2001).

Although some pioneering firms of open innovation have achieved major benefits, others

have faced difficulties in profiting from external knowledge (Lichtenthaler, 2009).

The challenges of open innovation are:

1. Firms are finding difficult on how to open up with the external world. Also, how to

motivate and manage innovation from outside (Boudreau & Lakhani, 2009).

2. How to strike a balance between open innovation activities and internal innovation

(Enkel et al., 2009) is a challenge for companies. Since the resources of the firms are

scarce, and resource allocation for open innovation and internal R&D is undecided to

many companies

3. Opening and connecting to external knowledge sources does not always provide an

assurance of successful innovation and higher performance of firm(Laursen & Salter,

2006).

4. Even though the ideas are identified by external sources and incorporated, it does not

ensure that they will be leveraged into the firm’s strategies. (West & Gallagher, 2006).

2.0 Review of Literature

Lichtenthaler U (2008) investigated 154 medium and large firms in Europe with a focus on

firm’s strategy towards adoption of Open Innovation’s dimensions of external technological

acquisition and external technological exploitation. He opines that many firms still pursue

traditional closed approaches to innovation despite a trend toward open innovation. Further

mentions that firm’s size has a positive impact on degree of openness, whereas the industry

type does not have an influence on openness.

V. van de Vrande et al. (2009) studied open innovation practices in Dutch SMEs. The sample

size undertaken for the study was 605 SMEs. The study found out that SMEs have adopted

and do engage in open innovation practices. The medium size firms are more active in

engaging open innovation practices than compared to smaller size firms. Further the findings

revealed that SMEs pursue open innovation principally for market – related motives. The

SMEs face an important challenge with regards to open innovation was related to

organizational and cultural issues.

Jayawardhana A and Surangi H (2010) studied open innovation practices among small and

medium ventures in Central Province of Sri Lanka managed by women. The sample size for

the study was 50 women entrepreneurs. The study reveals that there is a positive trend within

women business owners in the handicrafts industry to adopt open innovation practices which

helps them to achieve growth and sustainability. Further study reveals that there is significant

difference in the adoption to open innovation practices within medium and small ventures.

Tian and Feng (2010) investigated the types of external technology sources in open

innovation. The study revealed that apart from competitors, the external technology sources

include suppliers, users, universities and research institutes, R&D service companies.

Gumus B and Cubukcu A (2011) studied top Turkish firms on Open Innovation. The authors

aimed to study the impact of innovation on sustainable growth, the obstacles and challenges

faced by firms towards open innovation practices. The study included over 500 firms listed

by Istanbul chamber of commerce. The study opinions that awareness of Open Innovation

among Turkish firms is very low and mentions that for a sustainable growth a culture of

innovation is essential in the organization. The study reveals that there is no relation between

firm’s characteristics and innovation.

Xin S and Wang Q (2011) in their paper discusses that SMEs needs open innovation for

sustaining rather than for transformation to large organization. Further they mentions that

practices of innovation should be carefully adopted by SMEs. The paper discusses the key

joints of making open innovation a success. The study feels that knowledge management

may play an important role for success of open innovation in SMEs. The paper concludes

that SMEs sustainable development rely on innovation.

Songphon M and Sabin S (2011) examined the Industrial Technology Assistance Program

(iTAP), one of the innovation intermediaries for small and medium enterprises (SMEs) in

Thailand. The study identifies challenges faced by both SMEs and innovation intermediaries.

The study reveals that there has been an increasing interest in open innovation and innovation

intermediaries.

Kafouros I and Forsan N (2012) studied the role of open innovation in emerging economies

more specific to India. The study was restricted to chemical industry. The sample size of the

study was 109 chemical companies which are into cosmetics, fertilizers, organic and

inorganic chemicals. The study examined how firm’s openness to external knowledge

enables firms to increase their financial performances and Research and Development.

Abulrub A and Lee J (2012) researched on South Korean firms to investigate on Open

Innovation challenges and modes. The study comprised of both large and SMEs of South

Korea. The sample size for the study was 85 firms. The study opinioned that company size

and market type has an effect on open innovation mode and cooperation with external

partners. The results of the study indicate that globalization is main driver of open

innovation. The study strongly expresses that external partners are very important for SMEs

to adopt open innovation.

Bala Subrahmanya M H (2012) researched on external support and innovation performance

of SMEs. The study was restricted to SMEs of Bangalore city. The data was collected

through a semi structured questionnaire from 149 SME units. The study concluded that the

SMEs internal technical competence and their nature of innovation help them to fetch

external support. Further it is concluded that SMEs technical competency clubbed with

external support exploit market opportunities to achieve higher innovative performance.

Lukac et al (2012) investigated the adaption of Open Innovation model in Information and

Communication Technology (ICT) industry in Germany. The methodology adopted was a

case study approach. The study reveals that successful innovation for a company requires a

continuous and sustainable flow of innovation in order to stay competitive. This can only be

achieved through collaborative approaches.

Xu and Zheng (2012) in their work discusses about definition, background and research

foundations of open innovation. Also the paper discusses the implication for theory and

practice. The paper recommends that there is a need to study factors influencing open

innovation and how different modes of open innovation complement or substitute each other.

P.Janeiro et al (2013) conducted an empirical study to understand the link between open

innovation, service firms and universities in Portugal. The study comprised of 967 services

firms includes small, medium and large firms. The study revealed that successful firms tend

to rely more on universities. Further the study reveals that a causal relationship exists

between firm’s innovation and access to external sources like universities.

Rangus K and Drnovsek M (2013) investigated the state of Open Innovation in Slovenia.

About 350 firms in manufacturing and service sectors were part of the study. The firms

belonged to small, medium and large enterprises. The study included both qualitative and

quantitative research methods. The study opinions that the most commonly practices of open

innovation are customer involvement, employee involvement and pre-venturing activity. The

study revealed that firms collaborate with customers and suppliers. Also results suggest that

there are differences regarding the implementation of open innovation dimensions in relation

to firm’s size, with larger companies more involved in open innovation activities. The study

opines that smaller companies are more inclined to selling/licensing of their IP. The study

also revealed that service firms practice open innovation compared to manufacturing firms.

Ades et al (2013) analyses three case firms whose innovation management processes have

been fused. The study reveals that the implementation of Open Innovation practices is

challenge by cultural issues.

Cauchick M et al (2013) conducted a pilot case study on open innovation in Brazilian firm.

The methodology adopted was a case study. The author investigated on some aspects of the

introduction of an open innovation program in a company. The study was mainly focused on

the collaboration aspects of open innovation practices. The study concluded that there were

multiple ways of collaborations such as cooperation, co-creation, co-design, services,

consulting, financing, and others.

Segers (2013) observed that there is a strong collaboration between research institutions,

universities, venture capitalists, high-risk finance providers, existing large companies, and

new biotechnology firms in Belgium. The study feels that basic innovative activity occurs

mainly in university-based new biotechnology firms.

/

Revutska (2013) feels that the makeover of companies in the open innovation business model

is perspective from the viewpoint of strategic development. Companies benefit from the

quick commercialization of their ideas and will be able to improve their experience through

the diffusion of innovations, among other companies in the market i.e. startups and spin-offs.

Further the author mentions that model of “open innovation” gives the functioning of higher

outsourcing market. Authors also mentions that university education centers play a vital role

in the process of open innovation models creation.

Deegahawature (2014) investigated the extent of implementation of inbound open innovation

strategy by Low and, Medium-low Technology (LMT) firms in technologically less

advanced countries. The effect of both customer and competitor orientation on inbound open

innovation strategies and moderating effect of technology turbulence was the purpose of the

study. The results suggest that LMT firms implement inbound open innovation at a moderate

level. The findings suggest that LMT firms that adapt inbound open innovation should be

cautious on capabilities and environment turbulence.

3.0 Conceptual Framework of Study

Fig 2.2: Conceptual Framework Source : Literature Review

Sustainable

growth

Spill Offs

Licensing

Intellectual

Property

Joint Ventures

or alliances.

Academics

Suppliers

Customers

Competitors

Open

Innovat

ion P

ract

ices

SME Characteristics

SIZE Leadership AGE Culture

Stimulates

Government

Policies

Competition

Bu

sines

s ec

o s

yst

em

INF

LU

EN

CE

S

Collaboration

4.0 Research Objectives

The research objectives for the study are:

1. To assess the awareness level and adoption level of Open Innovation among

Indian SMEs;

2. To outline the motives and challenges for SMES to adopt and practice Open

Innovation;

3. To analyze whether the SMEs characteristics of firm influences Open Innovation

practices;

4. To identify suitable inbound Open Innovation partners of SMEs;

5. To search for those factors that will lead to stimulate Inbound Open Innovation

practices among SMEs &

6. To document those Inbound Open Innovation practices that help in achieving

sustainable growth.

5.0 Conclusion

Though innovation plays an important role in the sustainability of the SME and growth in the

industry cycle, but it is not yet clear about type of innovation management practices that

needs to be adopted by SMEs. SME firms are no exception to this. SMEs have to choose

between practices of Open innovation and closed innovation for its sustainable development.

Open Innovation is a fast evolving discipline where firms in SMEs are looking cautiously.

For more than a decade in the west the researchers are arguing on the need for the adoption

of open innovation practices for the sustainability and growth. The studies in past across the

Europe and other geographies in the west have advocated for the adoption of Open

innovation practices in the last decade. In India, the concept of Open innovation is gaining

importance from last few years. Hence there is a need to study about Open Innovation

practices in the Indian context among technologically intensive industrial segment with

special references to small and medium organizations of software product industry.

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