Innovation often relies on outside knowledge. First, in terms of “absorptive capacity”, or how much a firm can use external knowledge. Second, in terms of “search diversity”, or how the more a firm seeks external knowledge the more innovative it tends to be. A new paper co-authored by visiting researcher Abiodun Egbetokun studies the latter and breaks new ground in African research.
The Role of Industry and Economic Context in Open Innovation: Evidence from Nigeria analyses service and manufacturing firms in one of Africa’s largest economies. Yet instead of using single cross-sections of firms, as other studies have done, we pool a sample of firms over two periods. We do this because the different sample and economic context help us provide new insights for innovation and management literature. Additionally, our paper takes a multidimensional view of innovation, considering sectoral differences and the role of the economic context. In particular, we combine insights from economics and management literature to develop new hypotheses, linking firms’ external search strategies to their sectors of operation and the magnitude of innovation obstacles experienced.
Incremental vs. radical innovation
In some respects, the results are in line with previous studies: both the breadth and depth of search are statistically significant for incremental new-to-firm innovation, but not for the more radical new-to-market innovation. A possible explanation (apart from the national context and the combined sample) has to do with the nature of the innovation process. Following our definition, radical innovation occurs at the frontier of the domestic market, as it is appearing for the first time; and such innovation is not likely to depend on a thorough search of current domestic technologies. By contrast, innovation that is new to firms may benefit significantly from existing knowledge within domestic innovation systems, mainly because they lie below the technology frontier defined by new-to-market innovations.
Combining technological and non-technological innovation into a single measure, we find results similar to the existing literature only in the case of search breadth. We suspect that the observed difference stems from the inclusion of other types of innovation beyond what is normally done in the literature. However, this argument is only tentative because we did not separately analyse non-technological innovation. We believe that such evidence, together with what we already know about technological innovation, will help in building a more robust theory of open innovation, particularly for developing countries where non-technological innovation is of great importance.
Different lens for developing countries
The results obtained from testing two new hypotheses deliver fresh insights on the relationship between a firm’s external search strategy and its sector of operation, on the one hand, and the magnitude of innovation obstacles experienced, on the other hand. On these two aspects, the existing literature offers limited insights. The aspect of obstacles is particularly important in developing countries, as firms face various challenges in the innovation process.
First, we find no discernible difference in the innovativeness and search approaches of firms across service and manufacturing. In fact, the link between innovative performance and external search varies only slightly between the two sectors. This is an interesting result given the recent rise of servitisation, whereby many manufacturing firms undertake product differentiation by bundling services with their products. The line between service and manufacturing has become blurred, and that is becoming apparent in the innovation and knowledge search process. Indeed, rather than support dissimilar firm-level strategies in service and manufacturing, our results suggest the absence of any strong differences in firms’ open innovation behaviour and its link to innovative performance across the two sectors.
Second, it seems that the economic context indeed influences the openness of firms. When firms face a wide range of obstacles, they feel the need to broaden their search horizon. This stands to reason because, as the technological or cognitive space within which a firm searches expands, so does the amount of knowledge it can potentially access. However, in the face of more intense obstacles, searching broadly becomes less useful as it can lead to redundancy. Under such circumstances, it may be more beneficial for firms to use a few sources deeply, more likely those that have been successful in the past.
Finally, absorptive capacity also plays a role in open innovation. We show that firms with high quality human capital are better able to scan the environment both broadly and deeply. Thus, we highlight, from the perspective of open innovation, the widely reported importance of human capital in the innovation process in developing countries.
Management research, practice and policy
Our results also have implications for management research and practice. For instance, we find the type of innovation (either radical or incremental) influences external search strategy, irrespective of sector. Furthermore, the point at which diminishing returns to external search for knowledge sets in is earlier in developing countries, particularly in the case of new-to-firm innovation. This indicates that the domestic innovation system within which the firm is located affects both its innovativeness and external search strategies. Such effects may arise from variations in the abundance of external knowledge across national boundaries and, more importantly, from differences in the variety and intensity of innovation obstacles. In fact, as shown in other studies, the abundance of external knowledge positively affects firms’ search strategies.
In future studies, the use of datasets covering a longer period would provide answers to the issue of generalisation and time. Finally, most firms operating in developing countries are in close proximity either due to being in clusters or some industrial districts. The effect on search strategies should be of interest to policy, particularly because it affects the abundance and flow of knowledge resources. See below for the full paper.
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