Week 1 - Introduction to Value appropriation - Formal and Informal
mechanisms
(1) James (2013): How firms capture value from their innovations
The objectives of this article are to review the literature on value capture
mechanisms, to document what is known about the conditions under which specific
mechanisms are selected, and to spur future work that examines the conditions
under which these mechanisms are more or less effective. To do this, two research
questions need to be answered:
When should firms choose to invest in the use of a specific (bundle of) value
capture mechanism(s)? What are the relative effects of these mechanisms on
profits from innovation?
The figure helps to summarise literature on
this topic, and what relationships exist
among exogenous conditions, with the left
column giving a dimension of primary
contextual conditions likely to affect the
selection of specific value-capture
strategies, and the middle column being
the four primary isolating mechanisms.
Left column: dimension of primary contextual conditions likely to affect the selection of
specific value-capture strategies: Institutional environment, Industry, Firm, Technology
Middle column: four primary isolating mechanisms: Patents, Secrecy, Lead time,
Complementary assets
,Patents Product innovation!
● Can be ineffective and expensive to obtain weak appropriability
● Strong: lower costs associated with identifying and defending against infringement
● Superior innovation capabilities create a ‘shadow of the future’ that minimizes
inefficient patent disputes
● Larger or more experienced intellectual property teams are better able to identify
infringement and enforce legal remedies
● Some firms patent to stimulate information dissemination regarding their innovation or
to influence the direction of innovative activity
Secrecy Process innovation!
● Leveraged by trade secret law confidentiality agreements
● Culture of restricting flow of information, coding projects mitigates R&D
● Secrecy not effective in competitive technology space need patenting & info flow to
have R&D
● Paradox of disclosure: Firms must disclose technical details to signal the value of
their innovations; however, then technical knowledge becomes a public good, and
receivers of that knowledge might appropriate its value without compensating the
innovator.
● used: weak intellectual property
Lead time
● = introducing an innovation early
● Early commitment to a course of action competitive advantages, but flexibility
disadvantages, with respect to future investment opportunities.
● Late commitment opposite.
● Early-mover strategies are most appropriate where there is a high degree of
uncertainty, long time spans between innovations, and a high degree of
intergenerational learning
● Second mover advantage when knowledge is codified
Complementary Assets
● = manufacturing, distribution, marketing, or service used in conjunction with the
know-how underlying a focal innovation to deliver value RBV
● Incumbent firms owning or controlling specialized complementary assets are more
likely to sustain a competitive advantage and persistent performance
● Alter R&D towards complementary assets
Patents & Secrecy
● Processes: protected through secrecy
● Products: protected through patents that make broader claims of novelty
● Combination successful in weak appropriability regimes bc it mitigates the
ineffectiveness of patents
● Combination allows firm to exploit both tacit and codified knowledge that supports
their technological advantages, especially when they have product & process
innovation
,Patents & Complementary Assets
● Industries with relatively weak patent protection, owning specialized complementary
assets can help incumbent firms to capture value from their innovations despite rivals’
patenting of important innovations
● Patent paradox: increased bargaining power from owning complementary assets
related to patented innovations especially in weak appropriability where
capital-intensive firms are more likely to patent their innovations
Generally speaking, patents are used more often than secrecy, although in weak legal
appropriability regimes, relying on either specialised complementary assets, or secrecy may
be more effective. Moreover, various mechanisms work to capture value with different
industries and technologies, e.g. patents in discrete product industries with strong protection,
others in complex product industries with weak protection. Firm-specific capabilities enable
firms to capture value from their innovations independent of industry.
—-
Patents are legally-granted rights to exclude others from making, using, selling, or importing
an invention, for a limited time, within a given country. It is costly to create and enforce and
does not necessarily guarantee the holder expected profits from an innovation. Since legal
rights are owned by the actual inventor, the employer must obtain a written commitment of
a patent from relevant employees to obtain legal resources. Despite patent law promising
the owner a legal right to prevent others from using a patented invention, it is often
ineffective, either because patents offer an exclusionary right instead of an affirmative right,
or an inability to effectively enforce the exclusionary protection.
Varying costs and benefits suggest an opportunity for theory development regarding
the conditions under which patenting will provide an efficacious way for innovators to
maximise the value they capture from their innovations. There is variance in the propensity
to patent to appropriate gains from innovations, in particular depending on the strength of
the intellectual property regime affecting costs in at least two ways, namely 1) the increased
expectation of infringement directly raises expected patent litigation costs, and 2) the
number of expected infringing firms affects the cost of identifying particular rivals against
which to make a claim for punitive damages. In countries with relatively strong enforcement,
firms have lower costs associated with identifying and defending against infringement, and
vice versa under relatively weak appropriability regimes. Under the latter, firms are less likely
to use the patent system. Firms in discrete product industries are more likely to prevail in
patent litigation suits, and to choose patents as a value capturing mechanism. Research
suggests three reasons why firms may vary in their patent use:
, -Superior innovation capabilities create a ‘shadow of the future’ that minimises inefficient
patent disputes
- Firms with larger or more experienced intellectual property teams are better able to
identify infringement and enforce legal remedies
- Some firms patent to stimulate information dissemination regarding their innovation or to
influence the direction of innovative activity
Secrecy is a firm’s efforts to protect the uniqueness of an innovation by withholding its technical
details from public dissemination. It may reduce R&D efficiency by restricting the internal transfer of
knowledge about the firm’s successful projects and preventing learning from failed projects.
Government institutions supplement a firm’s efforts to keep innovations secret by enforcing trade
secret law and contractual obligations, e.g. confidentiality agreements, and non-compete
agreements.
The paradox of disclosure reads as follows: firms must disclose technical details to signal
the value of their innovations; however, once disclosed, technical knowledge becomes a public
good, and receivers of that knowledge might appropriate its value without compensating the
innovator. Hence, firms must weigh costs and benefits of maintaining secrecy versus disclosing
technical details of an innovation via patents or in the public domain through publication or open
innovation initiatives.
Keeping innovations secret versus patenting them is more costly when a firm operates in a
competitive technology space. Moreover, the economic pay-off for firms’ own R&D is lower when
they face intense competition. Thus, although secrecy can protect an innovation, it may also entail
significant costs and constrain information spill-overs that foster future innovation. Greater product
and process complexity makes a firm’s R&D strategies more difficult and requires more formal
organisational structures and quantitative mechanisms to control the flow of proprietary
information, which then increases the costs of maintaining secrecy and monitoring employees’
access to information.
However, there are also two rationales suggesting why firms may act in a manner opposite to
the concept of secrecy:
- Firms may publicly signal their efficiency or quality in an effort to reduce competition, with
the benefits being most salient in contexts where 1) there is an information gap between
buyers and sellers, 2) buyers know less about the commodity than sellers, and 3) the cost to
send a credible signal regarding the quality of an innovation is negatively correlated with the
ability to profit from an innovation
- Firms may publicly disclose information in an effort to encourage others to develop
complementary technologies, foster coordination across an ecosystem, or facilitate the
establishment of technical standards
Lead time advantages are the result of early timing of developing and introducing an innovation.
Early commitment can provide firms with pre-emptive competitive advantages, but possible flexibility
disadvantages, whereas late commitment can provide flexibility advantages, but potential
competitive disadvantages. Being focused on horizontal, i.e. products differing in attributes, or
vertical differentiation, i.e. products differing in quality and efficiency, mediates the relationship
between lead time and performance. Lead time advantages are contingent on the stage of industry
evolution.
Moreover, a superior ability to use absorptive capacity, the ability to assimilate and exploit external
knowledge, and its potential to realise first-mover and learning-curve
mechanisms
(1) James (2013): How firms capture value from their innovations
The objectives of this article are to review the literature on value capture
mechanisms, to document what is known about the conditions under which specific
mechanisms are selected, and to spur future work that examines the conditions
under which these mechanisms are more or less effective. To do this, two research
questions need to be answered:
When should firms choose to invest in the use of a specific (bundle of) value
capture mechanism(s)? What are the relative effects of these mechanisms on
profits from innovation?
The figure helps to summarise literature on
this topic, and what relationships exist
among exogenous conditions, with the left
column giving a dimension of primary
contextual conditions likely to affect the
selection of specific value-capture
strategies, and the middle column being
the four primary isolating mechanisms.
Left column: dimension of primary contextual conditions likely to affect the selection of
specific value-capture strategies: Institutional environment, Industry, Firm, Technology
Middle column: four primary isolating mechanisms: Patents, Secrecy, Lead time,
Complementary assets
,Patents Product innovation!
● Can be ineffective and expensive to obtain weak appropriability
● Strong: lower costs associated with identifying and defending against infringement
● Superior innovation capabilities create a ‘shadow of the future’ that minimizes
inefficient patent disputes
● Larger or more experienced intellectual property teams are better able to identify
infringement and enforce legal remedies
● Some firms patent to stimulate information dissemination regarding their innovation or
to influence the direction of innovative activity
Secrecy Process innovation!
● Leveraged by trade secret law confidentiality agreements
● Culture of restricting flow of information, coding projects mitigates R&D
● Secrecy not effective in competitive technology space need patenting & info flow to
have R&D
● Paradox of disclosure: Firms must disclose technical details to signal the value of
their innovations; however, then technical knowledge becomes a public good, and
receivers of that knowledge might appropriate its value without compensating the
innovator.
● used: weak intellectual property
Lead time
● = introducing an innovation early
● Early commitment to a course of action competitive advantages, but flexibility
disadvantages, with respect to future investment opportunities.
● Late commitment opposite.
● Early-mover strategies are most appropriate where there is a high degree of
uncertainty, long time spans between innovations, and a high degree of
intergenerational learning
● Second mover advantage when knowledge is codified
Complementary Assets
● = manufacturing, distribution, marketing, or service used in conjunction with the
know-how underlying a focal innovation to deliver value RBV
● Incumbent firms owning or controlling specialized complementary assets are more
likely to sustain a competitive advantage and persistent performance
● Alter R&D towards complementary assets
Patents & Secrecy
● Processes: protected through secrecy
● Products: protected through patents that make broader claims of novelty
● Combination successful in weak appropriability regimes bc it mitigates the
ineffectiveness of patents
● Combination allows firm to exploit both tacit and codified knowledge that supports
their technological advantages, especially when they have product & process
innovation
,Patents & Complementary Assets
● Industries with relatively weak patent protection, owning specialized complementary
assets can help incumbent firms to capture value from their innovations despite rivals’
patenting of important innovations
● Patent paradox: increased bargaining power from owning complementary assets
related to patented innovations especially in weak appropriability where
capital-intensive firms are more likely to patent their innovations
Generally speaking, patents are used more often than secrecy, although in weak legal
appropriability regimes, relying on either specialised complementary assets, or secrecy may
be more effective. Moreover, various mechanisms work to capture value with different
industries and technologies, e.g. patents in discrete product industries with strong protection,
others in complex product industries with weak protection. Firm-specific capabilities enable
firms to capture value from their innovations independent of industry.
—-
Patents are legally-granted rights to exclude others from making, using, selling, or importing
an invention, for a limited time, within a given country. It is costly to create and enforce and
does not necessarily guarantee the holder expected profits from an innovation. Since legal
rights are owned by the actual inventor, the employer must obtain a written commitment of
a patent from relevant employees to obtain legal resources. Despite patent law promising
the owner a legal right to prevent others from using a patented invention, it is often
ineffective, either because patents offer an exclusionary right instead of an affirmative right,
or an inability to effectively enforce the exclusionary protection.
Varying costs and benefits suggest an opportunity for theory development regarding
the conditions under which patenting will provide an efficacious way for innovators to
maximise the value they capture from their innovations. There is variance in the propensity
to patent to appropriate gains from innovations, in particular depending on the strength of
the intellectual property regime affecting costs in at least two ways, namely 1) the increased
expectation of infringement directly raises expected patent litigation costs, and 2) the
number of expected infringing firms affects the cost of identifying particular rivals against
which to make a claim for punitive damages. In countries with relatively strong enforcement,
firms have lower costs associated with identifying and defending against infringement, and
vice versa under relatively weak appropriability regimes. Under the latter, firms are less likely
to use the patent system. Firms in discrete product industries are more likely to prevail in
patent litigation suits, and to choose patents as a value capturing mechanism. Research
suggests three reasons why firms may vary in their patent use:
, -Superior innovation capabilities create a ‘shadow of the future’ that minimises inefficient
patent disputes
- Firms with larger or more experienced intellectual property teams are better able to
identify infringement and enforce legal remedies
- Some firms patent to stimulate information dissemination regarding their innovation or to
influence the direction of innovative activity
Secrecy is a firm’s efforts to protect the uniqueness of an innovation by withholding its technical
details from public dissemination. It may reduce R&D efficiency by restricting the internal transfer of
knowledge about the firm’s successful projects and preventing learning from failed projects.
Government institutions supplement a firm’s efforts to keep innovations secret by enforcing trade
secret law and contractual obligations, e.g. confidentiality agreements, and non-compete
agreements.
The paradox of disclosure reads as follows: firms must disclose technical details to signal
the value of their innovations; however, once disclosed, technical knowledge becomes a public
good, and receivers of that knowledge might appropriate its value without compensating the
innovator. Hence, firms must weigh costs and benefits of maintaining secrecy versus disclosing
technical details of an innovation via patents or in the public domain through publication or open
innovation initiatives.
Keeping innovations secret versus patenting them is more costly when a firm operates in a
competitive technology space. Moreover, the economic pay-off for firms’ own R&D is lower when
they face intense competition. Thus, although secrecy can protect an innovation, it may also entail
significant costs and constrain information spill-overs that foster future innovation. Greater product
and process complexity makes a firm’s R&D strategies more difficult and requires more formal
organisational structures and quantitative mechanisms to control the flow of proprietary
information, which then increases the costs of maintaining secrecy and monitoring employees’
access to information.
However, there are also two rationales suggesting why firms may act in a manner opposite to
the concept of secrecy:
- Firms may publicly signal their efficiency or quality in an effort to reduce competition, with
the benefits being most salient in contexts where 1) there is an information gap between
buyers and sellers, 2) buyers know less about the commodity than sellers, and 3) the cost to
send a credible signal regarding the quality of an innovation is negatively correlated with the
ability to profit from an innovation
- Firms may publicly disclose information in an effort to encourage others to develop
complementary technologies, foster coordination across an ecosystem, or facilitate the
establishment of technical standards
Lead time advantages are the result of early timing of developing and introducing an innovation.
Early commitment can provide firms with pre-emptive competitive advantages, but possible flexibility
disadvantages, whereas late commitment can provide flexibility advantages, but potential
competitive disadvantages. Being focused on horizontal, i.e. products differing in attributes, or
vertical differentiation, i.e. products differing in quality and efficiency, mediates the relationship
between lead time and performance. Lead time advantages are contingent on the stage of industry
evolution.
Moreover, a superior ability to use absorptive capacity, the ability to assimilate and exploit external
knowledge, and its potential to realise first-mover and learning-curve
