Near-Decomposable Modularity: On the Interdependence between Intellectual Property and Open Innovation in Digital Startups’ Innovation Strategies

MotivationDigitization is exerting its impact across industries and organizations (Yoo, Boland Jr, Lyytinen, & Majchrzak, 2012). While large firms are faced with the challenge of transforming their business, new ventures are capitalizing on the potential of digital technologies to create novel business models and drive new business ideas, at times disrupting established industries. As a result of the generative, open-ended nature of digital technologies, the way digital technology-based startups innovate and develop is somewhat different from regular technology-based startups. Arguably the most pertinent change in the way innovation is organized for these startups is in the way they make use of open and user innovation to draw in technologies and contributions on the inbound side, and allow for adaptations, generative innovation and derivatives on the outbound side. As a result, digital technology development is often an open and open-ended innovation effort, combining inputs from a variety of distributed actors in a non-linear fashion (Nambisan, 2017).\ua0ObjectivePrevious research has discussed the role of intellectual property (IP) in contexts of open innovation and user innovation, establishing the importance of IP rights for facilitating inter-organizational exchange and the use of selective revealing to allow simultaneous collaboration and competition (Baldwin & Henkel, 2015; Baldwin & von Hippel, 2011; Henkel, 2006). These studies have provided some initial expectations for the role and functioning of IP in settings of digital technology-driven open and user innovation but leave a lot of room for further articulating the way IP strategy forms and adapts to facilitate startups’ open innovation efforts.\ua0MethodThis research focuses on 8 digital technology-based startups differently engaged with open innovation, from open software, open hardware, collaborative innovation and partnering to fully in-house development. Using a multiple case study design, the development of these startups’ innovation process and IP management is described in order to elucidate the role of various IP decisions in fostering open innovation.FindingsWhat is found is that different formal IP rights and informal mechanisms are used to facilitate open innovation. We summarize these findings by conceptualizing startups’ digital innovation strategies as near-decomposable systems (Sarasvathy, 2003), made up of interdependent components and yet evolving by switching out and adding on components over time. In the strategy that emerges, IP decisions form important companion pieces to open innovation components. In general, startups were prone to using various forms of open innovation in accordance with their technology, and this openness was reinforced by appropriate IP management in a modular, interdependent fashion. IP can function as protective value capture tool, signaling device and ground rule facilitating collaboration. Driving open and user innovation in a startup setting was facilitated by allowing IP lax environments for experimentation and value creation, IP protected modules for exploitation and value capture, and designing these modules with their interdependence in mind, using IP in one module to attract contributors and set the ground rules for contribution in another. That is, traditionally protective IP decisions such as patenting and secrecy often function as a value capture tool protecting a closed module so that more openness can be employed in other modules. IP decisions which serve to reveal inventions, such as patenting, publishing and trademarking, can however also be employed as a way to communicate a startup’s stake in different technologies and therefore facilitate collaboration in open software and open hardware initiatives. These same tactics can be used to signal value and credibility to potential contributors and draw people in to the innovation effort. In open-ended innovation, abstaining from engaging with IP can be a way to allow the technology to evolve without committing to any technological direction (preventing path-dependence)