Learning from open innovation in a context of a less-open country

Chesbrough first coined the term “open innovation” about 15 years ago. Since then, a growing number of studies have shown that openness to the environment can improve firms’ innovation. However, most of the previous studies have focused on the development of product innovation through firms’ external search in high-tech organizations in developed countries. Less is known about how firms in emerging economies search for new knowledge from their environment to gain and sustain a competitive position in the market. In this thesis, by advancing the open innovation and absorptive capacity literatures, I discuss how firms operating in a traditional sector develop their internal capabilities, performance, and process-related innovation activities by tapping into outside sources of knowledge. This overall research question entails three related sub-questions, which are examined in three research essays through using a mixed qualitative (16 interviews) and quantitative (171 respondents) methodologies (the essays all use the same data). The essays are self-contained and focus on the same research context (the Iranian automotive industry) and level of analysis (the firm). While these essays use different analytical techniques, drawing from distinct pieces of literature, the common thread of the role of open innovation links them to the overarching research question. In the first essay, I argue why some firms are more successful than others in benefitting from external knowledge sources (e.g., suppliers, competitors, and universities). In doing so, I investigate the critical role of potential and realized absorptive capacity in the relationship between firms’ external search and performance. Previous studies on open innovation have tended to examine absorptive capacity as an unidimensional concept, measuring it using R&D intensity. However, R&D intensity does not capture essential aspects of the complex construct absorptive capacity, and there is value in understanding the organizational mechanisms and routines that influence the process of acquiring knowledge from the environment and, subsequently, the exploitation of this newly-generated knowledge in developing the firm’s performance. The findings indicate that potential and realized absorptive capacity are two distinct capabilities and each having a different impact on a firm’s performance. The findings also suggest that the capability of firms to acquire and assimilate external knowledge (potential absorptive capacity) has a strong relationship with performance. The second empirical essay explores how firms can develop process innovation through openness. Despite the importance of process innovation for firms, to date, there has not been clear evidence for how firms, especially small and medium-sized enterprises (SMEs), search for new knowledge to develop process innovation. This essay contributes to the literature by exploring the potential mediating effect of absorptive capacity. More precisely, it aims to investigate the effect that absorptive capacity has on the firm’s knowledge search from market- and technology-related partners, and the consequent process innovation. Unexpectedly, the findings reveal absorptive capacity only mediates the relationship between market-related partners (e.g., customers, competitors, and suppliers) and process innovation. This essay also suggests that knowledge search from suppliers, customers, and competitors is more likely to lead to the development of process innovation than that from universities and research organizations. The third essay expands on the open innovation literature using an international perspective. It discusses how external knowledge search depth from foreign and domestic partners is related to radical process innovation. In addition, this essay questions whether competitive intensity has a potential moderating effect on the relationship between external knowledge search depth (foreign and domestic) and radical process innovation. Surprisingly, it finds only the external search depth associated with foreign partners is positively related to radical process innovation. Based upon this finding, it appears that, although Iranian firms have faced limitations due to the international sanctions, they have continued to seek and gain knowledge from foreign firms and, thus, continued to develop their manufacturing processes. This study bolsters what is currently a limited body of knowledge on how firms operating under isolated environments, such as economic sanctions, continue to benefit from international knowledge search to introduce new processes. In addition, the competitive environment is found to have a profound impact when it comes to translating external knowledge into a firm’s radical process innovation. The questions tackled in this thesis add to the current research on open innovation and absorptive capacity in several ways: (1) opening the “black box” that rests between firms’ knowledge search and its performance, addressing how external knowledge search depth and breadth are associated with the development of potential and realized absorptive; (2) providing a deeper understanding of where and how firms can search for knowledge in order to better develop process innovation; (3) employing the concept of open innovation from an international perspective, suggesting a comparative view on the search for knowledge from domestic versus foreign firms to develop process innovation; (4) providing insights into how firms continue to draw on global knowledge resources in an effort to remain competitive, when they are prohibited from or face high barriers to trading across borders; and, (5) providing a deeper understanding on how emerging-economy firms – most especially SMEs – can benefit from open innovation