On the management of open innovation

In an open innovation relationship, the party that owns a key asset enjoys bargaining power that discourages the investments of the other party in the collaboration. We show that these incentives can be restored by conferring on the weak party the power to take decisions during the research process – e.g., a pharmaceutical firm with manufacturing and commercialization assets offers the direction of a joint research project to a biotech partner. However, on many occasions, the strong party still captures more value from the collaboration by retaining the power to take decisions during research even if it produces less innovation value and fewer aggregate profits. We conclude that the potential of open innovation is underexploited. In particular, owners may not release enough power to take decisions on the use of their assets.