Innovation outside: When spin-off firms and developer communities change the boundaries of the firm

Doctoral thesis, 2007

Few observers dispute that innovation is at the very heart of economic development and prosperity and a key determinant for the competitiveness of firms. Yet the literature has found it challenging to incorporate the boundary-spanning characteristic of innovation into the theory of the firm. The phenomenon investigated in this thesis is innovation outside, i.e. when innovation is managed at least partially outside and across the legal boundaries of the firm. I approach this phenomenon in five empirically based papers, which analyze how spin-off firms and open source software developer communities change the boundaries of the firm. A tentative framework for understanding innovation outside is put forward. Expanding previous research, it is suggested that the firm can be understood as a social community specializing in combining resources by leveraging control rights to access or discard resources. In other words, the firm is a nexus of relations in which the legal firm navigates. I submit that innovation outside can be understood in terms of a resource accumulation process, which is governed by: firm heterogeneity; legal barriers to internalization; value uncertainty; and misalignment of opportunity recognition. This leads to contributions in the theory of the firm where I develop two related arguments. First, that internalization of critical resources is not always the rational response. Second, that externalization of resources enables firms to do more while doing less, by releasing resources for productive use. Innovation outside enables the firm to manage resource heterogeneity and organizational growth constraints by functioning as an alternative to internal integration mechanisms. From a managerial perspective, innovation outside provides an opportunity for firms to participate in innovation processes when complete internalization is not possible or not desirable. Innovation outside also provides a mechanism to manage uncertainty about markets and technology, and to manage strategic ambiguity about core competencies.