Model building: open innovation economic system
The Open Innovation Economic system (OIES) is a macroscopic economic system wherein a sub economic system based on open innovation led by start-ups and small and medium enterprises (SMEs), a sub economic system based on closed innovation led by big businesses, and a sub economic system based on social innovation economy led by social enterprises or independent third sectors are interconnected, thereby affecting each other. OIES basically targets the economic system of one nation. However, the concept of the same macroeconomic system could be applied to a global and regional economic system.
That is, the capitalist economic system in a modern society is composed of the three sub economic systems described in Fig. 1 regardless of the characteristics of the political system of the economic system. An open innovation economy indicates an economy based on SMEs or start-ups led by individual entrepreneurs. It features a new combination between technology and the market suggested by Schumpeter (Brunswicker & van de Vrande, 2014; Schumpeter, 1934, pp. 15, 65). Open innovation economy is characterized in such a way that the original producer of technology, which is emerging under a knowledge based development as a new economic culture, is not the same as the subject delivering the production to a market (Carrillo 2015, Chesbrough, 2003, p. 43). Thus, the open business model, which is a new combination between technology and a market and led by various entrepreneurs, defines the growth and development of an open innovation economy (Chesbrough, 2007, 2010; 2013, p. 2). A closed innovation economy is led by mainly big businesses wherein monopolistic practices are dominant, and investment opportunities no longer exist (Schumpeter, 1942, pp. 81, 87). In this case, large companies create their own value based on the technology they have accumulated internally and transfer it to a market. Thus, they lead the closed innovation economy (Chesbrough, 2003, pp. 21–24). Social innovation economy indicates that in the economy, specific technology or knowledge creates a social value that meets social requirements without the intermediation of the market and provides it to the society (Rifkin & Kruger, 1996). Social innovation refers to innovative activities and services that are motivated by the goal of meeting a social need and that are predominantly diffused through organizations whose primary purposes are social (Mulgan, 2006). The so-called sharing economy such as Aribbnb, or Uber, and collaborative economy such as open source communities are concrete examples of social innovation economy which connects new technology and social requirement (Belk, 2014; Kostakis & Bauwens, 2014; Zervas, Proserpio, & Byers, 2014). Social enterprises that comprise the social innovation economy access the Internet of the things through a plug. They also play and use open and distributed architecture to create peer-to-peer horizontal collaborative commons (Rifkin, 2014, p. 109; Zervas, Proserpio, & Byers, 2014). With the activation of the Internet of the Things, including the communication Internet, logistics Internet, and energy Internet, productivity significantly increases, and a zero-marginal-cost society is realized. Thus, it is expected to implement a sharing economy that reorganizes most parts, such as energy, residence, and automobile logistics, based on access from ownership (Rifkin, 2014, p. 389; Sundararajan, 2013; Weitzman, 1985).
However, for OIES, the dynamics of the three sub economic systems are cyclical shown in Fig. 2. An economic system in which the dynamics of OIES actively occur can evolve and continuously create new jobs without the stagnation of growth. Thus, the growth limits of capitalism can be overcome when the dynamics of OIES actively occur based on the interconnection between the three sub economic systems. In this case, first, creative start-ups and SMEs of the open innovation economy are provided to the closed innovation economy in open and innovative ways like M&A, technology licensing, or open platform so that big businesses can continuously perform new combinations in a short period for continuous job creation. Second, virtuous big businesses of the closed innovation economy distribute wages and take on a sufficient tax burden through large scale employment. They continuously support the social innovation economy in an indirect way through this or in a direct way through voluntary contributions. Third, the social innovation economy plays a decisive role in the formation and development of a market by nurturing the social enterprises and social values created through the creative and newly open combination between technology and society. That is, social innovation economy actively provides the seed for open innovation which is a new combination between creative technology and the market in the dynamics of OIES.
Interactive relations in OIES
Companies in the open innovation economy are transferred to the closed innovation economy through mergers and acquisitions (M&A), and they get the opportunity to mass-produce new business models for a short period. In not product but also service industries, open innovation based on customers, platform, R&D centers, or others are popular in SMEs, start-ups, or even Multinational enterprises (MNEs) right now (Della Corte, Iavazzi,& D’Andrea, 2015; Han & Cho, 2015; Patra & Krishna, 2015). In open Innovation economy, diverse and heterogeneous technologies or expectations can lead to new creative combination between technology, and market which is the source of interaction with closed innovation economy (Lee and Lee, 2015). Nowadays, innovative city itself becomes the open innovation platform at which interactions between SMEs or Start-ups, and big businesses are increasing (Inkinen, 2015; Pancholi, Yigitcanlar, & Guaralda, 2015). Large companies of the closed innovation economy can easily and rapidly perform a new combination between technology and market through corporate venture capital (CVC) investment. Various virtuous interconnected relations, including the M&A in Fig. 3, are important factors for the activation of the dynamics of an open innovation economic system. For example, Apple bought about 20 technical companies related to smartphones through M&A, and opened the App Store to have a partnership with many SMEs around the world to enter into the smartphone industry for a short time and created millions of employment opportunities. Google also entered into the smartphone industry for a short time period through M&A with about 10 SMEs and start-ups like Android OS companies to create more new jobs around the world, specifically in the US. IBM changed itself as a software company from a manufacturing company through positive M&A with promising SMEs and start-ups. It achieved a new combination between technology and market, which is different from the existing computer industry, and created new jobs that replace the presently declining industry. SMEs and the large companies of Silicon Valley in the US that joined the Corporate Business Model Innovation Program of UC Berkeley confirmed the pursuit of mutual interests based on virtuous interactive relations described in Fig. 3. Large multinational corporations (MNCs) of the closed innovation economy basically apply various open innovation strategies for relations between SMEs and start-ups (Mortara & Minshall, 2014).
The closed innovation economy and the social innovation economy described in Fig. 4 are the core of corporate social responsibility (CSR). In particular, in terms of the relations between a big business and a local society as well as between a big business and a government, large companies should consider social and environmental interests and voluntarily cooperate with stakeholders for their sustainable survival (Crowther & Aras, 2008; Jones 1980). Big businesses of the closed innovation economy directly and indirectly support the social innovation economy. Through this process, a big business directly gets a social reputation, which is essential for its long-term survival and indirectly benefits from the final marketization of the value created in an open innovation economy by social enterprise. Increase of brand value of big business give positive effect for big business to support social innovation directly (Lee & Workman, 2015). The relation described in Fig. 4 gives the direct benefit of securing potential customers to large companies and contributes to various and continuous production of social value in a social innovation economy. In addition, it continuously allows new combinations between technology and market, which are essential for the survival of large companies. The increasing number of companies known for their hard-nosed approach to businesses, such as Google, IBM, Intel, Johnson & Johnson, Nestle, Unilever, and Walmart, have begun to embark on important shared value initiatives (Porter & Kramer, 2011). The simple macroeconomics of profit-sharing possesses natural immunity to stagnation (Weitzman, 1985) (Fig. 5). Green economy can become the interaction between Closed Innovation sub economy and Social Innovation sub economy (Cooke, 2015).
In a social innovation economy, social enterprises create social values by combining technology,and society, which becomes a source of new combination between creative technology and the market. Social innovation is normally based on social responsibility, social capital, or social entrepreneurship (Kim & Jung, 2015). But, open social innovation functionally can be defined as open combination between technology and society. Open Social Innovation (OSI) is the application of either inbound or outbound open innovation strategies, along with innovations in the associated business model of the organization, to social challenges (Chesbrough & Di Minin 2014). Meanwhile, many SMEs and start-ups of the open innovation economy try to join the social innovation economy with their experience and know-how and become a major supply source of knowledge, know-how, and manpower for the social innovation economy. In the open innovation economy, the creative source of new or shifting start-ups through the new combination between technology and the market is based on the social innovation economy. The increased web accessibility of social innovation sub economy has motivated the interaction between theses 2 sub economies (Noh, Jeong, You, Moon, & Kang, 2015). In addition, even if the social innovation economy is financially supported by the closed economy, the actual manpower, know-how, and experience are supported from the open innovation economy. The case of the 8th National Biennial Grassroots Innovation Awards of India, which was identified through participant observation, is exactly similar. All 41 winners, including the three student award winners, were supported with manpower, patent application, product development, and market sales know-how beyond the social type from the open innovation economy, such as the honey Bee Network. They were also financially supported from the closed innovation economy like the National Innovation Foundation of India. This action has vitalized the social innovation economy. If both economies configure the innovation community with a flat and open collaboration network, the most active collaboration can be realized. In the case of India, the role is played by the Honey Bee Network (Pisano & Verganti, 2008). The interaction between Social Innovation sub economy and Open Innovation sub economy will be activated by the increased chances of demand articulation in open social innovation (Kodama & Shibata, 2015). For example RFID which had been used at defense, security, environmental applications, is moving to market area such as transportation, healthcare, agriculture through demand articulation (Jung & Lee, 2015).
Theoretical roots of OIES
First, the theoretical reason for the relation among the open innovation economy, its closed innovation, and the social innovation economy can be found in the innovation and economy development through the new combinations of Schumpeter as well as in the open innovation for the open connection between technology and the market and the open business model for the open combination of Chesbrough. To produce other things or the same things using a different method means to combine these materials and forces in various ways. This is called a “new combination” (Schumpeter, 1934, p. 65). Innovation combines factors in a new way or carries out new combinations (Schumpeter, 1939, p.84). In addition to this, entrepreneurs carry out innovations (Schumpeter, 1939, p.100). Open innovation means that valuable ideas can come to a company and the market both internally or externally (Chesbrough, 2003, p. 43). In addition, a business model serves as an intermediate construct that links those technical and economic domains (Chesbrough, 2003, p. 69). The knowledge economy, the open connection in an open innovation and the open combination in the open business model of technology and market, is the driving force of new start-ups and creative value creation (Chesbrough, 2010).
Second, the theoretical framework of big businesses based on the closed innovation economy is Schumpeter’s Monopolistic Practices, Closed Season, and Corporate Social Responsibility, as well as the theory of partnered growth of Un-Chan Chung and Jang-Woo Lee. If big businesses continuously pursue monopolistic behaviors and closed strategies, investment opportunities will vanish (Schumpeter, 1942, pp. 87, 111). In addition, if large companies directly and indirectly support the social innovation economy and creating shared value (CSV), it is essential to guarantee corporate social responsibility (CSR) for long-term survival (Holme & Watts, 1999; Porter & Kramer, 2011). The theory of partnered growth, which handles the win-win growth strategy and partnered growth between SMEs that represents the open innovation economy and big businesses that represent the closed innovation economy, also serve as the theoretical basis for a mutual, virtuous, cyclical relation between the open innovation economy and the closed innovation economy (Won-Chan 2013, p. 226; Jang-Woo Lee, 2011, p.15).
Third, the theoretical basis of social innovation economy is Schumpeter’s Socialist Blueprint, Ostrom’s Governing the Commons and Sharing Economy or CSV. Socialist management would be able to start from a system of values that have evolved because of their capitalist predecessors (Schumpeter, 1942, p. 172). With the development of the Internet, marginal cost approaches zero, and the sharing social innovation economy emerges in automobiles, homes, and energy fields. The social blueprint of Schumpeter is partially being realized. Lastly, the shared economy offers a happier life, more money, more flexible lifestyle, reduced reliance on debt, and more trust in strangers as the subjects of the sharing economy that creates sharable value to essentially give benefits to them (Benkler, 2004). According to Ostrom, common pool resources (CPR) could be managed successfully without falling as prey to the “tragedy of the commons” through the design of durable, cooperative institutions that are organized and governed by the resource users (Ostrom, 1990, p. 25). Social open innovation based on the open combination between technology and society receives direct and indirect support from big businesses based on CSR and CSV. In addition, the interaction between the social innovation economy and open innovation is actually based on CSV.
Fourth, the dynamics of OIES has various theoretical bases. 1.) The theoretical base of the dynamics of OIES comes from Schumpeter. The dynamics of OIES basically complements the one-way, three-step discussion on dynamics like Schumpeter’s individual entrepreneur based new combination, big businesses based monopolistic practices, and socialist blueprint based on socialist democracy by changing it to simultaneous and feedback loop-style dynamics (Schumpeter, 1934, p. 59; 1939, p. 65–106; 1942, p. 87, 172, 232). 2.) Simon’s bounded rationality defines organizational learning beyond personal recognition and offers a theoretical basis for the dynamics of OIES as well as his organizational dynamics (Simon, 1982; Simon, 1991). 3.) The discussion on dynamics capability in a company suggested by Teece is the basis of the dynamics of OIES centered on the learning dynamics at the basic organizational level (Teece, Pisano, & Shuen, 1997). 4.) Christensen’s discussion to find the industrial dynamics based on the viewpoint of open innovation and Kong Rae Lee’s research inquiring about the innovation dynamics of the Japanese machine tools industry with users collectively forming the theoretical basis of OIES dynamics because they analyzed open innovation based on economic dynamics (K. R. Lee, 1996). Industrial dynamics must increasingly be conceived in terms of convergence and divergence rather than industry-bounded trajectories by open and industry-transcending patterns of innovations (Christensen, 2014; Christensen, Olesen, & Kjær, 2005). 5.) Linsu Kim’s theory, which suggests organizational learning through catch-up growth and the dynamics of Korea’s technological learning through innovative imitation, is also an important theoretical basis of the dynamics of OIES (Kim, 1997, 1998). 6.) Keun Lee's and Chaisung Lim's discussion on the learning and dynamics of Korean industry through catch-up is the basis of the dynamics of open innovation (K. Lee & Lim, 2001). They introduce the external base by adding knowledge-based learning and industrial dynamics through catch-up growth with an internal base and by explicitly applying the open innovation-based industrial dynamics to the catch-up model. For the effect of open innovation policy on the National Innovation System (NIS), the inquiry about the dynamics of open innovation at the national level through system dynamics is also matched with the theory of the dynamics of OIES (Yun, Won, Hwang, Kang, & Kim, 2015).