THE SOURCES OF INNOVATION THE SOURCES OF INNOVATION Eric von Hippel New York Oxford Oxford University Press 1988 Oxford University Press Oxford New York Toronto Delhi Bombay Calcutta Madras Karachi Petaling Jaya Singapore Hong Kong Tokyo Nairobi Dar es Salaam Cape Town Melbourne Auckland and associated companies in Beirut Berlin Ibadan Nicosia Copyright 1988 by Eric von Hippel Published by Oxford University Press, Inc., 200 Madison Avenue, New York, New York 10016 Oxford is a registered trademark of Oxford University Press All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Library of Congress Cataloging-in-Publication Data Hippel, Eric von. The sources of innovation.
Technological innovations-Economic aspects.2 are reprinted from Eric von Hippel, "The Dominant Role of Users in the Scientific Instrument Innovation Process," Research Policy, July 1976, Vol. 8 10 9 Printed in the United States of America on acid-free paper Dedicatedto: ARvH DvH JRJ ACKNOWLEDGEMENTS The research reported on in this book spans a period of twelve years. In that time I have been helped by many colleagues, students, innovators, and re- search sponsors. I have striven to make the research and this book worthy of the generous help I have been given.
I would like to thank Thomas Allen, Anne Carter, Zvi Griliches, Ken-ichi Imai, Ralph Katz, Edwin Mansfield, Richard Nelson, Ikujiro Nonaka, Ariel Pakes, Richard Rosenbloom, and Roy Rothwell for giving me many valuable comments as the research proceeded. I have been fortunate to have had a number of very talented visiting schol- ars and graduate students join me in research and discussion over the years. Especially prominent among these are: John Becker, Alan Berger, Julian Boyden, Alan Drane, Abbie Griffin, David Israel-Rosen, Andrew Juhasz, Toshihiro Kanai, Susumu Kurokawa, Walter Lehmann, Howard Levine, Wil- liam Lionetta, Gordon Low, Richard Orr, Barbara Poggiali, Kiyonori Sakakibara, Stephen Schrader, Frank Spital, Heidi Sykes-Gomez, Pieter VanderWerf, and Walter Yorsz. All contributed greatly to the substance of the work and to the sheer fun of research.
Over the years my students and I have interviewed hundreds of people. Some were the developers of the important innovations we studied, while others had less direct knowledge. Many loaned us materials and all strove to help us to accurately understand their industries and their innovation-related experiences. Thanks to all.
The research I report on here would not have been possible without funding from the Division of Policy Research and Analysis of the National Science Foundation. Alden Bean, Miles Boylan, Andrew Pettifor, Rolf Piekharz, Eleanor Thomas, and anonymous peer reviewers supported my work over the years with a series of grants, despite budgets for extramural research that sometimes dropped perilously near zero. Finally, I would like to thank Jessie Janjigian, who edited my manuscript and tried, with partial success, to teach me that respectable sentences can be less than a paragraph long, and that they need not include dashes-for emphasis. Cambridge, Massachusetts EvH October 1987 CONTENTS 1 Overview 3 The Functional Source of Innovation 3 Variations in the Source of Innovation 4 An Economic Explanation 5 Understanding the Distributed Innovation Process: Know-how Trading Between Rivals 5 Managing the Distributed Innovation Process: Predicting and Shifting the Sources of Innovation 6 Implications for Innovation Research 7 Implications for Innovation Management 8 Implications for Innovation Policy 9 2 Users as Innovators 11 The Sources of Scientific Instrument Innovations 11 The Sources of Semiconductor and Printed Circuit Board Assembly Process Innovations 19 The User-Dominated Innovation Process 25 3 Variations in the Functional Source of Innovation 28 Users as Innovators: Pultrusion 28 Manufacturers as Innovators: The Tractor Shovel 30 Manufacturers as Innovators: Engineering Thermoplastics 32 Manufacturers as Innovators: Plastics Additives 34 Suppliers as Innovators 35 Supplier/Manufacturers as Innovators: Wire Termination Equipment 36 Suppliers as Innovators: Process Equipment Utilizing Industrial Gases and Thermoplastics 38 Additional Evidence on Nonmanufacturer Innovation 40 x Contents 4 The Functional Source of Innovation as an Economic Phenomenon 43 The Hypothesis 43 Necessary Preconditions 44 Patents and Licensing 47 Trade Secrets and Licensing 54 5 Testing the Relationship Between the Functional Source of Innovation and Expected Innovation Rents 57 Five Empirical Tests 57 Pultrusion Process Machinery: Innovation and Innovation Rents 60 The Tractor Shovel: Innovation and Innovation Rents 63 Engineering Plastics: Innovation and Innovation Rents 66 Process Equipment Utilizing Industrial Gases and Thermoplastics: Innovation and Innovation Rents 68 Conclusions and Discussion 70 6 Cooperation Between Rivals: The Informal Trading of Technical Know-how 76 Informal Know-how Trading 76 Case Study: Informal Trading of Proprietary Process Know-how Between U.
Steel Minimill Producers 77 An Economic Explanation for Know-how Trading 85 Informal Know-how Trading in Context 88 Discussion 90 7 Shifting the Functional Source of Innovation 93 Nature of the Test 93 The Test 95 Commercial Value of User-Developed Innovations 96 Summary 99 8 Predicting the Source of Innovation: Lead Users 102 Root of the Problem: Marketing Research Constrained by User Experience 102 Lead Users as a Solution 106 Testing the Method 108 Discussion 115 9 Epilogue: Applications for Innovation Management 117 Identifying an Innovation Process Role 117 Organizing for an Innovation Process Role 118 The Distributed Innovation Process as a System 120 Contents xi References 12 3 Appendix: Innovation Histories 131 Introduction 131 Data Set for Scientific Instrument- Innovations 133 Data Set for Semiconductor Process Innovations 163 Data Set for Pultrusion Process Machinery Innovations 182 Data Set for the Tractor Shovel 188 Data Set for Engineering Plastics 195 Data Set for Plastics Additives 199 Index 209 1 Overview It has long been assumed that product innovations are typically developed by product manufacturers. Because this assumption deals with the basic matter of who the innovator is, it has inevitably had a major impact on innovation- related research, on firms' management of research and development, and on government innovation policy. However, it now appears that this basic as- sumption is often wrong. In this book I begin by presenting a series of studies showing that the sources of innovation vary greatly.
In some fields, innovation users develop most innovations. In others, suppliers of innovation-related components and materials are the typical sources of innovation. In still other fields, conven- tional wisdom holds and product manufacturers are indeed the typical innova- tors. Next, I explore why this variation in the functional sources of innovation occurs and how it might be predicted.
Finally, I propose and test some implica- tions of replacing a manufacturer-as-innovator assumption with a view of the innovation process as predictably distributed across users, manufacturers, suppliers, and others. The Functional Source of Innovation Most of the studies in this book use a variable that I call the functional source of innovation. This involves categorizing firms and individuals in terms of the functional relationship through which they derive benefit from a given prod- uct, process, or service innovation. Do they benefit from using it? They are users.
Do they benefit from manufacturing it? They are manufacturers. Do they benefit from supplying components or materials necessary to build or use the innovation? They are suppliers. Thus, airline firms are users of aircraft because the benefit they derive from existing types of aircraft-and the bene- fit they would expect to derive from innovative aircraft as well-are derived from use. In contrast, aircraft manufacturers benefit from selling aircraft, and 3 4 The Sources of Innovation TABLE 1-1.
Summary of Functional Source of Innovation Data Innovation Developed by Innovation Type NAa Total Sampled User Manufacturer Supplier Other (n) (n) Scientific instruments 77% 23% 0% 0% 17 111 Semiconductor and printed circuit board process 67 21 0 12 6 49 Pultrusion process 90 10 0 0 0 10 Tractor shovel-related 6 94 0 0 0 16 Engineering plastics 10 90 0 0 0 5 Plastics additives 8 92 0 0 4 16 Industrial gas-using 42 17 33 8 0 12 Thermoplastics-using 43 14 36 7 0 14 Wire termination equipment 11 33 56 0 2 20 aNA = number of cases for which data item coded in this table is not available. (NA cases excluded from calculations of percentages in table.) they would expect to benefit from an innovative airplane product by increas- ing their sales and/or profits. Of course, the functional role of an individual or firm is not fixed; it de- pends instead on the particular innovation being examined. Boeing is a manu- facturer of aircraft, but it is also a user of machine tools.
If we were examining innovations in aircraft, we would consider Boeing to have the functional role of manufacturer in that context. But if we were considering innovations in metal-forming machinery, that same firm would be categorized as a user. Many functional relationships can exist between innovator and innovation in addition to user, supplier, and manufacturer. For example, firms and indi- viduals can benefit from innovations as innovation distributors, insurers, and so forth.
As we will see later in this book, any functional class is a potential source of innovation under appropriate conditions. Variations in the Source of Innovation Novel ways of categorizing innovators are only interesting if they open the way to new insight. The first clue that the functional source of innovation is a potentially exciting way to categorize innovators comes with the discovery that the source of innovation differs very significantly between categories of innovation. Consider the several categories of innovation my students and I have studied in detail over the past several years (Table 1-1).
In each study summarized in Table 1-1 the innovator is defined as the individual or firm that first develops an innovation to a useful state, as proven by documented, useful output. Note the really striking variations in the functional source of innovation between the several innovation categories studied. Major product innovations Overview 5 in some fields, such as scientific instruments, are almost always developed by product users. In sharp contrast, product manufacturers are the developers of most of the important innovations in some other fields, and suppliers in still others (chapters 2 and 3).
An Economic Explanation The observation that the functional source of innovation can vary is interest- ing in itself. But if we can understand the cause(s) of such variation, we may be able to predict and manage the innovation process much better. There are many factors that influence the functional source of innovation. But we need not necessarily understand all of these in order to understand this variable usefully well and to predict the sources of innovation usefully often.
As the reader will see, I propose that analysis of the temporary profits ("eco- nomic rents") expected by potential innovators can by itself allow us to pre- dict the functional source of innovation usefully often (chapter 4). This basic idea will certainly not be a surprise to economists. If it is to be useful in this context, however, certain preconditions must be met,* and expectations of innovation-related profits must differ significantly between firms holding different functional relationships to a given innovation opportu- nity. Since little is known about how firms formulate their expectations of profit from innovation, I have explored this matter in several detailed case investigations (chapter 5).
In all cases studied, it did appear that innovating firms could reasonably anticipate higher profits than noninnovating firms. The reasons for such differ- ences varied from industry to industry. Interesting hints of general underlying principles did emerge, however, and sometimes these were related to the functional relationship between innovator and innovation. For example, users often had an advantage over other types of potential innovator with respect to protecting process equipment innovations from imitators.
(Users often can profit from such an innovation while keeping it hidden behind their factory walls as a trade secret. This option is seldom available to manufacturers and others, who typically must reveal an innovation to potential adopters if they hope to profit from it.