Consumer Communities Make Innovation Take Off
In the first chapter of the Wealth of Nations, Adam Smith, the father founder of economics, felt the need to state that "... all the improvements in machinery, however, have by no means been the inventions of those who had occasion to use the machines." According to Adam Smith, they were also made by the "makers of machines." He could then develop his argument that specialization in "making the machines" was the essence of division of labor. In fact, the term "however" suggests that he was going against the common wisdom of his readers, which was that inventions were typically made by the users of machines.
Today we have gone a long way since Adam Smith. The specialization that he predicted has taken place to a large scale, and the makers of machines produce many innovations. However, and it is now my turn to use the term "however", not only have the users made many innovations, but the rise of new technologies has eased their ability to make their innovations. Computer-aided design and manufacturing (CAD-CAM), the miniaturization of powerful technologies (e.g. computers) or manufacturing tools (e.g. 3D printers) have eased users' ability to design their objects, technologies (e.g. software), or ideas. Moreover, the web has enabled users to communicate and share among themselves ideas, technologies, and designs on a large scale, giving further impetus to innovation.
Examples abound. Lego has realized that users were able to create original objects, and has helped to found communities of users from which they license new ideas of Lego toys or designs. Arduino, an open source chip maker, nurtures a community of users that runs projects that improve and diffuse its technologies. Facebook has launched the Open Compute Project in which companies and individuals share new technologies for making efficient hardware and data centers. These communities are extensive, and survey data indicate that individual consumers who tinker and innovate with their products are in the order to a few millions in countries like the UK, the US, and Japan. Of course, the quality and quantity of user contributions to innovation is even larger if we consider the innovations of user firms.
The thurst of these examples is that open collaborations between users and producers has become a diffused mode of innovation. But how does it compare to the close innovation mode that permeated the XX century? The upside of openness is that firms benefit from the ideas and contributions of others. The downside is that they cannot prevent others from using their ideas.
Christina Raasch, Eric Von Hippel, and I developed a paper that shows that when the community of users that contribute to the innovation is large enough, the inputs that firms receive from participating in an open innovation projects justify the loss implied by the fact that users can use these ideas to produce competing products. In more recent research we show that the same applies to open projects in which both users and competitor firms participate.
A large open community produces a larger cake, and the share that each firm enjoys can be larger than the entire cake that each firm can produce by itself. In addition, the paper shows that society benefits from openness because it produces more innovations than the close model. It also shows that policies that support open collaborations favor this opportunity, while policies that provide incentives for the traditional research investments of firms encourage them to go back to the close mode. These incentives raise firm profits, but the closer innovation mode that ensues from it implies that society enjoys fewer innovations and less welfare.