Is it RIP for R&D?

Henry Chesbrough’s Open innovation suggests that most firms should leave R&D to the specialists.

For decades, firms such as AT&T, with its famous Bell Labs, were fortified R&D castles sitting in a broader R&D landscape that was relatively impoverished.

Now, however, Adobe, Intel and even IBM have shown that there is a different way of operating.

Today, firms increasingly rely on external sources of innovation and invention, says Harvard University’s Henry Chesbrough. This is because the distribution of knowledge has spilled out well beyond the central research labs of a few major firms, to other companies, customers, suppliers, universities, national laboratories, industrial consortia, and start-up firms.

To wide acclaim, Chesbrough has just published a new book, Open Innovation: the New Imperative for Creating and Profiting from Technology, available from Harvard Business School Press.

His argument goes like this: After the American Civil War, and at a faster pace after the Manhattan Project, government-funded R&D institutions grew up outside the R&D-based corporation, and they were funding more R&D than industry until 1985. By then small US firms, along with giant Japanese companies, were responsible for a large proportion of the patents granted in the US, and for a growing proportion of the R&D there.

Today, there is a whole US venture capital industry. If creative engineers don’t like their big-company employers, they leave and join a start-up.

More than half the post-doctorate scientists and engineers in Stanford and MIT hail from outside the US. The result is that vertically-integrated firms can no longer go on doing everything along the value chain and holding on to their intellectual property at all times. They must make a transition to a new, open paradigm of innovation, “based on a landscape of abundant knowledge”.

Research should be about not just knowledge generation, but also knowledge brokering.

Instead of saying “we know best, wait until we’re ready”, firms must make customers co-producers of innovation, and seek a dialogue with them.

They should license new, potentially business-cannibalising technologies to rivals rather than lose the initiative, lose their staff, or see those rivals “find ways of inventing around a firm’s intellectual property”.

Altogether, Chesbrough says, the golden age for in-house R&D is over.

But it seems to me that he has turned a necessity into a virtue. He has made the inability of large US corporations to reap economies of scale in the way they used to, and their increasing reliance on government, small firms and outsiders generally, into something to celebrate.

Chesbrough sees business models as a key part of innovation. Here he praises not Hoon-like abdications of responsibility, but the vagaries of the market: the profit margins to be had on blades rather than razors, or those to be had on leasing arrangements and the like.

It all amounts to sweating existing external intellectual assets, not creating new ones in-house. It is all Dell, and very little Apple. What a mistake.