Intellectual property: to share or not to share?

Gonçalo Pacheco de Almeida, Professor of Strategy and Business Policy - January 15th, 2012
mechanical brain - intellectual property

Appropriating the new technologies of another company is always beneficial for imitators and detrimental to innovators — right? Actually, neither of those two views is correct, say Gonçalo Pacheco de Almeida and Peter Zemsky. Their research shows that, in certain situations, it is more beneficial for innovators to share than to protect their secrets, and, perhaps even more surprising, that it is wise for imitators to limit the amount of intellectual property they absorb from others.

Gonçalo Pacheco de Almeida ©HEC Paris

Professor Gonçalo Pacheco de Almeida joined HEC Paris in 2011, having previously taught at New York University’s Stern School of Business (United States), the Institut d’Etudes (...)

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“The whole idea behind R&D is to invest time and money in a technology in order to bring it to market to make a profit,” says Pacheco de Almeida. And the window of competitive advantage that exists when a company brings a new technology to market before everyone else is one of the primary incentives for a company to make that investment. So why do some companies, once they have gone to market, freely reveal their research findings (thereby narrowing their window of competitive advantage)? Surprisingly, Pacheco de Almeida’s research shows that, in fact, sharing IP can benefit innovators more than withholding it, and, at the same time, that imitators have reason to limit how much IP they appropriate from others. “It all depends on the amount of IP that is being shared,” he says.


CONCURRENT VERSUS IMITATIVE DEVELOPMENT

Under concurrent development, companies start developing technologies at the same time and do not share any significant IP with each other. Conversely, under imitative development, the innovator completes its development process and goes to market before imitators start – usually either because a company saw an opportunity that others missed, or because imitators are waiting to benefit from the innovator’s research. A significant difference between the two is that there is no race between innovators and imitators to go to market under imitative development. To eliminate the pressure to move fast, therefore, innovators can share just enough IP to encourage followers to adopt imitative versus concurrent development: this is one of the major premises of Pacheco de Almeida’s research. Alternatively, when an innovator excessively limits the access of imitators to their IP, it pushes competitors (who, at that point, do not stand to gain enough to make it worth their while to wait) to switch to concurrent development — to “race.”


TRADE OFF BETWEEN TIME AND COST

When a company brings a technology to market, its flow of profits from the market increases and the profit flow to other companies with the same offering (at least weakly) decreases. In other words, the longer an innovator is the only one on the market, the more revenue it stands to make from a given innovation; put another way, the longer the window of competitive advantage, the more incentive an innovator has to invest in R&D. This constitutes one of Pacheco de Almeida’s primary observations of how timing influences the benefits of a new technology, and it suggests that innovators do in fact have reason to limit the amount of IP they reveal, since the more they reveal, the faster followers will be able to catch up and go to market, too. On the other hand, he points out that the costs of R&D increase relative to the speed at which a company develops a new technology, suggesting that, as well as having incentive to protect IP, innovators also have reason to share it openly, so that imitators will wait for them to finish rather than “racing” them to market.


QUALIFYING THE ESTABLISHED VIEW OF IP

The findings of Pacheco de Almeida reveal that innovators should consider revealing more of their IP than previously thought. By sharing adequate levels of IP, innovators encourage imitative versus concurrent development, which gives them greater control over the timing of new technologies and thus significantly reduces the costs of their R&D. But share too much, and they overly narrow their window of competitive advantage, nullifying any cost savings in R&D. At the same time, imitators should consider restricting how much IP they absorb, because they are better off when innovators have adequate incentive to invest in R&D and then share it with them. In other words, if imitators overly reduce the leader’s incentive by appropriating too much of their IP, they essentially “bite the hand that feeds them,” which, ultimately, works against them.

The research shows that the potential benefits for innovators and imitators of imitative development can go both ways (in fact, must go both ways), and, perhaps even more significantly, that the best interests of innovators and imitators alike are inextricably linked.


Based on an interview with Gonçalo Pacheco de Almeida and the article “Some Like It Free: Innovators’ Strategic Use of Disclosure to Slow Down Competition” (Gonçalo Pacheco de Almeida and Peter B. Zemsky, Strategic Management Journal , 2011)

PRACTICAL APPLICATION
PRACTICAL APPLICATION

To freely share some of their IP (and to publicly indicate this intention), innovators can stop defensive patenting and open up more inventions to competitors via technical papers, the Internet, or industry conferences; patent in countries with weak enforcement of IP protection laws; collaborate on R&D with other companies or build centers close to followers in order to facilitate the leakage of private information. On the other hand, to limit transparently how much IP they appropriate, imitators can choose to operate in different geographical sites than innovators; choose not to align strategy and organization with that of the leader; avoid hiring employees from innovator companies; reduce investments in complementary R&D or in capabilities to reverse engineer the leaders’ products.

METHODOLOGY
METHODOLOGY

Gonçalo Pacheco de Almeida and Peter Zemsky conduct their analysis using a model of the competition since the mid-1980s between a leader company (Intel) and a follower (AMD). The two companies adopted both possible forms of development processes (imitative and concurrent), making this example particularly suited to their analysis.

• Imitative development: Intel starts out by sharing enough of its IP that AMD is content to wait for Intel to go to market before starting its own development processes in order to benefit from inter-firm knowledge spillovers.

• Concurrent development: In 1985, Intel stops sharing IP with AMD, prompting AMD to start development at the same time as Intel.

In conclusion, while Intel was able to maintain its lead over AMD, the researchers find that Intel's decision to protect versus share its IP led to decreased profits from innovations after 1985.