THE SOURCES OF INNOVATION - MIT

1 THE SOURCESOF INNOVATIONTHE SOURCESOF INNOVATIONEric von HippelNew York OxfordOxford University Press1988 Oxford University PressOxford New York TorontoDelhi Bombay Calcutta Madras KarachiPetaling Jaya Singapore Hong Kong TokyoNairobi Dar es Salaam Cape TownMelbourne Aucklandand associated companies inBeirut Berlin Ibadan NicosiaCopyright 1988 by Eric von HippelPublished by Oxford University Press, Inc.,200 Madison Avenue, New York, New York 10016 Oxford is a registered trademark of Oxford University PressAll 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 of Congress Cataloging-in-Publication DataHippel, Eric SOURCES of Technological innovations-Economic 1988 338'.

2 06 86-28620 ISBN 0-19-504085-6 Figures and are reprinted from Eric von Hippel,"The Dominant Role of Users in the Scientific Instrument INNOVATION Process,"Research Policy, July 1976, Vol. 5, No. 10 9 Printed in the United States of Americaon acid-free paperDedicated to:ARvHDvHJRJACKNOWLEDGEMENTSThe research reported on in this book spans a period of twelve years. In thattime I have been helped by many colleagues, students, innovators, and re-search sponsors. I have striven to make the research and this book worthy ofthe generous help I have been would like to thank Thomas Allen, Anne Carter, Zvi Griliches, Ken-ichiImai, Ralph Katz, Edwin Mansfield, Richard Nelson, Ikujiro Nonaka, ArielPakes, Richard Rosenbloom, and Roy Rothwell for giving me many valuablecomments as the research 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 prominent among these are.

3 John Becker, Alan Berger, JulianBoyden, 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, KiyonoriSakakibara, Stephen Schrader, Frank Spital, Heidi Sykes-Gomez, PieterVanderWerf, and Walter Yorsz. All contributed greatly to the substance ofthe work and to the sheer fun of the years my students and I have interviewed hundreds of were the developers of the important innovations we studied, whileothers had less direct knowledge. Many loaned us materials and all strove tohelp us to accurately understand their industries and their INNOVATION -relatedexperiences. Thanks to research I report on here would not have been possible without fundingfrom the Division of Policy Research and Analysis of the National ScienceFoundation.

4 Alden Bean, Miles Boylan, Andrew Pettifor, Rolf Piekharz,Eleanor Thomas, and anonymous peer reviewers supported my work over theyears with a series of grants, despite budgets for extramural research thatsometimes dropped perilously near , I would like to thank Jessie Janjigian, who edited my manuscript andtried, with partial success, to teach me that respectable sentences can be lessthan a paragraph long, and that they need not include dashes-for , Massachusetts EvHOctober 1987 CONTENTS1 Overview 3 The Functional Source of INNOVATION 3 Variations in the Source of INNOVATION 4An Economic Explanation 5 Understanding the Distributed INNOVATION Process:Know-how Trading Between Rivals 5 Managing the Distributed INNOVATION Process: Predicting andShifting the SOURCES of INNOVATION 6 Implications for INNOVATION Research 7 Implications for INNOVATION Management 8 Implications for INNOVATION Policy 92 Users as Innovators 11 The SOURCES of Scientific Instrument Innovations 11 The SOURCES of Semiconductor and Printed Circuit BoardAssembly Process Innovations 19 The User-Dominated INNOVATION Process 253 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.

5 Process Equipment UtilizingIndustrial Gases and Thermoplastics 38 Additional Evidence on Nonmanufacturer INNOVATION 404 The Functional Source of INNOVATION as an EconomicPhenomenon 43 The Hypothesis 43 Necessary Preconditions 44 Patents and Licensing 47 trade secrets and Licensing 545 Testing the Relationship Between the Functional Sourceof 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 706 Cooperation Between Rivals: The Informal Tradingof Technical Know-how 76 Informal Know-how Trading 76 Case Study: Informal Trading of Proprietary Process Know-howBetween Steel Minimill Producers 77An Economic Explanation for Know-how Trading 85 Informal Know-how Trading in Context 88 Discussion 907 Shifting the Functional Source of INNOVATION 93 Nature of the Test 93 The Test 95 Commercial Value of User-Developed Innovations 96 Summary 998 Predicting the Source of INNOVATION : Lead Users 102 Root of the Problem: Marketing Research Constrained byUser Experience 102 Lead Users as a Solution 106 Testing the Method 108 Discussion 1159 Epilogue.

6 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 ContentsxReferencesAppendix: INNOVATION HistoriesIntroductionData Set forData Set forData Set forData Set forData Set forData Set forScientific Instrument- InnovationsSemiconductor Process InnovationsPultrusion Process Machinery Innovationsthe Tractor ShovelEngineering PlasticsPlastics AdditivesIndexContentsxi12 31311311331631821881951992091 OverviewIt has long been assumed that product innovations are typically developed byproduct manufacturers. Because this assumption deals with the basic matterof who the innovator is, it has inevitably had a major impact on INNOVATION -related research, on firms' management of research and development, and ongovernment INNOVATION policy.

7 However, it now appears that this basic as-sumption is often this book I begin by presenting a series of studies showing that thesources of INNOVATION vary greatly. In some fields, INNOVATION users developmost innovations. In others, suppliers of INNOVATION -related components andmaterials 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 innovationoccurs 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 theinnovation process as predictably distributed across users, manufacturers,suppliers, and Functional Source of InnovationMost of the studies in this book use a variable that I call the functional sourceof INNOVATION .

8 This involves categorizing firms and individuals in terms of thefunctional relationship through which they derive benefit from a given prod-uct, process, or service INNOVATION . Do they benefit from using it? They areusers. Do they benefit from manufacturing it? They are manufacturers. Dothey benefit from supplying components or materials necessary to build or usethe INNOVATION ? They are suppliers. Thus, airline firms are users of aircraftbecause the benefit they derive from existing types of aircraft-and the bene-fit they would expect to derive from innovative aircraft as well-are derivedfrom use. In contrast, aircraft manufacturers benefit from selling aircraft, and3 The SOURCES of InnovationTABLE 1-1. Summary of Functional Source of INNOVATION DataInnovation Developed byInnovation Type NAa TotalSampled User Manufacturer Supplier Other (n) (n)Scientific instruments 77% 23% 0% 0% 17 111 Semiconductor and printedcircuit 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 20aNA = number of cases for which data item coded in this table is not available.

9 (NA cases excluded fromcalculations of percentages in table.)they would expect to benefit from an innovative airplane product by increas-ing their sales and/or 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 examininginnovations in aircraft, we would consider Boeing to have the functional roleof manufacturer in that context. But if we were considering innovations inmetal-forming machinery, that same firm would be categorized as a functional relationships can exist between innovator and innovationin addition to user, supplier, and manufacturer. For example, firms and indi-viduals can benefit from innovations as INNOVATION distributors, insurers, andso forth.

10 As we will see later in this book, any functional class is a potentialsource of INNOVATION under appropriate in the Source of InnovationNovel ways of categorizing innovators are only interesting if they open theway to new insight. The first clue that the functional source of INNOVATION is apotentially exciting way to categorize innovators comes with the discoverythat the source of INNOVATION differs very significantly between categories ofinnovation. Consider the several categories of INNOVATION my students and Ihave studied in detail over the past several years (Table 1-1). In each studysummarized in Table 1-1 the innovator is defined as the individual or firmthat first develops an INNOVATION to a useful state, as proven by documented,useful the really striking variations in the functional source of innovationbetween the several INNOVATION categories studied.