You're deciding how to approach your next innovation project; should you develop everything in-house, or partner with universities and external specialists? It's one of the most strategic decisions you'll make for your R&D programme.
The innovation model you choose shapes costs, speed to market, IP ownership, and competitive advantage. So which approach serves your business goals?
What is Closed Innovation?
Closed innovation means your R&D happens entirely within your organisation. You develop, test, and commercialise new products or processes using only internal resources and expertise.
This is the traditional model that dominated the 20th century. Companies like IBM, Xerox, and Bell Labs built entire research divisions in-house, keeping everything from initial concepts to final products within their walls. The logic is simple: if you control every aspect of innovation, from idea generation to commercialisation, you maintain competitive advantage through secrecy and self-sufficiency.
This approach emerged partly because academic and government institutions weren't involved in commercial science applications. Companies couldn't wait for external research, so they developed the capability to handle the entire product development cycle themselves. Many organisations still choose this approach today, particularly in industries where secrecy drives competitive advantage.
The Benefits of Closed Innovation
The advantages of keeping R&D in-house include:
- Complete IP control: When all development happens internally, you maintain absolute control over intellectual property. There's no risk of accidental disclosure to partners, no complex licensing agreements, and no ambiguity about who owns what.
- Competitive secrecy: Keeping innovations secret until launch prevents competitors from reacting or copying your approach. In fast-moving markets, the element of surprise can mean the difference between market leadership and playing catch-up.
- Quality control: Direct oversight of every stage means consistent standards and immediate course correction. When problems emerge, you don't need to coordinate with external partners or navigate contractual limitations.
- Faster decision-making: Decisions happen faster when you're not scheduling meetings across multiple organisations or seeking consensus from partners with different strategic objectives.
The Drawbacks of Closed Innovation
The disadvantages of keeping everything in-house include:
- Higher costs: Building and maintaining internal expertise across all specialisms requires substantial investment in staff, equipment, and facilities. For many companies, particularly SMEs, these costs can be prohibitive, limiting the scope and ambition of R&D projects.
- Limited expertise: No organisation can be world-class at everything. Closed innovation means relying only on your internal capabilities, even when external specialists could bring decades of focused expertise to specific challenges.
- Slower development: Developing everything from scratch takes time, especially in rapidly evolving fields where external specialists could accelerate progress. What might take external experts six months could take your team two years as they build knowledge from the ground up.
- Concentrated risk: If an internal project fails, you've invested resources without the safety net of diversified approaches. All your eggs are in one basket, and if that basket breaks, you've lost time, money, and potentially market opportunities.
- Market blindness: Internal teams can become insulated from external trends, missing opportunities or threats that outside collaboration would reveal. When everyone thinks alike and works within the same framework, you risk developing solutions to yesterday's problems.
What is Open Innovation?
Open innovation means collaborating with external partners to develop new technologies and bring them to market. These partners might include universities, research institutions, suppliers, customers, or even competitors. Rather than keeping all R&D internal, you actively seek outside expertise and perspectives.
Henry Chesbrough, adjunct professor at UC Berkeley's Haas School of Business, popularised this approach in the early 2000s. He defined it as "a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as firms look to advance their technology."
More recently, the definition has evolved to recognise that open innovation isn't company-centric. It includes creative consumers and communities of user innovators. The boundaries between a company and its environment have become more permeable; innovations can easily transfer inward and outward between companies and other organisations, impacting consumers, industries, and society.
The shift toward open innovation reflects fundamental changes in how innovation happens. The increasing availability and mobility of skilled workers means expertise isn't trapped within organisations. The growth of venture capital markets provides funding for external innovation. There are now more options for commercialising ideas sitting on the shelf.
Because innovations tend to be produced by outsiders and startup founders rather than existing organisations, companies in a world of widely distributed knowledge can't afford to rely entirely on their own research. Instead, they buy or license processes from other companies (inbound open innovation) or take internal inventions outside through licensing, joint ventures, or spin-offs (outbound open innovation).
Different Models of Open Innovation
Open innovation has evolved into several distinct approaches:
- Inbound and outbound innovation: Inbound means bringing external knowledge into your organisation, such as licensing technology or partnering with universities. Outbound means commercialising your internal innovations externally, through licensing your IP to others or creating spin-off companies. Companies can use both approaches to maximise the value of innovation flowing in and out.
- Product platforming: Organisations release partially developed products or frameworks (such as APIs or SDKs) that external contributors can build upon. This increases functionality and shared value whilst leveraging network effects. The high scalability often results in increased complexity of administration and quality assurance.
- Customer immersion: Companies integrate customers closely into the later stages of product development through extensive customer interaction. This ensures designs and features align with real user needs whilst involving customers more closely in the design process.
- Collaborative product design and development: Firms co-develop products with external contributors whilst retaining control over the final output. This differs from platforming because the hosting organisation still controls and maintains the eventual products developed in collaboration.
- Innovation networks: Structured networks of contributors are incentivised to solve specific technical or process challenges rather than propose entirely new products. This leverages external problem-solving capability for identified issues.
The Benefits of Open Innovation
The advantages of collaborative R&D include:
- Access to specialised expertise: Instead of hiring permanent staff for every specialism, you can partner with world-leading experts for specific projects. A biotech startup can work with university researchers who've spent decades on a particular protein structure, accessing expertise that would be impossible to build internally.
- Shared financial risk: Development costs are split among partners, making ambitious projects feasible that would be prohibitive alone. If a €2 million R&D programme exceeds your budget, sharing costs with two partners makes it achievable.
- Faster time to market: Multiple partners working in parallel accelerates development substantially. What might take you three years internally could happen in eighteen months through collaboration. Research shows companies using open innovation bring products to market significantly faster on average.
- External validation: External partners bring fresh perspectives, challenge assumptions, and help validate commercial viability before you've over-invested. They'll spot flaws in your thinking and suggest alternatives you hadn't considered.
- Funding opportunities: Collaborative projects often qualify for government grants, and EU research programmes that aren't available to solo ventures. These funding bodies actively encourage collaboration, offering larger grants and better terms for partnerships.
- Innovation ecosystem leverage: Open innovation allows you to tap into broader innovation ecosystems, creating network effects where value increases with each additional participant. Digital platforms enable collaboration across boundaries, accelerating knowledge dissemination.
The Drawbacks of Open Innovation
The disadvantages of collaborative R&D include:
- IP complexity: When multiple parties contribute to innovation, determining who owns what becomes complicated. You'll need detailed IP agreements before work begins, and even then, disputes can arise about background IP versus foreground IP. There's also risk that you might lose competitive advantage by revealing intellectual property.
- Knowledge leakage risk: Sharing information with partners always carries some risk of disclosure, either intentional or accidental. Despite non-disclosure agreements, information can leak through casual conversations, conference presentations, or simple carelessness. This possibility of revealing information not intended for sharing is an inherent risk.
- Coordination overhead: Managing multiple partners requires substantial project management resources. Different timelines, priorities, and working cultures need constant alignment. You'll spend significant time coordinating meetings, negotiating compromises, and ensuring everyone stays focused on shared objectives. The increased complexity of controlling innovation and regulating how contributors affect a project can be substantial.
- Loss of control: You can't unilaterally change direction when partners have invested resources and expect certain outcomes. If market conditions shift or you identify a better approach, you'll need partner agreement before pivoting. The addition of perspectives that may contradict your own requires careful management.
- Dependency risk: If a critical partner withdraws or underperforms, your entire project timeline can collapse. You're dependent on organisations over which you have limited control, and their problems become your problems when you're relying on their contributions.
- Integration challenges: Properly identifying and incorporating external innovation requires new capabilities. You need to realign innovation strategies to extend beyond your firm to maximise return from external innovation.
Open Innovation for Startups and SMEs
Open innovation has particular relevance for startups and smaller companies. Although startups tend to have limited resources and experience, they can overcome this disadvantage by leveraging external resources and knowledge.
Startups can work with large companies, incubators, venture capital firms, and higher education systems. Collaborating with these institutions provides startups with the proper resources and support to successfully bring new innovations to market. This levels the playing field, allowing startups to produce innovation comparable to that of large companies.
Government-driven initiatives promote collaboration between businesses, research institutions, and graduates to drive innovation, productivity, and market growth. These programmes aim to deliver significant improvement in business partners' profitability through enhanced quality and operations, increased sales, and access to new markets.
Enterprise Ireland is a great place to start when considering the networks needed for your Open Innovation project.
Which Approach is Right for Your Business?
There's no universally correct answer. The right choice depends on your industry, competitive position, and strategic priorities.
As a general rule, choose closed innovation when IP protection is paramount. For example, defence contractors often can't risk external collaboration. If you have the internal capability and resources, and speed to market is less critical than absolute control, closed innovation protects what makes you unique. Your competitive advantage comes from secrecy, and sharing knowledge with partners would undermine that advantage.
Choose open innovation when you need specialised expertise you don't have. If speed to market is critical and development costs exceed your comfortable investment level, collaboration becomes essential rather than optional. In industries where the standard approach is collaborative, such as AI or quantum computing, trying to go it alone puts you at a severe disadvantage. A tech startup without capital for a full in-house team benefits enormously from university partnerships and collaborative research programmes.
Successful companies increasingly use both models strategically, choosing closed innovation for core differentiators and open innovation for supporting technologies. You might keep your proprietary algorithm secret whilst collaborating with partners on infrastructure, data collection, or peripheral features. This hybrid approach lets you protect what matters most whilst accelerating development through external expertise where it adds value.
The question isn't whether open or closed innovation is better. It's which model serves each specific project. Map your current R&D portfolio and ask yourself which projects must stay internal, and where would collaboration accelerate success without compromising competitive advantage?
How Innovation Models Affect R&D Tax Credits
Whichever innovation model you choose has implications for R&D tax credits.
Closed innovation offers simpler claims. All costs are yours, boundaries are clear, and documentation is straightforward. You're not navigating complex questions about who claims what or how to allocate expenditure between partners. Revenue's compliance requirements are easier to meet when everything happens internally.
Open innovation creates more complex but potentially larger claims. Subcontracted costs, connected party rules, and questions about who claims what require careful consideration. Multiple parties working on the same innovation raise questions about which company initiated the R&D, who bears the financial risk, and how to avoid double-claiming.
Your innovation strategy should drive your choice, not tax considerations. However, understanding the tax implications helps you structure partnerships properly from the start. Proper documentation of collaborative projects matters for Revenue compliance. Clear agreements about who intended the R&D, who owns resulting IP, and how costs are allocated will save you significant hassle when preparing your claim.
If you're working with external partners, document the arrangement clearly from the project's outset. This isn't just about tax compliance; it's about avoiding disputes that could derail your innovation programme. Good documentation serves both your R&D strategy and your tax position.
If you want to understand how your R&D strategy affects your tax position, we can help. Get in touch with our team to discuss your R&D tax credit claim.
