Exploring Market Failures in Open Innovation

There is now considerable empirical evidence demonstrating the innovation and performance benefits that accrue to firms engaging in Open Innovation (OI). Here, we use novel data on micro-businesses to show that the average level of engagement in open innovation falls well below the optimal level, a finding that reflects that of other empirical studies. We identify and examine three market failures which may help to explain this result. These relate to: firms’ lack of understanding of the potential benefits of OI; a lack of information about the capabilities of potential partners; and, a lack of information about the trustworthiness of potential partners. Our findings provide evidence that policy initiatives designed to offset these information failures are likely to increase the range of partners with which firms engage with significant benefits for innovation.