Can openness enhance a firm’s performance in an economic downturn?

Can openness enhance a firm’s performance in an economic downturn? Cutting the innovation budget may be one of the easiest ways of coping with an economic crisis but evidence from the previous downturns suggest that a strategy of Open Innovation can provide the necessary resilience.

In their article “Dynamic capabilities and economic crises: Has openness enhanced a firm’s performance in an economic downturn?” Joon Mo Ahn, Letizia Mortara and Tim Minshall investigate the dynamic relationship between openness and firm performance with particular consideration of the recent financial crisis in 2008.

Although during the recent economic recession, many firms severely reduced their investment in innovation (OECD, 2009) some highly innovative incumbents and fast-growing new entrants instead increased their innovation investment. Evidence suggests that this has helped them to overcome the challenges of operating in a slow economy.

Additionally, firms actively engaged in collaboration with new external partners displayed an increased organizational flexibility while preserving innovation capabilities for future growth implying that this is an effective approach for coping with an economic crisis.

Open approaches helped Fiat to avoid substantial reduction of R&D and innovation capabilityFor example, Fiat’s core R&D organization, Centro Ricerche Fiat (CRF), did not reduce its internal R&D costs during an economic downturn (1993–2003) but instead selected what knowledge to keep private and what to expose and then shared non-core technologies with external partners to generate additional income. CRF also established long-term strategic partnerships with customers and new partners to diversify the exploitation of their complementary assets. Such open approaches helped Fiat to avoid substantial reduction of R&D and innovation capability that would have impacted negatively the firm in a long term.

The study

It is proposed that an open approach can also increase organizational flexibility by adding new innovation routes. Firms can move onto a new equilibrium point that is more robust against external turbulence and to retain knowledge. This prevents firms from losing its future innovation capability.

To investigate these observations, the authors analysed data from the UK Community Innovation Survey (CIS) panel collected between 2006 and 2012. The study found evidence that supports the positive influence of openness on long-term firm performance. The results show that:

  • Increasing a firm’s openness is an effective way of enhancing its dynamic capability and hence its resilience
  • Collaboration with partners outside the firm’s value chain and with international partners has the highest impact on turnover recovery.
  • Openness increases the chances of acquiring newer knowledge, which in turn will help firms to identify new opportunities to achieve sustainable growth.

The findings of this article have some practical implications for managers and policymakers.

To read the article

Dynamic capabilities and economic crises: Has openness enhanced a firm’s performance in an economic downturn?

Joon Mo Ahn, Letizia Mortara and Tim Minshall

Industrial and Corporate Change, dtx048, https://doi.org/10.1093/icc/dtx048

Published: 27 November 2017

Abstract: https://academic.oup.com/icc/advance-article-abstract/doi/10.1093/icc/dtx048/4662982

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