Title: Open vs. integrated innovation
Description: We present a simple formal model to address the question: When is open innovation superior to integrated innovation? Our model has firms with limited visibility that either control all aspects of product innovation (integrated innovation) or open their designs to components developed by other players (open innovation). We show that the desirability of each development method depends on the complexity of product development. With low complexity, both approaches fare similarly. As complexity grows, open innovation becomes increasingly attractive. When complexity is very large, integrated innovation tends to deliver better returns. We show that an open innovation strategy allows the firm to discover combinations of product features that would be hard to envision under integration. Open innovation, however, confines the ability of the firm to establish the product’s technological trajectory. The resolution of the trade-off between discovery and confinement determines the best approach to innovation.