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Patent Management as an Integral Part of Strategizing: The Basics. Rik van Reekum Centre for Business Studies Faculty of Law Leiden University P.O. Box 9520 2300 RA Leiden +31.71.5277751 a.h.vanreekum@law.leidenuniv.nl Introduction This paper provides background information to a course outline on ‘Strategic IP(R) management’. 1 Together, they are the deliverables from a project under that name and were presented to the KVie-congress on the 16th of December, 2005. The course outline is aimed at professionalizing managerial thinking and activity of inventive Small and Medium-sized Enterprises (SME) as well as that of Public Research Organizations (PRO) in patent-intensive sectors. That course outline is not presented here, but the most basic concepts of strategic IP management are. Initiation of this KVie subproject was based on the notion that specialized professions have partial views, based on mono-disciplinary knowledge of either patent law or specific fields of technology. Such knowledge is indispensable in making an operational use of the patent system, but hardly contributes to a more strategic understanding of IP management issues in contexts of competition and/or co-operation. Though multinational corporations (MNC) can organize for the specialized knowledge needed to deal with any IP problem internally as well as externally, SME are highly dependent on external sources in matters they tend to keep internal. And matters of strategic importance are usually considered too delicate to outsource and therefore need to be comprehended and dealt with by SME managers themselves.

Particularly in environments that are characterized by Open Innovation, underutilization of patents poses a business risk. In such high-tech areas as medical and biotechnology, inventions in SME are to a large extent marketed in close co-operation with multinationals to reduce business risks and fully exploit the commercial potential of ‘the subject matter’ of such proprietary technology. Often lacking resources and capabilities for large scale product development, production and marketing, high-tech SME are extra dependent on their external relations. That makes the open approach to innovation even more relevant to technology-driven SME than for their MNC counterparts. So, Open Innovation should not be considered a fad but a structural necessity for innovation success, particularly for inventive SME.2

In this paper we argue for a more strategic view of patents in which economic and organizational issues are considered more dominant than legal and technological ones which are dominant in the operational view of IP management. Because inter-organizational relations are becoming more technology-driven, the role of IP management is changing. A more strategic view of IP management should be considered as a response to increasingly interdependent innovation trajectories involving multiple actors from both the private and public domain of science and technology. And that is the context in which valorization activities take place.3 1 IP and IPR management are here considered complementary in that the ownership of crucial rights results from purposeful managerial interference with the research activities financed by the organization. IPR management is about protecting and exploiting proprietary positions in order to secure and maximize returns on investment. See also table 2. From here on, the term IP management is used referring to both strategic stages of the innovation trajectory, the creation and the exploitation of IP. Later on, the distinction will be refined. 2 See, amongst others, Beije’s contribution on Open Innovation. 3 See, for instance, the contribution of Wubben, Omta, Van Lieshout and Goorden.

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Open Innovation and Intellectual Property The Open Innovation approach produces a paradoxical situation that could lead to misappropriation and underutilization of the opportunities patents provide to inventors. Certainly, many managers in inventive SME feel paralyzed, confused and often uncomfortably dependent on external professionals in the highly specialized, but fragmented world of patents and patenting (Blackburn, 2003). Moreover, patents are generally known in their function of providing protection for the commercialization of inventions, but they are hardly known as a means of:

• appropriating returns to research activity, • providing information about technology positions, • inspiring circum- and inventiveness, • identifying potential partners for co-operation, • building reputation, • securing (corporate) financial arrangements, and − last but not least – • as an incentive to inventive and innovative activity.

Therefore, ‘integral’ in this paper’s title means ‘being an integrated part of corporate, business and functional planning and management’. In other words, we argue for a strategic approach to complement the operational approach that deals with administrative, legal and technological issues, usually in response to environmental pressure or as a ‘dominant logic’.

In many high-tech businesses, patents have become ‘the lifeblood of the company’ as a defining means in competitive as well as in co-operative relations. Patents in the chemical and pharmaceutical industry have long been considered pivotal in competition. Increasingly, this goes for the computer and communications industries as well. Both hardware and software manufacturers, such as IBM, Microsoft, Sony, Philips and NEC, have become the world’s leading patent owners, in terms of their portfolio sizes and annual numbers of patents granted. There are many reasons to consider patents as an integral part of innovation. Technology-driven MNC owe an increasing part of their profits to managerial activity in exploiting IP. Proprietary knowledge is not only transferred internally, but also externally by selling or licensing the IPRs. Often in addition to the traditional strategy of commercialization, where the proprietary knowledge of key technologies is turned into a product to be exclusively marketed and sold by the owner company. These valorization practices have in some cases even been institutionalized as a separate business unit within corporate organization.4 Though gaining returns from IPRs can be considered exemplary for the knowledge economy, the financial contribution of such valorization activity is still relatively small compared to the returns gained through product sales. If an invention has global sales potential, the need for IP exploitation without commercializing the invention themselves, is even more important to high-tech SME. From SME research we know that firms continue to struggle with

• the complexity of formal IP, and conversely the level of ignorance of owner-managers of IP. I.e. those that make strategic decisions (!);

• the perceived costs of engagement with the IP industry (such as patent offices and attorneys); • the perceived ambiguous link between formal IP protection and innovation; • the perceived inability of owner-managers adequately to administer and enforce formal IP laws,

especially when in conflict with larger organizations; and • incongruity between formal, bureaucratic, state-based regulatory systems and those based on

notions of informality, trust and laissez-faire so common in small firms (Blackburn, 2003: 9/10). So, there are many good reasons to deepen the understanding of strategic patent management within inventive as well as innovative SME. The conceptual foundation is laid in this paper which is structured as

4 For example, Philips’ Intellectual Property & Standards unit, administrating and controlling the patent portfolio and licensing programs of the company as a separate profit making entity.

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following. First, the purposes that management can have with patenting will be dealt with in their strategic context. These purposes put the different functions of patents into a managerial perspective. Then, criteria in decision-making that are deemed to be relevant will be introduced. Deliberations concerning the question ‘to patent or not to patent’ are discussed in terms of their strategic value. Connected to this strategic problem is the intra- and interorganizational one of information and communication flows and structures. Creating patent positions then is a completely different kind of managerial and organizational activity than exploiting patent positions. That is the main reason for introducing the conceptual difference between IP management and IPR management. Their connection is expressed in the business strategy. Finally, a few common strategizing concepts are described in terms of the open innovation model and consequences are discussed for valorization purposes and activities (mechanisms).

Purposes and functions Patents are known in fundamentally different qualities, depending on the perspective used in viewing them. For instance, a policy maker will pursue national interests in a patent system that is to stimulate innovative entrepreneurship in the economy, to promote the diffusion of technology in society, and to ‘measure’ something as incomprehensible as progress in a certain knowledge base or ‘National Systems of Innovation’. A manager will be dealing with the patent system as a means to gain competitive advantage. Therefore, he/she will represent the company’s interests in patenting new technology in order to gain the exclusive exploitation and/or commercialization of inventions made.

Of all the previously described functions, protection is usually referred to by practitioners as the one with which the patent owner is most concerned. But there are differences in opinion about what actually is being protected by patents. In this sense, the notion of the life cycle is relevant in making a distinction between the stages of the creation and the exploitation of R&D results. From this perspective, protection is related to the knowledge domain of a firm as well as to the results from it; the physical products that constitute the company’s market domain. Consequently, protection in general relates to the scope of manufacturing and sales and, more indirectly, to the scope of the rivals’ research activities. By definition, patents affect relations between firms. This function of the patent is also reflected in the policy purposes of the patent system, whereby a certain amount of competition is sacrificed in order to induce entrepreneurs to innovate (Kaufmann 1984: 86). However, the notion of a monopoly in this context is common though misplaced since that is a form of market structure of which no examples are known that can be attributed to a single patent. The only strategy that can help building a temporary monopoly is that of being first with a new-to-the-world kind of product, so on a new market. But those market situations are very rare and market dynamics prevents them from becoming structural, if not intervened by government policy. It is people’s technological creativity that almost always prevents the exclusive exploitation of an invention to turn into a monopoly market situation.

Patent protection is referred to when speaking of the competitive advantage with which a company can provide itself by innovating. This primary motivation for conducting industrial research gives rise to two contradictory, but essential managerial purposes: - One should be free to use the results of one’s research, and - One should be able to prevent or license a competitors’ use of one’s invention. In other words, intellectual property decisions are based on both sharing and isolating the information about technical knowledge in the first instance and the returns on the investments made in the second. This inclusion and exclusion of (potential) knowledge are influenced by such means of information dissemination as publication and patenting or such means of information isolation as secrecy. Of course, non-IP strategies are also used, and in less patent-intensive sectors deemed to be much more effective in isolating returns to inventions, such as shorter times-to-market or exclusive contracts with distribution outlets, etc. But here we restrict ourselves to intellectual property.

Publication as soon as the invention is made has the advantage of preventing misappropriation, but the disadvantage is that any competitor is free to use the information, e.g. for further research. If a

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rival makes use of a proprietary invention, it will have to bring research forward to a point at which a new inventive leap is made, insofar as the additional work is intended to result in proprietary positions.

The workshop report of the EIRMA on this subject (1988: 9)5 starts with a statement about the main purpose of filing a patent, which is “to create a legal right that competitors will hold to be of significant commercial value”. This commercial value is ultimately expressed in the firm’s position in a particular product market. Without patents, the innovator would lose his investments in an innovation trajectory to imitators, who would be able to underprice the innovator’s product as a result of much lower investments. So, the protective value of a patent is based on the exclusivity that an inventor has to exploit his invention, either or not by commercializing the invention at his own risk. From a technology-driven company’s viewpoint, other forms of IP protection, such as trade marks, registered designs or copyright are legal instruments to complement patents. The benefits of patenting for a firm are determined mainly by the exclusivity that the patent provides. As mentioned before, in marketing, this exclusivity is devaluated when circumvention and technological diversity in producing functional equivalents generate product differentiation in the targeted market. So, patents should also be considered marketing instruments and elements in an information system on technological development (Granstrand 1990: 1).

Exclusion through patents also defines the operational effect of R&D conducted in innovative companies. In terms of research programs, the allocation of resources in activities yielding existing proprietary knowledge is commercially useless, unless it is expected to eclipse current and anticipated rivals’ positions. That is why in innovative MNC researchers are required to formulate IP prospects as part of plans they produce for resource allocation procedures. Distinctions between key, pivotal and peripheral research results can only be understood in terms of the business strategy when valuing knowledge to build IP strategies on. However, for the absorptive capacity of a research department, it often is an organizational necessity to invest in research activities that seem commercially uninteresting, but need to be undertaken in order to equip the company with the necessary ability to adopt enabling technologies for future products. Consequently, IP management teams need to be able to make the planning connections between the functional strategies of R&D and Marketing.

So, assessing the value of scientific discoveries, immediate research results of even existing new technologies in terms of its commercial potential is first of all a strategic planning problem. The longer the technological horizons, the greater the commercial risks and financial investments needed, the more important patents become in their additional functions, other than protection. From each of the purposes that management can have in actually using the patent in these contexts, a function is derived that we attribute to exploiting the bare ownership of patents. These relations are purely based on logical reasoning and do not represent real-life relations. The logical relation suggested below is based on the perception of the inherent function as intended by the designers of patent systems. In that sense, it is a sort of input to the actual use of the system by the legal subjects it is designed for. The attributed function is to be considered as a sort of output by interpretation which legal subjects give to patents in business. Inherent function Utility purpose Attributed function Incentive Investment Liability Appropriation Positioning Portfolio component Protection Exclusion Asset Dissemination Reputation Performance indicator

Table 1 − A managerial logic of patent functions

5 Based on meetings between December 1986 and October 1987 of 32 patent practitioners from large European companies.

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The utility purposes as defined in the table above are central to the managerial perspective of building a corporate future, i.e. planning, to which patents are instrumental in that on each invention made a multi-disciplinary assessment needs to be made in all relevant strategic contexts.

When a product is protected from imitation by a (large) number of patents, the relationship between a company’s patent positions and market positions can become very complex. Both indicating concepts of interfirm relations are regarded indispensable for understanding successful innovation. Of course, the situation in which any strategy to be chosen is most effective is not immediately obvious. Therefore, management needs criteria to decide on what the most effective way is of protecting and exploiting their technological assets.

Criteria and strategic value Generally, management will want to assess the circumstances, conditions and opportunities in each separate case. And particular cases will be perceived as being different from others. However, there are general principles to be formulated on the basis of changes in the innovation process. One of the most important implications for IP strategy results from technological developments in the innovation process. For instance, appropriability conditions and practical applications in biotechnology are increasingly determined by first mover advantages rather than secrecy and established patent positions (Della Valle et al. 1992: 10). This criterion for innovation success makes human capital a critical variable rather than a requisite for the creation of IP. It stresses the need for a well-organized team of scientists and engineers to exploit an idea effectively and quickly. The tacit knowledge involved outweighs the attention with which management should monitor the exclusivity of articulated knowledge. It favors the best and quickest realization of the innovative potential of an idea in the environment where it was born, rather than to be outsourced or even imitated by rivals. There are many criteria to be taken into consideration in each situation involving the appropriation of results from R&D activities. Related to the alternatives of publishing, patenting or maintaining secrecy, we will discuss a few of the ones mentioned in the EIRMA report (1988: 11-14).

Publishing This will be an issue to SME in cases where they co-operate with such PRO knowledge suppliers as universities and TNO that, from their public domain role, have a different orientation towards patents. Their purpose of filing patents is certainly not commercialization of the invention under their own risk, but exploitation of IP by selling or out-licensing, preferably on a non-exclusive basis to spin-outs and new technology based starters.

Attached to publishing information about a piece of research work is a statement of its copyright. The essential difference between copyright and patent right is that patented products are given commercial applications. Both publishing and patenting bring the idea into the public domain, but the patent right excludes the exploitation of the materialized idea, where publication of the unpatented idea would block the patented commercialization of it. If a rival would want to use the idea, he is forced to elaborate on the idea until he has developed it into a new patentable invention. Management will decide to publish if there is a need, interest or otherwise a willingness to 1. share results with competitors, 2. demonstrate scientific competence, 3. accept it as part of a collaborative contract, or 4. make it a veiled publication (so that a competitor cannot detect the significant value). On the other hand management will decide not to publish if it would 1. give away valuable know-how or 2. interfere with a patent application.

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Increasingly, publishing is considered necessary for building and/or maintaining the image of a science-based organization (be it MNC, SME or PRO!) needed to attract good scientists, obtain peer reviews, and be an attractive partner for co-operative arrangements. Publication of patented inventions can serve product registration and market introduction in the life sciences.

Patenting Generally, patenting is worthwhile when the security obtained from pre-emption and the ability to stop or, otherwise, license competitors using the invention more than compensate for the patenting costs and the disadvantage of disclosing one’s invention to competitors. In other words, a patent’s value is constructed from the benefits obtained from pre-emption, defense and exploitation as opposed to the drawbacks resulting from patenting costs and the harmful effects of disclosure. In more detail, factors to be taken into consideration are: - The likelihood of technical success of the invention. This matter concerns the number and variance in

applications, more than the commercial potential of each of those applications. - The validity of the patent (claims). In a pre-emptive sense, this may relate to technical criteria of

novelty, but in a case of infringement, it may pertain to legal criteria. Even for experts, it is hard to predict what the final decision of patent offices or courts on validity issues will be (EIRMA 1988: 12).

- The scope of the patent. It does not relate to the legal impact of valid claims only, but also to the geographic coverage achieved by foreign applications and/or filings. Patent search activities will outline the importance of this factor in decision-making situations.

- Competitors’ R&D activity. Pre-emption and defense might force competitors to stop similar activities, adjust programs or accept higher risks in continuing them. Such strategic decisions delay competition and, therefore, provide a competitive advantage for the innovator.

- Market conditions. Commercialization volume depends on the possibility of finding substitutes for the patented product, size of the relevant market, pricing opportunities, alternatives of distribution chan-nels, etc.

- Licensing opportunities. A wide geographical coverage of the patent may be exploited by transferring the technology or using the indispensable or added value of the patented invention for competitors’ technology.

- Organizational and managerial control. This point involves the measuring techniques of researchers/departments/business units, inventor’s remuneration, motivation of researchers, project formulation, resource allocation, etc.

The perceived effectiveness of patents may be limited by (Granstrand 1990: 5): - requirements for disclosure that force firms to make too much technical information public; - the fact that competitors can legally invent around patents; and - the case with which patents may be challenged and invalidated. Tendencies of patent authorities6 refraining from verifying the validity of a patent until notified by a challenger seem to favor aggressive patenting practices in which every patentable idea will be patented in order to pre-empt rivaling research. The propensity to patent is a function of expectations, both concerning technological developments and legal developments and competition. Granstrand (1990) reports that the Swedish firms involved in his survey intended to strengthen or were planning to strengthen IP protection as a result of increased (technological) competition, internationalization of economic activities and improved techniques for technological scanning. In Granstrand’s study, indications were found that large firms enforced their secrecy policies by intensifying the control over external communication processes of their research organization and personnel.

6 The Dutch patent law was changed in 1995 introducing a registration based short patent life of 6 years, as a cheaper and quicker alternative for the usual 20 year patent.

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Maintaining secrecy Secrecy plays an important function in the process of innovation both as an alternative to patenting (mainly concerning process inventions) and as a key measure that precedes patent applications. To maintain secrecy, the following practices may be adopted: - secrecy agreements, - restriction of individual computer (network) facilities, - control of access to research facilities, - control of publishing through externally hired investigators, - monitoring key R&D personnel, or - fragmentation of technical information. Starting from the information sources7 that contribute to individual knowledge, control of information flows would theoretically imply managing knowledge. IP management8 is here introduced as an in-creasingly important field of attention that needs to be considered not only as part of corporate strategy, but also as part of organizational and information systems design. As Allen states (1977: 41), “a good proportion of the truly important information generated in an industrial laboratory cannot be published in the open literature because it is considered proprietary and must be protected. But, it will disseminate within the organization and, for this reason, informal information exchange as well as the documentation system of the (parent) organization is an extremely important source of information for the engineer.”

IP management model: creation and exploitation In this section, the time dimension is added using the concepts described in the previous sections. The basis is provided by an analysis of patent functions and the purposes they serve. In doing so, the first environmental factor, the public knowledge base, has been related to the subject of managing knowledge under proprietary conditions.

In the view of IP management, as presented here, two lines of managerial activity, which occur in subsequent stages of the TLC and which are characterized by distinct IP considerations, influence the activities that firms can successfully engage in. The earliest conception and elaboration of ideas under proprietary conditions is what we call the creation of proprietary knowledge. The purpose of this line of managerial activities is to absorb and apply scientific information in order to build a solid in-house knowledge base that fully stimulates inventive activity. This stage includes such actions as • the definition of the core competencies in the corporate organization,9 • technology analysis, • research programming, • resource allocation, • project evaluation, • information technology development, • strategic human resource management, • stimulating IP awareness, • patenting, • publishing, etc.

7 E.g. oral, documented, mechanized, automated. 8 The term IP management is introduced referring to the whole of tasks and issues related to the creation and exploitation of IPRs. The term IPR management is used only when referring to the exploitation of existing IPRs. 9 These definitions are supposed to be based on benchmarked (reputed) strengths and weaknesses of (functional and cross-functional) areas of operation expressed in specific resources, skills, organizational systems, etc.

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The second line of managerial activities referred to above is labeled as the exploitation of proprietary knowledge.10 The purpose of this line of activity is to generate and to employ IPRs. This stage includes such actions in biopharmaceutical innovation as • IPR screening, • outsourcing (clinical) research, • out-licensing, • registration for market approval, • regulatory affairs, • product marketing, • organizing feedback from Post Marketing Survey, • product life extension,11 etc. Managerial control of the creative process is aimed at the maximal utilization of resources and capabilities to gain proprietary positions. Managerial control of the exploitation of these positions is aimed at the utilization of competencies and emerging opportunities in order to gain returns. ‘Creation’ is characterized by the transformation of data into (proto) information into knowledge within the organization. ‘Exploita-tion’ is characterized by the transaction of information between parts of the organization or between part-nering organizations, enabling parties to develop and/or commercialize technology for gain.

Stage Control

Creation Exploitation

Input Resources, capabilities, and technological opportunities

Competences (reputation) and business

Throughput Transformation Transaction Output Proprietary positions ROI Focus Intra-organizational Interorganizational Area (functional) Research Development & marketing Knowledge domain Public Private IP management IPR management

Table 2 − IP strategy stage and subjects of managerial control Reformulating these differences in terms of the life cycle concept, a tentative characterization of managerial control in these subsequent stages of IP strategy formation is depicted in table 2. The creation of opportunities that arise from differences in patent positions between firms and research organizations is what IP management should focus on if it wants to adopt a pro-active approach to its relevant innovation environment. The role that expectations about future technological developments play in determining how a company’s R&D should appropriate technological achievements needs to be assessed. The generation of technical knowledge in this stage is aimed at the creation of patent positions.

of value to IP Ground

Research/NPD Purchasing Manufacturing Marketing

Patent X X X X Proprietary information X X

10 In its materialized form, this stage includes product marketing (in its wide sense of meaning). In an immaterial form, it refers to the buying and selling of technology; patents, patent licenses, technology licenses, brand licenses, etc. 11 For example, franchise extension, patient loyalty (brand recognition), production process and cost reduction, increasing patent depth (protection in more countries), replacement, etc. (Barber 1992).

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Copyright X In-licensing X X X Out-licensing X

Table 3 – IP grounds and their value to related functional areas (Smith & Parr 1994: 279) The attention of management should be on the strategic aspects of technology while the scientists and engineers need to dispose of the information resources that support the development of individual competencies. Consequently, management must be fully aware of the potential of patents for internal management purposes. IP management should be regarded a compilation of functions patents can perform at various levels in the organization. The relevant knowledge domain for ‘creation’ concerns public domain research and research information. The relevant knowledge domain for ‘exploitation’ concerns private domain research conducted in (more or less) competing firms or research institutes. Therefore, a distinction is made between:

• IP management, meaning knowledge management under proprietary conditions. It refers to the creation of knowledge to which potential property rights pertain. It is an aspect of research management. And

• IPR management, meaning the management of proprietary information under commercial conditions (technology transfer). It refers to the exploitation of intellectual property rights. It is an aspect of product (development) management.

IP strategies; factor and product market views Another difference between these stages in the knowledge producing process involves the external input/output relationships. ‘Creation’ relates to input from factor markets by means of in-licensing, supporting university research, attracting graduate researchers, etc. ‘Exploitation’ relates to output concerning product markets by means of marketing, sales, exports, out-licensing (e.g. geographical marketing), etc. This difference can be illustrated referring to what Hax and Majluf (1996: 13) call the mission of the business. From the perspective of technological advantage, this mission constitutes the link between the creation and exploitation of proprietary knowledge. At the same time, it indicates a relation between the managerial levels of corporate and business strategy formation. The choice for the knowledge domain is subject to the corporate choice for a business scope:

Figure 1 – Factor and product market based views of business strategy

Business strategy

Factor markets Product markets

Business scope

(Potential) needs

Resources and capabilities

IP creation Technological scope

IP exploitation

Geographical scope Choosing domain

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In either case, the external environment is of crucial importance in formulating the propositions of IP management because networks of proprietary interests constitute the relations that are a part of this environment. The way management proposes to deal with the relevant innovation environment is, in the main, subject to corporate strategic authority. Therefore, there is a strong relationship between corporate strategy and IP management. Before discussing this point, we will first describe some of the deliberations that result from the different functions patents have and the context in which they need managerial attention. This set of problems and subsequent decisions constitutes the field of IP management.

Considering the creation of proprietary knowledge, internalization of human capital is what the development of specific creative capabilities starts with. Basic research, as an activity which is integral part of biopharmaceutical innovation, has performance characteristics that require an internal environment and management style which do not interfere with the professional activities and choices of scientists (Omta 1995: 232). Intrinsic modes of control seem almost contradictory to conventional modes of control in industrial environments. The most basic problem involved in R&D management concerns the allocation of resources to research and the output from these activities, which are frequently affected by a large number of external factors. As a result, there is an apparent contradiction involved in the appropriability of investments in research characterized by long terms, high risks, externalities, low controllability of results, concomitant problems of accountability of project success and failure, etc. Such factors lead us to conclude that organizational control should be focused on the input of research activity more than on its output. As Goodman and Lawless (1994: 4) conclude, “the essential corporate conundrum then is to align goals among the various functional and technical constituencies.” In studies on management of corporate R&D, empirical research reveals a basic autonomy-control dilemma (e.g. Graham 1986, Hounshell & Smith 1988, Weber & Perkins 1992, Debackere et al. 1996). Debackere, Clarysse & VandeVelde (1996) assume that the outcome of the socialization process during the preceding academic education of the research employee is the primary determinant for the state of the shared values.

Valorization; interaction between the public and private domain of innovation The need of industrial researchers to associate with the academic community is, in this respect, not a result of the science-based nature of − e.g. biopharmaceutical − innovation, but of the socialization process of the individual researcher. Reference to the academic community is expressed in, for instance, the choice of research agendas. In the process of resource allocation, the criteria set in the research program will have to meet business needs as formulated in corporate objectives on the one hand and scientific needs inherently present in the research organization on the other. This way, socialization in the public domain leads to forms of institutionalization in the private domain.

The dilemma concerning IP management is located in between the autonomy of researchers to control their research agenda and the organizational control of the research process in order to generate results that can be exploited as a piece of competitive technology. Goodman and Lawless (1994: 4) label this corporate order as “orchestrating among contending special interests”. The organization of alignment to appropriation targets is in this study qualified as appreciation. Appropriation and appreciation appear as central mechanisms in both stages of IP management: Appropriation in the context of creation will relate to public domain information. Whether external proprietary information can be transformed into internal knowledge will depend on the effectiveness of knowledge management. In the context of exploitation, appropriation will relate to patent licensing, risking non-acceptance of the acquired information by the licensing partner’s researchers (the NIH-syndrome). Reduction of such risk can be attained by influencing the appreciative system. For that reason, Weggeman (1997: 70) defines knowledge as being also the result of attitude.

On the side of the exploitation of proprietary knowledge, a similar dilemma of internalization-externalization exists. First of all, the word exploitation pertains to a patent’s function in market transactions. Regarding the exchange of knowledge in its appropriated form, the object of transaction can either be the patent itself or an associated right that transfers the subject of the right, the idea. Strategically

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related to patents is the license. Patenting must nowadays be considered a prerequisite for the inter-organizational exchange of technical information and knowledge. In-licensing of technical knowledge is considered internalization and, consequently, out-licensing of technical knowledge is considered a form of externalization.12 In-licensing as an intra-organizational activity is not in the first place determined by the patent portfolio but by the knowledge requirements of an R&D program. Purposes vary between enabling ongoing project success and the maintenance of strategic degrees of freedom in innovation. In the latter case, imminent gaps in prospected market positions can be prevented by the early in-licensing of a particular technology. In fact, on the basis of research programs, emergent technologies and patent positions, management creates proprietary positions with the aid of rivaling IP. In some cases firms need to ‘cooperate in order to compete’. And, in order to be an attractive potential partner for this kind of cooperation, innovative companies will have to be willing two-way participants. Paradoxically, the established reputations in certain fields of technology can obstruct the creation of strong proprietary positions in the other fields of technology into which a company has decided to enter. If one has the solid reputation of an innovative company in technology field X, other firms will tend to turn to you if they decide to out-license a piece of X-technology. But they would not do so with a piece of Y-technology, irrespective of any (communicated) intentions you might have to create proprietary and, consequently, market positions in that technology field Y. In that case the firm will tend to approach a competitor with a solid reputation of being an innovator in field Y because that company already possesses strong market positions in that field. Out-licensing should, therefore, be considered the other side of the same coin in competition. Imbalanced licensing policy can work to the detriment of long term innovative capabilities in a particular field of knowledge. In a more direct sense, imbalances can favor a company, but only in the short term. The long-term price that one might have to pay is expressed in the loss of reputation in technology transfer and of opportunities that an external IP could offer to your own program. In a latter stage of the pipeline, product market deliberations become effective in making decisions about licensing policy. As Hill (1992) states, “if the innovator does not out-license new technology, competitors may quickly develop their own, possibly better, version of the technology.” On the other hand, if imitation of the new technology is difficult, by denying its technology to competitors, the innovator may be able to establish a competitive advantage. And if the innovator does out-license its new technology, it runs the risk of losing control over the development of this technology (and, consequently, of losing its competitive advantage). The deliberations concerning a policy’s relation to the relevant innovation environment are in this study qualified as appropriability concerns.

Conclusion and research agenda The knowledge of (Open) Innovation and IP management has predominantly been developed on the basis of practices in large companies (MNC). SME and PRO, however, can benefit from this knowledge, if not for the internal organization of their IP management practice, then certainly for a better understanding of the external organization of open innovation, dealing with such MNC. However, many questions remain open and require additional attention in the form of research. Theoretical research could focus on, for instance:

− Bridging the vast literatures on innovation practices with regard to the differences between MNC, SME and PRO in terms of the conceptual basis proposed here.

− Modeling the organizational mechanisms of the appreciation and appropriation of inventions in general, in order to better understand why so many inventions fail to become innovations.

N.B. Invention literature has largely been focusing on the individual instead of organizational processes. Empirical research could focus on, for instance:

− What are inventive SME owner-managers’ understanding of the IP system? (Blackburn, 2003)

12 If one would study cash flows or contributions to annual turnover, the inverse qualification would apply.

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− What are the inter-industry differences in the relevance and practices of Dutch SME IP management? (based on Blackburn, 2003)

− How are the necessary mechanisms of appreciation and appropriation organized for in both SME and PRO?

− To what extent do differences in opinions about IPR in PRO block or hinder the appreciation and appropriation of inventions?

− To what extent are inventions lost for commercialization to misappropriation practices, particularly in SME and PRO?

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References Allen, T.J. − Managing the Flow of Technology: Technology transfer and the dissemination of

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