Implications of open innovation for organizational boundaries and the governance of contractual relations

To create value in an open innovation context, firms need to increase the permeability of their organizational boundaries to enable knowledge exchange with a broad set of partners. Yet, in order to capture value, firms also need to consider how to govern their cooperative efforts and prevent unintended knowledge leakage. This paper develops a novel framework for researching this “paradox of openness”, which combines an organizational boundary with a relational contract design perspective. First, we extend prior literature by arguing that value is not only created by optimizing resource bundles through external search processes (i.e. competence boundaries). Instead, value can be created by managing interdependencies with external parties (i.e. power boundaries), aligning open innovation activities with the organization’s identity (i.e. identity boundaries), and coordinating diverse transactions in an open innovation portfolio (i.e. efficiency boundaries). Second, we propose that relational contract design is an important alternative to formal appropriation regimes and discuss how contractual mechanisms derived from a relational perspective can enable value capture in an open innovation context. Finally, we discuss how firms can strategically manage configurations of firm boundaries and contract design via a set of dynamic capabilities.