Corporate knowledge spillovers can benefit the original innovators

In this age of heightened intellectual property paranoia, corporate knowledge spillovers are generally considered bad for business. The originating firm’s business, that is.

But they don’t have to be. A study co-authored by Kevin Steensma, a professor of management at the University of Washington Foster School of Business, finds that a company can learn—and profit—from competitors that exploit its intellectual property.

“The prevailing view is that spillovers have only a negative impact on the firm that developed the technology,” Steensma says. “But we are finding that there are gains to be had. The developing firm can learn vicariously from those who exploit its original knowledge—what we call ‘recipient firms.’ When a recipient firm connects the originating firm’s knowledge with other knowledge out there, it provides insight to that originating firm.”

Spillovers spill back

Working with Hongyan Yang of Hong Kong Polytechnic University and Corey Phelps of HEC Paris, Steensma tracked the patenting behavior of 87 telecom hardware firms—and many more firms that used their patents—over a ten year period.

While prior research had focused on the effect of knowledge spillovers on recipient firms or society overall, their study is the first to take up the case of firms whose innovations are exploited.

What they found is that knowledge flows from the originating firms to recipient firms that exploit it and connect it with other external knowledge. The resulting new insights eventually flow back to the originating firm. “You could call it a virtuous cycle of knowledge spillover,” Steensma says.

For example, Eastman Kodak invented organic light-emitting diode (OLED) technology in the early 1980s. In the ensuing 15 years, more than 30 firms, including Sony, Phillips and Xerox, exploited Kodak’s efforts by combining the core discovery with other complementary knowledge to generate additional innovations. But rather than limiting Kodak’s ability to advance OLED technology, the innovative efforts of these recipient firms enhanced Kodak’s subsequent ability to innovate around its original technology.

Steensma says that when recipient firms connect the originating firm’s knowledge with other knowledge in the market, no one is in a better position to exploit these new insights than the originating firm. And the larger the pool of spillover knowledge, the greater the potential benefit to the originating firm.

“The original firm has an inherent advantage in exploiting these new insights,” he explains, “because it possesses the core insight, the tacit knowledge of how to exploit it further.”

Go with the flow

Knowledge spillovers are an inevitable fact of corporate life. They can occur via purchase of patent information or by corporate piracy, intellectual property theft, employee mobility, reverse engineering, even plain old imitation (the sincerest form of flattery).

The seepage of secret sauce is serious business. “Our results should not be interpreted as a prescription for encouraging spillovers,” Steensma warns. “The losses that occur from spillovers may outweigh the benefits of learning from the resulting spillover knowledge pool.”

But his study does indicate that a proactive strategy can mitigate losses, creating a de facto outsourcing of R&D on original ideas.

“Our analysis suggests that managers should not view the knowledge that spills over as simply a loss, but rather as an opportunity,” Steensma adds. “They should consider creating systems and processes that enhance awareness of this developing knowledge pool and assimilate and utilize such knowledge in future innovation efforts.”

“Learning from what others have learned from you: The positive effects of technological spillovers on originating firms,” is published in the April 2010 Academy of Management Journal.