how do internal openness and external openness affect innovation capabilities and firm performance?

704 IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 60, NO. 4, NOVEMBER 2013

How Do Internal Openness and External OpennessAffect Innovation Capabilities

and Firm Performance?Yi-Ching Wu, Bou-Wen Lin, and Chung-Jen Chen

Abstract—Open innovation is a paradigm that believes that firmsshould use both internal and external ideas. These ideas can ad-vance technology and lead to competitive advantage, thereby im-proving a firm’s performance. However, the process of turninginnovative ideas into performance does depend on firms’ inno-vation capabilities. In this study, we first divide “openness” intoexternal openness, a search for external channels of informationused to innovate, and internal openness, a kind of open culturewithin a firm. In order to balance value capture with openness, thepower of openness in terms of value creation is largely supportedby innovation capabilities, including the inherent characteristics ofknowledge resources, absorptive capacity, and an entrepreneurialorientation. Our main goals are to state explicitly how a firm’sopenness strategies influence its innovation capabilities, and ex-plore how to advance innovation capabilities through openness inorder to improve performance. Therefore, we use an internationaland cross-industry survey which was executed by the ManagingInnovation in the New Economy (MINE) program. Based on datafrom 393 firms, our results show that the innovation capabilities ofthese firms derive from the accumulation of external openness andinternal openness. In addition, the findings of this study confirm therole of innovation capabilities in mediating the effect of opennessstrategies on firms’ performance. On the whole, this investigationdemonstrates the value of external openness and internal opennessto promoting favorable managerial decisions.

Index Terms—Innovation capabilities, open innovation, open-ness.

I. INTRODUCTION

THE rapid changes in technology and product market in-fluence corporate operations. All firms must seek ways to

maintain their competitive advantage and to enlarge their mar-ket share. In the past, operations from innovation and productproduction to promotion and marketing were all supervised bya single company or even a single research and development(R&D) department. However, the costs of creating, develop-

Manuscript received July 14, 2012; revised January 11, 2013; acceptedMarch 7, 2013. Date of publication May 27, 2013; date of current versionOctober 16, 2013. Review of this manuscript was arranged by DepartmentEditor C. Tucci.

Y.-C. Wu is with the Institute of Technology Management, National TsingHua University, Hsinchu 30013, Taiwan (e-mail: [email protected]).

B.-W. Lin is with the Institute of Technology Management, NationalTsing Hua University, Hsinchu 30013, Taiwan, and also with the General ofthe Science and Technology Policy Research and Information Center (STPI),National Applied Research Laboratories (NARL), Taipei 106, Taiwan (e-mail:[email protected]).

C.-J. Chen is with the Department of Business Administration, NationalTaiwan University, Hsinchu 30013, Taiwan (e-mail: [email protected]).

Digital Object Identifier 10.1109/TEM.2013.2262050

ing, and then shipping these novel products have risen tremen-dously. Worse, a shortening product life cycle means that evengreat technological advances can no longer be relied upon toyield a satisfactory profit before they become commoditized.Chesbrough [1] proposes that when corporations face a rapidlychanging environment, they need to collect more technologicalintelligence by cooperating with other companies and by en-couraging internal communication in order to develop an inno-vation strategy and generate innovative ideas to better respondto the competitive environment as soon as possible and thenadvance their technology and competitive advantage [2]. Byimplication, this improves corporate performance. Today, inno-vation must include open business models that are characterizedas spanning firm boundaries [3] and opening to new ideas [4]rather than just monetizing internal technology and R&D.

Nevertheless, if the firms acquire knowledge from differentsources, they need the ability to absorb, accumulate, and ap-ply that knowledge [5]. The process of translating innovativeideas into practice and improving performance should focuson firms’ innovation capabilities. Few studies have exploredthe way in which this indirect effect of innovation capabili-ties acts through the relationship between openness and firmperformance. Thus, our study will be devoted to two researchquestions. First, we must explore how a firm’s openness strate-gies influence its innovation capabilities. Second, we need toknow how to advance innovation capabilities through opennessin order to improve performance. In addition, the concept ofopenness is applied extensively and diversely in the contextof organizational culture and strategic orientation to openness.We separate the concept into two categories: external opennessand internal openness. Accordingly, the main research questionis how internal openness and external openness affect innova-tion capability and firm performance. Practically speaking, thisstudy provides managerial implications for innovation managersto understand the importance of external openness and internalopenness for innovation capabilities and firm performance.

II. THEORY AND HYPOTHESES

A. Openness

The concept of “openness” as a means of expanding valuecreation for organizations mainly originates from “open in-novation” models proposed by Chesbrough [3]. Open innova-tion creates new empirical phenomena that exist in the well-established theories of business strategy. In the past, businessstrategy guided firms to develop defensible positions against the

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WU et al.: HOW DO INTERNAL OPENNESS AND EXTERNAL OPENNESS AFFECT INNOVATION CAPABILITIES AND FIRM PERFORMANCE? 705

forces of competition and power in the value chain, suggestingthe importance of constructing barriers to competition ratherthan promoting openness. Recently, firms and even entire in-dustries have started experimenting with novel business modelsbased on using collective creativity through open innovation [2].In the spirit of open innovation models, firms’ innovation outputsreflect both internally generated knowledge and different typesof knowledge that are sourced from external partners [5]. Firmsintroduce new business models based on internal invention andcoordination within a community of innovators. Chesbroughet al. [6] suggest that open innovation should best be viewed asthe use of purposive inflows and outflows of knowledge to accel-erate internal innovation and expand the scope for the externaluse of innovation, respectively. However, a strategy involvingeffective openness will need to balance innovation value capturewith innovation value creation.

Openness strategy is used extensively and diversely, like theterms “open to new ideas” [4], “openness of communication”[7], “openness to cooperation” [8], “open to experience” [9],“planning openness” [10], “openness” [11], etc. According to areview of the literature, the concept of openness has many differ-ent definitions. It can be explained in the contexts of informationcollection, information sharing, organizational cooperation, andorganizational culture and attitudes toward change. In principle,we can divide openness into two categories according to an or-ganization’s innovation activity: the set of activities carried outby firms to both gather information from and voluntarily revealknowledge to the external world [12], [13] viewed as “exter-nal openness” and those carried out to encourage and supportsuggestions and change initiatives from below [4], [11], [13]viewed as “internal openness.”

External openness is a search strategy involving externalchannels of information that are used to innovate. We considerthe term to represent the broad set of activities that firms canconduct to acquire knowledge from, voluntarily disclose knowl-edge to and exchange knowledge with the external world [12].Chesbrough and Appleyard [2] propose that the business pro-cess of innovation is changing from one that is principally in-ternal to the firm to a new system that involves a range ofplayers distributed up and down the supply chain. Given theimportance of boundary-spanning innovation activities, corpo-rations may choose to adopt interorganizational cooperation ac-tivities [8], [14]. Romijn and Albaladejo [15] also propose thatinteractions with suppliers, customers, public assistance agen-cies, industry associations, or foundations can help with gather-ing information about technologies and markets and obtainingvarious other inputs to complement the internal learning process.Additionally, the effectiveness of such learning-by-interactingshould be boosted by regional clustering between network ac-tors.

Compared to external openness, internal openness can re-fer to a kind of open culture, involving cross-functional coop-eration and knowledge sharing within an organization. It canserve to clarify one’s beliefs and opinions, to elicit feedback,to deepen interpersonal relationships, and to control the behav-iors of others through encouraging and supporting suggestions,thus changing initiatives from the bottom up [4], [11], [13].Scott and Bruce [16] emphasize that employees will be more

engaged in individual innovation if they perceive that there isa climate for innovation. In other words, organizations sup-porting new ideas and change efforts will be more effectivein achieving group cohesiveness, minimizing participant (intra-group) conflict, increasing communication, and achieving groupproductivity [7].

B. Innovation Capabilities

In the concept of open innovation, the extensive use of purpo-sive inflows and outflows of knowledge can create more opportu-nities to access and integrate highly specific knowledge sets andthen bolster the confidence to take risks in order to further inno-vation. However, Fey and Birkinshaw [4] argue that a parallel setof cognitive capabilities are also required for new insights to berecognized and utilized. According to Deeds et al. [17], collec-tions of best practices need to be acquired in a manner wherebyfirms gradually access, assimilate, and utilize product-relatedknowledge generated by outside sources and cross-functionalcooperation in order to renew and reconfigure their innovationcapabilities. Especially in today’s competitive and fast-changingbusiness environment, a firm’s capability to innovate is likely tobe a particularly crucial learning output because it is the key togaining dynamic competitive advantage [15].

Lall [18] defines innovation capabilities as the capacity andknowledge needed to effectively absorb, master, and improvethe existing technologies and to create new ones. Especiallyin hostile environments that offer fewer and more competitivemarket opportunities, firms must encourage innovativeness, risktaking, and proactiveness to face and manage different infor-mation or innovative ideas [19]. Moreover, Romijn and Al-baladejo [15] also propose that the innovation capabilities ofa firm accumulate as a result of various internal and externalinputs. Therefore, in order to balance value capture with open-ness, the power of openness in terms of value creation is largelysupported by innovation capabilities [2], including the inherentcharacteristics of knowledge resources, absorptive capacity, andan entrepreneurial orientation.

Knowledge resources are the ways in which firms combineand transform tangible input resources [20]. Through interfirmnetworks and links between companies and local organizationsoutside the supply chain, this can provide a framework for intra-organizational learning and knowledge transfer [21]. Besides,knowledge resources can be accumulated through learning-by-doing [15]. In discussing the concept of the open business model,Chesbrough [1] states that a company starting to become moreopen to new ideas and technologies in the development and ex-ecution of its business model will unlock a significantly greaterset of knowledge resources. Love and Roper [22] also proposethat possible routes by which firms may obtain the knowledgenecessary to undertake innovation include R&D, technologytransfer, and networking. Interorganizational interaction activ-ities and cross-functional working teams can allow knowledgeresources to be translated into innovation outputs and appliedto the discovery and exploitation of opportunities [23]. There-fore, a firm’s efforts to extend beyond its organizational bound-aries and become open to intra-organizational communicationwill prove extremely helpful with respect to strengthening that


firm’s valuable knowledge resources and facilitating the suc-cessful achievement of innovation.

Absorptive capacity is a function of related prior knowledge.Such knowledge confers an ability to recognize the value of newinformation, assimilate it, and apply it to commercial ends [24].In addition, absorptive capacity allows collaborating firms tosystematically identify valuable know-how and then transfer itacross organizational boundaries, so that firms can get to knoweach other well enough to understand who knows what andwhere critical expertise resides [14]. Fey and Birkinshaw [4]believe that absorptive capacity is a facilitating mechanism thatimproves a company’s ability to make use of new knowledgewhen a firm finds itself interacting with external parties, whetherthrough contracting or partnering. When new opportunities sub-sequently emerge, the firm can take advantage of them. Addi-tionally, prior knowledge that facilitates the assimilation of newrelated knowledge can be extended to create a set of learningskills [24]. When a firm is more open to intra-organizationalcommunication, accumulated prior knowledge increases the ab-sorptive capacity to put new knowledge into memory, as well asthe intelligence to recall and use it. The intelligences to exploitexternal knowledge and encourage intra-organizational commu-nication are thus critical components of innovative capabilitiesfor improving firm performance.

Entrepreneurial orientation is grounded in the strategic choiceperspective. This refers to a firm’s strategic orientation and con-cerns the “methods, practices, and decision-making styles thatleads to new entry” [25]. Stevenson and Jarillo [26] state thatentrepreneurial orientation is neither created nor imposed bytop management but rather reflects the strategic posture as ex-hibited by multiple layers of management. Entrepreneurial firmswill tend to act autonomously, innovate, take risks, and be proac-tive when confronted with market opportunities, as evidencedby their strategic decisions and operating philosophy. Proactivecompanies can create first-mover advantages, target premiummarket segments, and skim the market ahead of competitors,especially when facing the shortening of product and businessmodel life cycles [27]. They employ initiatives to generate fu-ture profit streams from currently uncertain operations, and suchbusinesses will constantly seek out new opportunities [23]. Bycontrast, the management style of conservative firms will bedecidedly risk-averse, noninnovative, and reactive [19]. Over-all, entrepreneurial behaviors entail more risk than conservativebehavior. A company’s entrepreneurial orientation may be re-flected by its open corporate culture or influenced by new coop-erative relationships that focus on external openness. So, throughinternal knowledge sharing or external cooperation to promoteinnovation, acquiring new knowledge will affect a firm’s man-agement style, innovation attitude or risk tendency.

C. Relationship Between External Openness and Innovation

Love et al. [28] mention that the essence of external open-ness involves the promotion of greater openness through theacquisition of externally sourced ideas that clearly influence afirm’s ability to embrace new marketing, strategy, and organiza-tional innovations. For example, industrial organizational strate-gies such as diversification, globalization, vertical integration

and dependence on industrial groups, or external channels suchas suppliers, buyers, joint ventures with competitors, and ex-ternal R&D institutes are important in determining innovationcapabilities [29]. Moreover, Numprasertchai and Igel [30] con-clude that research collaborations can improve and create newknowledge resources and innovation. If firms have more openapproaches to innovation, they tend to show high levels of ab-sorptive capacity and knowledge resources as well as deepercommitments to innovation. Laursen and Salter [31] also men-tion alliances, industrial networking, technology transferring,licensing agreements, and internal venture capital as helpinga firm to acquire new knowledge and reuse existing knowl-edge from external sources. This is much like the argument putforth by Chesbrough [1] that firms need to develop innovationcapabilities to partake more fully in the benefits of open inno-vation. Specifically, a wider and more diverse search strategycan be helpful to create more opportunities to access and inte-grate highly specific knowledge sets and then strengthen a firm’sconfidence in taking innovation-relevant risks.

Thus, a firm’s extending beyond its boundaries is helpful forstrengthening its valuable innovation capabilities, potentiallyyielding a particular benefit associated with collaboration, suchas knowledge resources, absorptive capacity, or a strategic ori-entation that encourages proactiveness. Hence, the followinghypothesis can be formulated:

H1. External openness is positively related to innovation ca-pabilities.

D. Relationship Between Internal Openness and Innovation

In the context of innovation value capture, internal opennessand connectivity in innovation are equally important [28]. Theconcept of internal openness is motivated by the existence ofrigidities with respect to innovation within firms, such as the re-sistance to change [32]. If a firm adopts a strong “not-invented-here” position, which relates to a more closed approach to in-novation [33], [34], then the firm will develop several majorbarriers that block the inflow of knowledge or information andresistant to new ideas. As a result, the firm in question will pos-sess relatively low stocks of knowledge and restrict the firm’scapacity to recognize, assimilate, and apply best practices andcause it to make overly risk-averse decisions [35], [36]. Thus,internal openness has emerged as a facilitating mechanism thatimproves a firm’s ability to utilize new knowledge [4]. For exam-ple, a cross-functional working team in which the skills, efforts,and knowledge of differing functions of a firm are combined forthe purpose of new product development may facilitate knowl-edge integration and information exchange [37], [38], promotethe development of trust and mutual learning [39], and stimulateinternal entrepreneurship. In addition, cross-functional cooper-ation is crucial to sharing the information and knowledge thatallows the recipients of that information to obtain a more ac-curate conception of their organization as a whole and functionmore effectively within it [11]. Therefore, internal openness con-tributes to the emergence of an open and entrepreneurial culturein which individuals feel comfortable sharing their knowledgeand building cross-functional working relationships to improve


the firm’s innovation capabilities and productivity. Thus, wearrive at the second hypothesis:

H2. Internal openness is positively related to innovation ca-pabilities.

E. Mediating Effect of Innovation Capabilities

In the search for innovation value, firms need to balanceknowledge exploration and exploitation, shifting resources be-tween search and implementation in order to improve firm per-formance. The relationship between innovation capabilities andperformance has been confirmed in previous studies [15], [23],[24], [40], [41]. Yama et al. [42] affirm that a firm’s specificcompetencies can contribute substantially to its sales growth andcompetitive advantage. Particularly in competitive technologi-cal environments, firms must obtain the knowledge resourcesthat are necessary to undertake innovation [28] and possessthe ability to recognize the value of new information, assim-ilate this knowledge, and apply it to commercial ends [24].Moreover, Lumpkin and Dess [25] note that to obtain novel en-try and market opportunities, entrepreneurial firms should actautonomously, innovate, take risks, and adopt a proactive ap-proach. This principle emphasizes the importance of innovationcapabilities to firm performance.

Additionally, in terms of the relationship between externalopenness and performance, Schermerhorn [8] proposes thatopenness to cooperation, especially in the context of externalopenness, may be considered by decision makers as one possi-ble strategy for alleviating organizational performance distress,since interorganizational cooperation will encourage the useof manpower, intelligence, and scarce resources to solve thedilemma of “how to make resources stretch to meet increasingneeds.” Indeed, the use of partners in the R&D of a new productor service creates business model options that can significantlyreduce R&D expenses, expand innovation output, and open upnew markets that may otherwise be inaccessible [3]. Mansuryand Love [43] find that external linkages have an overwhelm-ingly positive effect on (innovator) firm performance. This mir-rors the argument of Chesbrough [3] who states that the potentialfor business model innovation via codevelopment is significant.

With respect to the relationship between internal opennessand performance, Love and Roper [28] emphasize the causallink in firms between open to intra-organizational communi-cation and innovation outputs; more broadly, these researchersdiscuss the value of internal openness during the exploratorystage of the innovation process. Compelling logical reasoningexists indicating that internal openness enhances performance.To be clear, there is enormous value to the firm, especially interms of the speed of decision making, the efficiency of inter-nal processes, and the level of social cohesion in the firm [44].Therefore, to maintain competitiveness despite global competi-tive pressures, shortened product life cycles, and the increasingease of imitation [41], firms must increase their internal open-ness to accepting new ideas and overcome the “not-invented-here” syndrome in their innovation processes. Fey and Birkin-shaw [4] verify that internal openness to new ideas has emergedas the single most important predictor of R&D performance andthat this openness directly affects performance.

Based on the arguments of Hypotheses 1 and 2, which pro-pose that external openness and internal openness affect a firm’sinnovation capabilities, and the relevant previous studies thathave confirmed the relationship between innovation capabilitiesand performance, we identify a string of relationships linkingexternal openness and internal openness to innovation capabil-ities and connect innovation capabilities to firm performance.This means that the relationships between openness strategiesand firm performance are hypothesized to be indirect, with nodirect effects. Therefore, innovation capabilities play the role ofintermediate variable to mediate the relationships between in-dependent variables of external openness and internal opennessand dependent variable of firm performance. Accordingly, wedefine Hypothesis 3:

H3. Innovation capabilities positively mediate the effect ofexternal openness and internal openness on firm performance.

Given the arguments outlined earlier, the research frameworkin this study is structured as follows (see Fig. 1).

III. RESEARCH METHOD

A. Sample

The data for our analysis is drawn from the ManagingInnovation in the New Economy (MINE) innovation survey(www.minesurvey.polymtl.ca) directed by Miller and Flori-cel [45] to understand how businesses actually innovate andto assess the results of their innovation efforts. The MINE Pro-gram is an industry–university research initiative that aims toidentify the ways in which value is created and captured in thenew economy and to instruct senior innovation managers how tobalance various strategic elements for innovation. This researchis sponsored by the Initiatives for the New Economy (INE) ofthe Social Science and Humanities Research Council of Canada(SSHRC), following a pilot research project sponsored by the In-dustrial Research Institute in Washington, DC, USA. The workis supervised by the Ecole Polytechnique de Montreal in collab-oration with several Canadian and U.S. universities. The surveytool developed by Roger Mill, MINE Principal Investigator, andcolleagues was first tested on 29 firms in the US, Europe, andJapan, including Ericsson, Merck Frosst, Mercury Computers,Bio Thermica, Cowi, MPB Technologies, SNC Lavalin, Exfo,and others. The interpretability, reliability, and validity of thisinstrument are described in Floricel and Miller [46] and Millerand Floricel [45]. The 12-page MINE survey thoroughly inves-tigates the firms’ external industrial environments, innovationstrategies, and organizational practices.

The MINE team continues to utilize this international surveyand intends to administer it to 1500 firms across 20 industries.The survey was designed to assess management innovation, andthe MINE team plans to address this topic by administering itto a substantial number of firms in fast-moving, R&D-intensivesectors. We then ask senior innovation managers, like CTOsand R&D vice presidents, to rate the extent to which strategiesand practices they have actually used within their firms in thepast three years. This paper will focus on the best practices andstrategies for organization openness—in this context, we createda theoretical model and a survey instrument to quantify open-ness and firms’ innovation capabilities. When we conducted our


Fig. 1. Research framework.

analysis in July 2007, the responses from 645 firms had beencollected. After eliminating observations with missing values,393 valid and complete questionnaires were used for the quanti-tative analysis. It represents a useable response rate of 26.20%.

B. Measures

To date, few attempts have been made to theoretically andempirically link a firm’s external openness and internal open-ness to innovation capabilities (knowledge resources, absorptivecapacity, and entrepreneurial orientation) or firm performance.In order to examine this relationship, we develop several vari-ables contained at least three question items. A summary ofmultiple-item variables and their associated Cronbach’s α val-ues is provided in the Appendix (see Table A1). An α level of0.7 or above is generally acceptable [47]. The α coefficients ofall variables are above the acceptable level.

External openness is assessed in terms of the external chan-nels of information used to innovate. We need to know therelative importance of various collaborative actions in terms ofcompany operating practices. Nine items pertaining to externalopenness and the response categories use seven-point scales.

Internal openness refers to a kind of open culture withina firm, such as cross-functional cooperation and informationsharing. It can best be explained in terms of two dimensions. Thefirst concerns how often people from different functions worktogether to interpret strategic information; the second concernsto what extent those involved in innovation can identify thevarious capabilities of people from different departments. Weuse seven-point scales to measure six items in two dimensions.

Regarding innovation capabilities, existing studies provideseveral leads about contributing factors. However, this studyconsiders only three dimensions: knowledge resources, absorp-tive capacity, and entrepreneurial orientation.

Knowledge resources transform tangible input resources intoinnovation. We are concerned about whether a firm has theabilities or skills to transform research results into customervalue in its sector. These eight items are measured on a seven-point scale.

Absorptive capacities are cognitive capabilities that allowcompanies to assimilate and act on new ideas. We focus onfinding problems and learning from experience. These threeitems are measured on a seven-point scale.

Entrepreneurial orientation can be understood as a strategicorientation that promotes innovation. We wish to know whether

a firm has put in place innovative practices. The seven itemswere measured on a seven-point scale.

Firm performance is multidimensional. Performance-relevantsales growth can be expressed using ratio scales that range fromnegative growth to 40% and higher. We also consider six itemsfor performance relative to competitors in the past three years.These questions use seven-point scales that range from “muchlower” to “much higher.”

The empirical study controls for several variables that mightaffect organizational performance. The control variables includecompany ownership, industry sector, firm size, and firm na-tionality. The different kinds of companies assessed are pub-licly traded companies, privately held companies, government-owned companies, and subsidiaries. Regarding the industry sec-tor control variable, we divide it into seven types, namely, con-struction, finance, manufacturing, mining, retail trade, trans-portation and communication, and wholesale trade, by usingthe SIC industry codes. These two control variables are all cap-tured using dummy variables. In our sample, firm size rangedfrom fewer than ten employees to over one hundred thousand.We followed tradition and used the logarithm of employees asa control for firm size effect. Firm nationality is a dummy vari-able that takes a value of 1 for a U.S. firm and a value of 0 fornon-U.S. firms.

C. Data Analysis

To know more about the characteristic of the sample, we com-pared the 393 observations used in the estimation sample andthe all sample of 645 with respect to four variables (ownership,industry, firm size, and firm nationality). Descriptive statisticsare presented in the Appendix (see Table AII). The two groupsexhibit similar demographic profiles. We found that the averagefirm of the sample is a privately held manufacturing company ofmedium size (with approximately 100–1000 employees) and is anon-U.S. firm. Moreover, the chi-square test for company own-ership (χ2 = 1.627, p = 0.653), industry sector (χ2 = 6.028,p = 0.420) and firm nationality (χ2 = 0.018, p = 0.894), and thecalculated t-statistics for the firm size (t = 0.160, p = 0.873)are all statistically insignificant, suggesting that there are nosignificant differences between two groups.

Table I depicts the correlation matrix and descriptive statisticsfor all variables used in this study. All of the bivariate correla-tions between the independent variables fall below the 0.70threshold, thus indicating acceptable discriminant validity [48].The bivariate correlations are quite low among the five variables


TABLE ICORRELATION AND DESCRIPTIVE STATISTICS

in terms of proxy complementarities and similarities, with thehighest being between external openness and knowledge re-sources (r = 0.493). It is important to note that this observationbecomes pertinent when we subsequently assess openness andinnovation capabilities in predicting firm performance.

This study also attempts to represent explicitly both the di-rect effect of one variable on another, and the indirect effect thatmay occur through a third variable (a mediator). One advan-tage of structural modeling is that it can estimate these directand indirect effects separately. Since regression analysis as astandard structural equation modeling tool is an appropriate sta-tistical technique for this study, we follow the recommendationsof Baron and Kenny [49] to test the mediating roles of the hy-pothesized variables. The three hypotheses derived from Fig. 1,and these direct and indirect effects were simultaneously testedusing SPSS 17.0 software. Furthermore, an ordered probit anal-ysis is an approach that generalizes the common technique ofprobit analysis to be applicable to a situation involving an ordi-nal dependent variable with more than two outcomes. MacKin-non et al. [50], in their comparison methods for assessing themediating effects, recommend the Sobel test (and its variants)as superior in terms of power and intuitive appeal. Accord-ingly, this study employed ordered probit model and the Sobeltest [51], [52] to assess the mediating effects again and ensure arigorous study.

IV. RESULTS

In order to understand the role of external openness, internalopenness and innovation capability in determining innovationperformance, Table II reports our regression analysis results.To test Hypothesis 1, we evaluate the direct effect of external

openness and internal openness on innovation capabilities inModels 1–3. To test Hypothesis 3, in Models 4–7, we assessthe mediating effect of innovation capabilities on the relation-ship between openness and performance relative to competi-tors, while in Models 8–11, we evaluate their mediating effecton sales growth. Moreover, we use an ordered probit modelfor performance variables to assess the robustness of the resultswith respect to the model specification. The results of these addi-tional analyses are presented in Table III. The mediating effectsof innovation capabilities on performance relative to competi-tors and on sales growth are examined separately in Models 12and 13, respectively.

A. Main Effects

Models 1–3 in Table II capture the direct effect of exter-nal openness and internal openness on innovation capabilities.These three models are significant at the p < 0.01 level (R2 =0.245, 0.232, and 0.257, respectively). Coefficients of externalopenness are positive and significant for knowledge resources(p < 0.01), absorptive capacity (p < 0.01), and entrepreneurialorientation (p < 0.01). Hence, these findings significantly sup-port the prediction of Hypothesis 1 and indicate that firms wouldimprove their innovation capabilities if external openness ofthe firm is higher. Similarly, these three models show that in-ternal openness has positive and significant effects on knowl-edge resources (p < 0.1), absorptive capacity (p < 0.001), andentrepreneurial orientation (p < 0.01). Therefore, these resultssuggest that the higher the internal openness, the better the firm’sinnovation capability, thus totally supporting Hypothesis 2.


TABLE IIRESULTS OF REGRESSION ANALYSIS

B. Mediating Effects

Hypothesis 3 focuses on investigating the mediating role of in-novation capabilities between openness strategies and firm per-formance, as in the proposed model depicted in Fig. 1. We useda sequential procedure recommended by Baron and Kenny [49]to test the mediating effects. In the first step of the analysis, thedependent variables (i.e., performance relative to competitorsand sales growth) are regressed on an antecedent variable (i.e.,external openness and internal openness) corresponding to theproposed mediators (i.e., knowledge resources, absorptive ca-pacity, and entrepreneurial orientation). As shown in Table II,the F -value and R-square metric for Model 5 are 16.349 and0.193, respectively, while those of Model 9 are 7.351 and 0.090,respectively. Therefore, these two models can provide the goodpredictions that external openness and internal openness havesignificant effects on firm performance. In the second step, thethree factors of innovation capabilities—namely, knowledge re-sources, absorptive capacity, and entrepreneurial orientation—are included in the models to examine whether they reduce theeffects of the antecedents to nonsignificance. Mediation occursif the direct effects of external openness and internal opennesson firm performance are reduced in the presence of the mediatorand if the overall explanatory power is improved. Both of theseconditions are acceptable, as shown in Table II. The result ofModel 7 shows that the overall fit of the model is improved (ΔR2

= 0.124) and the effect of external openness and internal open-ness on performance relative to competitors are greatly reduced,one of them to nonsignificance, in the presence of mediator,knowledge resources, absorptive capacity, and entrepreneurialorientation. Similarly, the result of Model 11 shows that the over-all fit of the model is improved (ΔR2 = 0.040) and the effectof external openness and internal openness on sales growth aregreatly reduced, two of them to nonsignificance, in the presenceof mediator, knowledge resources, and entrepreneurial orienta-tion. Overall, these findings support Hypothesis 3.

As Table III illustrates, to verify the robustness of the re-sults with respect to the model specification, we use an orderedprobit model for the examined performance variables. Becausethe empirical results of this model are quite consistent with theaforementioned findings of the primary model of this study, therobustness of our findings is clear. On the whole, the robustnessof this result provides strong support for our central hypothesisthat innovation capabilities are important mediators not only be-tween external openness and firm performance but also betweeninternal openness and firm performance.

C. Sobel Test

Following the conclusions of MacKinnon et al. [50], joint sig-nificance tests involving the product of coefficients such as theSobel test have been found to exhibit greater statistical powerthan other formal methods of assessing mediation, including theBaron and Kenny approach. We also use the Sobel test to moredirectly test for the presence of an indirect effect. Compared tothe series of regression analyses recommended by Baron andKenny [49], the Sobel test exhibits two features. First is thestatistical significance of the difference between the direct ef-fect and the indirect effect; programs conduct a test of the nullhypothesis that the indirect effect is zero [51]. Therefore, weapplied an SPSS macro that will formally test the significanceof the indirect effect both parametrically and nonparametrically,while simultaneously providing the output relevant to assessingmediation with the Baron and Kenny criteria. The macro outputsa 95% confidence interval for the size of the indirect effect, againunder the assumption that the sampling distribution of the effectis normal. Also, whereas the procedure outlined by Baron andKenny involves combining the results of several hypothesis tests,the Sobel test directly addresses the primary question of interest,namely, whether or not the main effect of external openness andinternal openness on firm performance is significantly reducedupon the addition of a mediator to the model. Given that we had a


TABLE IIIRESULTS OF ORDERED PROBIT MODELa

sample of 393 observations, the results of our Sobel test indicatethat knowledge resources (Sobel test z = 3.7366, p = 0.0002),absorptive capacity (Sobel test z = 5.0201, p = 0.0000), andentrepreneurial orientation (Sobel test z = 6.8809, p = 0.0000)fully mediate the relationship between external openness andperformance relative to competitors; furthermore, knowledgeresources (Sobel test z = 2.4130, p = 0.0158), absorptive ca-pacity (Sobel test z = 5.0816, p = 0.0000), and entrepreneurialorientation (Sobel test z = 5.0043, p = 0.0000) fully mediatethe relationship between internal openness and performance rel-ative to competitors. However, knowledge resources (Sobel testz = 2.4854, p = 0.0129) and entrepreneurial orientation (So-bel test z = 3.7391, p = 0.0002) successfully mediated the linkbetween external openness and sales growth except for absorp-tive capacity (Sobel test z = 1.6339, p = 0.1024). Similarly,knowledge resources (Sobel test z = 2.0837, p = 0.0372) andentrepreneurial orientation (Sobel test z = 3.498, p = 0.0005)successfully mediated the link between external openness and

sales growth except for absorptive capacity (Sobel test z =1.5815, p = 0.1138). These effects are not statistically differ-ent from zero, indicating that there is no relationship betweenopenness and firm performance after controlling for innovationcapabilities. In this example, all of Baron and Kenny’s criteriafor mediation are established, and the evidence suggests that in-novation capabilities completely mediate the effect of externalopenness and internal openness on firm performance excludingabsorptive capacity. Thus, the findings executed by the Sobel testare entirely consistent with the results produced by the series ofregression analyses.

V. DISCUSSION AND CONCLUSION

Chesbrough [1] proposes that the combination of leveragedcost and time savings with new revenue opportunities conferspowerful advantages for companies willing to open their busi-ness models. However, in the open innovation model, external


channels do not replace internal R&D, and the firm still needsits own open culture to undertake a significant part of itsown innovation activity [53]. That is to say, identifying rel-evant new ideas developed externally and internally, encour-aging their production, and gaining access to them comprisean effective way to create innovation value. Thus, the primaryresearch question investigated in this study is how internal open-ness and external openness affect innovation capability andfirm performance. In conclusion, this study makes three maincontributions.

First, this study helps to define the notions of openness and in-novation capabilities. In a discussion of open innovation, Ches-brough [3] further extends the concept to incorporate the useof internal ideas, external ideas, and paths to market that in-crease a firm’s number of possible innovations and the waysin which that firm can capitalize on these innovations. Mostscholars propose that a relationship exists between opennessand firm performance; however, firms must possess innovationcapabilities to enable openness to impact firm performance.Therefore, this study examined two types of openness, exter-nal openness and internal openness, and classified innovationcapabilities into the three categories of knowledge resources,absorptive capabilities, and entrepreneurial orientation in orderto balance value capture and value creation in the innovationprocess.

Second, based on insights from our study using the MINEinnovation survey and literature review, we learn about howbusinesses actually innovate, and we assess the results of theirinnovation efforts. In this study, we confirm that innovation ca-pabilities derive from the accumulation of external opennessand internal openness. To enhance their innovation capabili-ties, firms should strengthen external and internal innovation. Inaddition, firms’ managers must devote attention to eliminatingthe “not-invented-here” syndrome that can develop among thefirm’s technical staff with respect to opening the organization’sinnovation processes. Furthermore, these managers should opentheir innovative processes in a progressive manner because theopening of innovation processes requires relationships and trustto be built between the firm and its external partners [54]. A lackof openness will constrain a firm’s boundary-spanning activi-ties and knowledge-sharing mechanisms for strengthening thevaluable innovation capabilities [55].

Third, this study confirms that innovation capabilities mediateopenness strategies’ effects on firm performance. The results ofthis study suggest that external openness and internal opennessdirectly affects innovation capabilities and indirectly affects firmperformance. Thus, we demonstrate that the process of turninginnovative ideas into performance does depend on firms’ in-novation capabilities, including knowledge resources, absorp-tive capabilities, and entrepreneurial orientation. The findingsof this study fill the gap in the literature that is lack of empiri-cally examining the mediating roles of innovation capabilities inthe relationships between openness and firm performance. Onthe whole, this investigation expands our knowledge about thevarious types of openness and how to enhance innovation ca-pabilities through openness, even yielding best practices underconditions of uncertainty.

However, no significant effects of absorptive capacity werefound when it was treated as a mediator between internal open-ness and sales growth. The direct effect of absorptive capacityon firm performance is also insignificant. There are a numberof possible explanations for this failure. In principle, absorp-tive capacity is defined as a function of prior related knowledgeand is measured in the context of identifying problems andlearning from experience. Absorptive capacity allows collabo-rating firms to systematically identify valuable know-how, sothat when new opportunities arrive, a firm can take advantage ofthem. However, if the new ideas are different from prior expe-rience, a firm is not necessarily able to identify these emergingtechnological opportunities. Instead, firms should improve theirinnovativeness, risk taking, and proactiveness [19] and combineand transform tangible input resources [20] so as to adopt open-ness strategies compatible with enhanced performance. Thus,absorptive capacity is not viewed as a key mediator betweenopenness and firm performance, especially sales growth.

In addition, the findings of this study also offer implicationsfor innovation managers. Firms should apply external open-ness and internal openness to advance innovation capability andperformance. Especially when facing a severely changing envi-ronment, firms need to collect more intelligence by cooperatingwith other companies and encouraging internal communicationto develop an innovation strategy and harness innovative ideasso as to quickly respond to this environment and then enhancetheir technology and competitive advantage. However, in orderto translate innovative ideas into practice and improve perfor-mance, firms also need to develop innovation-relevant capabil-ities to access and integrate highly specific knowledge sets andthen build confidence in risk taking in innovation. Only the bal-ance of innovation value capture and innovation value creationcan be considered an effective openness strategy.

Despite the large number of participants and the variety oftasks, the results of the present study are not without limitations.According to Miller and Cote [56], what works in one sectormay not work in another, but this view is not necessarily appli-cable to this study of openness strategy. Because this study is aninternational and cross-industry investigation that reveals no sig-nificantly anomalous effects within particular industry sectors,we conclude that openness may be regarded as a universal bestpractice for stimulating innovation. Nevertheless, a firm’s deci-sion to embrace openness—whether it is best to do so or not—isworth exploring in future studies. Indeed, “closed,” “external,”and “open” approaches to innovation are conceptual models,but in reality, many firms lie between their extremes. Certainly,many but not most firms engage in a degree of open innovation.In general, completely closed and wholly external approachesto innovation are rare [53]. Therefore, the extent of opennessclearly needs further exploration. In addition, an extension to thecurrent study has been planned. In particular, we wish to matchour cross-sectional innovation survey data with longitudinal in-formation regarding business performance. This approach willallow us to more robustly obtain a complete understanding ofthe causal relationships between openness strategies and busi-ness performance and will enable us to appropriately calibratethe lags that exist in these relationships.


APPENDIX

TABLE AIMULTIPLE-ITEM CONSTRUCTS AND THEIR ASSOCIATED CRONBACH’S α VALUE


TABLE AI (Continued)


TABLE AII

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Yi-Ching Wu is currently working toward the Ph.D.degree from the Institution of Technology Manage-ment, National Tsing Hua University, Hsinchu, Tai-wan.

Her current research interests include knowledgemanagement, policy planning, and strategic manage-ment of technology.

Bou-Wen Lin received the Ph.D. degree in manage-ment of technology from Rensselaer Polytechnic In-stitute, Troy, NY, USA, in 1998.

He is currently a Professor at the Institution ofTechnology Management, National Tsing Hua Uni-versity, Hsinchu, Taiwan, and the Director General ofthe Science and Technology Policy Research and In-formation Center (STPI), National Applied ResearchLaboratories (NARL). He is a Lecturer and Writerin the fields of international technology transfer, newproduct development, and strategic management of

technology. His current research interests include knowledge management andpolicy planning.

Chung-Jen Chen received te Ph.D. degree in strategyand technology management from Rensselaer Poly-technic Institute, Troy, NY, USA.

He is currently a Professor at the Graduate Instituteof Business Administration, College of Management,National Taiwan University, Hsinchu, Taiwan. Hiscurrent research interests include knowledge man-agement, interfirm collaboration, innovation manage-ment, and entrepreneurship.

how do internal openness and external openness affect innovation capabilities and firm performance?

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