Substitutability in R&D and Open Innovation: Why Competing Firms Face a Paradox of Openness?

We explore how substitutability between internal and external R&D influences business conduct with regard to R&D approaches and their implementation with the support of managerial resources in a competitive innovation game. We develop a duopoly model which incorporates the assumption of substitutability due to managerial diseconomies of scope in firms using different innovation mechanisms to access technology. We establish that firms substitute internal sources of innovation for external sources as exogenous spillovers increase to manage the diseconomies of scope. We find a tension between the knowledge disclosures and the protections of innovation returns that arises as a paradox for firms. The finding of a positive association between the choice of a firm to be connected with the R&D environment and the appropriability of its innovation returns is understood to be consistent with empirical results of a paradox of openness that firms open to external sources of innovation face.