Externalities of openness in innovation

•This paper introduces the notion of the externalities of openness – the potential spillover benefits of open innovation beyond the focal firm.•Conceptual arguments for such externalities relate to buzz, structured inter-firm linkages and competitiveness effects.•Empirical analysis is based on Irish panel data suggests the empirical significance of these spillover effects.•This suggests a positive benefit from public intervention to increase the level of openness from socially sub-optimal levels. Discussion of open innovation has typically stressed the benefits to the individual enterprise from boundary-spanning linkages and improved internal knowledge sharing. In this paper we explore the potential for wider benefits from openness in innovation and argue that openness may itself generate positive externalities by enabling improved knowledge diffusion. The potential for these (positive) externalities suggests a divergence between the private and social returns to openness and the potential for a sub-optimal level of openness where this is determined purely by firms’ private returns. Our analysis is based on Irish plant-level panel data from manufacturing industry over the period 1994–2008. Based on instrumental variables regression models our results suggest that externalities of openness in innovation are significant and that they are positively associated with firms’ innovation performance. We find that these externality effects are unlikely to work through their effect on the spread of open innovation practices. Instead, they appear to positively influence innovation outputs by either increasing knowledge diffusion or strengthening competition. Our evidence on the significance of externalities from openness in innovation provides a rationale for public policy aimed at promoting open innovation practices among firms.