Collaboration without risk: How the most innovative SMEs protect critical knowledge in joint innovation activities with partners

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Chapter 2.1.1., Long term (strategic) means of protection:

Long term (strategic) means of protection are such, which are put in place even before the company considers going into a specific collaboration. These mechanisms are generally applied throughout the company and all collaboration projects. For example, a company may adopt a generic first-mover strategy (lead time), where it seeks to protect innovations by being first to market (Laursen & Salter 2005a). Specific collaborative projects will usually not influence such a long term strategic orientation.
Secrecy:

Companies generally try to control what knowledge is revealed to partners in collaborative arrangements (Paasi et al. 2010). Extensive efforts are made to control the communication flow between employees and the external environment (Laursen & Salter 2005a) where companies are preventing employees from disclosing critical knowledge to co-operation partners (Hipp & Herstatt 2006). When applying secrecy, knowledge is simply not disclosed, and therefore, the mechanism is regarded the most effective protection against R&D spillovers (Cohen et al. 2000).
However, secrecy has two main drawbacks in joint collaborative projects. First of all, it is difficult to make sure that employees adhere to trade secret laws, because these laws are generally difficult to prosecute: legal means of prosecution are narrow in scope and companies need to implement safeguards to monitor employees (Liebeskind 1997). And second, an overemphasis on secrecy may limit the possibilities for collaboration and knowledge trading (Hipp & Herstatt 2006), which is a fundamental problem that also applies to other protection mechanisms (please see chapter '2.2.1 Dilemma of openness and protection").
For small firms in particular, secrecy is expected to be a very important and popular mechanism, because in comparison to other means it is more readily at their disposal (c.f. Olander 2009). However, SMEs seem to face a difficulty in maintaining trade secrets in close cooperative relationships (Leiponen & Byma 2009).
Lead time:

Lead time is about being first to enter a market with a new product. When focusing on lead time, companies protect innovations by being faster than competition: by the time a potential competitor copies or imitates an innovation, the next service or product generation is already being developed by the focal firm (Hipp & Herstatt 2006).
Hence, lead time protects knowledge differently than other means such as secrecy. It does not restrict the access to knowledge, but it generates a competitive situation in which knowledge that may be leaked in collaborations becomes useless to competitors because the focal firm is faster at commercializing this knowledge. It follows that, to render such a strategy effective, firms must be able to seek opportunities to enter the market more quickly than their rivals (Laursen & Salter 2005b).
Although lead time is one of the most popular protection mechanism (Harabi 1995), it has some significant drawbacks. In some industries, it is necessary to own complementary assets and to have sufficient market power for that companies can earn returns on innovation through lead time - otherwise, these returns would be captured by imitators or followers who possess the complementary assets (David J. Teece 1986). Furthermore, the strategy requires an enormous innovation investment, which has to be amortized over a short time period (Hipp & Herstatt 2006).
Lead-time is generally perceived as a very effective means of protection for smaller companies, because small firms simply move faster and they are able to adapt opportunities that emerge within their networks very quickly (H. Chesbrough 2010). However, in industries where complementary assets or large innovation investments are required to sustain lead time (Hipp & Herstatt 2006), it may be difficult for small enterprises to afford this strategy.
Complementary Assets:

As mentioned before, in order to successfully commercialize innovations and not to lose against imitators or followers, complementary assets may be necessary in some industries. Such assets include complementary marketing, manufacturing, or after-sales support services (David J. Teece 1986). Firms, which control such co-specialized assets, are better positioned to benefit from innovations relative to other companies.
Similarly to lead time, complementary assets reduce the risk that knowledge, which has been leaked, may harm the focal company, because imitators cannot commercialize any knowledge gained without owning the necessary complementary assets.
Due to their limited size and resources, small firms are less likely to possess such complementary and specialized assets. They will either have to develop these capabilities themselves or contract them through external partners (Knudsen 2006), which puts them at an additional danger of possible imitation by these contracted partners (David J. Teece 1986).
Therefore, whenever smaller companies develop new innovations, they need to operate under the radar of bigger firms, which own these assets, and to be successful, they need to be very quick in orchestrating a range of activities in order to gain market share before incumbents can overcome them (Laursen & Salter 2005b).
Patents, Copyrights and Trademarks:

Society has granted innovators a number of legal means (i.e. intellectual property rights or formal means of protection), allowing them to appropriate returns of their innovations. Legal means of protection include patents, trademarks, registration of design, and copyrights (Laursen & Salter 2005a; Hurmelinna-Laukkanen & Puumalainen 2007).
The most prominent means of legal protection are patents, which grant a company the right of being the sole beneficiary of a patented innovation and, hence, allow this firm to hold on to its original creation and to delay imitation through competitors (Olander 2009). In other words, through a patent, companies gain exclusive rights to an invention, which can secure them monopoly rents if the company can commercialize the invention before the patent expires.
Gaining patent protection entails a formal process, where companies need to apply for protection at a patent office. It requires companies to disclose their inventions to external sources, such as lawyers and patent authorities (Laursen & Salter 2005b), which will grant legal protection once novelty of the innovation has been confirmed.
Hence, patents do not shield knowledge from external partners (such as secrecy), but they deliberately disclose it to the general public. In return, innovators receive the legal right of exclusivity for their innovations, preventing collaboration partners from commercializing any knowledge protected through patents. This process defines intellectual property rights explicitly and indisputably, which establishes a clear ownership of ideas and innovations (Leiponen & Byma 2009). This is how firms can protect the appropriation of rents on innovations and hence, knowledge protection is not necessary anymore.
Reasons to patent are manifold: firms do not only patent to protect knowledge, they patent to commercialize and license a patented invention, prevent rivals from patenting related inventions (Cohen et al. 2000), and to enhance their position in negotiations (Harabi 1995). SMEs are most likely to patent because they want to approach capital markets and to enhance the reputation of the firm (Cohen et al. 2000).
Despite its benefits, patents have not been found to be effective for all types of innovations. In fact, the effectiveness of patents for process innovations is limited. Moreover, the number of industries, which can benefit from patents seems to be very restricted (Harabi 1995). There are many reasons, why patents may not be a good choice for companies. Some firms have difficulties in demonstrating the novelty of an innovation (Cohen et al. 2000). Others may fear that the amount of information disclosed in a patent application will provide competitors with information about follow-on products or processes (Liebeskind 1997). And most importantly, companies may fear that patents can be invented around by competitors (Harabi 1995; David J. Teece 1986).
What is more, the process of gaining legal protection has been characterized as being time consuming and labor intensive (Laursen & Salter 2005a), involving substantial resource commitments (de Faria & Sofka 2010), and being bureaucratic (Macaulay 1963). SMEs in particular find patents to be very cumbersome because of these reasons (Leiponen & Byma 2009). In the process of acquiring a patent, knowledge needs to be codified and technical novelty demonstrated to external actors; a process, which does not guarantee that the inventor will receive protection at all. Not surprisingly, the time and costs associated prevent many small firms from applying for patents in the first place (Cohen et al. 2000).
Barriers are not only limited to problems of acquiring patent protection. Once a patent is granted, the legal requirements for upholding its validity are high (David J. Teece 1986). The costs of defending patents in court may prohibit companies, especially SMES, from patenting (Olander 2009). What is more, Chesbrough (2010) points out that SMEs have a disproportionately higher risk of being sued for submitted patents, and this increased risk of litigation is not offset by a more rapid resolution of their suits (Lanjouw & Schankerman 2004).
Other, more general drawbacks of patents include that patents may contribute to a decrease of trust between partners (Macaulay 1963) and that its usage may lead to a lock-in into a certain product concept, closing up the possibilities for further modification (Teece, 1986). Furthermore, it is important to keep in mind that patents can protect effectively only explicit, codified knowledge (D.J. Teece 1998).
After a patent has expired, trademarks and copyrights may prolong the rents on innovations. Trademarks for example, may well preserve the image of an innovation and become a barrier to imitation (Hurmelinna-Laukkanen & Puumalainen 2007). However, unlike patents, trademarks and copyrights do not protect knowledge against imitation.
Human resource management:

The loss or leakage of critical knowledge is often attributed to the indiscretion of individual employees (Lowe & Jordan 2004). Therefore, it is important to create a corporate culture that signals a more prudent relation to competitors or partners (Knudsen 2006).