How SMEs protect critical knowledge in joint innovation activities with external partners

Master's Thesis, 2011

101 Pages, Grade: Sehr gut


Table of Contents


List of Tables and Figures

List of Names and Abbreviations

1. Introduction and Research Question
1.1. Background
1.2. Research question
1.3. Outline of the report

2. Theory
2.1. Means of protecting critical knowledge
2.1.1. Long term (strategic) means of protection
2.1.2. Medium term (tactical) means of protection
2.1.3. Short term (operational) means of protection
2.1.4. Overarching factors
2.1.5. Other
2.2. Strategies of protecting critical knowledge
2.2.1. Dilemma of openness and protection
2.2.2. Factors and determinants
2.2.3. Unique opportunities and challenges of smaller companies
2.2.4. Interrelations and trade off of protection mechanisms
2.2.5. Current best practices

3. Methodology
3.1. Research Design: Building theory from case studies
3.2. Research field
3.2.1. “Top 100 Unternehmen”
3.2.2. Research sample
3.3. Data collection: Interviews and secondary sources
3.4. Data analysis

4. Findings
4.1. Protection strategies
4.1.1. Formal vs. informal means of protection
4.1.2. Means of protection vs. openness to external partners
4.1.3. Strategic groups
4.2. Cross-case patterns and relationships
4.2.1. Initial secrecy and patents reduce possible innovative performance
4.2.2. Influencing factors and the relevance of personal experiences
4.2.3. Strategies do not differ for different collaboration partners
4.2.4. SMEs prefer to collaborate with small partners
4.2.5. Large companies can protect knowledge better
4.3. Protection mechanisms
4.3.1. Distribution of protection mechanisms
4.3.2. Detailed evaluation of protection mechanisms

5. Discussion & Implications
5.1. Conclusion
5.2. Managerial implications
5.3. Further research
5.4. Limitations

6. Bibliography

7. Appendix
7.1. MAXQDA code system
7.2. Interview guideline – preliminary version
7.3. Interview guideline – final version
7.4. Relationships of different protection mechanisms


For small firms, knowledge leakage, loss and theft are counted among the greatest risks in inter-firm collaborations. SMEs are more vulnerable, because they suffer from a number of structural disadvantages when collaborating with larger companies, and yet, they need to collaborate with external partners to overcome their lack of resources.

Therefore, this study investigates how SMEs can most effectively protect critical knowledge in collaborations with external partners, for that they can prevent knowledge loss, leakage and theft, while maximizing the performance of the collaboration. Based on a comprehensive review of existing literature, and a qualitative multiple-case study evaluation, where highly innovative and successful SMEs in Germany contributed their experiences, I have derived valuable insights for practice and theory.

Overall, the most commonly used means of protecting critical knowledge were secrecy, patents, the systematic selection of partners, and contracts. Despite the importance given to these mechanisms, not all of them proved to be effective. In fact, trust, secrecy and the systematic selection of partners were considered to be most effective, while initial secrecy and patents were concluded to overprotect knowledge, thus, limiting the possible overall innovative performance. Complementary assets, rotating personnel, oligopolistic market structures, equity relationships, technical means of protection, and employee contracts were found to be entirely ineffective for SMEs.

When analyzing the relations of protection mechanisms, a significant correlation between the type of protection and the openness to external innovation emerged: companies, which used initial secrecy and patents to protect knowledge, did not collaborate with external partners to co-develop new ideas, while companies, which focused on trust as a means of protection, were much more likely to do so. What is more, SMEs did not differentiate these strategies for different types of partners and they generally preferred to collaborate with smaller firms. In fact, it turned out that strategies are influenced by a number of factors including experiences made in previous collaborations.

List of Tables and Figures


Table 1: Characteristics of interviewees and respective companies


Exhibit 1: Overview of available protection mechanisms

Exhibit 2: Selection of companies from study "Top 100 Unternehmen"

Exhibit 3: Correlation of secrecy/patents vs. trust/other mechanisms

Exhibit 4: Classification of companies along informal vs. formal means of protection

Exhibit 5: Correlation of protection mechanisms vs. openness to external innovations

Exhibit 6: Protection mechanisms by strategic groups

Exhibit 7: Overview of protection mechanisms applied by companies

List of Names and Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction and Research Question

1.1. Background

Innovation, a key success factor for today’s businesses (Oecd Publishing 2008), was in the past created and delivered by company-internal R&D divisions (H. W. Chesbrough 2006). However, internal capacities have become insufficient to compete with the increasing competition in the globalised marketplace. In order to gain new competitiveness, companies have opened up innovation boundaries (Economist Intelligence Unit 2007) and have embraced the ideology of appreciating external sources as an essential means for sustaining competitive advantages (Di Gangi & Wasko 2009). Increasingly, companies collaborate with external partners, such as customers, in new product development (Brockhoff 2003; Prahalad & Ramaswamy 2000).

Despite its benefits, collaborating with external partners to co-create products or services is fraught with challenges (Bughin et al. 2008). Some of the greatest challenges include the risks of knowledge leakage, theft and loss (Gassmann et al. 2010; Gassmann et al. 2005; Kausch 2007; Hipp & Herstatt 2006; Enkel & Gallen 2005; Economist Intelligence Unit 2007).

The problem emerges because in order to create value, both collaboration parties need to be open and share their knowledge. (Paasi et al. 2010) Collaborators have to adopt means to facilitate knowledge transfer, which, at the same time, expose the companies to the risk of knowledge leakage (Heiman & Nickerson 2004). It follows that external collaborators may acts opportunistically in bad faith (Dahlander & Gann 2010) and acquire the focal firm’s knowledge, to imitate or appropriate innovations (Norman 2004), or to trade this knowledge to competitors (Enkel & Gallen 2005). Therefore, knowledge sharing needs to be protected (Paasi et al. 2010) .

But, protecting knowledge in collaborative projects with external partners is not a straightforward process. Clear-cut situations, where an innovator is easily protected through patents or copyrights, or where the nature of the product is such that tacitness effectively denies access to imitators, have become the exception rather than the rule (David J. Teece 1986). What is more, there is a risk of over-protection, where the fear of knowledge theft may focus companies’ attention away from the opportunities in the external environment, and may induce them to limit collaborations with external partners (Laursen & Salter 2005b; Norman 2004).

The challenge is even more delicate for smaller firms. On the one hand, SMEs have a greater need to collaborate with external partners, because they are confronted with their boundaries: their smallness, their limitation and scarcity of resources and their shallow nature of knowledge (Nooteboom 1994). But on the other hand, collaborating with external partners entails even greater risks for them. In comparison to larger firms, SMEs often lack the capabilities necessary to identify, transfer and absorb external ideas and technologies effectively (H. Chesbrough 2010), and they suffer from a lower absorptive capacity (Nooteboom 1994), a lack of resources, and a lack of institutionalized, well-structured innovation processes (H. Chesbrough 2010). Furthermore, the danger of loss of critical knowledge becomes even more vivid for smaller businesses, because they cannot prop up failures in one activity with successes elsewhere due to a restricted scope of activities (Nooteboom 1994). Hence, small firms worry about losing core knowledge assets to collaborators (Olander 2009), which can ultimately obliterate their business.

To compensate for these risks, larger companies implement various means of protection. They use patents, practical concealment and secrecy, lead time, labour legislation and contracts, technical means to limit access, tacitness of knowledge, and complementary marketing and manufacturing capabilities (Cohen et al. 2000; Hurmelinna-Laukkanen & Puumalainen 2007; Liebeskind 1997). They selectively choose partners, partition tasks and rapidly rotate staff (Lowe & Jordan 2004), and they try to strike a balance between trust and contracts (Paasi et al. 2010).

However, due to the remarkable differences between small and large firms, it is unlikely that strategies, which are applied by larger firms, are effective means to protect knowledge for smaller companies as well. As a matter of fact, relatively recent studies, which have been set up to investigate this issue, have found that such strategies are not beneficial for small firms engaged in cooperative innovation (Leiponen & Byma 2009) and that SMEs need to develop their own toolbox of mechanisms (Olander 2009).

1.2. Research question

In this study, I want to contribute to this field and evaluate which strategies and mechanisms SMEs should apply to protect critical knowledge in collaborations with external partners.

Previous publications do not to address this topic, because they focus on the appropriation of innovation and not the protection of knowledge. Therefore, they lack to provide a clear path for smaller companies on how to deal with the challenge presented earlier. Furthermore, many studies, which have been published in this field, have often investigated broad empirical samples, which has resulted in a literature of common, but not necessarily best practice.

With this research I will close this gap. The research question shall be defined as:

How do SMEs most effectively protect critical knowledge in joint innovation activities with external partners?

In this study, I intend to develop best practice on how SMEs should deal with this challenge. Not only will I analyze the relations of different means of protection and cluster evolving strategies, but I will also investigate the influence of external and environmental factors and evaluate the unique strengths and weaknesses of smaller firms in comparison to their larger counterparts.

By examining best practices used by the most innovative and successful SMEs in Germany, the results of this study will be particularly valuable for other companies. Firms of all sizes may benefit from this study to develop their strategies and to plan accordingly for the risk of knowledge leakage. Small firms may adopt the insights gained in this work to better protect critical knowledge in collaborations, while larger firms may find this study useful to understand the motives, fears and decisions of smaller collaboration partners.

1.3. Outline of this document

After I have demonstrated the relevancy of this study, I want to briefly outline the structure of this document.

In the following chapter, “2 Theory”, I will review relevant literature, which reflects current best practice on protecting critical knowledge in collaborations. In this chapter, I will recapitulate the protection mechanisms available to companies and summarize important considerations for creating effective protection strategies.

Afterwards, in chapter “3 Methodology”, I will outline how this research was set up and present the methods, which have been applied to gather and analyze data. In detail, I will discuss the research design, which is based on a multiple case study approach by Eisenhardt (1989). What is more, I will present the “Top 100 Unternehmen” project and the companies, which have been selected from this project to be interviewed for this study. Furthermore, I will summarize how data was collected and analyzed.

Subsequently, in chapter “4 Findings”, I will present the findings of this study. First, I will summarize and cluster the different strategic approaches of knowledge protection applied by the companies in this study. Then, I will evaluate patterns and influential factors, which have emerged from the analyses of data. And afterwards, I will review in detail how the companies in this study have applied the protection mechanisms presented earlier.

Eventually, in chapter “5 Discussion & Implications”, I will conclude this study by developing a number of propositions resulting from the findings presented earlier. What is more, I will derive managerial implications for companies of all sizes, propose possible areas of further scientific research and discuss the limitations of this study.

2. Theory

I have outlined that knowledge needs to be protected (Paasi et al. 2010) to overcome the risks of its leakage, loss and theft. In the following subchapter, I will review protection mechanisms available to companies to protect knowledge in collaborations. Afterwards, I will summarize important considerations for creating effective knowledge protection strategies, where these mechanisms are combined and influential external factors are taken into consideration.

2.1. Means of protecting critical knowledge

Firms may protect knowledge in joint collaborative projects with external partners through a range of different mechanisms. These means of protection constitute the building blocks of knowledge protection strategies.

Since no single research contribution provides a comprehensive overview of all relevant means of protection for SMEs (authors have usually focused on a subset of protection mechanisms based on the particular challenge they are addressing in their research), I will synthesize relevant means of protection from many different and relevant areas of expertise. This synthesis includes mechanisms to appropriate returns of innovation (Hurmelinna-Laukkanen & Puumalainen 2007; Leiponen & Byma 2009; Cohen et al. 2000; Olander 2009; Laursen & Salter 2005a; Harabi 1995; David J. Teece 1986), protection mechanisms of knowledge in general (Liebeskind 1997; de Faria & Sofka 2010), protection mechanisms in collaborative relationships and alliances with external partners (Paasi et al. 2010; Hoecht 2005; Lowe & Jordan 2004; Hipp & Herstatt 2006; Heiman & Nickerson 2004; Knudsen 2006; Norman 2004; Norman 2002), protection mechanisms in collaborative relationships with customers (Kausch 2007; Enkel & Gallen 2005; Gassmann et al. 2010; Gassmann et al. 2005), and protection mechanisms of knowledge and innovation in smaller companies (Olander 2009; Leiponen & Byma 2009; Lanjouw & Schankerman 2004). All of these different streams of literature contribute to or constitute best practice of protection strategies from different points of view, which are relevant for the challenge of exchanging critical knowledge in joint innovation activities.

In order to get a better overview of the most important means of protecting critical knowledge, I have created a model, which classifies the mechanisms in four categories: “long-term (strategic)”, “medium-term (tactical)”, “short-term (operational)” and “overarching factors”. Please refer to Exhibit 1 for this overview.

Abbildung in dieser Leseprobe nicht enthalten

Exhibit 1: Overview of available protection mechanisms[1]

I shall define long-term (strategic) mechanisms as such, which are generally deployed for all collaboration projects and which are planned and implemented well ahead. Medium-term (tactical) means are such, which are put into practice for specific collaborative projects and which may differ from collaboration to collaboration. Short-term (operational) means of protection are immediate mechanisms, which may change in the course of a collaborative assignment. In addition to that, there are “overarching factors”, which cannot be planned for by the company and which substitute the need for other protection mechanisms throughout all phases.

In the following subchapters I will review the different means of protection in more detail. Wherever applicable, differences in the manner a mechanism is exercised by SMEs compared to large companies will be delineated.

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.


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).

Rules and Sanctions

In order to control human resources, firms are legally empowered to impose rules on employees (Liebeskind 1997) . Such rules may be imposed through employment contracts (Hurmelinna-Laukkanen & Puumalainen 2007) or through codes of conduct. To protect knowledge, rules may restrict the transfer of knowledge by specified employees to specified others, confine social interaction or limit physical access to specified areas (Liebeskind 1997).

In order to ensure that rules are adhered to, companies need to monitor personnel and impose sanctions. Upon infringement, employees may be prosecuted under trade secret laws or they will have to face termination of employment and/or legal sanctions (Liebeskind 1997).

Unfortunately, there are a number of drawbacks to rules and sanctions. An effective system may incur substantial costs and there is the risk that it will disgruntle employees and lead to resistance rather than cooperation (Liebeskind 1997).

Therefore, it is important to not to impose such a system on employees, but to gain their commitment and help them comprehend the reasoning for such measures. People must understand the value of knowledge, so that they refrain from accidentally revealing it to external partners (Liebeskind 1997) .

Compensation Design

Another means of motivating employees to be more careful when dealing with critical knowledge is to create a compensation design as defined by Liebeskind (1997) . It is about creating an organizational design and a compensation structure, so that employees are provided with incentives not to leak valuable information to outside experts.

A possible way of implementation includes the pooling of rewards to teams, so that employees are encouraged not to violate the team’s knowledge monopoly. If knowledge becomes the property of teams rather than individuals, valuable knowledge will also be more diffused throughout a firm, which will make it harder to grasp for external partners (Liebeskind 1997).

Trust and social control

Employees cannot be controlled or monitored at all times, but should be trusted by employers. Therefore, companies should establish a social system, where rules are enforced through social control (Liebeskind 1997) .

In fact, social relationships are a very effective means for protecting knowledge. They operate through imposing significant psychological, social and economic pressures on individuals who transgress established norms (Liebeskind 1997) .

2.1.2. Medium term (tactical) means of protection

The following means of protection are usually put into practice just before a company starts to collaborate with an external partner. They may differ from collaboration to collaboration.

Systematic partner selection

According to Kausch (2007), all risks in collaborative projects boil down to having chosen the wrong partner. Also, researchers focusing on relational aspects of alliances emphasize the importance of selecting the right partner for successful outcomes (Lowe & Jordan 2004) . Selecting a trustworthy partner is important because it decreases the risk of betrayal by external partners, and it increases the potential for a creative exchange of ideas.

Companies may choose collaboration partners, which they know already or which they have tested before (Enkel & Gallen 2005). Partners, which were reliable in prior projects are the best candidates (Gassmann et al. 2010) and personal contacts are the preferred selection criterion (Kausch 2007), in particular for SMES (Nooteboom 1994).

In fact, prior relationships with partners allow firms to learn about that partner and build up trust (Norman 2002). In the first phases of a new partnership, partners can develop behavioral expectations, reduce uncertainty and establish a situation where intentions become clear and partners understand each other (Larson 1992). Nevertheless, it is crucial to consistently monitor the quality of partners to make sure that an initially “right” partner continues to remain one (Kausch 2007) . If the focal firm cannot establish a trusted relationship with one of its partners, it can respond by protecting knowledge through other mechanisms and it may refrain from choosing the same partner again.

Porter (1986) argues that good alliance partners should have the following characteristics, which will reduce the risks in collaborations:

- Possession of desired source of competitive advantage
- Possibility to make a complementary and balanced contribution
- Compatible view of strategy
- Low risk of becoming a competitor
- Pre-emptive value in relation to rivals: e.g. a major source of advantage to threaten rivals
- Organizational compatibility

Nevertheless, for SMEs it might be difficult to put this strategy into practice. Smaller firms suffer from a limitation of information sources and resources, which may make it difficult to find reliable partners in the first place (S. Lee et al. 2010).

Good timing of partner integration

The timing of partner integration also prevents the loss of knowledge in collaborative arrangements. When collaborating with external partners, the integration needs to be as early as necessary, but as late as possible (Kausch 2007). The right timing ensures that the partners learns as little as possible about the company know-how as late as possible and that the partner contributes his own ideas at a moment when they still have a decisive impact (Enkel & Gallen 2005).

Contracts and Non-disclosure agreements

As part of collaborations, companies usually set up a number of agreements regarding intellectual property. Such contracts usually comprise non-disclosure agreements (NDAs), lists detailing the contribution of know-how, and agreements on ownership of the outcome of the collaboration (Enkel & Gallen 2005) .

Codified knowledge can be controlled to some extent by such agreements (Hurmelinna-Laukkanen & Puumalainen 2007). However, the protection afforded by this mechanism is limited (Kausch 2007) as it is only useful as long as partners honor it (Gassmann et al. 2010). The problem is that it is difficult to prove a violation and monitoring is not always possible (Hoecht 2005).

Furthermore, NDAs require both legal skill and managerial feeling to create the right balance between knowledge protection and creativity for innovation (Gassmann et al. 2010). Too much attention on contracts at the beginning of joint work may kill innovation (Paasi et al. 2010).


Hipp & Herstatt (2006) point out that lock-in effects can reduce the danger of imitation and uncontrolled knowledge spillovers. Such effects may be created through interrelated services or agreements, which ensure that collaboration partners have a continued interest in keeping any critical knowledge gained secret.

2.1.3. Short term (operational) means of protection

Operational means of protection are those, which companies may put into practice in single collaborative projects and which they may change throughout a project depending on how the collaboration develops.

Control and manipulation of information flow

A common variance of secrecy is the control of information flows (Norman 2002). Companies may choose to control the process of sharing knowledge, by structuring and restricting outgoing knowledge flows and turning mutual sharing into one-way knowledge absorption (Malhotra 2000).

What is more, in order to protect critical knowledge, firms may choose to manipulate information, before exchanging it. This is a practice, which has not received a lot of attention and has not been considered in comparative studies on the protection of knowledge or innovation. However, it is not new. Malhotra (2000) points out that partners may on purpose provide less or inaccurate information in collaborations.

It is important to keep in mind that controlling or manipulating information flows may have a negative impact on the outcome of collaborations. In particular, the desired knowledge spillover from the external partner to the company, which is an important reason for its integration, could be impaired by comprehensive restrictions (Kausch 2007). Furthermore, manipulating information obviously undermines central principles of a partnership, which leads to a risk that, when external partners realize that they have been given false information, they may lose trust in the focal firm and refuse to collaborate.

Clear task partitioning

Clearly partitioning tasks reduces the risk of knowledge leakage because it can prevent unintentional transfers of knowledge to external partners (Lowe & Jordan 2004). Kausch (2007) recommends subdividing one task as much as possible and using different partners for different jobs, so that the company will only reveal a limited part of its knowledge to external partners.

However, small firms may find it difficult to put this strategy into practice due to the costs, time and effort associated to making it work. In particular, it seems difficult to reach a balance between protecting the company knowledge and telling the partner enough, so that it can contribute to the project.

What is more, this practice is only useful when partner firms possess distinctive comparative advantages for certain modular tasks (Lowe & Jordan 2004). If partners possess such a comparative advantage, this strategy does not only allow companies to protect knowledge better, it can also improve architectural learning by focusing more explicitly on ways in which both partners’ technology, capabilities and organizations fit together (Lowe & Jordan 2004).

Rotating personnel

Another means to enhance the appropriability of innovations is to frequently rotate personnel or managers (Kumar & Seth 1998), which will prevent tacit knowledge from being transferred easily (Hurmelinna-Laukkanen & Puumalainen 2007), because individuals do not easily reveal knowledge unless they know and trust the partner. Most notably, tacit knowledge needs inter-personal communication and extended social contact to be transmitted (Liebeskind 1997)

However, it is important to keep in mind that rotating personnel may slow down the collaborative process of developing new innovations, because it reduces the openness in knowledge sharing and progress made in earlier interactions may be lost when new employees join a project. What is more, smaller firms may fail to adopt this mechanism because of their limited human resources.

Technical means

At last, there are a number of practical and technical means to limit access to information, such as passwords, digital signatures, copy prevention, and cutting of access to information on a particular date (Hurmelinna-Laukkanen & Puumalainen 2007).

These means are similar to the control of knowledge flows. They make sure that critical knowledge is not leaked easily.

2.1.4. Overarching factors

Overarching factors balance the need for other protection mechanisms and they can usually not be influenced by the focal firm - they either exist or not.


Trust is of crucial importance in collaborative assignments (Hoecht 2005). It is defined as a positive expectation about the partner’s behavior, which leads to a decreased risk perception, making it possible for the focal firm to ignore some of the objective risks in collaborations (Hoecht 2005). Furthermore, it establishes informal norms and agreements and can cover situations which cannot explicitly be enclosed in formal contracts (Blomqvist et al. 2008). Knowledge is protected by engaging with trusted partners, who have a lower likelihood of being opportunistic (Lowe & Jordan 2004) .

According to Sako (1992) there are three types of trust: contractual trust, where the partner is trusted to adhere to specific written or oral agreements; competence trust, where the partner is trusted to be performing its role competently; and goodwill trust, where the partner is trusted to be dependable beyond contracts and to refrain from unfair advantage taking. When it comes to collaborative arrangements, in most cases goodwill trust is necessary: even when partners are presented with learning opportunities, they shall not use the acquired knowledge in ways that are harmful to the focal firm (Norman 2004).

The more the focal firm can trust partners, the less protective it needs to be. Consequently, safeguarding procedures and monitoring costs can be reduced (Inkpen & Li 1999). In addition to that, through trust, firms are more likely to focus their efforts on activities that are beneficial for the partnership (Norman 2002) - not only will the company save costs, but it will also acquire more and lose less knowledge (Norman 2004).

However, it is important to keep in mind that trust does not prevent opportunistic behavior; it only lowers the perceived risk. Trusting someone does not mean that this person cannot betray this trusted relationship (Hoecht 2005).

What is more, it is important to keep in mind that trust is usually established between individuals. It is a personal judgment (Hoecht 2005). Therefore, trust is highly volatile, and can only be benefited from as long as trusted individuals are collaborating with one another – once they move on, trust may be lost (Lowe & Jordan 2004). Also, it is not a mechanism that can be planned for in advance; it develops through recurrent transactions between these individuals (Bougrain & Haudeville 2002).

Consequently, trust alone is not enough to cover for the risks of knowledge loss. In particular at the beginning of new relationships, trust levels are expected to be low, and therefore, it is necessary to protect knowledge with other mechanisms. In absence of trust, structural mechanisms can induce partners to act in non-detrimental ways (Lowe & Jordan 2004).

As with secrecy and lead time, trust is a mechanism that is more easily at the disposal for small firms. Therefore I expect that trust will be an important factor for SMEs when protecting knowledge.

Tacit Knowledge

The possibility of knowledge acquisition by external partners is affected by the degree of tacitness of knowledge. Tacit knowledge is difficult, if not impossible, to transfer (Hurmelinna-Laukkanen & Puumalainen 2007), while codified knowledge is more exposed to industrial espionage and the like (David J. Teece 1986). In fact, tacit knowledge can only be acquired by external partners through close working relationships (Lowe & Jordan 2004): it needs inter-personal communication and extended social contact to be transmitted (Liebeskind 1997).

However, tacitness can also constrain collaborations. Knowledge transfers, which are required in some situations, become more difficult as the level of tacitness increases (Heiman & Nickerson 2004).

Furthermore, when knowledge is tacit, companies may not be able to use other means of protection. Patents are difficult to implement, because disclosing the required information may not be possible (Tuppura et al, 2005). Lead time may not be applicable anymore due to the increased difficulty of knowledge diffusion within the company (Hurmelinna-Laukkanen & Puumalainen 2007).

What is more, there might as well be a need for increased protection due to the tacitness of knowledge, because it is likely to be a source of competitive advantage and therefore represents an indispensible asset to the focal firm, which shall not be leaked to external partners (Norman 2002).

As with trust, tacitness of knowledge is something companies cannot plan for, it is either present or not (Hurmelinna-Laukkanen & Puumalainen 2007). In case it is, it will have a great impact on the strategy put in place for protecting knowledge in joint innovation activities.

Because knowledge is more likely to be of tacit nature in small businesses (Nooteboom 1994), they are more likely to benefit from it when protecting knowledge. In contrast, in large businesses, knowledge naturally becomes more explicit and documented, because it needs to be communicated across a wider span of people (Nooteboom 1994).

Complexity of Design

The more complex a product, the more difficult it is for other firms to grasp and imitate (Laursen & Salter 2005a). Hence, even if partners could gain critical knowledge in collaborative projects, this knowledge may simply be too complex for them to comprehend and it can only be fully exploited if it is combined with additional expertise (de Faria & Sofka 2010) .

2.1.5. Other

At last, there are some other means of protection, which have been investigated in theory. Some empirical evidence suggests that oligopolistic market structures offer protection (Harabi 1995). What is more, equity relationships seem to experience significantly lower levels of knowledge loss (Norman 2004). However, these means of protection have only received very little attention.

2.2. Strategies of protecting critical knowledge

Clear-cut situations in tight appropriability regimes, where an innovator is easily protected through patents or copyrights, or where the nature of the product is such that tacitness effectively denies imitators access, have become the exception rather than the rule (David J. Teece 1986).

Nowadays, companies need to develop comprehensive strategies to protect critical knowledge by choosing the appropriate means of protection from the range of possible knowledge protection mechanisms presented earlier, while taking into account the challenges posed by the environment (de Faria & Sofka 2010). The more effective the strategy, the better the firm can control the outflow of knowledge and the more likely cooperative arrangements will be successful (Cassiman & Veugelers 2002).

Crafting knowledge protection strategies starts with choosing what knowledge to protect, which is generally difficult to determine. Hence, any strategy adopted will result in either over- or under-protection (Liebeskind 1997). It follows that management needs to be especially careful about any possible negative side-effects as the choices it makes can become a matter of life or death for their firm (Laursen & Salter 2005a) .

The following chapters will present challenges when protecting knowledge, review factors which influence strategies, reveal unique benefits and disadvantages of small firms in protecting knowledge, shed light on the interrelations of protection mechanisms, and recapitulate current best practices.

2.2.1. Dilemma of openness and protection

I have outlined that too little protection of knowledge can lead to a loss of competitive advantages and market positions. Yet, too much protection can be equally harmful. There must be a balance between protecting knowledge and encouraging the exchange of information.

Traditionally, knowledge is valuable only if it is privately held and excluded from the use by others - only when it is asymmetrically distributed it can earn firms rents (Liebeskind 1997). It follows that firms may choose to limit knowledge exchanges and to lock themselves into a mentality of control and secrecy, where they are unable to share ideas with external partners (Laursen & Salter 2005a). They may create a tight protective regime, where they prevent possible losses by limiting a partner’s learning opportunities (Norman 2004) while creating barriers to collective knowledge development (Lowe & Jordan 2004).

Such behavior is counter-productive. Doing so will lead to a sub-optimal outcome of the collaborative partnership (Lowe & Jordan 2004). External partners may be less willing to share their knowledge in such a controlled environment and hence, opportunities to learn may be reduced (Norman 2004) and possibilities of utilizing positive network externalities diminish (Hurmelinna et al. 2007). The desired spillover from the partner to the company will be impaired (Kausch 2007) and the transfer of the highly valuable knowledge from the partner to the focal firm may be obstructed (Hurmelinna-Laukkanen & Puumalainen 2007).

A dilemma evolves. Protection mechanisms are necessary to decrease the risk of knowledge leakage, but they also decrease the transferability of knowledge (Hurmelinna et al. 2007). There is a tension between the need to share and to protect knowledge (Heiman & Nickerson 2004).

This tradeoff between maximizing protection and maximizing value is inevitable (Hurmelinna-Laukkanen & Puumalainen 2007). Hence, companies need to find ways to balance this on-going tension (Laursen & Salter 2005b). Although they should plan for the risk of leakage, they must also consider the opportunities of knowledge sharing, namely that it can result in increased innovative performance, it can help shape institutional environments, it contributes to establishing dominant designs, and it influences researchers’ opinions (Spencer 2003). In particular, companies must weigh the risk of knowledge leakage against the risk of falling behind competitors and loosing access to cutting-edge information (Hoecht 2005).

Consequently, the enforcement of protection mechanisms must be limited accordingly in order to allow for positive network externalities (Hurmelinna et al. 2007). Companies must balance the need to share knowledge with the need to protect knowledge in the interest of long-term strategic perspectives (Norman 2002).

2.2.2. Factors and determinants

Many factors, most of which cannot be controlled for, need to be taken into account when crafting protection strategies. Literature suggests that the following factors have a great influence on the choice of protection mechanisms:

- The nature of the knowledge
- The competitive environment
- The partner
- The organization

First of all, the nature of the knowledge such as its complexity or the tacitness (as outlined earlier) has a great influence on the need for other means of protection (Cohen et al. 2000) – the more tacit or complex, the less additional protection is needed. Furthermore, the possibility of possession by individuals and the possibility of legal protection will impact strategies as well (Liebeskind 1997). What is more, the R&D investment required for underlying innovations plays a role: where higher investments are necessary, patents are more likely to be used (Leiponen & Byma 2009).

Furthermore, the competitive environment, in which the company operates, will influence the choice of protection mechanisms (Olander 2009). Important factors include the nature and intensity of competition (Cohen et al. 2000), and the appropriability conditions in the industry (Cassiman & Veugelers 2002). The more competitive or risky the environment, the higher levels of protection will be.

Moreover, the perception of the partner, which a company wants to collaborate with, will impact the strategies. Norman (2002) has found that firms are more protective when partners possess resources and capabilities, which are similar to the focal firms’ own resources, when partners are perceived to have higher learning intents, and when partners have a desire or the ability to use the knowledge acquired. In contrast, when partners are trusted, firms are usually less protective.

At last, the effectiveness of organizational arrangements has been found to impact the choice of protection mechanisms (Liebeskind 1997). The more effective the arrangement, the less additional protection is needed.

In addition to that, it is important to highlight that the decisions companies make are also driven by stated intentions and suspicions (Norman 2002). In other words, the company will react to risks it perceives to be the most problematic, not necessarily those which objectively would be.

In addition to that, Hurmelinna-Laukkanen & Puumalainen (2007) outline a number of further factors, which may influence the choice of protection mechanisms:

- Efficiency of protection mechanism for other purposes (e.g. patents might be used for a number of purposes)
- Availability (e.g. the usage of patents may not be possible if novelty cannot be demonstrated)
- Costs (e.g. maintaining patent rights is very costly)
- Changes in the environment (i.e. the strength of different mechanisms changes over time: trade secrets may be revealed, patents may lose efficacy)
- Perceived strengths of protection mechanisms

Many of these factors are also distinguishable for different industries. Therefore it is not surprising that there are significant industry differences when it comes to the protection of knowledge (Laursen & Salter 2005a; Harabi 1995). The size of the company is an equally important differentiating factor; small firms’ strategies differ significantly from larger companies (Cohen et al. 2000) .

2.2.3. Unique opportunities and challenges of smaller companies

Small and medium sized companies face unique challenges and have unique opportunities when it comes to exchanging information and collaborating with external partners. Their unique characteristics ultimately influence the effectiveness of different means of protection.

In comparison to larger firms, SMEs have a greater need to collaborate with external partners. They are confronted with their boundaries: their smallness, their limitation and scarcity of resources and their shallow nature of knowledge (Nooteboom 1994). In fact, the collaboration between firms and networks is increasingly regarded as an important success factor for SMEs to compensate for the lack of awareness and knowledge (S. Lee et al. 2010; Nooteboom 1994), and to overcome the lack of resources when developing and commercializing new products (van de Vrande et al. 2009). Not only that, collaborations and networks may also be effective means to enter wider markets and to improve chances to compete against larger competitors (S. Lee et al. 2010). They provide SMEs with a window on technological change, a source of technical assistance and provide information about market requirements and strategic choices made by other firms (Bougrain & Haudeville 2002). In particular, when it comes to collaborating with large companies, there is an opportunity for SMEs to absorb more knowledge from their partners, than partners can absorb from them (Norman 2004).

However, SMEs also face some unique challenges when protecting knowledge in collaborations.

SMEs suffer from structural disadvantages, which is why they are in a weaker position when dealing with firms larger than themselves (Leiponen & Byma 2009). They often lack the capabilities necessary to identify, transfer and absorb external ideas and technologies effectively (H. Chesbrough 2010). In comparison to larger firms, they suffer from a lower absorptive capacity (Nooteboom 1994), a lack of resources, and a lack of institutionalized, well-structured innovation processes (H. Chesbrough 2010). Moreover, their bargaining power is weaker (Olander 2009) due to their restricted resources and their lack of patent portfolios for negotiations. Consequently, they are often economically dependent on large firms as customers or suppliers (H. Chesbrough 2010). In case of problems, they cannot easily go to court against larger companies because of the risk of losing important partners and the costs associated by such a process (H. Chesbrough 2010).

Furthermore, the danger of loss of critical knowledge becomes even more vivid, because small businesses cannot prop up failures in one activity with successes elsewhere, due to a restricted scope of activities (Nooteboom 1994). While large companies can spread risks (Vossen 1998), small firms need to worry about losing core knowledge assets to collaborators (Olander 2009), which can ultimately obliterate their business.

Consequently, the strategies of protection used by smaller companies beg to differ from those used by larger counterparts and not surprisingly, they have been found to be qualitatively different (Leiponen & Byma 2009). In fact, most small firms emphasize informal means of protection, such as lead time, secrecy, tacitness of knowledge or human resource management (Leiponen & Byma 2009; Olander 2009). These means of protection are more readily at the SME’s disposal (Olander 2009) because small firms can take faster decisions and implement them rapidly (H. Chesbrough 2010).

2.2.4. Interrelations and trade off of protection mechanisms

Knowledge protection mechanisms influence one other. On the one hand, there are mechanisms, which are more effective when used together. For example, in order to enforce contracts, HRM mechanisms are beneficial (Hurmelinna-Laukkanen & Puumalainen 2007) and complementary capabilities become particularly useful through lead time (Cohen et al. 2000).

On the other hand, there seems to be a tradeoff between some mechanisms, such as patents and secrecy (Hurmelinna-Laukkanen & Puumalainen 2007) or first mover strategies and legal means of protection (Laursen & Salter 2005a).

And also, there are some mechanisms, which seem to substitute for others. Trust, for example, is often understood to balance the need for other mechanisms (Paasi et al. 2010).

These interrelations need to be kept in mind when crafting protection strategies to establish the right combination of the mechanisms available.

2.2.5. Current best practices

In overviews of different protection mechanisms for innovation and knowledge, informal means of protection (including lead time, secrecy and complexity of design) have found to be imperative (Laursen & Salter 2005a; Paasi et al. 2010; Olander 2009). Patents take an important role as a legal means of protection, but are frequently used only in a limited number of industries. These results, however, can hardly be generalized because, as outlined earlier, there are a number of other factors and determinants leading to different strategies. In fact, there is no one protection mechanism that fits all the diverging needs of companies. Therefore, I will outline in more detail, when which mechanisms afford optimal protection.

According to Harabi (1995), lead time seems to be the most effective means of appropriating returns for both product and process innovations. In particular, small firms, which are engaged intensively in vertical relationships, tend to emphasize speed to market (lead time) more than patents or secrecy (Leiponen & Byma 2009).

After lead time, secrecy is the most emphasized means of protection (Cohen et al. 2000; Harabi 1995). In particular for process innovations, secrecy is considered to be very effective and in particular private research laboratories, chemicals, electronics and the food industry emphasize this mechanism (Harabi 1995). When it comes to small firms, secrecy is favored by those, which invest little in R&D, focus on process innovation or sustain horizontal R&D cooperations (Leiponen & Byma 2009). Nonetheless, experts agree that it is generally a weak means of appropriability (Harabi 1995).

Among the legal means available to protect knowledge, patents are the most popular. In a study by Paasi et al. (2010) half of the interviewees confirmed that patents are an important way to protect knowledge. Especially for product innovations (Harabi 1995), patents are effective for a number of industries, such as medical equipment and drugs, special purpose machinery, computer and auto parts (Cohen et al. 2000). When it comes to small firms, mainly those closely cooperating with universities as well as R&D intensive and science-based firms rely on patents (Leiponen & Byma 2009). In addition to that Brouwer & Kleinknecht (1999) outline that a firm’s propensity to patent is significantly higher among R&D collaborators.

Despite the benefits that patents offer to companies operating in certain industries, patents are ineffective for other industries. In a study by Harabi (1995), patents are considered to be the least effective means to protect innovations[2] and Cohen et al. (2000) point out that patents tend to be least emphasized by the majority of firms in manufacturing industries[3]. Patents are also reported to be less effective for process innovations (Cohen et al. 2000), and they are criticized for being too slow and too costly for many firms (Hoecht 2005).


[1] Source: compiled by the author

[2] Other means of protection surveyed included secrecy, lead time, complementary assets and moving quickly down the learning curve.

[3] Other means of protection surveyed included secrecy, lead time, complementary assets and other legal means.

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How SMEs protect critical knowledge in joint innovation activities with external partners
Vienna University of Economics and Business  (Entrepreneurship & Innovation)
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International Management / Entrepreneurship &amp, Innovation
SME, knowledge protection, alliances, collaboration, knowledge leakage, knowledge theft, secrecy, patents, trust, NDAs, openness, co-development, collaborative innovation, open innovation, dilemma of openness, best practice, co-creation, knowledge transfer, knowledge sharing, Germany, case study, small firms
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Karl Tschetschonig (Author), 2011, How SMEs protect critical knowledge in joint innovation activities with external partners, Munich, GRIN Verlag,


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