Research Policy 35 (2006) 1122–1130

Profiting from innovation and the intellectual property revolution

Gary Pisano ∗,1
Harvard Business School, Soldiers Field, Boston, MA 02163, USA
Available online 12 October 2006

Abstract
This paper reviews the contribution of Teece’s article [Teece, D., 1986. Profiting from technological innovation: implications
for integration, collaboration, licensing and public policy. Research Policy 15, 285–305.]. It then re-examines the core concept
of appropriability in the light of recent developments in the business environment. Whereas twenty years ago the appropriability
regime of an industry was exogenous and given, today they are often the product of conscious strategies of firms. And as open
source software and other industries show, advantageous appropriability regimes are not always “tight” or characterized by strong
intellectual property protections. The strategies adopted by firms that have successfully profited from their innovative activities cast
into new light old questions about the impact of intellectual property protection on the rate and direction of innovation.
© 2006 Elsevier B.V. All rights reserved.

Keywords: Technological innovation; Teece; Appropriability

1. Introduction In this essay, I have two objectives. First, I want

Twenty years ago, David Teece published his highly
influential article entitled “Profiting from Innovation.”
Since that time, this paper has drawn extensive attention
in the literature. It is one of the most cited papers in
the field of innovation, and it has been the most cited
paper in “Research Policy” over this time period. The
attention and praise aimed at this article is well deserved.
“Profiting from Innovation” (PFI) has had a profound
influence on the field of innovation and strategy. In short,
this paper initiated a process of convergence between
two fields that had essentially (and surprisingly) lived
apart: innovation and strategic management. Many of
the ideas presented in PFI continue to shape the way
scholars, and increasingly practitioners, think about the
role of intellectual property in strategy.
∗ Tel.: +1 617 495 6562.
E-mail address: gpisano@hbs.edu.
1 Harry E. Figgie, Jr. Professor of Business Administration.
to summarize what I see as the main contributions of
PFI to the fields of strategy and innovation and how
these ideas have shaped the intellectual dialogue on the
topic. Second, I want to re-examine some of the core
concepts presented in PFI – particularly the concept of
“appropriability regimes” – in light of recent changes in
the nature of intellectual property. In PFI, the appropri-
ability regime was exogenous. The challenge of strat-
egy was to develop appropriate vertical integration and
complementary asset positions given the extant appro-
priability regime. Increasingly, appropriability regimes
are not givens but are the product of conscious strategies
of firms. And, surprisingly, an advantageous appropri-
ability regime is not always “tight” or characterized
by strong intellectual property protections. Phenomena
such as open source software and forms of deliberate
intellectual property sharing are increasingly being uti-
lized by for-profit enterprises as a rent seeking strategy.
Such strategies cast into new light old questions about
the impact of intellectual property protection on the rate
and direction of innovation.

0048-7333/$ – see front matter © 2006 Elsevier B.V. All rights reserved.
doi:10.1016/j.respol.2006.09.008
 G. Pisano / Research Policy 35 (2006) 1122–1130
2. PFI and the fields of innovation and strategy
Like most good theory, PFI addressed a puzzle that
had not been well explained in the previous literature,
namely: why is it that innovators often fail to capture the
economic returns on their innovations? At the time PFI
was written, there were many such examples, and the
paper cites these (e.g. EMI in CAT scanners, Bowmar
in calculators). Perhaps more impressively, during the
ensuing twenty years after PFI was published, we can see
many more examples of such failures. The phenomenon
endures. The first generation PC manufacturers all but
disappeared from the scene (and even IBM, while not a
first-mover in PCs, recently exited the business by selling
its PC business to a Chinese company, Lenova). Apple
invented the graphical user interface, but Microsoft Win-
dows dominates the PC market. Apple invented the PDA
(the bricklike Newton) but Palm became the dominant
player. Netscape invented the browsers, but Microsoft
captured the market. Merck was a pioneer in cholesterol
lowering drugs (Zocor), but Pfizer, a late entrant, grabbed
the dominant market position (Lipitor). Excite and Lycos
were the first real web search engines, but they lost out
to Yahoo. And Yahoo then lost out to Google.
At first glance, it is tempting to say that these exam-
ples simply reflect the normal rough and tumble of typi-
cally Schumpeterian competition. Winners do not stay on
top for long; in highly dynamic settings, new entrants are
always ready with disruptive innovations.1 I will return
later to the “why established firms fail” literature and its
relation to PFI. However, it is worth noting that there
is ample variance in the phenomenon. There are many
cases where first or early movers captured and sustained
significant competitive advantage over time. Genentech
was a pioneer in using biotechnology to discover and
develop drugs, and 30 years later is the second largest
biotechnology firm (and, the most productive from an
R&D point). It is second only to Amgen, another early
entrant. Intel invented the microprocessor and contin-
ues to dominate that market more than 30 years later.
Dell pioneered a new distribution system for personal
computers and, despite numerous attempts to imitate its
highly successful business model, remains the dominant
“supplier” of computers (and increasingly a wide range
of electronics).
The contributions of PFI can be viewed at various
levels. At a very specific level, PFI offered a theoreti-
1 There is a long literature on the role of new entrants in dislodging
established firms. See for instance, Anderson and Tushman (1990),
Clark (1985), Henderson and Clark (1990), Christensen (1997), etc.
1123
cal framework for explaining and predicting why (and
when) innovators would generate sustained profits from
their innovation and when they were vulnerable to dis-
placement by later entrants. I will not bother to recite
the details of the argument here, as they are clearly
explained in the original PFI. In essence, the ability of
an innovator to profit from its innovation over time was
a function of its “complementary asset” position and
the “appropriability regime” in which it found itself. In
“weak” appropriability regimes – where imitation was
relatively easy from both a technical and legal stand-
point – protecting rent streams from innovation required
privileged access to what Teece called complementary-
specialized assets (or “co-specialized assets”). In strong
regimes, in contrast, firms could rely on licensing
and other contractual arrangements to extract rents
from their innovation without access to such assets.
In short, strategy is contingent on the appropriability
regime.
This is an extraordinarily powerful insight, and this
leads to the broader, perhaps even more enduring, con-
tribution of the paper. Previous to PFI, the field of
strategy was disconnected from the field of innovation,
at least academically (practitioners had always had to
deal with these issues!). The field of innovation was
focused on understanding such (important) issues as the
rate and direction of technical progress (at both industry
and national levels), the sources of innovation (e.g. von
Hippel, 1978), and a host of questions about the orga-
nization and management of R&D. In the mid-1980s,
the strategy field was being transformed by Michael
Porter’s seminal work on the competitive forces (Porter,
1980). Strategy was focused on understanding the impli-
cations of industry structure on competitive choices
and positioning. Innovation was not really a central
actor.
Industrial organization economics came closest to
providing a link. Theoretical and empirical work explor-
ing the link between R&D, innovation, and market
structure was the main focus of industrial organization
economics at that time. That work itself could be classi-
fied into two broad categories: traditional neo-classical
microeconomics work (including game theoretic explo-
ration of “patent races”) and evolutionary models of
Nelson and Winter (1982). The more traditional eco-
nomic work was not really concerned with strategy; strat-
egy involves choices, and in traditional economics of the
mid-1980s, choice was about optimizing. The idea that
similar firms (facing similar prices) might make different
choices was something most of economic theory did not
really want to think about. In addition, game theoretic
approaches that might have led to insights about strate-
1124 G. Pisano / Research Policy 35 (2006) 1122–1130
gic interaction generally assumed perfect patents. There
is nothing wrong with simplifying assumptions; they are
simply a way to hold constant one set of parameters in
order to explore the implications of changes in others.
However, by holding constant the assumption of per-
fect patents, these models could not provide insights into
how competition under different appropriability regimes
might operate.
An alternative line of work that emerged in the late
1970s and early 1980s was the evolutionary economic
approach to technical change. Pioneered by Nelson and
Winter (1977, 1982) this approach took a more grounded
approach to innovation. It recognized that innovation was
an often messy and unpredictable process. Firm strate-
gies were viewed as sets of heuristics (that may or may
not be consciously articulated by management). More
importantly, Nelson and Winter recognized that firms
operated in potentially different environments when it
came to both the opportunity for innovation and the
ability to block would-be imitators. In a very interest-
ing empirical investigation, Klevorick, Levin, Nelson,
and Winter (1995) surveyed a large sample of senior
R&D managers to understand how they thought about
different mechanisms of appropriability (patents, trade
secrets, etc.). This work demonstrated that appropri-
ability was a multi-dimensional concept. It was not, as
economic theorizing had generally assumed, only about
patents. Firms could seek to protect their innovation in
various ways.
This was an important insight, and, as is widely rec-
ognized today, evolutionary economic approaches have
had a powerful influence on the field of strategy. But, at
that time, evolutionary economic theorizing was focused
squarely on “fixing” the discipline of economics and was
not looking to influence the field of strategy.2 However,
a predecessor to the kind of issues found in PFI can be
found Nelson and Winter’s (1982, chapter 7) simula-
tion models exploring how “imitative” versus “innova-
tive” strategies might perform over time under different
assumptions of appropriability.
In building on this thread, Teece triggered a deeper
exploration of the connection between firms’ strate-
gies, innovation, and appropriability. Strategy and orga-
2 As a personal side note, the field of strategy also appeared to be
completely unaware of evolutionary economics at that time. When I
interviewed for a job in the strategy department at a leading business
school in 1988, I was asked by a top scholar in the field of strategy
what I thought the most important book published in the strategy over
the past 10 years had been. When I replied, “Nelson and Winter’s
‘Evolutionary Economic Theory’,” I received a blank stare (and no job
offer!).
nization mattered to innovation. And, appropriability
regimes mattered to strategy. In bringing these issues to
the same table of debate, Teece introduced to the innova-
tion and strategy field new theoretical perspectives such
as transaction cost economics, evolutionary economics,
and legal theories of intellectual property.
The influence of PFI on subsequent research is pro-
found and far reaching. An enumeration of specific arti-
cles or topics would be well beyond what even the most
comprehensive review piece could accomplish. Let me
just highlight a few of the most critical areas where the
PFI framework seems to have the most impact.
2.1. Alliances and networks
The first would clearly be the mass of work on
strategic alliances and networks. While this work is
extraordinarily broad, a significant part of the alliance
and network literature is concerned with innovation.
Prior to the 1980s, the lion’s share of innovative activ-
ities (R&D and the complementary activities needed to
bring innovation to market) was conducted inside the
boundaries of firms. In essence, innovation and verti-
cal integration went together. Beginning in the early to
mid-1980s, amidst growing global competition, large US
enterprises began to experiment with alternative orga-
nizational approaches to innovation. In particular, they
began to source technology through alliances, licensing
agreements, and other contractual forms of collabora-
tion with outside (often smaller, entrepreneurial) firms.
This trend first began in electronics, computers and
software, and telecommunications (in the wake of the
re-structuring of the industry after the AT&T divesti-
tures), but has clearly spread throughout the economy.
Pharmaceuticals/biotechnology, automobiles, entertain-
ment and media, and financial services all involve mas-
sive amounts of inter-firm collaboration. Innovation
occurs through both internal hierarchies and through
markets.
The academic literature exploring such arrangements
has grown accordingly. This literature is vast and thus
falls into multiple theoretical categories. Teece’s PFI
has influenced the strand of literature concerned with
strategic positioning in these networks and the perfor-
mance of different network strategies. The basic PFI
provides a potentially useful way to understand these
alliances and to make normative predictions about per-
formance. In order to help innovators specialize (safely),
markets for know-how must work effectively. Networks
of innovation thus depend partly on intellectual property
regimes. Strong intellectual property regimes would sup-
port broader and more diffuse networks of innovation.
 G. Pisano / Research Policy 35 (2006) 1122–1130
2.2. Sustainability of innovation-based first-mover
advantage
Ever since the 1970s, the strategy field has been con-
cerned with the normative implications of so-called first
mover strategies. When will the first entrant into a new
market sustain their advantage? When will a company
with a novel value-creating business model sustain their
initial dominance? Again, this is a vast literature. Not
all first mover advantages have to do with innovation,
but innovation represents an important potential source
of first mover. The PFI framework provides a theoret-
ical underpinning for examining when and where first
mover innovators may sustain their advantage and when
they will not. Operating in a weak appropriability regime
does not mean a first-mover strategy will not work. It
simply means that a firm will need to protect its position
by securing access to complementary specialized assets.
2.3. Capabilities-based approaches to strategy
Over the past decade, there has been a swelling inter-
est in the role that various kind of organizational capabil-
ities play in competitive advantage (see e.g. Pisano and
Teece, 1994; Teece et al., 1997). One of the most impor-
tant, interesting, and yet vexing management challenges
concerns investments in building appropriate organiza-
tional capabilities. While ex post case studies can often
identify (or at least rationalize) missing capabilities that
doomed a competitor, ex ante it is extremely difficult to
identify what capabilities matter to competitive advan-
tage. Much of the general writing on the subject is vague.
Managers are urged to focus on building their organiza-
tion’s “core capabilities.” But, how one can identify what
these core capabilities should be is another matter. The
basic theoretical constructs offered in PFI begin to give
us some traction around this question.
Following PFI, the answer really begins with under-
standing the appropriability regime. In a very strong
appropriability regime, the firm can specialize. It needs
only a narrow range of “core capabilities” and can cap-
ture returns on their innovation via the market. It does
not need complementary capabilities. Take an extreme
example: Stephen King is an extremely talented writer.
He does not need to own a book publisher, a printing
press, or distribution network to capture the rents on
his considerable talent. He can use contracts because he
operates in a strong appropriability regime. Books are
well protected by legal mechanisms. It is hard to imitate
his talents. And transferring his “technology” to produc-
tion, particularly in this day and age of electronics, is
a trivial matter of hitting the “send” key on email and
1125
remembering to attach the right files. There is no tacit
knowledge in taking his manuscript and printing it.
But in weak appropriability regimes, complementary
assets – often in the form of capabilities – matter. Thus,
“core capabilities” become less meaningful in those set-
tings. Capturing value on innovation requires the firm to
have mastered complementary capabilities (e.g. manu-
facturing, distribution, etc.).
The case history of Intel is an example of the basic
concepts of PFI applied to the idea of capabilities.3
Intel was a pioneer in DRAMs but lost its competitive
advantage to Japanese rivals in the early 1980s because
it lacked complementary capabilities in process devel-
opment, manufacturing ramp-up, and manufacturing.
These lessons were not lost on Intel senior manage-
ment when they began their ascension in microproces-
sors. Intel invented the microprocessor. Initially, they had
strong intellectual property protection on the basic archi-
tecture of their microprocessors. Over time, this IP posi-
tion eroded (partly due to licensing that enabled a rival,
AMD, access to the micro-code). Yet, Intel was able
to maintain its dominance; why? Part of it was invest-
ments in complementary specialized assets; throughout
the mid-1980s and early 1990s, Intel invested heavily in
building world-class process development and manufac-
turing capabilities. By the mid-1990s, Intel was one of
the best performers in ramping up high volume produc-
tion of new chips (Iansiti, 1997). While it was possible
for AMD to enter the market with architecturally com-
patible designs (X86), Intel consistently won the market
by ramping up production more quickly. We might not
normally think of Intel’s “core capabilities” as manu-
facturing. It was not historically. It was, in the DRAM
period, a weakness. But, recognizing the need for this
complementary asset, the company built these comple-
mentary capabilities. Intel may create value through its
designs, but it captures them through its complementary
process development and manufacturing capabilities.
2.4. Why established firms fail
One of the most productive lines of research in the
innovation field has concerned the question of why
established firms fail in the wake of major technolog-
ical changes. This literature, of course, has its roots
in Schumpeter and the notion of creative destruction.
Several decades elapsed before scholars of innovation
picked up the question in the 1980s (Anderson and
3 See “Intel Corporation: 1968–1997” (D.J. Collis, G. Pisano, P.
Botticelli, HBS case number 737-137).
1126 G. Pisano / Research Policy 35 (2006) 1122–1130
Tushman, 1990; Clark, 1985; Henderson and Clark,
1990; Christensen, 1997). This body of work tackles the
issue from two basic angles. On the “supply side” are
writers such as Anderson, Tushman, Clark, and Hen-
derson who have explored the ways in which a firm’s
existing repertoire of capabilities may either blind it from
seeing novel opportunities to innovate or acting upon
those opportunities when they see them. For instance,
Henderson and Clark (1990) advance the idea that some
innovations are “architectural” in nature and thus require
a reconfiguration of existing organizational and techno-
logical capabilities to pursue. Organizations have diffi-
culties with these types of reconfiguration due to iner-
tia and kindred forces. As a result, they predict, and
demonstrate in the case of photolithography, that exist-
ing organizations are more likely to fail when faced with
architectural innovation (than when they are faced with
“component” innovations which require change in one
organizational sub-unit, but not across units).
On the “demand side” of this literature is a writer
like Christensen who sees lack of response rooted not
so much as in constrained organizational capabilities
but in the constraints created by connections to exist-
ing customers and markets. Christensen theorized and
demonstrated for various industry cases (but most deeply
in disk drives) that new innovations that challenge an
organization’s existing business model and customer
segmentation are more likely to give an established com-
pany difficulty.
Interestingly, PFI theory has largely been outside the
domain of the “established firm failure” literature. I
would argue that PFI theory has something to add to
this literature. Established firms fail in the wake of inno-
vation when, by definition, new entrants succeed. Part
of the story is clearly rooted in the kinds of inertias dis-
cussed by the writers above. However, we know from PFI
theory that there is more to the story than just success-
fully innovating. New entrants that successfully innovate
can still fail if they fail to capture sustainable returns.
PFI theory points out certain key features of the envi-
ronment and strategies that might matter a great deal.
Clearly, again, appropriability regimes matter. If appro-
priability regimes are weak, not only can a new entrant’s
innovation be imitated by other new entrants, they can be
imitated by established firms. In many of the case studies
explored in the above literature, appropriability regimes
seemed to be weak. That is, established players did not
fail because they got legally “locked out” of the new tech-
nology (indeed, there is ample evidence that established
firms often have very strong access to the relevant tech-
nologies and technical talent). PFI theory would then
lead us to consider the role of complementary assets.
In a weak appropriability regime, complementary assets
should matter. Asset position of incumbents (manufac-
turing, distribution, etc.) have not been a major focus
of the “why established firms fail” literature. If PFI the-
ory is correct, complementary assets would also need
to become somewhat obsolete by the new technology to
enable entrants to gain a protected foothold.
In the disruptive innovation framework of Chris-
tensen, “disruptive” innovations (by definition) take hold
initially in small niches that are of less interest to incum-
bents. Mini-mills got their foothold in the “low end”
market for rebar; 5.25 disk drives got their foothold in
the then tiny market for desktop computers. In essence,
disruptive innovations take hold because the innovators
are given an opportunity to build the complementary spe-
cialized assets needed to enter the market.
A contrasting example would be that of biotechnol-
ogy and pharmaceuticals.4 For more than 30 years, many
observers have predicted that new biotechnology firms
would displace the established pharmaceutical compa-
nies that have dominated the sector for more than 60
years. This has not happened. Incumbent firms remain
dominant. Only a tiny fraction of biotechnology firms
that have entered the industry since 1976 have entered
the league of top companies (Amgen is approximately
5th in size by market capitalization; Genentech, the sec-
ond most profitable firm, is 60% owned by an established
firm, Roche). Why did not biotech follow the same pat-
tern as say disk drives, photolithography, and others?
PFI theory helps: in essence, while biotechnology cre-
ated novel approaches to discovering, developing, and
manufacturing drugs, by and large the key downstream
complementary assets needed to commercialize drugs
are very similar between “old” and “new” technologies.
Drugs still need to go through clinical trials; one still
needs deep regulatory expertise; and, both new and tra-
ditionally derived drugs are by and large sold through the
same marketing and distribution channels. In essence,
the biotech firms needed access to the co-specialized
assets controlled and owned by incumbents. These assets
were costly to build; as such, most biotech firms were
forced to collaborate with incumbents. Large pharma-
ceutical companies have been able to use their control
over co-specialized assets to appropriate the lion’s share
of value from the biotech revolution. PFI theory would
predict that only once we see changes downstream (e.g.
in terms of how drugs are marketed or distributed in the
wake of changes in the health care system) will we see
new entrants gain a foothold.
4 For a discussion of these issues, see Pisano (2006).
 G. Pisano / Research Policy 35 (2006) 1122–1130
3. Why PFI matters today
One of the tests of the significance of any piece of
research is whether the questions and issues raised can
stand the test of time. At the time Teece wrote PFI,
issues of collaboration and novel organizational forms
for innovation were just coming to the fore of both aca-
demic and practitioner attention. It is clear that twenty
years after PFI, these issues continue to be of enormous
importance. Today, globalization, and in particular the
emergence of China and India as formidable competi-
tors on the global stage, means that companies across the
world increasingly find themselves embroiled in com-
plex webs of collaborative and contractual relationships.
Whereas in the mid-1980s, companies were beginning
to experiment with novel forms of partnerships, today,
collaborative arrangements are woven into the fabric of
corporate strategies worldwide. Moreover, companies
in most industries face extremely able competitors and
innovators across the world.
At one level, global competition has raised the impor-
tance of innovation once again. A perusal of any major
business publication, such as Business Week, shows that
innovation is in vogue again as companies look for ways
to grow. Once seemingly mature industries – like televi-
sions and consumer electronics – have become hotbeds
of innovations. At the same time, it has become perhaps
more difficult than ever to profit from innovation for all
the reasons Teece outlined in 1986. In many contexts,
particularly in China and India, appropriability regimes
are weak. Innovation draws rapid imitation. In others,
technically sophisticated competitors are able to respond
very quickly to innovations, and develop equivalent, if
not superior, products of their own. A PFI framework
helps organizations to think through systematically the
kinds of assets they need to foster internally and those
that they can safely outsource.
Perhaps one of the most important factors reshap-
ing the terms of innovation based competition is the
impact of digitization. Over the past decade, a wide
range of product categories – such as phones, cameras,
televisions, music systems, music distribution, entertain-
ment, etc. – once based on mechanical, optical, and
analog technologies have been transformed through the
application of digital technologies. Beyond changing the
technology of products, digitization has had two criti-
cal impacts on the landscape of innovation. First, it has
altered the locus of innovation. As more functionality
is embedded in chips, innovation increasingly occurs in
the digital components of the system. Increasingly, the
system is the chip and the chip is the system. Second, as
the key intellectual property shifts to the chip system, the
1127
distribution of rents from innovation moves away from
traditional end product innovators and toward innovators
in chips. This happened first in PCs (with the emergence
of the Windows and Microsoft standard) but has contin-
ued in others such as cell phones, televisions, and digital
cameras. For instance, if a company wants to get into the
cell phone business, it can now buy the relevant chips
sets from a company like Qualcom. In these settings,
rents flow to the suppliers of specialized chips that create
lock-in via compatibility or control over standards. Note,
this does not mean that innovation is impossible outside
the chip. A cell phone supplier, for instance, can inno-
vate in key pads, displays, software, and aesthetic design.
However, appropriating the value on this innovation is
difficult where control over the key system functionality
is dictated by the chip.
The PFI framework helps us consider the kinds of
strategies that may or may not be appropriate in the
context of digitization. Prior to digitization, innovation
competition centered around high level system design.
Traditional system producers (e.g. computer manufac-
turers, phone manufacturers) innovated by architecting
unique designs from a combination of proprietary (self-
designed) and non-proprietary components. In these con-
texts, systems could be reverse engineered and rents
flowed across horizontal competitors (computer man-
ufacturers competed with other computer manufactur-
ers). As more of the functionality shifted to chips, those
companies, often specialized chip suppliers like Intel or
Qualcom, captured a growing share of the rents from
innovation at the system level. Using PFI terminology,
the chip design (including embedded software) became
the key co-specialized asset. And because these designs
could be well protected by patents, it became nearly
impossible for system producers to capture the rents.
The PFI framework would suggest that in these set-
tings, the best alternative strategy for a system producer
would be to establish another set of co-specialized assets,
such as downstream marketing and distribution. This
seems to be what happened in the PC industry. As Intel
(and Microsoft) gained control over the rents from PC,
most PC manufacturers were reduced to suppliers of
a commodity product. Only Dell was able to maintain
super-normal profits largely because it created a highly
unique and difficult to imitate direct-sales distribution
system.
4. PFI in the age of endogenous appropriability
regimes
I want to conclude this paper by briefly suggesting an
important avenue for future research that was not con-
1128 G. Pisano / Research Policy 35 (2006) 1122–1130
sidered in the original Teece PFI framework, but which
recent history suggests has become a critical compo-
nent of innovation strategy. In the original formulation,
appropriability regimes are taken as a given. They are
determined exogenously by a confluence of legal forces
(e.g. the scope and potency of patent protection) and the
nature of the technology itself (e.g. ease of imitability).
The PFI framework sees the firm’s strategic problem as
choosing the best complementary assets positions given
the appropriability regime it faces. I would like to sug-
gest that recent history suggests that this view may miss
a critical element of intellectual property rights strategy.
Increasingly, appropriability regimes are endogenously
influenced by the behaviors and strategies of firms them-
selves. And, in some cases, firms take their complemen-
tary asset positions as given and then attempt to shape
the appropriability regime to optimize the value of those
assets. Let me provide two examples: the first from the
field of genomics and the second from the field of open
source software.
4.1. Genomics
During the late 1980s and 1990s, there was a ver-
itable revolution in the field that came to be known
as genomics. With enormous advances in the scien-
tific instruments used to “read” DNA code, it became
possible to identify genes on a mass production scale.
Where it once might have taken a researcher ten years
of dedicated work to sequence a single gene, it became
possible by 1990s to identify thousands of genes on a
monthly basis. The US government funded a project
– the Human Genome Project – to sequence all the
genes found in the human body. And a competing pri-
vately funded effort was launched by a company called
Celera Genomics. The potential of mass sequencing of
genes for biomedical research was immense. For the
first time, researchers could begin to explore the genetic
bases for a variety of diseases such as cancers, diabetes,
Alzheimers, and many others. The potential economic
impact was not lost on the financial community. If genes
were valuable to biomedical research and drug discov-
ery, and drug discovery was lucrative, then it stands to
reason that genes had enormous economic value if they
could become intellectual property. Following this logic,
venture capitalists funded dozens of firms (e.g. Celera,
Incyte, Human Genome Sciences, etc.) to exploit the
commercial potential of genomics through the selling
of proprietary genomic databases to pharmaceutical and
biotechnology firms.
The potential for firms to take ownership of specific
genes caused some consternation in public policy and
legal circles. What were the implications for privately
owned genes? Was this legal? Was this ethical? What
impact might this have on biomedical research progress?
Interestingly, equally concerned with the patenting of
genes were a group of companies who are normally
among the staunchest advocates of strong patent rights:
pharmaceutical companies. The concern among phar-
maceutical companies was that they could essentially
be held hostage by another entity that claimed owner-
ship of a key gene or genes associated with a disease
where they had strong commercial interest. Take a firm
like Merck. Merck had established a very strong research
program in cardiovascular disease and cholesterol lower-
ing drugs in particular. Moreover, they had built a strong
downstream asset positions in the sales and marketing of
such drugs. Merck’s R&D and marketing capabilities in
cardiovascular drugs represented strong co-specialized
assets positions to use PFI terminology. If some other
private firms were able to identify and claim intellec-
tual property ownership over the genes associated with
cardiovascular disease, this could potentially lead to a
hold-up situation (at an extreme). If Merck could not con-
tinue to conduct certain research programs, it might not
be able to leverage its existing co-specialized assets posi-
tions. The value of these assets would become severely
impaired.
One strategy for a large company with existing co-
specialized assets positions would be to move aggres-
sively to secure rights to the genes that might impact
its future research. This strategy was followed by a
number of large pharmaceutical companies who signed
expensive deals with genomics firms for access to their
proprietary genetic databases. These deals were both
a way to open avenues for new research, but to also
protect the firm against future lock-out. Another strat-
egy, one followed by Merck, was to attempt to alter the
appropriability regime. Once something is made pub-
lic, it can not be patented. In September 1994, Merck
announced plans to collaborate with Washington Uni-
versity to create a database (the Merck Gene Index) of
expressed human gene sequence and to put these data
into the public domain. The stated goal of this effort,
and in particular the decision to make all findings pub-
licly available in 48 hours, was to stimulate biomedical
research. This sounds highly altruistic, and I do not want
to discount the potential for Merck to be engaged in a
public service. However, it is also easy to see a strate-
gic motive: by making expressed human gene sequences
publicly available, Merck was essentially preventing a
privatization of genes that could block its future research
objectives. In essence, Merck was keeping the upstream
appropriability regime “loose.”
 G. Pisano / Research Policy 35 (2006) 1122–1130
An interesting point of the Merck Gene Index story
is that it shows how a profit seeking intellectual prop-
erty strategy does not necessarily mean creating a tighter
appropriability regime. In discussions of IP strategy, it
is generally assumed that private, profit seeking firms
would always desire a “tighter” appropriability regime.
However, viewed through the lens of complementary
asset theory and PFI, we see the flaw in this logic. A firm
with very strong downstream complementary assets may
have strong strategic incentives to make “upstream” IP
weak to prevent foreclosure of opportunities. The value
of those assets is higher in a weak appropriability regime
than in a strong one. This is consistent with PFI theory.
4.2. Open source
Open source refers to a movement in software devel-
opment to make publicly available the source code for
computer programs so that other developers can build
upon on the code base. Under various open source licens-
ing arrangements (such as the GPL), any developer can
use open source code and build upon it, as long as they
do not try to appropriate (i.e. claim intellectual prop-
erty ownership) of the previously disclosed code. This
is designed to prevent anyone from essentially privatiz-
ing the intellectual commons. Well known examples of
open source development include Linux and Apache,
but there have been literally tens of thousands of other
lesser known (and often much less successful) efforts.
Open source clearly represents a shift in the appropri-
ability regime of software. Traditional software devel-
opment followed the model we see in other industries;
development was proprietary and developers do every-
thing possible to protect the designs from imitation or
un-compensated use. In software, this included using
legal mechanisms (e.g. copyrights and patents) but also
secrecy (e.g. refusing to make available source code).
With open source, the opposite logic holds. Developers
contribute code with an understanding that it can be used
freely by others (including additional development). In
essence, open source leads to the creation of a commonly
shared base of technology.
Robert Merges draws a fascinating analogy between
open source and medieval guilds (Merges, 2004). While
he notes important differences, he sees important simi-
larities: both utilize shared norms in a community about
what can and can not be appropriated. Open source
communities are generally often depicted as mass move-
ments of independent developers who share some com-
mon goal around building a particular piece of software.
To some extent, this is true. Since the open source
community invites the participation and contribution of
1129
any capable person, and allows anyone to utilize the
open source software (as long as they abide by the
norms), open source communities tend to be fairly broad.
Depending on the project, literally thousands of develop-
ers around the world may be involved in an open source
project.
Open source poses an interesting strategic challenge
for firms. How do they respond? Should they embrace
open source? Should they resist (if possible)? This
is an issue firms like Microsoft and Sun are dealing
with today. The emergence of Linux clearly represents
a threat to Microsoft’s server operating system busi-
ness (Windows). And it represents a threat to Sun’s
server business which rests on a proprietary version
of Unix called Solaris. Some firms, like IBM, have
clearly embraced open source and promoted it. Figur-
ing out how to respond partly depends on a company’s
co-specialized asset position. A weakening of the appro-
priability regime through the emergence of open source
operating systems can be beneficial to companies with
strong downstream asset positions in middleware, appli-
cations, hardware, and services. In essence, as the server
operating system becomes a commodity, the locus of
value capture in the innovation chain shifts downward.
This is another example where the weakening of an
appropriability regime can be economically beneficial
to some firms (while hurting others). It may well be in
the interest of firms with strong downstream complemen-
tary asset positions to proactively weaken the upstream
appropriability regime (e.g. via code contributions or
public announcements of support).
5. Conclusion
To conclude briefly, twenty years after its publication,
PFI has continued to have a profound impact on the inno-
vation field, and its relevance today in a world of global
competition, open source, and other forces is greater than
ever. Understanding the source and evolution of appro-
priability regimes has been a topic of interest in legal
scholarly communities, but to date has not been the sub-
ject of deep research in strategic management. Many
interesting questions remain to be explored. For instance,
how much can firms proactively shape an appropriability
regime in their favor (either by weakening or strength-
ening it)? What are the mechanisms firms can use to
shape an appropriability regime? What are the alterna-
tive institutional arrangements? As intellectual property
continues to play a central role in the health and growth
of firms, these questions will continue to be of as much
importance over the next twenty years as they have been
over the past twenty.
1130 G. Pisano / Research Policy 35 (2006) 1122–1130
References
Anderson, P., Tushman, M.L., 1990. Technological discontinuities
and dominant designs: A cyclical model of technological change.
Administrative Science Quarterly 35, 604–633.
Christensen, C., 1997. The Innovator’s Dilemma: When New Tech-
nologies Cause Great Firms to Fall. Harvard Business School Press,
Boston, MA.
Clark, K.B., 1985. The interaction of design hierarchies and mar-
ket concepts in technological innovation. Research Policy 14,
235–252.
Collis, D.J., Pisano, G.P., Botticelli, P., 1997. Intel Corp. —1968–1997.
Harvard Business School Publishing, Boston, MA, HBS Case No
797-137.
Henderson, R.M., Clark, K.B., 1990. Architectural innovation: the
reconfiguration of existing product technologies and the failure
of established firms. Administrative Science Quarterly 35, 9–30.
Iansiti, M., 1997. Technological integration: making critical choices in
a turbulent world. Harvard Business School Press, Boston, MA.
Klevorick, A.K., Levin, R.C., Nelson, R.R., Winter, S.G., 1995. On the
sources and significance of interindustry differences in technolog-
ical opportunities. Research Policy 24, 185–205.
Merges, R., 2004. From medieval guilds to open source software:
informal norms, appropriabability institutions and innovations. In:
Conference on the Legal History of Intellectual Property, Novem-
ber, University of Wisconsin, Madison.
Nelson, R.R., Winter, S.G., 1977. In search of useful theory of inno-
vation. Research Policy 5, 36–76.
Nelson, R., Winter, S., 1982. An evolutionary theory of economic
change. Harvard University Press, Cambridge, MA.
Pisano, G.P., 2006. Science business: the profits, the reality and the
future of biotech. Harvard Business School Press, Boston, MA.
Pisano, G.P., Teece, D., 1994. Dynamic capabilities: an introduction.
Industrial and Corporate Change 3, 537–556.
Porter, M.E., 1980. Industry structure and competitive strategy: keys
to profitability. Financial Analysts Journal 36, 30–41.
Teece, D., 1986. Profiting from technological innovation: implications
for integration, collaboration, licensing and public policy. Research
Policy 15, 285–305.
Teece, D.J., Pisano, G.P., Shuen, A., 1997. Dynamic capabilities
and strategic management. Strategic Management Journal 18,
509–533.
von Hippel, E.A., 1978. Users as innovators. Technology Review 80,
30.