Does institutional quality matter in open innovation?

Open Innovation (OI) is increasingly adopted worldwide to leverage the involvement of entities from outside firms’ boundaries in the production of new knowledge. However, the effects of OI on firm performance have not been thoroughly examined so far. Indeed, focusing on industry and firm specific factors, previous literature provided till now mixed results about the impact brought about by OI on firm performance. With this study, we stress that to properly understand the effects brought about by OI we need to focus on the institutional dimension of the collaboration that is established between firms. In fact, OI involve a joint effort to pursue an innovative goal. As firms activities are strongly affected by the institutional environment in which they operate, we contend, under the Institution Based View, that the OI activities are influenced by the difference between institutional quality levels of the countries of the partner involved. Through an event study, we evidenced that institutional differences among the parties involved in OI determine the effect of OI on firm stock market performance, as they shape how the collaboration among the partners involved will perform. In greater detail, we have evidenced that a company starting a OI collaboration with another company residing in a country with worst (better) institutional quality level has a negative (positive) stock market performance. In so doing we advance the academic understanding of OI, and we also provide indications to managers to carefully consider the institutional environment of the partner when starting Open Innovation practices.