How Can Open Source Technology Ecosystem Create Value? Evidence from Investors’ Reactions to Firms’ GitHub Code Releases

This study examines whether and how firms create value by making their innovations free and non-proprietary open source technologies, a possibility that runs counter to the central tenet in strategy regarding the control of private knowledge as a key to profiting from innovation. In exploring this counterintuitive conjecture, we focus on the stock market reactions as a forward-looking indicator of value creation and connect the literature of innovation ecosystems with investors' reactions to firm strategies. More specifically, we argue that the stock market positively reacts to firms’ release of innovation as open technologies, because it constitutes an effective ecosystem disclosure strategy that not only enables investors to fully evaluate the value of the underlying innovation ecosystem, but also creates new opportunities for ecosystem expansion and maintaining more efficient coordination and collaboration in ways that creates value. In turn, we further argue that shock market reactions to the disclosure of open technologies are positively influenced by a firm’s proprietary innovations that ease the value capture within an ecosystem, while they are negatively affected by the potential of non-proprietary open collaboration opportunities that present high opportunity cost in the process of value appropriation through ecosystem collaboration. We also propose that the effect of those drivers would be accentuated by the technological interdependencies of the released technology. Those arguments are fully supported in our empirical analysis of 2,738 release of open-source software programs by 132 public companies in the software development industry. Our analysis shows that, on average, a release of innovation as open technologies created a 0.34% cumulative abnormal return for the disclosing company. We discuss implications for the understanding of innovation ecosystems and the development of value creation of open technologies.