Abstract: Through releasing software as open source, the software vendor can improve software quality significantly with the help of outside innovation forces. However, it leads to the loss of market. With construction of a two-period economic model and comparison of equilibrium outcomes under two innovation models, this paper obtains the software vendor’s choice of innovation model and R&D investment strategy. The study results are as follows: first, when the software vendor has stronger absorptive capacity for code resource from contributors compared with the open source community, the vendor’s best choice is open source innovation model as long as the community attracts much enough contribution or the vendor has low R&D cost, otherwise the vendor would choose proprietary innovation model. On the contrary, when the open source community has stronger absorptive capacity, the vendor would choose open source innovation model only if it has low R&D cost, else proprietary model is the best. Second, although the software vendor can obtain the support from outside innovation force after releasing the source code, it should raise its R&D investment to maintain quality advantage of its software. This paper provides some insightful guidance for software vendors and policy makers.

Key words: open source, innovation model, R&D investment, absorptive capacity