Companies in many industries are feeling immense pressure to improve their ability to innovate. Even in these tough economic times, executives have pushed innovation initiatives to the top of their priority lists, but they know that the best ideas aren't always coming out of their own R&D labs. That's why a growing number of companies are exploring the idea of open-market innovation--an approach that uses tools such as licensing, joint ventures, and strategic alliances to bring the benefits of free trade to the flow of new ideas. For instance, when faced with the unanticipated anthrax scare last fall, Pitney Bowes had nothing in its R&D pipeline to help its customers combat the deadly spores. So it sought help from outside innovators to come up with scanning and imaging technologies that could alert its customers to tainted letters and packages. And Dow Chemical and Cargill jointly produced a new form of plastic derived from plant starches--a breakthrough product that neither company could have created on its own. In this article, Bain consultants Darrell Rigby and Chris Zook describe the advantages and disadvantages of open-market innovation and the ways some companies are using it to gain competitive advantage. By importing ideas from the outside, the authors say, companies can collect more and better ideas from different kinds of experts. Creative types within a company will stick around longer if they know their ideas will eventually find a home--as internal R&D projects or as concepts licensed to outside buyers. Exporting ideas also gives companies a way to measure an innovation's real value. However, the authors warn against entering into open-market innovation without properly structuring deals: Xerox and TRW virtually gave away their innovations and had to stand by while other companies capitalized on them.