The strength of long ties and the weakness of strong ties: Knowledge diffusion through supply chain networks

•Examines the effects of supply chains on productivity and innovation through knowledge diffusion.•Ties with distant suppliers benefit more than ties with neighboring suppliers.•Ties with neighboring clients benefit more than ties with distant clients.•Density of a firm's ego network has a negative effect.•These results suggest that access to diversified is important for knowledge diffusion. Using a large firm-level panel dataset for Japan, this paper examines the effects of the structure of supply chain networks on productivity and innovation capability through knowledge diffusion. We find that ties with distant suppliers improve productivity (as measured by sales per worker) more than ties with neighboring suppliers, which is likely because distant firms’ intermediates embody more diversified knowledge than those from neighboring firms. Ties with neighboring clients improve productivity more than ties with distant clients, which is likely because neighboring clients more effectively diffuse disembodied knowledge than distant clients. By contrast, ties with distant suppliers and clients improve innovative capability (as measured by the number of registered patents), whereas ties with neighboring suppliers or clients do not affect innovative capability. In addition, the density of a firm's ego network (as measured by how densely its supply chain partners transact with one another) has a negative effect on productivity and innovative capability, implying knowledge redundancy in dense networks. These results suggest that access to diversified ties is important for improving productivity and innovation capability through knowledge diffusion.