Supplier dependence and innovation: a contingency model of suppliers' innovative activities

The management of innovation is a complex task and the management of suppliers' innovative activities is especially so because it involves managing technological factors across the traditional boundaries of the firm. This paper explores the determinants of suppliers' innovative activities by developing a theoretical model of these activities and testing this model with data from a set of organizations that supply intermediate goods to the automotive Original Equipment Manufacturers (OEMs) in the United States. The contingency model developed assumes that the factors influencing product innovation by a supplier firm depend on a key characteristic of its environment — the degree of dependence on a specific automotive OEM for its livelihood. Statistical analysis of survey data on supplier innovative activity from 172 respondents demonstrates that there are substantial differences in the factors leading to innovative activity in independent and dependent suppliers. While independent suppliers follow more traditional economic models which argue that they will innovate only if they perceive favorable and calculable benefit-cost ratios, dependent suppliers seem more willing to innovate in less clearly favorable circumstances if they are clear on what kinds of innovations are desired by their customers. That is, the dependent suppliers are willing to invest in innovation to maintain their customer base even if the results are not clearly cost effective in the short term. The implications are that OEMs that place a high priority on encouraging innovation by their suppliers must make some effort to differentiate between suppliers that are highly dependent on the OEM-supplier relationship and those that are not. The study results suggest ways in which these two types of suppliers should be managed.