Innovation and its Impact on Firm Financial Performance: Empirical Investigations in Buyer-Supplier Relationships

Abstract

Firms increasingly seek to profit from the innovative capabilities of their customers and suppliers. Extant research on vertical relationships has thus focused extensively on the outcomes of collaborative innovation. Specifically, many studies explored the effects of involving customers and suppliers in product development on product quality, product costs, and development times. However, improvements in these measures need not necessarily lead to enhanced corporate financial performance. Collaborations with vertical partners entail the risk that valuable technological knowledge spills to competitors. Furthermore, collaborations can leave firms dependent on the assets and technologies of their partners. Hence, the focal firm might in fact lose out, while its partners and competitors capture most of the value from innovation. Further research is thus called for that focusses on financial outcomes, and that thereby advances our understanding of how firms can profit from their own and their partners’ innovations. The present dissertation addresses this gap. Through three distinct empirical investigations, it sheds light on the relationship between innovation and firm financial performance in the context of buyer-supplier relationships. The empirical investigations build on a large panel of buyer-supplier relationships obtained from Compustat North America and the U.S. Patent and Trademark Office (USPTO). The panel covers the period from 2000 to 2013 and contains, in total, 4306 buyer-supplier dyads from the U.S. In utilizing panel regressions, the investigations offer robust findings on (1) how firms can profit from their suppliers’ innovations, (2) on whether and to which extent component suppliers depend on their buyers’ innovative activities to earn returns on their own investments in innovation, and (3) on the implications of absorptive capacity for the value of supplier relations to buying firms. The obtained findings on these three issues provide important contributions to the management literature and have relevant implications for practice.