Supply base concentration and firm innovation performance: A contingency study of supply base breadth, depth, dispersion, and collaboration

Abstract

To survive in the current business environment, a firm must embrace ‘innovation’ in its overall business strategies. While scholars have investigated drivers of firms’ innovation performance, the concentration of a firm’s supply base and its potential link to innovation performance remains unexplored. We draw on the Knowledge-Based View (KBV) and the power asymmetry literature to propose that supply base concentration influences a firm’s innovation performance non-linearly, and that structure of the supply base in terms of breadth, depth, and geographical dispersion, and nature of the supply base in terms of collaboration moderate this relationship. Using data from 185 firms spanning six years and eleven industry sectors and implementing a robust empirical procedure that accounts for endogeneity and unobserved firm-level heterogeneity, we find that supply base concentration has an inverted U-shaped relationship with innovation performance. Moreover, breadth positively and geographical dispersion negatively influence this relationship. The results also show that supply base collaboration strengthens the relationship between concentration and innovation performance. Through multiple post hoc analyses, we also show partial empirical evidence of the theoretical mechanisms we propose. We contribute to the extant literature on supplier management, innovation performance, and the structure of the supply base.