Supplier Innovation Strategy: Transactional Hazards and Innovation in the Automotive Supply Chain

Abstract

Over the last few decades, innovation has doubled automobile performance at a time when outsourcing has increased. But outsourcing is subject to well-known contracting hazards that would also afflict outsourcing for innovation. In this paper, we examine how supplier firms generate innovation in the presence of such hazards, using a recent survey of the US automotive supply chain that contains new measures of innovative activity. Taking the supplier perspective on the traditionally buyer-framed make-or-buy problem pays surprising dividends. First, we identify three supplier innovation strategies — distinct combinations of various innovative activities. Next, we find evidence that each strategy represents a response to the transactional hazards associated with innovating in this environment. Finally, the coexistence of heterogeneous supplier strategies enhances our understanding of the buyer’s make-or-buy problem, providing a more complex picture of the various approaches to transactional hazards that buyers employ simultaneously.

Keywords: transaction costs, automotive, supply chain, innovation

JEL Classification: L62, L22, O31, O32