Innovation, Exploration, and Survival: The Ripple Effects of Customer Fraud
44 Pages Posted: 24 Jan 2020
Date Written: November 28, 2019
We investigate how suppliers adjust their innovation activities when a customer is revealed involved in corporate fraud. We find that suppliers reduce R&D expenses after financial misconduct of the customer become known and generate fewer patents in comparison to a control group of firms that are not affected in a similar manner. They engage in more (less) explorative (exploitative) innovation and move the direction of innovation away from that of the fraudulent customer. Interestingly, while the survival likelihood of the affected suppliers decreases in the next three years, over a ten-year period, their survival likelihood increases, relative to control firms. Suppliers who are successfully able to implement more explorative innovation increase their survival likelihood, while those that continue to do exploitative innovation are more likely to exit. These results are consistent with the view that adversity encourages risk-taking innovation (Manso, Balsmeier and Fleming (2019)), but also suggest that in the presence of major customers who benefit from dedicated investment, suppliers may not be diversifying their innovation optimally. Consistently, we find that the number of identifiable customers that the affected suppliers sell to increases relative to the control group after fraud revelation.
Keywords: Corporate fraud; technological innovation; supply chain
JEL Classification: G14, G3, L14, L24
Suggested Citation: Suggested Citation