One Sows and Another Reaps: Outsourcing Innovation to Suppliers

Abstract

While we know the innovation of supply chain partners can be complementary, I document novel evidence of a substitutionary relationship: Exploiting variation in upstream firms' effective cost of R&D around the introduction of state-level R&D tax credits, I find customers strategically outsource innovative investment upstream when their suppliers' R&D becomes effectively cheaper. Subsequently, customers produce patents that are more innovative, more similar to their suppliers' expertise, and that garner more forward citations. Customers file more patents naming inventors previously named in upstream patents. Overall, results indicate firms can outsource their innovative expenditures upstream, while still reaping the innovative outputs.

Keywords: Innovation, R&D Outsourcing, Supply chain relationships, Patenting

JEL Classification: L14, L24, G31, G32