Management Accounting Section Midyear Meeting

Do Major Customers Help or Hurt Innovation? The Effects of Customer-Base Concentration on Radical and Incremental Innovation

• In Event: Interfirm Issues

Abstract

We examine the effect of a firm’s customer-base concentration on two types of firm innovation: radical (i.e., a revolutionizing breakthrough from existing technology) versus incremental innovation (i.e., minor improvements to existing practices). Drawing on theories of resource dependence and resource allocation, we predict that dependence on major customers can discourage a firm from making risky investments in radical innovation and encourage a firm to invest in incremental innovation. We test our hypotheses with a sample of 11,940 firm-year observations between 1984 and 2010. Consistent with our predictions, we find that customer-base concentration is positively associated with incremental innovation, and such association is more pronounced for firms with high investment irreversibility (i.e., low asset redeployability). Although we do not find a main effect of customer-base concentration on radical innovation, we find an interaction effect between customer-base concentration and investment irreversibility such that radical innovation is significantly lower in firms with high customer concentration and high investment irreversibility than in other firms. Our results suggest that firms with high customer concentration may allow their innovation resource allocation decisions to be shaped by major customers, leading to incremental innovations at the expense of radical innovations.

Authors

• Xiaoling Chen, University of Illinois-Urbana-Champaign

• Wei Jiang, Jinan University

• Wentao Yao, University of Hong Kong