Learning from Customers: Corporate Innovation along the Supply Chain

This paper studies the effect of supplier-customer relationship on supplier innovation through a knowledge spillover channel. We use the geographical distance between a supplier and its major customers to capture knowledge spillovers along the supply chain. To establish causality, we explore plausibly exogenous variation in distance caused by customer headquarters relocations. In a difference-indifferences framework, we show that knowledge spillovers from customers appear to have a positive, causal effect on supplier innovation. The effect is stronger when the customers are more innovative themselves and are within closer technology proximity with the suppliers. Finally, we show that innovation attributable to knowledge spillovers from customers positively contributes to a firm’s product market performance. Our paper sheds new light on the real effect of knowledge spillovers along the supply chain its enhancement on firm innovation.