Supplier dependence and R&D intensity: The moderating role of network centrality and interconnectedness

• DOI: http://doi.org/10.1016/j.jom.2018.11.002
• Author: Dong‐Young Kim,Pengcheng Zhu
• Date: 01 November 2018
• Published date: 01 November 2018

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Journal of Operations Management

journal homepage: www.elsevier.com/locate/jom

Supplier dependence and R&D intensity: The moderating role of network

centrality and interconnectedness

Dong-Young Kim

a,∗

, Pengcheng Zhu

b

a

University of North Florida, Coggin College of Business, 1 UNF Drive, Jacksonville, FL, 32224, USA

b

University of San Diego, School of Business, 5998 Alcala Park, San Diego, 92110, USA

ARTICLE INFO

Accepted by: T Browning

Keywords:

Supplier dependence

Eigenvector centrality

Supply interconnectedness

R&D intensity

Resource dependence

Social network

Econometric analysis

ABSTRACT

This study examines whether financial dependence upon a few customers is negatively related to the allocation

of innovation resources of supplier firms. Furthermore, this study investigates whether these negative effects of

supplier dependence on research and development (R&D) intensity are reduced when the supplier leverages

social capital conceptualized in terms of eigenvector centrality and interconnectedness. Using panel data, we

find that a supplier firm's dependence upon major customers has a negative relationship with the supplier firm's

R&D intensity. Our results, however, reveal that a dependent supplier having high eigenvector centrality or

working with other companies that are densely connected to each other mitigates the negative effects of supplier

dependence on R&D intensity. These findings highlight the importance of external information or resources

being available in supply networks when suppliers that are dependent upon major customers explore and exploit

opportunities for new product development.

1. Introduction

Although U.S. companies refrained from boosting most business

spending, such as ordering fewer machine tools and building fewer

buildings, their R&D spending in 2016 increased at a rapid pace com-

pared with the previous year. This change includes, for example, a 23%

increase in R&D spending and a 19% decline in spending on structures

(Buss, 2016). The human genome project, led by the U.S. government

from 1988 to 2003, generated $796 billion in economic impact and

helped the U.S. economy generate $141 for every $1 spent on the R&D

project (Tripp and Grueber, 2011). Investment in product and process

innovation indicates a firm's R&D intensity and is a major outcome of

collaborations, which involve a risky decision and highly uncertain

returns over a long period of time (Eroglu and Hofer, 2014;Lim, 2015;

Mackelprang et al., 2015). Understanding some of the factors that

motivate suppliers, which are dependent upon major customers to en-

hance their R&D intensity, is critical. Most supplier firms face a di-

lemma of whether to provide products or services to a few dominant

customers or seek a more diversified customer base (Irvine et al., 2016).

Suppliers that have a dependent relationship with customers must not

only constantly produce innovative products but also lower production

costs (Crook and Combs, 2007;Emery and Marques, 2011;Petersen

et al., 2008;Yan and Dooley, 2014).

Supplier dependence refers to the extent to which a supplier firm

relies on its major customers for financial resources (Elking et al., 2017;

Patatoukas, 2012;Tangpong et al., 2008). Dependence upon major

customers is one of the most critical characteristics of supplier-customer

relationships (Huang et al., 2016). Such dependence indicates the

amount of power occupied by a dominant buyer, resulting in a dete-

rioration of a dependent supplier's commitment and cooperation

(Handley and Benton, 2012;McHugh et al., 2003). A supplier with

asymmetric dependence is easily exposed to different types of risks,

such as losing substantial future sales and reducing cash flows

(Dhaliwal et al., 2016). Such an imbalance in bargaining power can

cause negative outcomes in a supply chain and influence a supplier

firm's willingness to engage in risk taking and innovation.

Despite the significance of investment in R&D, which is a primary

source of returns and innovation, we know little about why supplier

firms highly dependent upon customers make changes in R&D invest-

ments. As Table 1 shows, researchers have made significant progress in

understanding how the dependent relationship negatively affects firms'

financial performance (Irvine et al., 2016;Kim, 2017;Patatoukas, 2012;

Terpend and Krause, 2015;Villena et al., 2011). Prior studies also ex-

plored dependent suppliers' perceptions in interacting with their pow-

erful customers (e.g., Ak and Patatoukas, 2016;Villena and Craighead,

2017). However, much less attention has been devoted to a theory of

why and when dependent suppliers invest in R&D, which is a key de-

terminant leading to a sustainable competitive advantage (Chen and

https://doi.org/10.1016/j.jom.2018.11.002

Received 22 September 2017; Received in revised form 23 November 2018; Accepted 27 November 2018

∗

Corresponding author.

E-mail addresses: d.kim@unf.edu (D.-Y. Kim), pzhu@sandiego.edu (P. Zhu).

Journal of Operations Management 64 (2018) 7–18

Available online 17 December 2018

0272-6963/ © 2018 Elsevier B.V. All rights reserved.

T