Is it too complex? The curious case of supply network complexity and focal firm innovation

• Author: Sourav B. Borah,Amalesh Sharma,Anirban Adhikary,Surya Pathak
• DOI: http://doi.org/10.1002/joom.1067
• Published date: 01 October 2020
• Date: 01 October 2020

RESEARCH ARTICLE

Is it too complex? The curious case of supply network complexity

and focal firm innovation

Amalesh Sharma

1

| Surya Pathak

2

| Sourav B. Borah

3

| Anirban Adhikary

4

1

Marketing, Mays Business School, Texas

A&M University, College Station, Texas

2

Operation and Supply Chain Management,

School of Business, University of

Washington, Bothell, Washington

3

Marketing, Indian Institute of Management

Ahmedabad, Ahmedabad, India

4

Operations Management, Quantitative

Methods, and Information Systems, Indian

Institute of Management Udaipur, Udaipur,

India

Correspondence

Surya Pathak, Operation and Supply Chain

Management, School of Business,

University of Washington, Bothell,

Washington.

Email: pathaksd@u.washington.edu

Handling Editor: Subodha Kumar, Sriram

Narayanan and Fabrizio Salvador

Abstract

Firms have increasingly relied on their supply network for improving their innova-

tion performance. Although the relationship between the supply network structure

and innovation has been investigated, the link between supply network complexity

and a firm's innovation remains unexplored. By employing transaction cost eco-

nomics and the concept of a recombinatory search, we propose that the complexity

dimensions (horizontal, vertical, and spatial complexity) of a supply network

impact the innovation performance of a firm and that such relationships are moder-

ated by a strategic emphasis on value creation and the influence of the firm over

the supply network. With a large-scale network data of 201 firms across six indus-

tries and 20 countries, we take a robust empirical approach that accounts for endo-

geneity, unobserved heterogeneity and intrafirm error correlation to test our theory.

We find strong support for a nonlinear relationship (with diminishing growth)

between both horizontal and vertical complexity with respect to innovation perfor-

mance. We find that spatial complexity is negatively related to innovation perfor-

mance. Additionally, we find that a firm's strategic emphasis and its influence

indeed moderates the link between the complexity dimensions and innovation per-

formance. Based on our findings, we offer specific managerial guidance for the

effective implementation of sourcing practices.

KEYWORDS

innovation performance, knowledge recombination, network influence, strategic emphasis, supply

network complexity

1|INTRODUCTION

Gone are the days when product and process innovations

were carefully guarded secrets within the four walls of a

firm. With the rapid advancement of technology, the globali-

zation of markets, and increased consumer appetite for inno-

vative products and services, focal firms have increasingly

started to rely on external partners for delivering these needs.

Every September, Apple must match its customer expecta-

tions with the launch of a major product release or a range of

upgrades. Although alliances and partnerships with compet-

ing firms have certainly been an avenue adopted for

innovation, focal firms are increasingly relying on their sup-

pliers for developing its next generation of products and ser-

vices (Azadegan & Dooley, 2010; Choi & Krause, 2006;

Dyer & Nobeoka, 2000; Von Hippel, 1988). Apple's latest

release of its generation 4 smartwatch has inputs from major

suppliers that include Samsung, Texas Instruments, Analog

Devices, Qualcomm, and Jabil, to name a few. Naturally,

researchers have started to explore the link between a focal

firm's network of suppliers and its innovation output

(Bellamy, Ghosh, & Hora, 2014; Narasimhan & Narayanan,

2013). Recent industry surveys of supply chain professionals

have revealed the poor understanding of sourcing complexity

Received: 15 October 2018 Revised: 18 September 2019 Accepted: 27 September 2019

DOI: 10.1002/joom.1067

J Oper Manag. 2020;66:839–865. wileyonlinelibrary.com/journal/joom © 2019 Association for Supply Chain Management, Inc. 839

and its implications for focal-firm innovation as one of the

leading causes for “sleepless nights”among supply chain

leaders.

1

Sourcing scholars have primarily focused on two dimen-

sions of a focal firm's supply network: the structure of a net-

work and the complexity of a network. The structure of a

network has been linked to the innovations (in terms of pat-

ents) produced by a focal firm (Bellamy et al., 2014). The

primary focus of this line of research has been on under-

standing the value of managing a supply network for firm

innovation and performance implications. The theoretical

understanding associated with the same is that a firm gains

information and knowledge from local and distant relation-

ships, which helps the firm to cultivate innovation. Supply

networks are complex adaptive systems (Choi, Dooley, &

Rungtusanatham, 2001; Pathak, Day, Nair, Sawaya, &

Kristal, 2007). Although it is important to capture the impact

of the network structure on innovation, it is equally impor-

tant to identify how complexity in the supply network might

affect the innovation performance of firms. As complexity in

the network may increase the costs of managing the supply

partners, opportunistic behavior and restrict the flow of

information and material, network complexity may facilitate

or hinder innovation.

In a recent publication, Lu and Shang (2017) focus on

the second dimension, that is, the complexity of a focal

firm's supply network, the linked redundancy of suppliers,

vertical integration, the spatial dispersion of suppliers, the

shared suppliers between focal firms and their customers,

and collaborations in the supply base to the financial perfor-

mance of the firm. Giannoccaro, Nair, and Choi (2017)

employ the NK model (Kaufmann, 1993) to combine both

the structural and complexity perspective of a supply net-

work, and they link “more complexity”to reduced perfor-

mance. Scholars have also investigated supply network

complexity and its impact on supply chain disruptions

(Bode & Wagner, 2015; Brandon-Jones, Squire, & Van Ros-

senberg, 2015), overall plant performance, responsiveness,

and delivery speed (Choi & Krause, 2006; Vachon &

Klassen, 2002).

A closer look at this growing area of research reveals an

important gap in our understanding. Researchers have either

investigated the supply network structure and innovation or

the complexity of a supply network and financial perfor-

mance. Little evidence exists on linking the complexity of a

supply network to the innovation performance of a focal

firm. In this article, we address this gap. Innovation perfor-

mance has been measured with multiple operationalizations,

notably, the number of patents (Bellamy et al., 2014), num-

ber of forward citations of the patents (Bellamy et al., 2014;

Sharma, Saboo, & Kumar, 2018), ability of a firm to

innovate (Schneider, Günther, & Brandenburg, 2010), and

number of new products launched (Baron & Tang, 2011).

Although the central focus of our work is to unravel the

relationship between network complexity and innovation

performance, we also explore why, with similar levels of

complexity, some firms outperform other firms with respect

to innovation. Additionally, we focus on two different mod-

erating effects that may affect a focal-firm's innovation.

First, the research on innovation has highlighted that a firm's

strategic focus may be on value creation or value appropria-

tion (Mizik & Jacobson, 2003). Firms that are focused on

value creation invest resources primarily in internal research

and development (R&D) activities, whereas firms that focus

more on value appropriation invest resources primarily in

external activities, such as sales management, marketing,

and relational activities (Saboo, Chakravarty, & Grewal,

2016). As the focus on innovation varies based on a firm's

strategic emphasis, one can argue that the strategic emphasis

of a firm moderates the effect of supply network complexity

on innovation. Second, as a firm's influence in the network

may facilitate the flow of knowledge and learning, the posi-

tion that a firm occupies in the network may influence the

effects of complexity on innovation performance.

We lean on the theoretical lenses of recombinatory search

(Fleming, 2001), and transaction cost economics (TCE)

(Williamson, 1979) to develop our conceptual framework

and test hypotheses that relate to supply network complexity

and a firm's innovation performance. Based on our review of

the supply network, complexity, innovation, and firm perfor-

mance literature, we propose that the effects of supply net-

work complexity on innovation performance may be

curvilinear. By utilizing a rich and novel dataset, we esti-

mate a series of robust econometric models that account for

the potential endogeneity in the complexity dimensions,

unobserved firm-level heterogeneity, and heteroscedasticity.

Specifically, we collect the innovation data for 201 firms

across 20 different countries and six different industry sec-

tors with USPTO's patentsview.org website

2

and Google's

patents database. Supply network complexity-related data

were collected by using Bloomberg's supply chain analysis

(SPLC) database. The data captured as part of this study

include buyer–supplier network (BSN) information up to the

Tier-2

3

level that enables us to incorporate complexity in a

multitier structure, which is a unique contribution of this

study. We find that with increases in horizontal and vertical

complexity, innovation performance increases at a decreas-

ing rate, whereas spatial complexity negatively affects inno-

vation performance. With an increase in the influence of the

focal firm in the network, the effects of the network com-

plexity dimension on innovation performance increases.

Finally, as the strategic emphasis of the focal firm on value

creation activities over value appropriation activities

840 SHARMA ET AL.