Abstract
When a firm collaborates with its suppliers, it expands its access to external know-how, and thus, can enhance its innovation outcomes. However, such partnerships also expose it to various transactional hazards including knowledge spillovers and opportunism appropriations. The trade-offs are also underscored by whether the collaboration complements the firm’s strategic resources and directions deployed to yield a strategy dividend. Recent accounts suggest the verdict on supplier collaborations is noisy. Reports indicate buyer-supplier perceptions of these collaborations do not align on the key issues of governance, strategy, and value generation. We study co-development contracts of a sample of high-tech original equipment manufacturers that collaborated with suppliers from 1985 to 2016 and show that misalignment between a firm’s co-development contracts, strategic capabilities, and positioning strategy significantly erodes its innovation outcomes. This suggests that blanket prescriptions for one or the other types of contracts may be misdirected.
Valuation Insight
Innovation performance is a key element contributing to firm value, and product co-development collaborations of original equipment manufacturers with suppliers are common. These collaborations provide access to external know-how but also allow proprietary firm knowledge to spill over or be appropriated. Thus, the net impact of these collaborations on firm value is uncertain. For a sample of original equipment manufacturers collaborating with suppliers, misalignment between governance form, strategies, and capabilities is responsible for the cases in which innovation performance is disappointing.