Abstract
The relationship with customers has important implications for operating decisions as well as firm performance. One important aspect of the supplier–buyer relationship is the contract duration, and how this factor is likely to affect firm investments has been under-researched. This study aims to investigate whether corporate innovation is linked to the maturity of contracts between suppliers and buyers. Using a sample of 1516 manufacturing firms in Vietnam for the period of 2014 to 2018, we find that longer-term contracts are positively related to firm propensity of innovation. However, only contracts with foreign purchasers have this characteristic, confirming the supportive role of foreign partners in uplifting the technology for domestic suppliers in a developing country. Interestingly, longer contracts do not tend to facilitate firm innovation or raise the aimed level of newness for firms with very long contracts compared with those that have short-term contracts. This is consistent with the agency cost theory. These findings are robust to different specifications and econometric approaches. Based on the findings, implications are provided to manage the relationship with customers more efficiently.
Highlights
There are different costs and benefits associated with contracts of various lengths between buyer and seller, and the choice can be challenging at times [1]
The patterns are in line with Hypothesis 1, which suggests that longer maturity creates favorable conditions for firms to innovate
These results are consistent with the argument that in a competitive market, having secured the income stream for a period of time allows firms to have more resources to do research and upgrade technology, and long-term contracts enable firms to extract insights from customers and continuous feedback, which effectively directs the innovation process [2]
Summary
There are different costs and benefits associated with contracts of various lengths between buyer and seller, and the choice can be challenging at times [1]. Thanks to a long relationship with customers, the seller could receive more constant feedback and be able to identify trends, which is the prerequisite to innovation and to offering better services/products to the customer [2,3]. This is important as innovation is a complicated process that influences several types of stakeholders, and it can provide substantial benefits to upgrade the performance of both manufacturing and services firms [4,5,6]. This type of investment can include the audit of the technical efficiency and financial ability of the supplier, and in certain cases require the buyer’s aids in building up the technology and capital capacity to match the specific requirements of the buyer [1,7]
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