Customer concentration and corporate innovation: Evidence from China

Abstract

This paper investigates the impact of customer concentration on corporate innovation in China. We hypothesize that a more concentrated customer base increases a supplier’s operational risk and causes firms to become more cautious with regard to investment in innovation. Moreover, a more concentrated customer base gives such customers stronger bargaining powers and makes suppliers less willing to make relationship-specific investments. Hence, the hold-up costs of customer concentration in China exceed the benefits that accrue from the economies of scale associated with such concentrations, which impede a supplier’s corporate innovation. Our results reveal that suppliers with higher customer concentrations produce fewer patents and invention patents. Moreover, our results are robust after adopting an instrumental variables approach. We further show that the effect is more pronounced in firms with lower business diversification and in firms that have lower stability in their major customers. Our paper sheds lights on the hitherto underexplored unfavorable impact of customer concentration on innovation.