Do Major Customers Help or Hurt Innovation? The Effects of Customer-Base Concentration on Radical and Incremental Innovation

Abstract

We examine the effect of a firm’s customer-base concentration on two types of firm innovation: radical versus incremental innovation. Drawing on theories of resource dependence and resource allocation, we predict that dependence on major customers will lead a firm to make less investment in radical innovation and more investment in incremental innovation. We test our hypotheses with a sample of 13,546 firm-year observations between 1976 and 2010. We find strong support for a positive association between customer-base concentration and incremental innovation and weak support for a negative association between customer-base concentration and radical innovation. These results hold after controlling for spillover effects from major customers’ innovations. Furthermore, we find that these associations are stronger when a firm faces greater financial constraints and has higher investment irreversibility. Collectively, our results are consistent with major customers shaping firms’ innovation resource allocation decisions.