Learning from Customers: Corporate Innovation along the Supply Chain

Abstract

This paper studies the effect of timely feedback along the supply chain on motivating innovation. We use the geographical distance between a supplier and its major customers to capture the ease and intensity of timely feedback from customers to their suppliers. To establish causality, we explore plausibly exogenous variation in distance caused by customer headquarters relocations. In a difference-in-differences framework, we show that timely feedback from customers has a positive effect on supplier innovation. The effect is stronger when the customers are more innovative themselves and are within closer technology proximity with the suppliers. Our paper provides the first analysis that tests the feedback effect proposed in Manso (2011) and sheds new light on the real effect of customer-supplier relationship along the supply chain.