Supplier Dependence Asymmetry and Investment in Innovation: The Role of Psychological Uncertainty

Abstract

A key source of competitive advantage for large firms accrues from investments in innovative products and processes by their suppliers, incentivized by a positive relationship climate. A fundamental hindrance to such climate lies in a condition that commonly characterizes buyer-supplier relationships: asymmetric levels of dependence between business partners. Such asymmetry has been shown to be detrimental to the relationship, enhancing the likelihood of conflict, and negatively impacting the performance of the more dependent party. Considering that such dependence asymmetry is likely to persist, large buyers face the challenge of promoting a relationship environment that provides an incentive for suppliers to invest in innovation. In this study, we propose that large, dominant buyers can influence suppliers’ intentions and behaviors through mitigating two psychological dimensions of uncertainty – perceived riskiness and perceived ambiguity – which emerge from a situation of dependence asymmetry. Specifically, using the lens of resource dependence theory we investigate the effects of these two dimensions of uncertainty on a supplier’s trust, commitment, and willingness to invest in innovation, as well as the moderating effect of a buyer’s information sharing in shaping a supplier’s perceived uncertainty. Our findings indicate that a supplier’s dependence on a large customer increases its perception of ambiguity and riskiness in the relationship, negatively impacting its trust, commitment, and willingness to invest in innovation. However, a buyer’s initiative to share relevant and timely information with the supplier reduces its perceived uncertainty, enhancing its attitudes towards the buyer and encouraging innovation. As such, positive relational attitudes by suppliers can be achieved even under conditions of dependence asymmetry.