Supplier innovativeness through contracting

Abstract

In recent years there has been an increasing focus on virtual organizations, alliances, networks and supply chain management as tools through which companies can achieve competitive advantage. Innovation has become another important factor for achieving competitive advantage, especially in markets where the macroeconomic conditions are unfavorable, with high wage and high tax. This paper is an empirical investigation of how companies can achieve innovation through contracting, on a general level. The paper attempts to identify contract mechanisms which will foster suppliers’ innovativeness. The research in this paper was done by conducting a quantitative study. The investigation method was testing the dependent variable, supplier innovativeness, in relation to several independent variables; pay-for-performance, detailed contract, competition and close supplier relationships. The findings showed a significant positive effect of detailed contracts on suppliers’ innovativeness. Another finding from the research was that a close relationship with the supplier will be important for innovation. Close supplier relationships and a detailed contract was found to be complementary variables, and both will contribute to suppliers being more innovative. A surprising finding from this study was that reward schemes based on performance was not found to promote suppliers’ innovativeness. This is a finding that contradicts other small studies of performance based contracts and innovation. A close supplier relationship stands out from the findings as the key mechanism to foster supplier innovativeness.