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Abstract

News — Manufacturing firms implement two actions to foster component innovation by suppliers: (i) providing the supplier with incentives for component innovation and/or (ii) initiating a collaborative relationship with the supplier for this purpose. In this research, we draw from social exchange theory to investigate how and when each action fosters supplier component innovation. Regarding how innovation is fostered, we argue that by motivating supplier component innovation through both economic and non-economic rewards, incentives and collaboration, respectively, encourage this outcome. As for when such innovation is fostered, we argue that the supplier’s relative economic outcome is a key boundary condition determining the impact strength of manufacturer actions on supplier component innovation. The positive impact of incentives is strengthened when supplier relative economic outcome is high, while the positive impact of collaboration is strengthened when supplier relative non-economic outcome is high. Results from a survey of 188 supplier–manufacturer matched dyads support our hypotheses.