Corporate Innovation Along the Supply Chain

In this paper, we document a positive effect of supplier-customer geographic proximity on supplier innovation. To establish causality, we explore plausibly exogenous variation in proximity caused by customer relocations. The positive effect of supplier-customer proximity on supplier innovation is stronger when customers are more innovative themselves, when suppliers and customers are closer in technological space, and when customers’ demand accounts for a larger fraction of suppliers’ total sales. These findings suggest that the feedback channel and the demand channel are likely underlying mechanisms through which supplier-customer proximity affects supplier innovation. Overall, our paper sheds new light on the real effect of supplier-customer relationship on corporate innovation.