EXPLAINING DOWNSTREAM INNOVATION BY COMMODITY SUPPLIERS WITH EXPECTED INNOVATION BENEFIT

Empirical researchers have observed that occasionally firms that sell variable physical inputs for use in production processes ("suppliers") originate innovations in the process. When such innovation is performed by commodity suppliers this phenomenon would appear to contradict previous theory and evidence suggesting that innovation is profit motivated. Such suppliers do not obviously share in the economic benefits generated by their innovations-those would appear to accrue to process-using firms. This author proposes that downstream process innovation by suppliers can be explained by.the increase in demand that the innovation induces, which provides the suppliers with an economic return. A simple model of firms' expected innovation benefit based on this hypothesis, when tested on data from a set of innovations in commodity materials-using production processes, discriminates effectively between supplier and nonsupplier innovations. The adequacy of the few predictive variables used further suggests that in practice suppliers of commodities will tend to innovate in a downstream process when (1) they are relatively concentrated, (2) the prospective innovations promise to expand the market for the relevant material greatly, and (3) the process users are relatively unconcentrated.