How can suppliers strategically involve downstream manufacturers in research and development collaboration? A knowledge spillover perspective

Innovation collaboration has become increasingly important for supply chain partners. In this study, we examine the impact of innovation collaboration on supply chain partners, specifically focusing on how suppliers can design strategies to motivate downstream buyers to engage in cost-reduction research and development (R&D) activities. We present a scenario in which two downstream manufacturers purchase identical parts from a shared supplier and compete on the end market while individually investing in R&D. Our findings indicate that the manufacturers may be less inclined to invest in R&D due to knowledge spillover effects, which can reduce their order quantities from the supplier. To address this issue, we propose that the supplier become involved in the R&D through a cost-sharing agreement, aligning the incentives of all supply chain partners and internalizing both supply chain and knowledge externalities. Our results suggest that this approach allows the supplier to share R&D costs with the manufacturers while ensuring that the manufacturers are not worse off in a supply chain collaboration scenario compared to other scenarios. We also recommend that the supplier involve downstream manufacturers with perfect spillovers.