Exploring innovation across organizations: the role of contracts and management controls

Abstract This paper addresses a gap in the management accounting literature by examining the relationship between innovation, contract completeness, and the use of management controls in buyer–supplier relationships. Early evidence shows that uncertainty significantly affects contracts and controls, reducing both contract completeness and the inclusion of control specifications in contracts. However, little is known about the role of innovation in shaping inter-organisational relationships. Our study leverages survey evidence collected in the fashion industry, where innovation is both a source of competitive advantage and an intrinsic feature of the production process. Results indicate that process innovation has a negative relationship with contract completeness and reduces the formalisation of controls in contracts, while product innovation has no significant association. This study highlights the importance of designing contracts that balance completeness and flexibility in innovation activities, and the crucial role that trust plays, as a substitute for contractual control mechanisms, in improving buyer–supplier relationships.