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. This paper was accepted by Gustavo Manso, finance.