To innovate or not? The optimal innovation strategy choice in a supply chain—from the perspective of the leading supplier

Abstract Innovation plays a critical role in shaping market advantages and leading technology competition. Meanwhile, innovations have spillover effects that are beneficial to others, even though they are not involved in the practice of innovation. Innovation is full of uncertainty, which means investment is not guaranteed to pay off for innovators. Therefore, it is essential to choose the appropriate innovation strategy, especially for those leading firms with both innovative ability and bargaining power. In this paper, both uncertainty (including technical uncertainty and market uncertainty) and spillover effect are taken into consideration to explore the innovation strategies adopted by leading firms: non‐innovation, independent innovation, and collaborative innovation (i.e., co‐innovation hereafter). Furthermore, numerical analysis is conducted to explore the integration strategy that a leading firm adopts to control one of the manufacturers. The results are obtained as follows. First, the innovation of a leading supplier is always beneficial to the whole supply chain. Second, the spillover effect of co‐innovation is more significant, compared to other innovation strategies. Last, from the perspectives of profit and innovation efficiency across the supply chain, co‐innovation is the best option for a leading firm.