Do Major Customers Help or Hurt Innovation? The Effects of Customer-Base Concentration on Innovation Volume and Radicalness

We examine the effects of a firm’s customer-base concentration on two distinct outcomes of
innovation: volume and radicalness. Drawing on resource dependence and resource allocation
theory, we predict a positive association between customer-base concentration and innovation
volume and a negative association between customer-base concentration and innovation
radicalness. Using a sample of 18,419 firm-year observations between 1976 and 2010, we find
results consistent with our predictions. Furthermore, cross-sectional analyses show that the
negative association between customer-base concentration and innovation radicalness is more
pronounced when the firm has lower bargaining power, faces greater financial constraints, or has
higher investment irreversibility. These results are consistent with innovation resource allocation
driving the negative association between customer-base concentration and innovation radicalness.
Collectively, our results are consistent with major customers shaping firms’ innovation outcomes
and innovation resource allocation decisions.