Buyer power is widely considered to decrease innovation incentives of suppliers. However,
there is little empirical evidence for this statement. Our paper analyses how buyer power influences
innovation incentives of upstream firms while taking into account the type of competition
in the downstream market, namely price and technology. We explore this relationship
empirically for a unique dataset containing 1,129 observations of German firms from manufacturing
and service sectors including information on the economic dependency of firms
from their buyers. Using a generalised Tobit model, we find a negative effect of buyer power
on a supplier’s likelihood to start R&D activities. This negative effect is mitigated if the supplier
faces powerful buyers operating under strong price competition. There is also weak evidence
for a negative effect of buyer power on suppliers’ R&D intensity if the powerful buyer
operates under strong technology competition.
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