To read the full version of this content please select one of the options below:

Fostering incremental and radical innovation through performance-based contracting in buyer-supplier relationships

Regien Sumo (Industrial Engineering and Innovation Sciences Department, Eindhoven University of Technology, Eindhoven, The Netherlands)
Wendy van der Valk (Department of Management, Tilburg University, Tilburg, The Netherlands)
Arjan van Weele (Industrial Engineering and Innovation Sciences Department, Eindhoven University of Technology, Eindhoven, The Netherlands)
Christoph Bode (Business School, University of Mannheim, Mannheim, Germany)

International Journal of Operations & Production Management

ISSN: 0144-3577

Article publication date: 7 November 2016

Abstract

Purpose

While anecdotal evidence suggests that performance-based contracts (PBCs) may foster innovation in buyer-supplier relationships, the understanding of the underlying mechanisms is limited to date. The purpose of this paper is to draw on transaction cost economics and agency theory to develop a theoretical model that explains how PBCs may lead to innovation.

Design/methodology/approach

Using data on 106 inter-organizational relationships from the Dutch maintenance industry, the authors investigate how the two main features of PBCs – low-term specificity and performance-based rewards – affect incremental and radical innovation.

Findings

The authors find that term specificity has an inverse-U-shaped effect on incremental innovation and a non-significant negative effect on radical innovation. Furthermore, pay-for-performance has a stronger positive effect on radical innovation than on incremental innovation. The findings suggest that in pursuit of incremental innovation, organizations should draft contracts with low, but not too low, term specificity and incorporate performance-based rewards. Radical innovation may be achieved by rewarding suppliers for their performance only.

Originality/value

The findings suggest that in pursuit of incremental innovation, organizations should draft contracts with low, but not too low, term specificity and incorporate performance-based rewards. Radical innovation requires rewarding suppliers for their performance only.

Keywords

Citation

Sumo, R., van der Valk, W., van Weele, A. and Bode, C. (2016), "Fostering incremental and radical innovation through performance-based contracting in buyer-supplier relationships", International Journal of Operations & Production Management, Vol. 36 No. 11, pp. 1482-1503. https://doi.org/10.1108/IJOPM-05-2015-0305

Publisher

:

Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited