Investment in Process Innovation in Supply Chains with Knowledge Spillovers under Innovation Uncertainty

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Conditions for investment in uncertain process innovation with spillovers are derived

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The manufacturer with weak enough absorptive capacity could benefit from investing

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Bilateral investment may result in lose-lose, lose-win, win-lose, or win-win outcomes

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Cross-selling reshapes the manufacturers’ incentives to invest in process innovation

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Direct sales entail a wider range of investment conditions than indirect sales do

In this paper, we consider two supply chains each consisting of a manufacturer sells products to customers through an exclusive retailer to investigate the issue of whether the manufacturers with differentiated absorptive capacity will invest in uncertain process innovation under knowledge spillovers. To this end, we develop game-theoretic models with bilateral investment, unilateral investment, and no-investment. Analysis of the equilibrium outcomes shows that the manufacturers when confronted with weak (strong) spillovers will (not) invest. If a manufacturer’s knowledge seldom spills over and the opposite is true for the competitor, they behave as the unique investor and free-rider, respectively. If both of them are exposed to medium spillovers, there exist thresholds below which the investment strategies are asynchronous, and they are synchronous otherwise. Moreover, we reveal that: (i) bilateral investment may yield lose-lose, lose-win, win-lose, or win-win outcomes for the manufacturers; (ii) the manufacturer with weak absorptive capacity may invest even though it almost learns nothing from external knowledge; and (iii) if the success probability of innovation is high, the investment strategies hinge on the intensity of knowledge spillovers. Otherwise, the manufacturers generally have fewer incentives to invest. Finally, we extend the model to verify the robustness of the key findings in situations with cross-selling and channel integration, respectively, as well as shed some light on the effects of different supply chain structures on the manufacturers’ incentives to invest in uncertain process innovation.