The Strength of Long Ties and the Weakness of Strong Ties: Knowledge diffusion through supply chain networks

This paper examines the effect of the structure of supply chain networks on productivity and innovation capability through knowledge diffusion, using large firm-level panel data for Japan. We find that ties with distant suppliers improve productivity, as measured by sales per worker, possibly attributed to intermediates from distant firms embodying more diversified knowledge than from neighboring firms. Ties with neighboring clients also improve productivity, which may be a result of diffusion of disembodied knowledge from neighboring clients being more effective than from distant clients. By contrast, ties with distant suppliers and clients improve innovative capability, as measured by the number of patent applications, suggesting the importance of a diversity of knowledge from distant firms for innovation. In addition, the density of a firm's ego network, which is measured by how densely its supply chain partners transact with each other, is found to have a negative effect on productivity and innovative capability, implying knowledge redundancy in dense networks. Overall, our results emphasize the importance of diversified partners in knowledge diffusion through supply chain networks.