Buyer-Supplier Relationships, Internationalization and Product Innovation

Recent empirical studies have reported strong firm-level evidence of `learning by exporting\' in product innovation. In this paper we consider a specific channel which might contribute to explain the innovation premium of exporters, by focussing on the information exchange between firms establishing buyer-supplier relationships related to production to order (PTO). Using new European firm-level data, we first provide some descriptive evidence that suppliers doing PTO for foreign firms are more innovative than suppliers producing only for domestic rms. We rationalize this evidence in a theoretical framework where firms are heterogeneous in the characteristics of their products and where buyers, searching for a specialized input, have to match either with a domestic or with a foreign supplier in order to produce a final good. A successful match requires the intermediate good\'s adaptation/modification (`innovation\') which can be carried out either by the buyer or by the supplier. In a framework where information is imperfect and contracts are incomplete, we single out the conditions for which different internationalization and innovation strategies are implemented, and in particular suppliers are likely to adapt their products for foreign buyers (i.e., `learning by exporting\'). Our results are driven by the interplay between the innovation costs\' structure, the internationalization costs and the density of suppliers in the different countries.