Supplier and buyer market power, appropriability, and innovation activities: Evidence for the German automobile industry

Recent econometric studies only emphasize the role of long-term demand expectations and technological capability. They neglect the impact of buyer market structure on innovative efforts of input suppliers. This paper deals with the effects of supplier and buyer market concentration, and appropriability conditions on the innovative behavior of suppliers within the German automobile industry. The data set contains firms from all size classes and measures of innovation input as well as innovation output. It can be shown that a) innovation and R&D-employment intensity will decline (increase) in buyer concentration if supplier markets are low (high) concentrated, b) buyers' pressure on input prices reduces suppliers' innovation expenditures and their incentive to develop new products, c) a small number of competitors in domestic and foreign suppliers markets and a large stock of customers stimulates innovative behavior, d) small and medium sized suppliers invest more in their innovation activities but have lower probabilities to realize innovations than larger firms, and f) higher technological capabilities lead to a higher innovation input and output.