Fostering incremental and radical innovation through performance-based contracting in inter-organizational relationships

R. Sumo, W. van der Valk, A.J. van Weele, C. Bode

Research output: Chapter in Book/Report/Conference proceedingConference contributionScientificpeer-review

Abstract

In addition to internal innovation, inter-organizational relationships (IOR) have become an increasingly important source of innovation. Such IORs are usually governed by contracts that provide safeguards to opportunistic behavior and failures, yet the majority of contracts are not conducive to innovation. Nevertheless, anecdotal evidence suggests that innovation in IORs can be fostered by applying performance-based contracts (PBCs); yet, to date, our understanding of the underlying mechanisms is limited. This study combines transaction cost economics and agency theory to develop a theoretical model that explains how and under what conditions PBCs lead to innovation. More specifically, we investigate how the two main features of PBCs—low term specificity and rewards that are tied to performance—affect incremental and radical innovation using data on 106 IORs from the Dutch maintenance industry. We find that term specificity has an inverse-U-shaped effect on incremental innovation and a negative effect on radical innovation. Furthermore, pay-for-performance has a stronger positive effect on radical innovation than on incremental innovation. Finally, contrary to our expectations, we find a positive moderation effect of the partner’s degree of risk-aversion on the relationship between pay-for-performance and both types of innovation. We also found that this moderation effect is stronger for radical than for incremental innovation.
Original languageEnglish
Title of host publicationProceedings of the 23rd International Purchasing and Supply Education and Research Association Conference (IPSERA 2014)
Subtitle of host publicationPurchasing and Supply Management in Difficult Times: The Sky is the Limit
EditorsH. Badenhorst, et al.
Place of PublicationPretoria
Pages1-19
Publication statusPublished - Apr 2014
Event23rd International Purchasing and Supply Education and Research Association Conference (IPSERA 2014) - Legend Golf and Safari Resort, Pretoria, South Africa
Duration: 13 Apr 201416 Apr 2014

Conference

Conference23rd International Purchasing and Supply Education and Research Association Conference (IPSERA 2014)
Abbreviated titleIPSERA 2014
CountrySouth Africa
CityPretoria
Period13/04/1416/04/14

Fingerprint

Radical innovation
Performance-based contracting
Innovation
Incremental innovation
Interorganizational relationships
Moderation
Pay-for-performance
Specificity
Industry
Sources of innovation
Transaction cost economics
Opportunistic behavior
Safeguards
Reward
Agency theory
Economic theory
Risk aversion

Cite this

Sumo, R., van der Valk, W., van Weele, A. J., & Bode, C. (2014). Fostering incremental and radical innovation through performance-based contracting in inter-organizational relationships. In H. Badenhorst, & E. A. (Eds.), Proceedings of the 23rd International Purchasing and Supply Education and Research Association Conference (IPSERA 2014): Purchasing and Supply Management in Difficult Times: The Sky is the Limit (pp. 1-19). [CP 18] Pretoria.
Sumo, R. ; van der Valk, W. ; van Weele, A.J. ; Bode, C. / Fostering incremental and radical innovation through performance-based contracting in inter-organizational relationships. Proceedings of the 23rd International Purchasing and Supply Education and Research Association Conference (IPSERA 2014): Purchasing and Supply Management in Difficult Times: The Sky is the Limit. editor / H. Badenhorst ; et al. Pretoria, 2014. pp. 1-19
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abstract = "In addition to internal innovation, inter-organizational relationships (IOR) have become an increasingly important source of innovation. Such IORs are usually governed by contracts that provide safeguards to opportunistic behavior and failures, yet the majority of contracts are not conducive to innovation. Nevertheless, anecdotal evidence suggests that innovation in IORs can be fostered by applying performance-based contracts (PBCs); yet, to date, our understanding of the underlying mechanisms is limited. This study combines transaction cost economics and agency theory to develop a theoretical model that explains how and under what conditions PBCs lead to innovation. More specifically, we investigate how the two main features of PBCs—low term specificity and rewards that are tied to performance—affect incremental and radical innovation using data on 106 IORs from the Dutch maintenance industry. We find that term specificity has an inverse-U-shaped effect on incremental innovation and a negative effect on radical innovation. Furthermore, pay-for-performance has a stronger positive effect on radical innovation than on incremental innovation. Finally, contrary to our expectations, we find a positive moderation effect of the partner’s degree of risk-aversion on the relationship between pay-for-performance and both types of innovation. We also found that this moderation effect is stronger for radical than for incremental innovation.",
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Sumo, R, van der Valk, W, van Weele, AJ & Bode, C 2014, Fostering incremental and radical innovation through performance-based contracting in inter-organizational relationships. in H Badenhorst & EA (eds), Proceedings of the 23rd International Purchasing and Supply Education and Research Association Conference (IPSERA 2014): Purchasing and Supply Management in Difficult Times: The Sky is the Limit., CP 18, Pretoria, pp. 1-19, 23rd International Purchasing and Supply Education and Research Association Conference (IPSERA 2014), Pretoria, South Africa, 13/04/14.

Fostering incremental and radical innovation through performance-based contracting in inter-organizational relationships. / Sumo, R.; van der Valk, W.; van Weele, A.J.; Bode, C.

Proceedings of the 23rd International Purchasing and Supply Education and Research Association Conference (IPSERA 2014): Purchasing and Supply Management in Difficult Times: The Sky is the Limit. ed. / H. Badenhorst; et al. Pretoria, 2014. p. 1-19 CP 18.

Research output: Chapter in Book/Report/Conference proceedingConference contributionScientificpeer-review

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AB - In addition to internal innovation, inter-organizational relationships (IOR) have become an increasingly important source of innovation. Such IORs are usually governed by contracts that provide safeguards to opportunistic behavior and failures, yet the majority of contracts are not conducive to innovation. Nevertheless, anecdotal evidence suggests that innovation in IORs can be fostered by applying performance-based contracts (PBCs); yet, to date, our understanding of the underlying mechanisms is limited. This study combines transaction cost economics and agency theory to develop a theoretical model that explains how and under what conditions PBCs lead to innovation. More specifically, we investigate how the two main features of PBCs—low term specificity and rewards that are tied to performance—affect incremental and radical innovation using data on 106 IORs from the Dutch maintenance industry. We find that term specificity has an inverse-U-shaped effect on incremental innovation and a negative effect on radical innovation. Furthermore, pay-for-performance has a stronger positive effect on radical innovation than on incremental innovation. Finally, contrary to our expectations, we find a positive moderation effect of the partner’s degree of risk-aversion on the relationship between pay-for-performance and both types of innovation. We also found that this moderation effect is stronger for radical than for incremental innovation.

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Sumo R, van der Valk W, van Weele AJ, Bode C. Fostering incremental and radical innovation through performance-based contracting in inter-organizational relationships. In Badenhorst H, EA, editors, Proceedings of the 23rd International Purchasing and Supply Education and Research Association Conference (IPSERA 2014): Purchasing and Supply Management in Difficult Times: The Sky is the Limit. Pretoria. 2014. p. 1-19. CP 18