Exchange characteristics, capability upgrading and innovation performance: evidence from Latin America

Purpose This paper aims to attempt to examine the effect of firm-customer exchange characteristics, frequency and specificity, on the likelihood of the firm to generate customer-driven innovation. The authors draw from social capital theory and argue that repetitive and customer-specific exchange improves the trusts between firm and customers, which in turn ease the flows of tacit knowledge from customers to the firm. From the perspective of customer knowledge management, the authors contribute by examining the mechanism by which a firm can acquire knowledge from and about customers. The authors further argue that a firm’s ability to absorb knowledge from customers and turn them into innovation also depends on its internal capability. A firm that consistently upgrades its capacity is more likely to generate customer-driven innovation than those that do not. Also, the authors argue that the joint effect of exchange characteristics and internal capability upgrading can further increase the likelihood of customer-driven innovation. Such a joint force implies the positive moderating effect of internal capability upgrading to the relationship between exchange characteristics and customer-driven innovation. Design/methodology/approach The authors test the hypotheses on 3,000 firms from six countries in Latin America. They take advantage of the 2017 World Bank Enterprises Survey. This most recent of the survey asks questions on various types of innovation and firm-customers exchange characteristics and other firm-level variables. Findings The authors find support for our hypotheses that repeated exchange and exchanges tailored to specific customers have a positive effect on customer-driven innovation. Also, they find the support that internal capability upgrading, in the form of investment in product design, marketing and organizational development has a positive effect on customer-driven innovation. The authors also find that investment in product design positively moderates the impact of exchange characteristics on the likelihood of customer-driven innovation. Originality/value While past studies focus on strategies to acquire and manage customers’ knowledge, little has been said about how exchange attributes can encourage or discourage innovation? This question is important because various theoretical perspectives may have a different prediction on the effect of firm-customer relationship and innovation. This study attempts to bridge such theoretical tension.