Impact of the Buyer-Supplier Relation on the Parts Supplier’s Innovation in the Automotive Industry

The Moon Jae-in administration’s economic policy is composed of three pillars: Income-Led Growth, Innovative Growth and Fair Economy. Although the buyer-supplier relation lies in the policy domain of the Fair Economy, it can also affect the Innovative Growth by its impact on the supplier’s incentives to invest in innovation. This channel is particularly important in the automotive industry, which is a crucial industry for the Innovative Growth, in which parts suppliers’ relation with car makers can significantly influence the formers’ incentives to invest. Economic theory, country comparison, case studies of Germany and the U.S. and empirical analysis using the firm-level panel data from Korea and the U.S. all indicate the importance of a parts supplier’s sales dispersion on its performance and innovation. Thus, the government needs to consider incentivizing the suppliers to diversify their sales and removing the obstacles to such diversification. More fundamentally, it is important to foster trust between buyers and suppliers, which appears to be a prerequisite for them to form a long-term relation.