Mediation effects of trust and contracts on knowledge-sharing and product innovation

Purpose: The purpose of this paper is to analyze the mediating role of contracts and trust on the generation of product innovations stemming from buyer-supplier knowledge-sharing (KS) among the members of the supply chain. Together with the individual effects of trust and contracts, their joint effect is examined in order to determine whether these are complementary or alternative mechanisms of safeguarding and control. Design/methodology/approach: Drawing on a survey of 202 European machine tool firms acting as buyers and sellers, the authors propose and evaluate a structural equation model. Findings: Results confirm that there is a positive relation between contracts and trust with respect to buyer-supplier KS, and of the latter with respect to innovation performance. They also show that firms in which both the levels of trust and contract use are high reinforce their product-innovation capability based on buyer-supplier interaction (complementarity thesis). However, results also show that, contrary to trust, contracts by themselves do not act as a stimulus for product innovation. Research limitations/implications: Establishing contracts seems to be a highly recommended action in a buyer-supplier relationship focused on increasing innovation capacity. This does not go against engendering trust in a relationship. Both trust with a degree of formalization, in different ways, help to increase the effect of sharing valuable knowledge on innovation capacity. Originality/value: To the authors’ best knowledge, no prior study has delved into differentiating the use of contracts and trust as mechanisms in mediating the effect originated from knowledge-sharing on product innovation performance with two different samples formed by buying and selling firms.