Influence of exclusive subcontracting on technological innovation: The case of Korean SMEs

Does subcontracting with large firms promote the innovation endeavours of small and medium-sized enterprises (SMEs)? This study addresses this question using panel data from 22,528 observations of Korean SMEs across all industries from 2015 to 2019. We tested the hypotheses individually for five sub-industries based on Pavitt’s (1984, 1990) technological trajectory classification. The findings indicate that exclusive subcontracting negatively affects innovation endeavours, specifically in the supplier-dominated, science-based, and assembly/processing industries. By examining SMEs both as a whole and within specific industries, this study provides new evidence on the relationship between exclusivity and innovation, expanding on prior research that focused on data from limited sectors. Specially, the findings have implications for the innovation strategies of firms, industries, and countries such as South Korea, where SMEs heavily rely on transactions with large firms. These findings offer new quantitative evidence for sectoral innovation systems, emphasising different innovation strategies for each industry.