When companies talk about innovation, they tend to focus inward: new product teams, R&D budgets, design labs. But our research finds that a powerful and often overlooked driver of innovation lies far beyond a company’s walls and even beyond its first-tier suppliers.The real innovation engine may be hidden two or three tiers deep in your supply chain, among the suppliers of your suppliers.The Missing Link in InnovationMost firms already know that collaborating directly with their main suppliers pays off. Close relationships build trust, shorten development cycles, and open up shared problem-solving. But the vast network that supports those suppliers—the component makers, material specialists, and process innovators behind the scenes—is where fresh ideas and technical breakthroughs often begin.We call this “cross-tier supplier collaboration,” when a company’s first-tier suppliers actively partner with their own suppliers on research, technology development, or joint product solutions. These upstream alliances can quietly create new materials, production methods, or technologies that flow down the chain to the buying firm.Think of how Corning and West Pharmaceutical worked together to create advanced glass packaging for injectable drugs. Their collaboration benefited not just West but also major pharmaceutical companies like Eli Lilly, which gained access to a better delivery system without ever working directly with Corning.What the Research ShowsTo understand how these upstream collaborations influence innovation, we analyzed data from more than 2,000 U.S. manufacturing firms between 2010 and 2019. We looked at each company’s suppliers, and the suppliers’ suppliers, to see whether cross-tier collaborations improved innovation efficiency—the ability to…
