Focusing on a small number of big-paying clients might feel secure for companies, but it could hinder innovation.
Research by Professor Xinming He in collaboration with Dr Shan Zhao (Nankai University), Dr Baichao Ma (Jiangsu University of Science and Technology) and Professor Wenming Zuo (South China University of Technology) analysed data from 14,203 firm-year observations of A-share listed firms in Chinese stock markets between 2008 and 2017.
Their findings reveal that companies with a more diverse customer base are more likely to invest in research and development (R&D), driving innovation and long-term growth. In contrast, firms that depend on a small number of major clients face restricted decision-making and heightened operational risks, which reduce their ability to invest in R&D.
This lack of investment, the researchers explain, stems from companies being bound to the specific needs of their key clients. Additionally, these firms face higher risks if a key client withdraws, further stifling innovation. By contrast, companies with a broader customer base experience competitive pressure to innovate, enabling them to maintain a strong market edge.
The researchers found that companies who focused heavily on a small number of big clients were much less likely to invest in R&D innovation, than those companies who had a wider spread of clients. The reason, the researchers state, is that companies with a small number of big clients have less freedom as they are bound to the wants and needs of exclusive clients, and face higher risks if these clients leave.
The researchers also found that there are a number of external factors that also influence the amount of R&D innovation that these big-client focused firms invest in. Intense competition and weak intellectual property (IP) protection, along with internal issues like short-term thinking by management, all amplify the negative effect on R&D investment.
For business leaders, this research underlines the need to diversify the customer portfolio as a priority so that the company isn’t overly dependent on a few key clients. Companies should also focus on fostering a culture that values long-term innovation, even in challenging environments.
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