User-Producer Interaction as a Driver of Innovation: Costs and Advantages in an Open Innovation Model

While drawing on theories of distributed innovation and search, we conjecture that because a lot of important knowledge can only be obtained through the use of a product, the use of customer knowledge is beneficial for firms’ innovative performance. However, the use of customer knowledge also has an important downside as customers may often be conservative (for many good reasons), forcing producer firms to search for new solutions along established paths, while shying away from truly new and promising opportunities. In this paper these two forces are reconciled through an argument stating that there is an inverse U-shaped relationship between the intensity of the use of customer knowledge and innovative performance. We hypothesize that the negative effect at high levels of intensity of the use of customer knowledge is offset by firms’ broader search strategies in terms of the breadth of external search among other sources of innovation: If firms search more broadly among several sources of innovation, they are much more likely to enjoy the benefits of customer knowledge, while avoiding important negative aspects. Overall, we find empirical support for these conjectures.