New research from Durham University Business School reveals that companies heavily reliant on a small number of high-paying clients are less likely to invest in research and development (R&D) innovation compared to those with a broader customer base.
The study, led by Professor Xinming He of Durham University Business School alongside co-authors Dr. Shan Zhao, Dr. Baichao Ma, and Professor Wenming Zuo, analysed data from 14,203 firm-year observations of A-share listed companies in Chinese stock markets between 2008 and 2017. The research examined the top five clients of each firm and their corresponding R&D investments.
The findings show that firms with a high concentration of big clients have less operational freedom, are more bound to the specific needs of those clients, and face increased risk if a key client departs. These factors significantly reduce the likelihood of investing in innovative R&D.
The researchers also identified external factors amplifying this effect. Intense competition, weak intellectual property protection, and short-term management priorities further discourage R&D investment in firms dependent on a small number of large clients.
“Having a small number of trusty big clients who like your products or services and are willing to pay big for them feels like a safe and comfortable space for companies,” said Professor Xinming He. “However, a safe and comfortable space is not the right environment to innovate, and investing in R&D is crucial for firms if they want to gain a competitive advantage. By having a wider number of customers, companies feel pressure to innovate further, which ultimately is a positive for the company.”
The research underscores the importance of diversifying the customer portfolio to reduce overreliance on a few key clients and foster an environment that supports long-term innovation. Business leaders are encouraged to balance their focus between maintaining strong relationships with large clients and cultivating a broader, more diverse customer base to sustain growth and innovation.
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