Abstract

Drawing from the literature on transaction cost economics (TCE), social exchange theory and embeddedness theory, this study has developed a comprehensive model that explains driving forces and incremental innovation processes. Utilizing the partial least squared (PLS) technique, we assessed how incremental innovation can be explained by a group of determinants. The results of the study strongly supported our hypotheses. Our findings revealed that a manufacturer's asset-specific investments, frequency of exchange and satisfaction with previous outcomes will influence its intention to establish an embedded tie with a supplier. The establishment of an embedded tie between partners provides a basis for trust, reciprocity and commitment mechanisms. These mechanisms enable joint action between partners to facilitate incremental innovation. Moreover, a manufacturer can employ its positional advantage to directly facilitate incremental innovation. Here, we made three contributions. First, this study integrates transaction cost economics and social exchange theory to explain the dynamic evolution of relational embeddedness. Second, this study examines incremental innovation processes through the theoretical lens of the embeddedness perspective. Third, this study examines the relationship between a firm's centrality in a network and its incremental innovation. The implications of the study are discussed, along with limitations and suggestions for future research.