Contract choice for upstream innovation in a finance-constrained supply chain

This study explores a supply chain with one finance-constrained upstream startup supplier that invests in quality innovation and one downstream manufacturer that sells to consumers under demand uncertainty. The survival and profit-seeking cases are investigated for the startup supplier. The manufacturer supports quality innovation by the startup supplier via an investment-sharing contract. The results show that when making quality investment decisions, the survival-seeking supplier focuses on financial constraints, whereby large constraints pressure the firm to invest more in quality innovation. By contrast, profit-seeking suppliers are encouraged by a large potential market. Investment-sharing contracts are proven to facilitate "win-win" vertical R&D cooperation in the supply chain. Last, by introducing a revenue-sharing contract and comparing it with an investment-sharing contract, our numerical analyses show how the manufacturer should select the appropriate contract as key parameters change.