Does Customization Promote Innovation? Evidence From Knowledge‐intensive Business Service Firms

Abstract The relationship between customization and innovation remains unclear in existing research. Customization requires firms to gain in‐depth knowledge of clients and the product attributes they need, and such knowledge is typically seen as vital for successful innovation. However, close attention to current clients' requirements may limit awareness of broader market needs and innovation opportunities. This study develops hypotheses about the customization–innovation link on the basis of an attention‐based perspective on innovation. We test our predictions using data from an original survey of UK and US knowledge‐intensive business services firms, and employing a novel measure of customization (capturing the degree of customization as displayed through firms’ portfolio of services). The results reveal a clear positive association between a firm's service customization and its innovative activity. This relationship, however, is weakened as the firm's intensity of collaboration with current clients increases – unless the firm has also developed deliberate learning processes. We advance understanding of how customization can spark innovation, by showing that while firms must understand current clients' needs, they should remain mindful of broader market opportunities and develop deliberate learning practices to transform client‐specific knowledge into innovation for the wider market.