Recent research has indicated that suppliers are one of the most important sources of firms' innovation. Another line of research on supply chain management has found it critical for manufacturing firm and its suppliers to coordinate their operations (including innovation activities) for optimizing performance at the network level. In this thesis, we investigate an issue of a manufacturing firm's supporting its suppliers' innovation that eventually benefits the manufacturer: such support can be regarded as a mechanism of supply chain coordination. We propose that an optimal amount of such subsidy be determined by dynamic interplay among market demand uncertainty, supplier's innovation capability, and information delay between the manufacturer and its suppliers. In order to substantiate our proposition, we employed three research methods, case study, system dynamics simulation, and optimal control theory. Based on our analysis, we have proved our proposition and demonstrated how the analytical as well as simulation model can be applied to real world situations.
