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At present, new product development (NPD) has become the key to company survival and development in all industries. But conventional wisdom can also threaten a companypsilas ability to compete. NPD researches, mostly dwelling on company level, were found to ignore the product users-customers. This study, however, based on transaction cost theory and from knowledge sharing perspective, is to explore the effect mechanism of customer participation on NPD, in which customer participation is supposed to improve NPD performance through effects of relational embeddedness on knowledge sharing between customers and NPD companies. Meanwhile, the effect mechanism is better shown up with customer knowledge heterogeneity being added as a moderating variable. This study could also give advices on improving NPD performance from customer participation perspective by improving customer-enterprise relations and gaining helpful knowledge about NPD.