I document novel evidence of a substitutionary relationship in supply chain innovation: When R&D becomes relatively cheaper upstream through state tax credits, customers strategically reduce innovative investment while their suppliers increase it. Suppliers produce no additional patents from the increased R&D; instead, customers accrue more patents in their suppliers’ technological domains. These patents are more exploratory and garner more citations. As mechanisms through which upstream R&D can translate to downstream patents, formal alliances and collaborative patenting arrangements become more frequent. Collectively, findings indicate firms can outsource innovative expenditures upstream, while still reaping the innovative outputs, blurring traditional firm boundaries.