| Promoted by knowledge economy and information technology, the economic and social life of human beings is leaping over the regional and cultural obstacles, presenting a global trend towards connection, exchange and interaction in all directions and aspects. Enterprises all over the world now bound with each other, thus form global production network. It is under such conditions that modularized organization comes into being. Modularized organization can be defined as: on the basis of modular decomposition of product system, different intermediate products are assigned to different enterprises and then integrated, thus form a network among enterprises which we call modularized organization. In recently years, research on modularized organization and production has gradually become a hot issue in management and economics studies, and made a series of research achievements. But in previous literature, few were discussed on mechanism of modularized organization's operation and governance. On the basis of reviewing the previous theory on modularization, concerning with New Institutional Economics, Evolutionary Economics and Behavioral Economics, this paper studies: 1) The emergence and evolution of modularized organization, 2) Mechanism of internal and external governance of modularized organization, 3) China's development of modularized organization, and finally gives suggestions on the optimization and upgrading of China's manufacturing industry.Modular organization is a new model of organization in the global network of production, and there are deep reasons lies for its emergence. On the one hand, modularized products cater to personalized consumption demands; on the other hand, it can reduce the risk, uncertainty as well as the complexity of production. In the economic globalization age, some industries have developed into a system of global network of modularized production.Modularized Organization has its own information features and operational mechanism that different from traditional organization. Information encapsulation enhances heterogeneity innovation activities within modularized organizations, and also increases the possibility of successful innovation. The assimilation of system information advances the free play of innovation activities of each sub-modular, which not only provides a variety of innovative options in the future, but also makes self-evolution possible without concentration beforehand. In modularized organization, decentralized decision-making information structure stimulates labor division and brings increasing returns. Self-organization is one of the features of modularized organization and complementary can bring synergistic effect.For the successful operation of modularized organization, it is needed to construct an effective mechanism of governance. In this paper, comprehensive studies are made on the governance of modularized organization from both aspects of internal and external control.Firstly, the paper discusses the internal governance of modularized organization from the perspective of property rights and contractual arrangements. Modularized organization forms a flexible contract network under the condition of intra-product specialization. Coordination among modularized organizations is mainly led by the rule-maker. Various parties in the organization are equal in status; the asset specificity of two parties is low, while the transaction frequency is higher than that of the market transactions, but lower than the frequency within the enterprise itself. The main point of modularized organization's property rights is the distribution of cooperation residual. The principle of the cooperation residual distribution is: an individual's share of cooperative residual is proportional to its influence. Standards can be divided into three categories: standard of private goods nature, standard of clubs item nature and standard of public product nature. However, products with network externality are easily to become the de facto standard in the market, and access to the high level of corporate profits.Secondly, the internal governance of modularized organization is discussed from the aspects of social capital and informal constraints. Mainly analyses from these three areas:1) The effective operation of modular organization needs to follow the principle of fairness and reciprocity. It is not only the exchange of equal interests but also the exchange of equal damages. In economic globalization age, strong reciprocity of the punitive nature is vitally important to maintain the cooperative order of modularized organization. 2) Credit mechanism can reduce transaction costs caused by the incompletion of the contract; in the meantime, credit mechanism can also expand the scope of cooperation among modularized organizations. 3) While reputation is similar to the human capital, a certain possession of reputation capital can gain its owner corresponding returns.Thirdly, the paper studies the external governance of modularized organization through market mechanism and government regulation. It looks into competition and monopoly, and government regulation under modularized organization. It stands that: 1) The border of modularized organization is developing dynamically. Some industries have a modularized monopoly structure, which features as: a final product is actually produced by a number of joint enterprises; new technologies, new products, and new combination of essential production factors are often the cause of the formation of modularized monopoly structure. 2) While the marginal costs is on the decrease, the maximization of social welfare may require the enterprises not to follow the pricing principle of MR = MC. However, it is difficult for enterprises to monopolize the market permanently at the price higher than MC, because innovations will lead to constant evolution of market structure. 3) The competitions in modularized organization are different from that of the past. Not only has competition reached every chain of production, but also comes from the same enterprise. In modularized organization age, the barriers in market and the asset specificity have decreased while the contestability has greatly increased.Based on the above analysis on the theory of modularized organization's governance, together with China's present environment, this paper finally discussed the optimization and upgrading of China's manufacturing industry. The participation of China's manufacturing industry in the global modularized labor division is increasing, but we should also be aware of it that the scale of Chinese enterprises is rather small and usually at the lower end of the modularized value chain. To enhance the international competitiveness of manufacturing sector, China needs to make full use of its advantages of modularized production methods and improve the governance mechanisms. Suggestions are: 1) Improving the internal control of modularized organization to make the optimization and upgrading of China's manufacturing industry. a) Specifying and upgrading enterprise's position in the modular organization system. Enterprises with social capital and network advantages should strive to become the system integrator; enterprises with technology advantages should stand in its own specialized module, and endeavor to become a standard-maker; b) Emphasizing on the cultivation of social capital, and use flexible contract networks to expand cooperation. 2) Improving the external governance of modularized organization. a) Viewing market concentration and monopoly from the aspect of efficiency. b) Using modular approach to enhance competition, modularizing industry organization or products, in order to reduce enter or exit barriers to potential competitors, and promoting competition in China's natural monopoly industry as well. c) Supporting enterprises at both ends of the value chain, increasing investments in high-tech manufacturing industry accounted for the entire amount of investment proportion; increasing risk investment and encourage patent pool among enterprises.
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