Impact Of Modularity Upon The Evolution Of Industrial Organization

Modularity has exerted great influence on the evolution of industrial organization since it was fully introduced into the U.S. computer industry in 1960's. In a modularity industry, corporate organization tends to decentralized, and interfirm network develops quickly. In the meantime, the price of products is dropping while their quantities are increasing and innovation is getting more and more. As a result. the industry expands quickly and stimulates economic growth greatly. Modularity appeared firstly in product design. Technology evolution of complex product system shows two paths through structure innovation by modularity. As a result, the degree of specialization is rising while complexity based on division is falling. Then firm behavior changes in the process of adjusting its boundary Diversified market structure is taking shape based on innovation competition, and a special "industrial evolution path appears.Modularity is a method of simplifying complex product system. A complex product system could be disassembled by design rules or standards, or some modules could be integrated into product system. In a modular system, modules and final product evolves respectively and simultaneously. The modules here are not simple parts or individual units but complex system.Technology innovation guides industrial evolution. Industrial technology evolution is propelled by complex product structure innovation, which was introduced by modularity. A bilateral technology evolution path was formed and evolves simultaneously in complex product system after modularity was introduced. In the meantime, an active open innovation system is forming. And then innovation inside or outside a firm could outflow or inflow conveniently, so innovation quantities in a society increase greatly. As an example, the technology evolution in the U. S. computer industry started from product innovation, and then got into a bilateral technology evolution path. Complex product system innovation began with process innovation, while modules innovation was filled with a lot of product innovation and process innovation with the increase of modules quantities. After that, important innovation of some core modules brought about a new product system, and then industrial technology paradigm evolved along new product system path. Modules cluster expanded and more innovation emerged. Moreover, new product systems based on important innovation of modules would spring up, while technologies would spread to other related industry.Modularity advances evolution of division. It could enhance the degree of specialization in a complex product system, while reduce the complexity of division. In a modular system division style was formed between capital and innovation, design and production. Three layer divisions are took shape as follows, design rules and modules, system integration and tests in the first layer, division among modules in the second layer and division inside modules in the third layer. Modularity could play an important role in expanding market scale, increasing transaction efficiency, reducing the division of coordination cost and advancing knowledge development. As a result. the evolution of division develops. Economies of division refer to comparative advantages by division and specialization. Substitution and complementation effects exist in a modularity system by the substitution between the new and old modules, and they are diverse between a modular system and an integration system. In a modular system complementation effects are stronger than in an integration system, while substitution effects are weaker. Therefore the total effects in a modular system are better than in an integration system. Evolution of division could be expressed as the increase of quantities and kinds of intermediate goods, the final products and main modules.Modularity has an influence on the adjustment of firm boundary and promotes the development of interfirm networks. The modular complex product system tends to vertical disintegration. Modularity reduces the technological and market transaction cost. The decrease of technological transaction cost could help the modules exist independently in the market, while the decrease of market transaction cost could make decentralization of the firms. In the mean time, venture capital plays a vital role in the foundation of such firms, which could cut down the capital entry barrier. Modularity could provide flexibility to product system, which forms corporate core competence and endogenous comparative advantage. Hence corporate capability was enhanced in the long-term. Modularity in organization gives play in the development of interfirm network. Firm scale is different from firm boundary. Relative lower asset specificity level of a module is depended by its technological attribute. Market exchange serves to attenuate the production and transaction costs comparing to internal exchange in a corporation. Therefore, the design and production of most of modules disperse in varies firms, while other specific modules may be organized in one corporation with its correlated modules. As a result, the industry tends to decentralized.Modularity affects market structure, conduct and performance. In the first place. interfirm competition dwells mainly around product innovation. Incumbent firms will be influenced by resource transaction costs, and have an advantages on inter-temporal economies of scope. So the incumbent firms do not have an absolute advantage in the process of innovation. Barriers to industrial entry under modularity are relatively lower. Entrants could enter into a market by product innovation, imitation innovation or taking advantage of disruptive technology, while the incumbents would reacts in different ways. In addition, innovation techniques, modularity level, sunk cost and market environment influent the entrants. Secondly, the technology characteristics of a modular system has an impact on firm behavior. The open innovation background by modularity makes firms into an ecological system. Consequently the success of a firm depends heavily on if it could act as a leading role in the system. Cooperation and competition between firms replaces traditional competition. Sometimes firms need to pay the price freely in order to make a profit. Moreover, the innovation contests among firms exhibit repeated, "fastest-not-best" and "capture-in-use" character in order to get market share quickly. In the end. the core modules market shows competitive monopolization, while other modules market reveals monopolistic competition in a modularity industry. The modularity industry also exhibits a distinct disintegration and network character. Thirdly, favorable market performance could be got through modularity. Accompanied by keen innovation competition and firms scattering, prices are cutting down, while product quantities are increasing and qualities are improving greatly. In the meantime, the speed of technology innovation is accelerating. So modularity could play an important role in economic growth, and could influent the production and life styles.Modularity forwards industry evolution. It brought about a continuous rising industry evolution path in stages. For example, as a high-tech intensified industry, it shows a specific evolution path in the U.S. computer industry since modularity was introduced. Industry creating and developing are influenced by technology, market demand, structure innovation in a product system, government support and the routine of core firms. Technology coevolves with industry in a modularity industry. Consequently, a two-stage market reveals as modules and products market, which promotes and influents each other. The concentration in product market seems high in the early industry. Then it becomes higher with the emergence of modularity. After that it will decline due to a great deal entrants enter into market. On the contrary, the concentration in core modules market rises constantly. Decentralized innovation among modules leads to new product innovation, which makes the market of modules vibrate again. Then a new concentration or decentralization situation appears. After that the product assembly market will tend to decentralized. As a result, technology of core modules will proliferate outside, which brings forth new entry. Hence the core modules market concentration falls down subsequently. The industry growth reveals a character as rising by stages constantly. After the introduction of the first modularity product, the industry develops quickly since the market entry and exit take place frequently. Then it grows slowly with the product grows mature. After that, the breakthrough of core modules technology brings about the emergence of new product system, more and more new modules appear. In the end, the industry development could be accelerates continually. Therefore such industry expands day after day. and proliferates to related industries. As a result, the rising stage of the industry is prolonged.