Innovation and Competition in Complex Environments

By Ciarli, Tommaso; Leoncini, Riccardo et al. | Innovation: Organization & Management, October 1, 2007 | Go to article overview

Innovation and Competition in Complex Environments


Ciarli, Tommaso, Leoncini, Riccardo, Montresor, Sandro, Valente, Marco, Innovation: Organization & Management


1. INTRODUCTION

Innovation is largely recognised as a key determinant of industry dynamics in terms of both their composition and organisation (Malerba 2005). Indeed, technological competition among firms develops through patterns of differentiated dynamics related to the capacity of firms to cope with 'complex' technological problems and hence to obtain quite different performances in the market.

Within this perspective, in this paper we focus on the relationships between the dynamics of an industry, in terms, for instance, of firms' market shares and product quality, and the nature of firms' technological competition. More precisely, we concentrate on the role of product modularity in determining the effects of firms' technological research and, hence their competitiveness in production. In the innovation literature (e.g. Langlois 2002), product modularity is interpreted as the way in which changes in one component (or module) of a good affect the other components (or modules) used to produce the final good. Indeed, it is now widely accepted in the literature that product modularity affects the way in which firms 'de-compose' both their production and search activities. Problem decomposition is the way in which firms may simplify a complex problem (such as technological research) by solving each sub-problem separately (e.g. Simon 1969). Therefore, the level of product modularity determines the decomposability of production and technological complexity faced by firms that attempt to increase their relative share of the market.

To this and related literatures on industrial organisation, we make two contributions. We provide a preliminary explanation of the transformation of an industry as an outcome of the relation between technological complexity, product modularity and technological research. We employ qualitative simulation modelling, suggesting a theoretical framework and methodology that disentangles explanations of emerging complex behaviours and can be easily expanded.1 That is, we describe firm behaviour by means of an agent-based model, and analyse the results firm search at industry level. The computational model allows us to provide an interpretation of the complex dynamics that result from combining product characteristics and firm strategies.

We model an economic system that represents one industry in which a set of firms produces a heterogeneous good. The good is characterised by a complex architecture, and is produced by assembling a set of intermediate components (modules). Before it is sold, the good is evaluated and selected by consumers on the basis of its characteristics (user services). The quality of the good produced, the market concentration, and the firms' fitness are emergent properties of the firms' search process in complex technological 'landscapes' for innovations in product modules (components). It is our contention that the degree of modularity of the production process is a crucial variable in yielding different outcomes in terms of market competition.

The paper is organised as follows. In Section 2, we sketch the theoretical background to the paper. Section 3 provides an abstract interpretation of the issues by describing the model in qualitative form. The simulation results are presented in Section 4 and Section 5 concludes.

2. THEORETICAL BACKGROUND

Market competition through technological change is at the core of neo-Schumpeterian and evolutionary economics analysis (Nelson and Winter 1982). Indeed, it is now common knowledge that firms in innovative sectors compete with rivals by searching for goods and processes of higher quality in an attempt to gain temporary monopolistic profits, rather than displacing competition based on cheaper output or production factors. The relation between technological change at firm level - with all its specificities in terms of radicalness, path dependency, lock-in, and the like, market structure, and some measure of global fitness, has permeated several research strands, with different degrees of closeness to Schumpeter's original work (Fagerberg 2003) and with different focal questions. …

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