MODULARITY AND INNOVATION IN COMPLEX SYSTEMS.

The problem of designing, coordinating and managing complex systems is central to the management and organizations literature. Recent writings have emphasized the important role of modularity in enhancing the adaptability of such complex systems. However, little attention has been paid to the problem of identifying what constitutes an appropriate modularization of a complex system. We develop a formal simulation model that allows us to carefully examine the dynamics of innovation and performance in complex systems. The model points to the trade-off between the virtues of parallelism that modularity offers and the destabilizing effects of overly refined modularization. In addition, high levels of integration can lead to modest levels of search and a premature fixation on inferior designs. The model captures some key aspects of technological evolution as a joint process of autonomous firm level innovation and the interaction of systems and modules in the marketplace. We discuss the implications of these arg...