Allocation of Inventive Effort in Complex Product Systems

Abstract

The paper examines the allocation of inventive effort in complex product systems. I argue that complex product systems (e.g., personal computers) are distinguished by functional interaction among several components each guided by a relatively autonomous bundle of technical and economic characteristics. I try to explore whether the dynamics of such interactions between components of complex product systems can help us understand changes in the relative allocation of inventive effort. I advance and empirically test three hypotheses: (1) emergence of component constraints (bottlenecks) in product systems will trigger R&D investment to resolve the constraints; (2) slack component firms have a strong incentive to invest in resolving component constraints; and, (3) the incentive of slack component firms to invest in resolving component constraints is increasing in their prior sunk R&D investments in slack components. In sum, I argue that interactions between components in a product system conditions the R&D incentives of firms and also that the incentives are increasing in their prior investments or capabilities. Using product reviews from technical journals, I trace the constraint components in the PC from 1981-98 and attempt to predict shifts in the allocation of inventive effort in the subsequent period. The empirical results strongly support all three hypotheses. This study highlights the paradoxical effect of modularity in complex product systems. Modular design architectures, while contributing to accelerating the pace of technical change, also tend to limit the economic benefits of firms' component R&D efforts especially when different components technologies are progressing at different rates. This often creates an impetus to enlarge the scope of firm R&D activities beyond the component product markets that firms operate in. Other implications for R&D decision making are discussed.

Keywords: Inventive effort, R&D scope, Complex systems, Modularity

JEL Classification: D21, L22, L23, O31, O32