Interfaces, Modularity and Ecosystem Emergence: How DARPA Modularized the Semiconductor Ecosystem

Abstract

Scholars have identified the pivotal role that modularity plays in creating innovation ecosystems—complex arrangements of buyers, suppliers, and complementors. In large part, this is due to modularity’s effect on industry structure, breaking up the value chain along interfaces, thus allowing specialized firms to enter, compete, and innovate. Less well-understood is where modularity comes from. While modularity theory is heavily influenced by the information technology sector, other industries (such as automobiles) suggest a potential conflict between firm incentives and the creation of modular interfaces. We demonstrate the role for government funding in generating modularity using an historical case study of the semiconductor industry and shifts in industry structure enabled by public R&D funding in the 1970s. We argue that this funding was mission-oriented with an interest in changing the semiconductor industry structure from a vertically-integrated oligopoly to a competitive, de-integrated industry. A subsequent shift, to an ecosystem encompassing an ever-expanding variety of customer industries, further increases the long-term economic value of modularity-as-policy.