Modularity and incremental innovation: the roles of design rules and organizational communication

Abstract

As little attention has been paid to the relationship between modularity and near decomposability, extant studies have not unveiled the impact of modularity on incremental innovation completely. We argue that the modular structure is a special case of nearly decomposable structure, in which the interdependencies between modules are specified by design rules, and the degree of modularity is defined by the level of near decomposability and the extent to which intermodule dependencies are specified. The results of our simulation experiments show that in the term of near decomposability, the increase of modularity leads to higher innovation advantage in the short term, but effective communication between modules can help systems with moderate and low modularity gain more innovation benefits in the long term; in the aspect of design rules, modularization may restrict the search space of the incremental innovation within each module, but under some conditions the option value of modularity may offset or even exceed the restriction effect of design rules.