Product complexity, innovation and industrial organisation

Abstract

This paper highlights distinctive features of a neglected class of economic activity in the domain of innovation, namely the creation and development of high cost, complex products and systems (CoPS), asking how their nature might be expected to affect innovation and industrial organisation. It argues that because CoPS are highly customised, engineering-intensive goods which often require several producers to work together simultaneously, the dynamics of innovation in CoPS are likely to differ from mass produced commodity goods. To consider the argument, the paper describes some of the defining features of CoPS and counterpoises two ideal-type innovation schemes: a `conventional' mass production innovation scheme, and an idealisation more suited to CoPS. Implications for innovation and industrial coordination are discussed, pointing to the project and the project-based organisation as natural CoPS organisational forms. While major differences between groups of CoPS are apparent, user involvement in innovation tends to be high and suppliers, regulators and professional bodies tend to work together with users ex-ante to negotiate new product designs, methods of production and post-delivery innovations. Markets are often bureaucratically administered and contestability is low in contrast to commodity goods which are characterised by arms-length market transactions. In relating the critical attributes of CoPS to industrial processes and organisational form, the paper emphasises the wide variety of possible innovation paths and points to the CoPS project, rather than the single firm, as a chief unit of analysis for innovation, management and competition analysis.