MODULARIZATION AND INDUSTRIAL COMPETITIVENESS:

Modularity, Technological Learning and Innovation

V G R Chandran Govindaraju Department of Economics

University of MalayaPhD Candidate

Supervisor:Prof. Dr. Rajah Rasiah

BACKGROUNDTechnological progress and innovation is key to growth (Schumpeter, 1911; Solow, 1957; Denison, 1962)Due to latecomers properties - in developing countries, economists – attention was on the mechanisms of technological progress (Kim, 1997; Lall, 2000; Rajah, 2004, 2005 )This study will take the same path – analyzing the source of technological advancement at firm level in Malaysia

BACKGROUND

Malaysia – FDI is the source of tech transfer; learning; innovation –unlike NIEs – licensing, importsparticularly important to Malaysia is the industrial fragmentation – also known as segmentation, production sharing, outward processing, vertical specializationIncreasing presents of Modular Production Networks [MPN] (Sturgeon T., 2002) – East Asia – distinct breaks in the value chainMPN is seen as the major source contributing to the export competitiveness in the sub-sector of E&E in Malaysia

BACKGROUND

this has turn my attention to investigate the possible contribution of MPN via the concept of modularization (product and process) to the industrial upgrading e.g. the technological learning and innovation activities the idea in this study was established by integrating the literatures on modularization, technological learning (knowledge, absorptive capability, technological capability) and innovation

MODULARIZATION

Application of standardization or substitution principles to create modular components and processes that can be configured into a wide range of end products (Ulrich, 1995) – idea taken from modular product design (Ulrich, 1995; Sanchez & Mahoney, 1996; Schilling, 2000)

Today – modularization reached beyond its traditional meaning – from design rule to a new form of supply chain relationship including new form of manufacturing practices

The existence of modularity and components standardization led to loosely coupled and decentralized structure

Process modularization: decompositions of the company’s key activities into specific routine and interfaces that allow frequent reconfiguration of processes

Firms boundary is extended outside the firm

MODULARIZATION

It is increasingly adopted by firms as a strategic advantage Economies of scale and substitution accelerate rate of technological change cut development cost reduce uncertainty and complexity

Modularization is important in particular for Malaysia due to the industrial fragmentationUntil now, little is know how modularity is related to technological learning and innovation

Research questions

Thus, we have some major interpretative questions to answer

What are the potential implications of modularization on the rate of technological learning/capabilities?Is there any significant differences in technological learning/capabilities between the more and the less modular firms How does modularization influence the innovation activities in local suppliers? Does the modularization offer any benefits to the module producers?

Research objectives

to identify whether there is any significant differences in technological learning between the modular and integrated firmsto examine the significance influence of the level of modularity on technological learning (while controlling for other variables)

To understand the linkages between product modularization and product technology learning

To understand the linkages between process modularization and process technology learning

to examine the association between modularization and innovative activitiesto examine the association between technological learning and innovation activities within the manufacturing firms

Significance of the study Previous studies - try to explain the source of

divergence in technological advancement by analyzing

Firms characteristics – ownership, export intensity, size etc Other environmental variables: trust, relationship, network etc This study looks at a different dimension called modularity –

contributing to the literature of technological advancement in developing countries

The finding can lead to several important policy implication Industrial Policy Innovation Policy Outsourcing practices etc

Study Boundaries

Focus - firms (manufacturing – sub sector of E&E- Why?

reasonable degree of modularization Production fragmentation – FDIDeveloped higher export capabilities

Conceptual framework

Developed by integrating past scholarly literatures on modularity, organization learning, technological capabilities, innovation, technology management etc. Theories – trade theories,, learning, technological taxonomies, trajectories, path dependent, evolutionary

The Basic framework

Degree of Modularization

(Product & Process)

Technological learning

Innovation

(product and process)

Control Variables

Focus of this study

Selected literatures linking modularity, technological learning and innovation

Modularization increase the opportunity to improve knowledge and learning at component level (Sanchez & Mahoney, 2000)Greater locality-wide sharing of production capacity leads to greater opportunity for learning and technology transfer (Sturgeon, 2000)Module producers work can together with many customers and develop better knowledge (Magnusson, 2001)Modularity allow parallel and distributed business processes, increase incremental innovation by separating component level and learning processes (Garud & Kumaraswamy, 1995)Standardization generates informational structure that allows “embedded coordination” (Sanchez & Mahoney, 1996)Modularity allows decentralized networks – intensifying division of labour – thus allowing detailed design and manufacturing know how to be transferred (Langlois & Robertson, 1992)

Proposition DevelopmentP1: Firms in a more modularized production are more

likely to develop technological learning capabilities

P2: Firms with a higher product modularity is associated with higher product technological learning

P3: Firms with a higher process modularity is associated with higher process technological learning

P4: Modularization is positively associated with innovative capabilities

Proposition DevelopmentP5:Product modularization is associated with

product innovation

P6: Process modularization is associated with process innovation

P7: Firms with better technological learning develops a better innovative capabilities

P8: Other control variables (firms specific variables) are highly associated with technological learning

Research Methodology

sampling – stratified – based on sub- sectors of E&E - location – Klang Valley, Penang list to be obtained from MIDA Officers from MIDA,, and FMM – agreed to provide some inputs - EPU – Knowledge Content Survey data collection: questionnaires validation – based on R&D manager and production engineers feedback (Intel, Freescale, NEC, Ford, Samsung)

Measurement: ModularityModularity:Is the application of unit standardized or substitution principles to create modular components and processes that can be configured into a wide range of end products

Measurement are based on two dimensions

* Product Modularity: practice of using standardized product modules so they can be easily reassembled/rearranged into different functional forms, or shared across different product lines

Likert scale; 8 items* Process Modularity: practice of standardizing manufacturing process modules so that they can be resequenced easily or new modules can be added quickly in response to changing requirements

Likert scale; 11 items

Attempts to measure modularity was based on the literature of modularity; Past studies measuring modularity includes Worren et al, 2002; Tu et al, 2004;Parente, 2003; Miltenburg, 2003)

Measurement: Technological Learning

Technological Learning: process of acquiring tacit & codified

knowledgeCan be viewed in two ways

Various process by which knowledge is acquired and converted into organizational learning Knowledge acquisition, knowledge socialization and

knowledge codification The trajectory or path along which the accumulation of

technology capabilities proceedsSince the end results of technological learning is technological capabilities [ is about learning capabilities - assessing, embracing and utilizing new knowledge] – I use the latter then the former in measuring tech. learningTech learning – is about acquiring the technological capabilities

Measurement: Technological Learning

I make use of Lall’s – technology capabilities taxonomy various aspects of technological capabilities will be looked at namely; Process capabilities Product capabilities Production capabilities Investment capabilities

Measurement: Innovation

Innovation- guided by the Oslo Manual – also used in NIS (Malaysia)Combines both the product and process innovationProduct Innovation:

good or service which is either new or significantly improved in terms of fundamental characteristics, technical specifications, incorporated software or other immaterial components, intended uses or user friendliness.

Process Innovation: new or significantly improved production technology,

method of delivering products. Outcome should be significant with respect to level of output, quality of products or cost of production and distribution

Conclusion

Modularization may offer some insights in understanding technological learning and innovation in Malaysia

THANK YOU

Questions/Suggestions