Modular Production Networks: A New American model of Industrial Organization

This paper uses the case of contract manufacturing in the electronics industry to illustrate an emergent American model of industrial organization, the modular production network. Lead firms in the modular production network concentrate on the creation, penetration, and defense of markets for end products—and increasingly the provision of services to go with them—while manufacturing capacity is shifted out-of-house to globally-operating turn-key suppliers. The modular production network relies on codified inter-firm links and the generic manufacturing capacity residing in turn-key suppliers to reduce transaction costs, build large external economies of scale, and reduce risk for network actors. I test the modular production network model against some of the key theoretical tools that have been developed to predict and explain industry structure: Joseph Schumpeter's notion of innovation in the giant firm, Alfred Chandler's ideas about economies of speed and the rise of the modern corporation, Oliver Williamson's transaction cost framework, and a range of other production network models that appear in the literature. I argue that the modular production network yields better economic performance in the context of globalization than more spatially and socially embedded network models. I view the emergence of the modular production network as part of a historical process of industrial transformation in which nationally-specific models of industrial organization co-evolve in intensifying rounds of competition, diffusion, and adaptation.