Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    The Impact of Modularity on Intellectual Property and Value Appropriation
    13 Jan 2012Working Paper Summaries

    The Impact of Modularity on Intellectual Property and Value Appropriation

    by Carliss Y. Baldwin and Joachim Henkel
    Distributed innovation in open systems is an important trend in the modern global economy. In general, distributed innovation in open systems is made possible by the modularity of the underlying product or process. Carliss Y. Baldwin and Joachim Henkel provide a systematic analysis of value appropriation in closed and open modular systems, with implications for managers. Modular systems are made up of components that are highly interdependent within sub-blocks, called modules, and largely independent across those sub-blocks. Despite the technical benefits of modularity, history shows that it is not always straightforward for firms to capture value in a modular system. The paper argues that strategies for capturing value in an open, modular system must be formulated at the module level. But modularity is not a single strategy: it is rather a large set of strategic options and related tactics that can be deployed in different ways depending on the interplay of countervailing forces. Key concepts include:
    • Special attention should always be paid to essential modules, which have the capacity to capture a portion of total system value.
    • The IP related to some modules can and should be given away, although care must be taken not to let essential modules fall into the wrong hands.
    • Other modules can be protected via state-sanctioned IP rights and/or agent payments under a relational contract.
    • The modular architecture of the system should not be cast in stone until its IP dimensions are understood.
    • After IP issues have been analyzed, some modules may need to be split further to concentrate agents' knowledge or reduce payments to outside owners of knowledge. Others may need to be made larger to make imitation and substitution more difficult.
    LinkedIn
    Email

    Author Abstract

    Distributed innovation in open systems is an important trend in the modern global economy. In general, distributed innovation is made possible by the modularity of the underlying product or process. But despite the documented technical benefits of modularity, history shows that it is not always straightforward for firms to capture value in a modular system. This paper brings together the theory of modularity from the engineering and management literatures with the modern economic theory of property rights and relational contracts to address the question of value appropriation. It defines three generic threats to intellectual property (IP) and models the interactive impact of modularity and state-sanctioned IP rights on these threats. It identifies strategies for capturing value in so-called "open systems" in which IP is distributed among several parties. It shows why open systems should be designed as modular systems. Finally, it analyzes in detail the strategy of capturing value by maintaining exclusive control of an essential module in an open system.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: December 2011
    • HBS Working Paper Number: 12-040
    • Faculty Unit(s): Finance
      Trending
        • 14 Mar 2023
        • In Practice

        What Does the Failure of Silicon Valley Bank Say About the State of Finance?

        • 16 Mar 2023
        • Research & Ideas

        Why Business Travel Still Matters in a Zoom World

        • 13 Mar 2023
        • Op-Ed

        How Leaders Should Leave

        • 13 Mar 2023
        • Research & Ideas

        The Power of Personal Connections: How Shared Experiences Boost Performance

        • 25 Jan 2022
        • Research & Ideas

        More Proof That Money Can Buy Happiness (or a Life with Less Stress)

    Carliss Y. Baldwin
    Carliss Y. Baldwin
    William L. White Professor of Business Administration, Emerita
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Intellectual Property
    • Strategy

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College