ARCHITECTURE AND INNOVATION

The architecture of a system denotes the fundamental structures of a complex system as defined during the early stages of product development. Similar to the way the

288

architecture of a house is different from the house itself, the architecture of a system is not the final, working system, but is instead a description of the system’s basic building blocks.

The relationship between architectures and the economic system can be understood within a broader framework that economists use to explain the evolution of the economy as a whole.⁷ In this framework, the economic system evolves as economic actors pursue their own interests within a set of constraints, and as they act to change those constraints. Constraints delimit the options available to economic actors and influence the costs and benefits associated with these options. Well-known constraints include prices, laws, norms, and the natural and technical environments in which economic actors exist.

Like these other constraints, an architecture can affect human behavior by imposing constraints on those who interact with the architecture or are exposed to it.⁸ Specifically, by imposing constraints on those who design, produce, and use a complex system, the architecture of the system (and the design principles that were used to create it) can influence the economic system in which the system is developed, produced, and used. Different architectures may impose different constraints, which may result in different decisions by economic actors, which in turn may result in different firm and market struc­tures and different levels of economic activity.

Understanding that architecture may constrain potential innovators is only the first step toward explaining the relationship between architecture and innovation. An eco­nomic actor’s reaction to a constraint depends on the characteristics of the economic actor, the other constraints on the actor, and the actor’s existing relationships and antici­pated interactions with other actors.¹⁰

First, the effect of architecture depends on the characteristics of the actors exposed to it.¹¹ Actors may have different resources, capabilities, cost structures, goals, motivations, and cost-benefit assessment practices; consequently, their perception of costs and ben­efits is idiosyncratic, and they may react differently to the same architectural constraint.¹² An actor who hopes to profit from selling their innovation may be disinclined to innovate if they are operating within an architecture that reduces their potential sales revenue. In contrast, an actor who innovates to use the innovation themselves may remain unaf­fected by the same architectural change (so long as the architecture lets them use the innovation).

Second, architecture is not the only constraint on potential innovators.¹³ Laws, social norms, market conditions, and the natural and technical environments also influence innovators’ actions. Like architecture, these constraints delimit the available choices and affect the corresponding costs and benefits. Intellectual property laws, for example, influ­ence the expected benefits of an innovation by conferring a temporary monopoly on the innovator but impose costs on subsequent innovators who want to build on the original innovation. By striking different balances between the interests of the original innovator and those of subsequent innovators, alternative intellectual property regimes that differ in duration and scope facilitate different types and amounts of innovative activity.¹⁴ The structures and operations of capital and labor markets (both heavily influenced by laws and norms) may affect the ease with which a potential innovator can acquire the financial and human capital necessary to realize his or her innovation.

Finally, a potential innovator’s response to a constraint may be influenced by his or her extant relationships and anticipated interactions with other actors.¹⁷ For example, if a market has only a few potential or anticipated innovators, each firm will base its level of investment on the level of investment it expects from the others. A firm that has long collaborated with another firm may be able to work with this firm on innovative projects that require constant interaction, because the trust and coordination mechanisms result­ing from the long-term relationship may enable it to overcome the coordination problems that usually prevent firms from coordinating closely interdependent activities across firm boundaries.¹⁸

Thus, the same architecture, operating in environments with different actors and con­straints, may enable very different types and levels of innovative activity. For example, consider an architecture that encourages entrepreneurial innovation, but that requires more capital than entrepreneurs are usually able to invest individually. In this case, we would expect to see more innovation from entrepreneurs in an environment in which funding from venture capitalists is available than in an environment in which similar financial actors do not exist.¹⁹

Within the framework just described, this chapter focuses on the effect of one con­straint (network architecture) on one type of economic behavior (innovation). To focus on the specific effect of architecture, the analysis assumes that while the architecture changes, everything else (i.e., the group of actors exposed to the architecture and the other constraints under which they operate) stays the same, and that there are no legal rules that limit network providers’ ability to take advantage of the capabilities provided by the architecture.²⁰

14.3