In economic development circles, there has been a false debate that pits tacit knowledge against explicit knowledge and localization against globalization.  As Tim Sturgeon points out in the context of economic geography [1], these phenomena go hand in hand.  Sturgeon notes the growing importance of modular production networks, which "encompass nodes of tacit activity linked through the exchange of codified information."  He goes on to elaborate, "In modular production networks firms with a high degree of autonomy rely on standardized protocols to exchange codified knowledge, sometimes on a global scale."

The Power of Modularity

As Carliss Baldwin and Kim Clark documented in Design Rules: The Power of Modularity, modular networks unleash two drivers of economic value: specialization and flexibility.  Modularity requires well-defined interfaces.  For example, standards-based technologies (e.g., the Internet) and well-understood contractual forms (e.g., convertible preferred stock) are types of business interfaces.  The explicit knowledge instantiated in the form of interfaces encourage the specialization and fragmentation of the tacit, highly interdependent knowledge contained within nodes.

Mohan Sawhney is one business thinker who has highlighted how, in a networked economy, intelligence tends to migrate, simultaneously, to the center and the periphery.  In other words, as effective interfaces evolve, economic activity becomes both more localized and more distributed.  Likewise, John Hagel has observed how new technological interfaces such as web services are likely to accelerate the process of unbundling and rebundling of corporations.

Modularity on the Economic Frontier

When I returned to the boonyack a few years ago, I misunderstood the importance of the "node" businesses I found here.  I've since come to appreciate that the keys to success on the economic frontier are to specialize and connect.  Three local examples come to mind: RightNowTechnologies, PrintingForLess.com, and Image Labs.

RightNow Technologies has emerged from its humble roots to become a recognized challenger to Siebel in the customer relationship management (CRM) field.  RNT's early success resulted from offering a hosted, Web-based, customer service module that could, within hours, be "bolted on" to a client's Web site.  In other words, RNT offered a turn-key solution that utilized existing technology protocols and did not require extensive interaction with the customer. [2]

To an even greater extent, PrintingForLess.com, has leveraged technological and contractual interfaces to become one of the fastest-growing companies in the country.  PFL has artfully leveraged Internet protocols, the de facto imaging standard of Adobe's PDF, and it's own PFL-Net interface with its printing partners to complement its in-house tacit knowledge regarding customer intimacy and the art of digital pre-press file manipulation to create a highly modular company.

Another local Inc. 500 alumus, Image Labs builds imaging components for customers' industrial systems.  Customers from around the country provide the specifications, and Image Labs uses its local, specialized expertise to build add-on solutions.

In short, the most successful companies in this corner of the hinterlands in recent years are those that have not attempted to become vertically integrated but, rather, have exploited the power of modularity in their organizational forms and in their product offerings.

Respecting the Power of Agglomeration; Acknowledging the Opportunities in Specialization

Too often, economic developers in more rural areas attempt to simply mimic urban characteristics, even while bemoaning the lack of economies of scale.  The result, all too often, is subsidization of programs that are fatally flawed because they don't respect the very real power of agglomeration.  Furthermore, too much emphasis on creating a "self-contained" local or regional economy neglects the opportunities of combining local specialization with global production or process networks.  Few firms in the world will play the role of network coordinator as described by the likes of Sawhney and Hagel.  Most companies, whether situated in an urban or rural setting, will be niche players that thrive by combining their specialized, tacit knowledge with the explicit knowledge manifested in the form of standardized technological and contractual interfaces.

[1] "What really goes on in Silicon Valley?" Journal of Economic Geography, Vol. 3, No. 2, April 2003, pps. 199-225.

[2] Note that as RNT has subsequently sought to offer "enterprise class" solutions, it has found it necessary to open offices in major metropolitan areas.