Modularity and disruptive innovation by local firms: Evidence from the Chinese Shanzhai mobile phone industry

Local firms in emerging economies are catching up technologically and carrying out innovations, especially disruptive innovations. From the investigation of Chinese Shanzhai mobile phone industry, we found that technological modularity breaks down the complexity of the design of mobile phones into the development of several simpler modules. The industrial value chain evolves in such a way that a few key technologically advanced firms focus on designing and producing chipsets and software, while local firms focus on appearance design and marketing. Therefore, technological modularity and the evolution of industrial value chain lower the threshold for local small firms´ entry into technology-intensive markets and promotes disruptive innovations. By accumulating technology and market knowledge, these local firms can work their way up to eventually become major players in this technology-intensive sector. This finding offers a new path for latecomers in emerging markets to catch up with established competitors.