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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies 3 Semiconductors JEFFREY T. MACHER Georgetown University DAVID C. MOWERY University of California, Berkeley ALBERTO DI MININ Scuola Superiore Sant’Anna, Pisa, Italy INTRODUCTION The determinants, patterns, and consequences of globalization of the innovative activities of U.S. high-technology firms are the subject of a large empirical literature. Among the central questions addressed within this research is the extent to which international flows of research and development (R&D) investment and the offshore movement of other forms of innovative activity are linked with U.S. firms’ foreign investments in manufacturing and related activities. A second important issue concerns measurement of the internationalization of firms’ innovative activities—firm-level R&D investment data often do not capture developments within individual technological or industrial fields, and R&D data may provide little information on important aspects of the internationalization of firms’ innovation-related activities. Partly because of the imperfections of these data, analyses of the globalization of innovative activity rarely consider developments within individual industries. This chapter addresses these challenges in an examination of trends in the globalization of innovation-related activities in a single industry—semiconductors. We consider several measures of innovative activity within this industry, including R&D investment, technology-development alliances, and patenting. As is often the case in empirical work, the insights from this approach are obtained at some cost, confining our analysis to a relatively short time period and limiting our discussion of trends in the globalization of non-U.S. semiconductor firms’ innovation-related activities. In addition, the data themselves represent imperfect proxies for the actual phenomena that we wish to examine. The different innovation-related indicators also do not aggregate in a straightforward
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies way, which complicates efforts to develop strong conclusions concerning the consequences of these trends. Remarkably, after more than 30 years of intensive study of the internationalization of R&D and other innovation-related activities in the semiconductor industry, the data on these trends remain fragmented and limited in their coverage. Nevertheless, the results of our analysis highlight several distinctive trends in the globalization of innovation-related activities in this industry: The share of industry-funded R&D investment devoted to offshore R&D by U.S. firms in “electronics components” manufacturing (an industry category that includes semiconductors, along with several other electronics product segments) grew only modestly during 1985-2001. The number of technology-development alliances in the global semiconductor industry declined during the 1990s, although alliances among foreign firms appear to have grown more substantially than alliances among U.S. semiconductor firms during this period. Process-technology R&D remains “homebound” in the home countries of U.S. and non-U.S. semiconductor firms, based on trends in the siting of “development” fabrication facilities (“fabs”). The patenting activity of large U.S. integrated semiconductor firms (those that both design and manufacture their products) remains predominantly “homebound,” with little increase in offshore inventive activity in their patents during the period 1991-2003. Patenting by European, Japanese, and Taiwanese semiconductor firms is similarly dominated by domestic inventive activity and this dominance by “home country” inventive activity appears to have increased slightly during the period 1996-2003. The patenting activity of U.S. “fabless” semiconductor firms, which design and market but do not manufacture their products, indicates modest growth in offshore inventive activity during the period 1991-2003. Although the vast majority of inventive activity undertaken by non-U.S. firms remains homebound, the United States is the predominant location for offshore inventive activity of all but Canadian semiconductor firms. There is little evidence that the changing international structure of U.S. semiconductor firms’ innovation-related activities has had negative consequences for engineering employment in the U.S. semiconductor industry, reflecting the limited offshore movement of innovation-related activities documented by these indicators. Taken as a whole, our findings underscore the importance of a broad view of the array of activities that contribute to innovation in the semiconductor industry. These results also highlight the influence of growing vertical specialization on the globalization of innovation in this industry. Interestingly, the expanded offshore
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies investment by U.S. semiconductor firms in production capacity does not appear to have influenced movement of their R&D activities to non-U.S. locations. Instead, the most important influence on the expanded offshore inventive activities of a subset of U.S. semiconductor firms (the fabless firms) may be the emergence of new segments of market demand that are concentrated in Southeast Asia. But even within the fabless segment of the U.S. semiconductor industry, the contributions of “offshore” innovation-related activities are modest thus far. STRUCTURAL CHANGE IN THE GLOBAL SEMICONDUCTOR INDUSTRY The global semiconductor industry experienced significant structural change during the 1990s. The market for semiconductor components shifted from one dominated by personal computers (PCs) to a more diverse array of heterogeneous niches associated with the Internet and wireless communications applications. The integrated device manufacturers (IDMs) that both design and manufacture semiconductor components no longer dominate industry production and innovation; instead, a vertically integrated industry segment coexists with a vertically specialized segment. IDMs compete and often collaborate with firms that specialize in either design and marketing (fabless firms) or manufacturing (foundries). As is the case in other high-technology industries, semiconductor-related market demand and technical expertise are growing in geographic regions that formerly accounted for smaller shares of global demand for semiconductor components (e.g., Malaysia, Taiwan, Singapore, China). The Decline of the PC and Emergence of New Component Markets The market for end-use semiconductor components during the late 1990s and early 2000s experienced a gradual shift away from one dominated by computer applications (especially PCs) to a more fragmented market in which wireless communications and other non-PC consumer products are more significant (Linden et al., 2004). Figure 1 depicts the shares of chip consumption accounted for by different end-use markets during the period 1994-2004. Computer applications still represent the predominant end-use market for semiconductor components, but most industry observers agree that non-computer (i.e., communications and consumer product) markets for semiconductor components will grow more rapidly during the next decade. Differences between PC and non-PC markets for semiconductor components mean that this shift in consumption patterns has important implications for the organization of innovative activities in the semiconductor industry. The PC market is characterized by an entrenched architectural standard (the so-called Wintel standard), with well-defined and stable interfaces among semiconductor components and PC components. This stable architectural standard contrasts with the
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies FIGURE 1 Semiconductor end-use markets by application, 1994-2004. SOURCE: Integrated Circuit Engineering (ICE) and IC Insights. situation in many non-PC markets, where new products require more extensive “design-in” efforts on the part of component suppliers, and the interfaces governing the design and compatibility of components for these products can change significantly through successive product generations. No single product dominates semiconductor end-use demand in these applications—another contrast with PC component markets. As a result, production runs of new component designs are likely to be smaller and the cost savings through production-based learning will decline in significance. Smaller production runs also mean that new semiconductor production capacity, the costs of which continue to rise, must become more flexible and capable of producing a wider variety of component designs. The relative decline of the PC market for semiconductors has important implications for the geographic location of demand for semiconductor components. The PC market has been dominated by designs developed in the United States and by an architecture that was largely under the control of U.S. firms. But designers
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies FIGURE 2 Semiconductor end-use markets by geographic region, 1994-2004. SOURCE: Integrated Circuit Engineering (ICE) and IC Insights. and producers of the systems for which markets are growing more rapidly (e.g., wireless communications and consumer products) are more heavily concentrated in Southeast Asia, especially in Taiwan, Japan, and Singapore. Figure 2 illustrates the shifting geographic structure of demand during the period 1994-2004, highlighting declines in the share of global chip consumption accounted for by Japan and the United States and a corresponding rise in Southeast Asia’s share. Producers of these electronics systems often require that functionality be based on features in the semiconductor components incorporated in the products—so-called system-on-chip designs that are more complex and require more intensive interaction between system and chip designers (Ernst, 2005). Moreover, the number of new applications that use semiconductors has increased dramatically. The needs of an increasing variety of system providers mean that a one-size-fits-all model for semiconductor components is appropriate in only a limited number of cases. As a result, close interaction between designers of components and designers (as well as producers) of these more heterogeneous electronics systems is essential to product development. Proximity to system customers, more
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies and more of whom are located in Southeast Asia, therefore is likely to grow in importance for developers of state-of-the-art semiconductor devices. GROWTH OF VERTICAL SPECIALIZATION IN THE SEMICONDUCTOR INDUSTRY For the first two decades of the computer and semiconductor industries, large integrated producers such as AT&T and IBM designed their own solidstate components, manufactured the majority of the capital equipment used in the production of these components, and utilized internally produced components in the manufacture of electronic computer systems that were leased or sold to their customers (Braun and MacDonald, 1978). During the late 1950s, “merchant” manufacturers entered the U.S. semiconductor industry and gained market share at the expense of firms that produced both electronic systems and semiconductor components. Specialized producers of semiconductor manufacturing equipment began to appear by the early 1960s. Since 1980, the interdependence between product design and process development has weakened in many semiconductor product segments (Macher et al., 1998). This shift has been associated with the entry of new types of firms that specialize in semiconductor component design or production. Hundreds of so-called fabless semiconductor firms that design and market semiconductor components have entered the global semiconductor industry since 1980. These firms rely on contract manufacturers (so-called foundries) for the production of their designs. Contract manufacturers include “pure-play foundries” that specialize in semiconductor manufacturing, as well as the foundry subsidiaries of established integrated device manufacturers (IDMs) seeking to fully utilize excess fabrication capacity. Fabless semiconductor firms serve a variety of fast-growing industries, especially computers and communications, by offering more innovative designs and shorter delivery times than integrated semiconductor firms. Fabless-firm revenues increased from slightly less than 4 percent of global industry revenues in 1994 to more than 15 percent by 2004 (Figure 3). The increasing demand for and variety of communications and consumer products (e.g., GPS systems, game controllers, appliances, automatic lighting) suggests that the demand for special-purpose functionality has also increased. The so-called embedded systems and software market represents a growing and increasingly important segment of the semiconductor industry, with its own vertically specialized market structure. Measuring the growth of this market segment, however, is hampered by a lack of data. The growth of vertical specialization in the semiconductor industry reflects the influence of developments in markets and technology (Macher and Mowery, 2004). The expansion of markets for semiconductor devices enables vertically specialized semiconductor design and production firms to exploit economies of scale and specialization. Scale economies lower production costs, expanding
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies FIGURE 3 Fabless and overall industry revenues, 1994-2004. SOURCE; Fabless Semiconductor Assocation (FSA) and Integrated Circuit Engineering (ICE). the range of potential end-user applications for semiconductors and creating additional opportunities for entry by vertically specialized firms. The increasing capital requirements of semiconductor manufacturing provide another impetus to vertical specialization, since these higher fixed costs make it necessary to produce large volumes of semiconductor components in order to achieve lower unit costs. The design cycle for new semiconductor products also has become shorter and product life cycles more uncertain. As a result, it is more difficult to predict whether demand for a single product will fully utilize the capacity of a fabrication facility that is devoted exclusively to a particular product, increasing the risks of investing in such “dedicated” capacity. Since foundries tend to produce a wider product mix, they are less exposed to these risks. At the same time, however, a number of large semiconductor firms (IDMs) still combine semiconductor device design and manufacture. The advantages of integrated management of design and manufacture are greatest in product lines
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies at the leading edge of semiconductor technology, especially in DRAMs (Macher, 2006). The relationship between the specialized foundry producers and the IDMs combines elements of cooperation and competition. For example, U.S. IDMs negotiated license agreements for the supply of product and process technologies to less-advanced semiconductor firms operating in Japan and South Korea during the 1970s, and U.S., Japanese, and European IDMs also supplied product and process technologies to Taiwanese and Singaporean foundry firms during the 1980s and 1990s. Many of these IDMs provided advanced process technologies to foundries in exchange for a guaranteed supply of semiconductor components. The development of a semiconductor intellectual property market also spurred growth in the number and importance of specialized product design firms (Linden and Somaya, 2003). Product and process licensing in the semiconductor industry has facilitated entry by both vertically specialized and integrated firms. Increased vertical specialization in the semiconductor industry has been associated with the entry of new firms and geographic redistribution in production capacity. Figure 4 shows the regional distribution of fabrication capacity (measured in terms of wafer starts per month1) during the period 1995-2003. The North American and Japanese shares of global semiconductor production capacity fell significantly during the period, and the shares attributable to “Asia/ Pacific” countries increased, reflecting capacity growth in China, Taiwan, South Korea, and Singapore. These Southeast Asian countries now collectively account for the largest regional share of global production capacity, and their share will continue to grow in the near future. Figure 5 reclassifies manufacturing capacity by region of ownership rather than location for the period 1997-2003, revealing a slightly different pattern. The share of global manufacturing capacity owned by firms headquartered in Southeast Asian countries trails that of Japanese and North American producers. North American, Japanese, and (to a lesser extent) European semiconductor firms have shifted much of their production capacity to Southeast Asia since the mid-1990s and have entered joint ventures with Southeast Asian producers. Southeast Asian firms, on the other hand, have invested primarily within their home regions during this period. The growing concentration of manufacturing capacity in Southeast Asia is attributable in large part to the success of the foundry business model, which is reflected in foundry firms’ growing share of semiconductor-industry revenues (Figure 3). The most advanced foundries are located in Singapore and (especially) Taiwan. A few Taiwanese firms have opened foundries in the United 1 There are many possible measures of fab capacity, including the number of wafers processed over a given time period, the total wafer surface area that can be processed, the amount of installed processing equipment, and so on. Leachman and Leachman (2004) measure fabrication capacity as the estimated number of electrical functions that are produced by chip manufacturers, where a function is a memory bit or logic gate.
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies FIGURE 4 Geographic location of semiconductor manufacturing capacity, 1995-2003. SOURCE: Strategic Marketing Associates. FIGURE 5 Location of ownership of semiconductor manufacturing capacity, 1997-2003. SOURCE: Strategic Marketing Associates.
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies States, and Taiwan’s dominant position in the foundry industry faces competition from lower-cost production sites in other areas of Southeast Asia (particularly Malaysia and China) and elsewhere. U.S. DOMINANCE IN PRODUCT DESIGN Although semiconductor manufacturing capacity now is widely distributed among mature and fast-growing regions within the global economy, semiconductor design activities, especially those associated with fabless firms, remain more concentrated. U.S. fabless semiconductor firms accounted for more than 60 percent of the value of orders received by the top four foundry firms (TSMC, UMC, Chartered, and SMIC) during the period 2000-2004. Nonetheless, the growth of fabless firms in other countries is one indication of the widening geographic distribution of semiconductor-design activity and expertise. Table 1 indicates that several non-U.S. clusters of fabless firms have emerged in Israel, Canada, Taiwan, the United Kingdom, and South Korea. Although hundreds of fabless firms now operate in dozens of other countries, most of these firms are smaller than their U.S. counterparts.2 A number of factors have contributed to the success of U.S. firms in semiconductor design. Established regional high-technology clusters in areas such as Silicon Valley, Boston’s Route 128, and Austin, Texas, attract large numbers of semiconductor designers. These clusters are located near universities and other research centers that produce new design techniques, design software, and engineering talent. The role of U.S. universities in developing new design software and chip architectures has long outstripped their function as a source of new manufacturing methods, in part because the cost of constantly re-equipping the necessary facilities exceeds the resources of most academic institutions. Although we lack data to track these trends more systematically, most industry observers suggest that Southeast Asian countries account for a growing share of global semiconductor industry design activities (Brown and Linden, 2006a). As U.S. semiconductor firms, and especially fabless firms, seek to collaborate more closely with the systems firms that are located in Southeast Asia, a regional or local design presence is important. In addition, countries such as Taiwan and South Korea have developed product development expertise in digital consumer electronics and wireless communications, among other areas (Ernst, 2005). Offshore design centers, particularly in China and India, may offer cost savings and comparable productivity in less-sophisticated design activities (Brown and Linden, 2006b). But most observers assess the semiconductor design capabilities of 2 The data in Table 1 that form the basis for this discussion include 640 fabless firms that are members of the Fabless Semiconductor Association (FSA) or nonmembers verified by the FSA. At least 300 other small fabless firms are thought to exist but have not been verified by the FSA.
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies TABLE 1 Fabless Firms by Country of Location, 2002 Country Fabless Firms Non-U.S. City Fabless Firms United States 475 Tel Aviv, Israel 14 Canada 30 Ottawa, Canada 13 Israel 29 Hsinchu, Taiwan 13 Taiwan 22 Seoul, South Korea 9 United Kingdom 22 Taipei, Taiwan 8 South Korea 13 Toronto, Canada 8 Germany 8 Cambridge, England 4 France 6 Japan 5 Sweden 5 Switzerland 4 India 3 Spain 3 Others 15 TOTAL 640 SOURCE: Arensman (2003). Chinese and Indian centers as lagging those of Canada, Israel, Taiwan, the United Kingdom, and the United States, as well as other industrial economies. In summary, the structure of production activities in the global semiconductor industry has shifted from one dominated by vertical integration to a more complex structure that blends vertical specialization and vertical integration. Specialized design and manufacturing firms have entered the industry in large numbers, and the growth of foundry firms has been associated with a substantial shift in production capacity investment to Southeast Asia. Vertical specialization has facilitated the entry of new firms, many of which are located outside of the regions that were homes to established firms. But, thus far, increased vertical specialization in this industry appears to be associated with shifts in the location of production to a much greater extent than shifts in the location of product design and R&D activities. MEASURING GLOBALIZATION OF INNOVATION-RELATED ACTIVITIES IN SEMICONDUCTORS Indicators of Offshore Innovation-Related Activities We use four indicators to examine trends in the offshore R&D activities of U.S. and non-U.S. other firms in the global semiconductor industry: (1) the share of industry-funded R&D expenditures supporting offshore R&D (available only for U.S. firms) during the period 1985-2001; (2) the number and location of development fabs established by U.S. and non-U.S. firms within the global
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies with major systems firms based outside of the United States. Shorter product life cycles and the increased variety of individually smaller applications that utilize semiconductor components mean that the IDMs face greater risks from swings in demand as the costs of their production facilities continue to rise. The design and (especially) the manufacturing capabilities of foreign regions also have improved significantly since the 1980s, creating new opportunities for U.S. firms to exploit a global division of labor in semiconductor design and manufacturing. Among other things, this emergent division of labor has supported the rapid growth of fabless semiconductor firms in the United States. In contrast to the industry challenges of the 1980s that threatened the viability and very survival of the U.S. semiconductor industry, the challenges of the early 21st century stem from the need to manage this global division of labor effectively and strategically while maintaining leadership in innovation. These challenges are hardly new, as lower-productivity, labor-cost-sensitive functions in many U.S. manufacturing industries (and a growing array of U.S. nonmanufacturing industries, such as software and financial services—see Chapters 2 and 10, respectively) have moved to lower-cost areas of the global economy. Many of these regions have developed strong educational and economic infrastructures that can support the creation of productive labor forces and contribute to such innovation-related activities as product design and process engineering. The offshoring and outsourcing of various activities by U.S. firms has a long history, but so too do the innovative responses of successful U.S. firms. Even as the more cost-sensitive, lower-value-added activities have been shifted to offshore locations, U.S. firms have maintained their global competitiveness by developing and introducing innovative new products (e.g., PCs and communications) and business models (e.g., fabless semiconductor firms). In the semiconductor industry, product innovation will remain central, and manufacturing-process innovation is likely to focus on a narrower range of products in which U.S. IDMs remain dominant. In other words, the strategic management of innovation becomes even more important for the competitive performance of semiconductor firms that seek to exploit the emerging global division of labor in product design and manufacturing while maintaining strength in product and process innovation. It seems likely, for example, that the remaining U.S. IDMs will continue to exploit offshore sites for manufacturing while relying on foundries to serve a larger portion of their production requirements for products that are slightly behind the “bleeding edge” of technology—the “fab-lite” model of production. The continuing growth of semiconductor foundries will provide further opportunities for expansion by U.S. fabless firms, although these firms also are likely to shift at least some of their design-related activities to offshore locations because of the presence of major customers in these areas. In spite of the powerful forces that are shifting some design, manufacturing, and other functions to offshore locations, the bulk of U.S. semiconductor firms’ “inventive activity” did not shift during the 1990s. As measured imperfectly
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies by the reported residence of inventors listed on U.S. patents, the inventive activities of U.S. semiconductor firms remain concentrated in the United States. Moreover, the inventive activities of non-U.S. semiconductor firms, as measured by similar information for their U.S. patents, also appear to be concentrated in their home countries. This tendency for inventive activity to remain homebound was first pointed out in an analysis by Patel and Pavitt (1991) of patenting by multinational firms. The “nonglobalization” of patenting activity seems to reflect the strong dependence of inventive activity on domestic sources of fundamental research and skilled researchers. Despite remarkable advances in the codification and global transmission of scientific research, access to such research results for purposes of inventive activity remains surprisingly national in scope. And the apparent importance of the national science and engineering base for domestic inventive activity reinforces the importance of another key governmental function—funding the scientific and engineering research and education that support this domestic knowledge pool. The most important implications of this study for U.S. public policy thus relate to (1) the importance of continued (and arguably renewed) federal funding for R&D in the engineering and physical sciences in industry and universities and (2) the importance of public support (which may be financial or regulatory) for more rapid development of the “information infrastructure” (e.g., broadband communications) that can support the growth of a large domestic market of demanding and sophisticated consumers that will in turn spawn innovations in information and electronics technologies. Much of the remarkable record of innovation in the U.S. semiconductor and related IT industries that spans the 1945-2006 period rested on substantial investments of public funds in R&D that supported industrial research and innovation, as well as the training of generations of engineers and scientists. Much of this federal R&D investment was linked to national-security goals, and the end of the Cold War and associated defense “build-down” led to significant reductions in growth and in some cases the level of federal funding for R&D in the physical and engineering sciences, especially in academic institutions. Growth in federal R&D investment since the late 1980s has been dominated by growth in biomedical R&D funding. Although a portion of this biomedical R&D investment has supported education and training in the physical sciences and engineering, the imbalance in investment trends, if not reversed, could have detrimental consequences for the continued innovative vitality of the U.S. semiconductor industry and related industries. The importance of market demand in the locational structure of innovation in the semiconductor industry and other high-technology industries (see Chapters 8, 9, and 10, which illustrate the importance of local demand in service industries as well) is difficult to overstate. We have noted that the declining share of semiconductor consumption accounted for by the PC has been associated with the growth of new markets for semiconductor components (e.g., wireless com-
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies munications devices) that involve major non-U.S. systems firms. Moreover, many of the most innovative, demanding, and sophisticated users of such devices now are located in non-U.S. markets (e.g., South Korea for wireless devices, or Finland for broadband-based applications). Historically, U.S. semiconductor firms have derived enormous competitive advantages from their ability to serve (and learn from) a large domestic market populated by sophisticated and demanding users—in some cases, these demanding users were major institutions, such as the military. One important reason for the rapid development of browser-based applications and new business models in the early days of the World Wide Web, which relied on innovations developed in Europe, was the broad diffusion and low cost of PCs within the United States, as well as the low costs of accessing computer networks (Mowery and Simcoe, 2002). Government policy can play a significant role in the creation or support of markets for advanced technologies (recall that the Internet was aided by substantial federal as well as private funding) by supporting investment in the infrastructure that proved so fruitful in the early days of computer networking and developing regulatory policies that create incentives for the large private investments in the communications infrastructures needed for the emergence of new applications, products, and services. R&D and related investments from around the globe are likely to flow to markets in which users demand the most advanced technologies and where these users have access to an array of options for developing new applications of these technologies. Such markets are likely to rely in part on a sophisticated wireless and high-speed broadband communications infrastructure. CONCLUSION The U.S. and global semiconductor industries have experienced significant structural change since 1980 with the growth of specialized design and manufacturing firms. The growth of new products that use semiconductor components and the entry of firms from Southeast Asia also have contributed to growth in offshore manufacturing capacity within the industry, much of which remains under the control of U.S. semiconductor firms. Nevertheless, there is surprisingly little evidence that the innovation-related activities of U.S. semiconductor firms have moved offshore to a comparable extent. Overall, the results of this descriptive examination of an array of measures of the “globalization” of innovation-related activities in the semiconductor industry support the findings of Patel and Pavitt (1991) from more than a decade ago. The innovation-related activities of otherwise global firms in this industry remain remarkably nonglobalized, even in the face of expanded international flows of capital and technology, far-reaching change in the structure of semiconductor manufacturing, and significant shifts in the structure of demand. How can one explain these findings? The homebound nature of process inno-
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies vation investments is perhaps the least surprising, given the complexity of process technology within the semiconductor industry and the demanding requirements for coordination between product and process innovation. Moreover, the emergence of vertically specialized foundries that do not rely on development facilities to the same extent as IDMs means that our data on the location of development fabs exclude process innovation in a segment of semiconductor manufacturing that has grown considerably and gives every indication of continued growth. It is also important to highlight the retrospective nature of these indicators, which (especially in the case of patents) reflect R&D and related investments made years before their effects appear in these data. Trends in patenting in the late 1990s thus reflect actions or strategies that were put in place in the early 1990s and, like most other scholars, we have almost no forward-looking indicators. Some of our other indicators, such as the NSF R&D investment data, exclude non-U.S. firms, and the data themselves may well omit significant innovation-related activities. It is plausible, for example, that much of the design work of U.S.-based fabless firms is not captured by the NSF R&D surveys. U.S.-based semiconductor firms also benefit from the strength of their home-based innovation system, especially in the product design area. “Home-base augmentation” (Kuemmerle, 1999) thus may be a relatively minor factor for U.S. firms’ R&D investment strategies and a significant motive for non-U.S. firms’ R&D investments in the United States and elsewhere. Moreover, the exploitation by U.S. semiconductor firms of these “home-base” advantages may not require significant offshore R&D investment to complement offshore production investment. Indeed, one hypothesized motivation for offshore R&D that receives the most support from our analysis is the “market-demand exploitation” hypothesis of Gerybadze and Reger (1999), which may be particularly relevant to the patenting activities of U.S.-based fabless firms. The trends highlighted in our discussion of technology-development and R&D alliances in this industry also raise interesting questions. The declining rate of formation of domestic and international alliances by semiconductor firms throughout the industry is surprising but may reflect some exhaustion of the pool of potential alliance partners or projects. Nontariff barriers to U.S. firms’ access to foreign markets resulting from government procurement restrictions or other policies have been reduced during the past decade in several industries (OECD, 2005), and it is possible that these reductions in market-access barriers have reduced U.S. firms’ incentives to pursue collaborative ventures with non-U.S. firms. Our alliance data also do not fully capture the types of alliances that are important to the fabless firm segment of the U.S. semiconductor industry, and thereby understate the significance of international alliances within the overall industry. These data nevertheless suggest some growth in the participation by non-U.S. firms in domestic and foreign alliances, especially among non-Japanese Asian firms. Some portion of this alliance activity may be motivated by access to the Chinese mainland market, where nontariff barriers remain significant.
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies The results of our analysis of patents provide the strongest support for the original findings of Patel and Pavitt (1991), but these results also must be treated with caution. As we pointed out earlier, patents omit many of the innovation-related activities that are most important to the creation or maintenance of competitive advantage for IDMs and fabless firms alike, and our findings for these indicators accordingly must be qualified. Does the nonglobalized character of U.S. semiconductor firms’ innovation-related activities differ significantly from that of semiconductor firms based in other nations? The data presented in Table 3 indicate that the homebound character of U.S. semiconductor firms’ patenting is similar to that of semiconductor firms headquartered in other nations, as is the homebound character of the process-technology development facilities that U.S. and non-U.S. IDMs and systems firms operate. Are the trends discussed in this paper for the semiconductor industry representative of other high-technology industries, or is this industry unique? Comparing the extent of “nonglobalization” in the semiconductor industry with that of other knowledge-intensive industries is difficult, since few detailed studies of these trends have been undertaken for other industries. Offshore R&D investment by U.S. firms in electronic components accounted for a smaller share of industry-funded R&D during the 1990s than is true of U.S. firms in pharmaceuticals, where more than 14 percent of industry-funded R&D was performed offshore in 2001 (National Science Board, 2006). Like semiconductors, the pharmaceuticals industry underwent considerable structural change and vertical specialization during the 1990s (see Chapter 6), particularly through the entry of biotechnology firms that often specialize in drug discovery and contract research organizations that specialize in drug development (i.e., clinical trials). Unlike semiconductors, however, the structure of market demand in pharmaceuticals has undergone little significant change—the U.S. remains the most profitable single national market, thanks to the peculiar structure of its health care delivery system. Why do we observe such contrasts between these two industries in the (apparent) share of offshore sites in innovation-related activities? One hypothesis appeals to the more diverse structure of products in the pharmaceuticals industry, combined with substantial scientific research capabilities (in many cases, based on public funding) in many non-U.S. industrial economies. The science underlying product innovation in various therapeutic classes, to say nothing of the growing variety of delivery mechanisms (topical, inhaled, subdermal, as well as oral), arguably spans a wider variety of fields and has become much more diverse during the past 20 years than is true of product innovation in semiconductors. These factors have supported the growth of significant clusters of scientific expertise in specific therapies or diseases that attract the R&D investments of U.S. pharmaceuticals firms. A large part of the “D” in pharmaceutical R&D also represents costs associated with conducting and administering clinical trials to diverse patient populations. The situation in semiconductors arguably is
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies quite different—the structure of products and markets remain less complex, and government R&D programs have not created comparably accessible clusters of scientific and technological expertise. As this speculative discussion suggests, the dynamics of globalization and nonglobalization in innovation are complex and reflect contrasting paths of evolution (at the industry level) within different national innovation systems, as well as the interplay among these national innovation systems, trade policy, and other influences. Still another important influence on the globalization of at least some types of pharmaceuticals R&D is regulatory policy in the offshore as well as domestic markets in which all global pharmaceuticals firms operate. Maintaining a significant R&D presence in their offshore markets may facilitate the management of clinical trials for new products that U.S. firms seek to introduce into these markets. Even in the pharmaceuticals industry, however, Narin et al. (1997) have pointed out that the patents filed in the United States by non-U.S. (as well as U.S.) inventors tend to rely disproportionately on “home-country” science, as measured by the citations to scientific publications in their patent applications. The links between science and technology that contribute to much of the inventive activity that is embodied in patenting retain a considerable homebound element, rather than operating seamlessly and frictionlessly across national boundaries. Overall, this discussion of the globalization of innovation-related activities in the U.S. semiconductor industry does not indicate an imminent policy-related “crisis” in the innovative capabilities of U.S. firms. The implications of our discussion for the employment of engineers in innovation-related activities in the U.S. semiconductor industry also are reasonably positive. As we have noted repeatedly, U.S. firms have reacted to the growth of offshore innovative and productive capabilities by developing novel business models that have enabled them to compete successfully in an array of new markets. The success of these innovative strategies has sustained innovation and employment in the U.S. semiconductor industry. Nonetheless, it seems clear that much of the innovative performance of U.S. semiconductor firms relies on the health of a complex domestic R&D infrastructure that has benefited from large investments of public funds during the past six decades. A second important historical contributor to the innovative performance of U.S. firms is the large domestic market of innovative users that these firms face. Sustaining both of these factors that have contributed to the innovative performance of U.S. semiconductors in an intensely competitive global industry will require innovations in policy by both government and industry for decades to come. ACKNOWLEDGMENTS Research for this chapter was supported by the Alfred P. Sloan Foundation, the Ewing M. Kauffman Foundation, and the Andrew W. Mellon Foundation.
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies A portion of David Mowery’s research was supported by the National Science Foundation (SES-0531184). A portion of Alberto Di Minin’s research was supported by the In-Sat Laboratory, Scuola Superiore Sant’Anna, Pisa, Italy. Deepak Hedge provided valuable comments on an earlier draft of this chapter. REFERENCES Appleyard, M. M., N. W. Hatch, and D.C. Mowery. (2000). Managing the development and transfer of process technologies in the semiconductor manufacturing industry. Pp. 183-207 in The Nature and Dynamics of Organizational Capabilities, G. Dosi, R. R. Nelson, and S. G. Winter, eds. London: Oxford University Press. Arensman, R. (2003). Fabless goes global. Electronic Business. March 21. Bergek, A., and M. Bruzelius. (2005). Patents with inventors from different countries: Exploring some methodological issues through a case study. Paper presented at the DRUID conference, June 27-29, Copenhagen, Denmark. Braun, E., and S. MacDonald. (1978). Revolution in Miniature: The History and Impact of Semiconductor Electronics. Cambridge: Cambridge University Press. Brown, C., and G. Linden. (2006a). Offshoring in the semiconductor industry: A historical perspective. In Brookings Trade Forum 2005: Offshoring White-Collar Work, S. M. Collins and L. Brainard, eds. Washington, D.C.: Brookings Institution Press. Brown, C., and G. Linden. (2006b). Semiconductor Engineers in a Global Economy. National Academy of Engineering Workshop on the Offshoring of Engineering: Facts, Myths, Unknowns and Implications. Washington, D.C.: The National Academies Press. Ernst, D. (2005). Complexity and internationalisation of innovation: Why is chip design moving to Asia? International Journal of Innovation Management 9(1):47-73. Gerybadze, A., and G. Reger. (1999). Globalization of R&D: Recent changes in the management of innovation in transnational corporations. Research Policy 28(2-3):251-275. Hagedoorn, J. (2002). Inter-firm R&D partnerships: An overview of major trends and patterns since 1960. Research Policy 31:477-492. Hall, B. H., and R. H. Ziedonis. (2001). The patent paradox revisited: An empirical study of patenting in the U.S. semiconductor industry, 1979-1995. RAND Journal of Economics 32(1):101-128. Hatch, N. W., and D. C. Mowery. (1998). Process innovation and learning by doing in semiconductor manufacturing. Management Science 44(1):1461-1477. Integrated Circuit Engineering (1990-1999). Profiles: A worldwide survey of IC manufacturers and suppliers. Scottsdale, AZ: Integrated Circuit Engineering Corporation. Kuemmerle, W. (1999). The drivers of foreign direct investment into research and development; An empirical investigation. Journal of International Business Studies 30(1):1-24. Leachman, R. C., and C. H. Leachman. (2004). Globalization of semiconductors: Do real men have fabs, or virtual fabs? In Locating Global Advantage: Industry Dynamics in the International Economy, M. Kenney and R. Florida, eds. Palo Alto, Calif.: Stanford University Press. Linden, G., and D. Somaya. (2003). System-on-a-chip integration in the semiconductor industry: Industry structure and firm strategies. Industrial and Corporate Change 12(3):545-576. Linden, G., C. Brown, and M. Appleyard. (2004). The net world order’s influence on global leadership in the semiconductor industry. Pp. 232-257 in Locating Global Advantage: Industry Dynamics in the International Economy, M. Kenney and R. Florida, eds. Palo Alto, Calif.: Stanford University Press. Macher, J. T. (2006). Technological development and the boundaries of the firm: A knowledge-based examination in semiconductor manufacturing. Management Science 52(6):826-843. Macher, J. T., and D. C. Mowery. (2003). Managing learning by doing: An empirical study in semiconductor manufacturing. Journal of Product Innovation Management 20(5):391-410.
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies Macher, J. T., and D. C. Mowery. (2004). Vertical specialization and industry structure in high technology industries. Pp. 317-356 in Business Strategy over the Industry Lifecycle—Advances in Strategic Management (Vol. 21), J. A. C. Baum and A. M. McGahan, eds. New York: Elsevier. Macher, J. T., D. C. Mowery, and D. A. Hodges. (1998). Reversal of fortune? The recovery of the U.S. semiconductor industry. California Management Review 41(1):107-136. Macher, J. T., D. C. Mowery, and D. A. Hodges. (1999). Semiconductors. Pp. 245-286 in U.S. Industry in 2000: Studies in Competitive Performance, D. C. Mowery, ed. Washington, D.C.: National Academy Press. Mowery, D. C., and T. S. Simcoe. (2002). Is the Internet a U.S. invention? An economic and technological history of computer networking. Research Policy 31:1369-1387. Narin, F., K. S. Hamilton, and D. Olivastro. (1997). The increasing linkage between U.S. technology and public science. Research Policy 26(3):317-330. National Science Board (2006). Science and Engineering Indicators 2006. Arlington, VA: National Science Foundation. OECD (Organisation for Economic Co-operation and Development). (2005). Looking Beyond Tariffs: The Role of Non-Tariff Barriers in World Trade. Paris: OECD Trade Policy Studies. Patel, P., and K. Pavitt. (1991). Large firms in the production of the world’s technology: An important case of “nonglobalisation”. Journal of International Business Studies 22(1):1-20.
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies APPENDIX: SEMICONDUCTOR PATENT CLASSES 029. Subclasses: 116.1; 592; 602.1; 613; 729; 740; 827; 830; 832; 835; 840; 841; 854; 855; 025.01; 025.02; 025.03 065. Subclass: 152 073. Subclasses: 514.16; 721; 727; 754; 777; 862; 031.06 084. Subclasses: 676; 679 102. Subclasses: 202 117 Subclasses: all 118: Subclasses: 407; 408; 409; 410; 411; 412; 413; 414; 415; 669; 715; 716; 717; 718; 719; 720; 721; 722; 723; 724; 725; 726; 727; 728; 729; 730; 731; 732; 733; 900 134. Subclasses: 902; 001.2; 001.3 136. Subclasses: 243; 244; 245; 246; 247; 248; 249; 250; 251; 252; 253; 254; 255; 256; 257; 258; 259; 260; 261; 262; 263; 264; 265 148. Subclasses: 239; 033 156. Subclasses: 345; 625.1; 626; 627; 628; 636; 643; 644; 645; 646; 647; 648; 649; 650; 651; 652; 653; 654; 655; 656; 657; 658; 659; 660; 661; 662 164. Subclass: 091 174. Subclasses: 102; 261; 015.1; 016.3; 052.4; 052.5 194. Subclass: 216 204. Subclasses: 192; 206 205. Subclasses: 123; 157; 656; 915 206. Subclasses: 334; 710; 711; 832; 833 216. Subclasses: 002; 014; 016; 017; 023; 079; 099 219. Subclasses: 121.61; 385; 500; 501; 505; 638 228. Subclasses: 122.2; 123.1; 179.1; 903 250. Subclasses: 200; 208; 338.4; 339.03; 341.4; 370; 371; 390; 492; 552; 559 252. Subclasses: 950; 062.3 257. Subclasses: all 264. Subclasses: 272.17 307. Subclasses: 201; 270; 272; 291; 296; 355; 443; 446; 454; 455; 456; 463; 465; 468; 473; 475; 530; 651 310. Subclass: 303 313. Subclasses: 366; 367; 498; 499; 500; 523 315. Subclass: 408 323. Subclasses: 217; 223; 235; 237; 263; 265; 268; 300; 311; 313; 314; 315; 316; 319; 320; 350; 902; 907 324. Subclasses: 207.21;235; 252; 719; 722; 763; 765; 767; 768; 769; 158F; 158R 326. Subclasses: all
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies 327. Subclasses: 109; 112; 127; 170; 186; 188; 189; 192; 193; 194; 195; 196; 203; 204; 206; 207; 208; 209; 210; 211; 212; 213; 214; 223; 224; 258; 262; 281; 288; 306; 324; 327; 328; 334; 366; 367; 368; 369; 370; 371; 372; 373; 389; 390; 391; 404; 405; 409; 410; 411; 412; 413; 416; 417; 419; 420; 421; 422; 423; 424; 425; 426; 427; 428; 429; 430; 431; 432; 433; 434; 435; 436; 437; 438; 439; 440; 441; 442; 443; 444; 445; 446; 447; 448; 449; 450; 451; 452; 453; 454; 455; 456; 457; 458; 459; 460; 461; 462; 463; 464; 465; 466; 467; 468; 469; 470; 471; 472; 473; 474; 475; 476; 477; 478; 479; 480; 481; 482; 483; 484; 485; 486; 487; 488; 489; 490; 491; 492; 493; 494; 495; 496; 497; 498; 499; 500; 501; 502; 503; 504; 505; 510; 511; 513; 527; 528; 529; 530; 536; 537; 538; 539; 541; 542; 543; 546; 562; 563; 564; 565; 566; 568; 569; 570; 571; 574; 575; 576; 577; 578; 579; 580; 581; 582; 583; 584; 585; 586; 587; 051; 065; 081; 408; 409; 410; 411; 412; 413 329. Subclasses: 301; 305; 314; 326; 342; 362; 364; 365; 369; 370 330. Subclasses: 114; 116; 117; 118; 124; 127; 128; 129; 140; 141; 142; 143; 144; 146; 147; 148; 149; 150; 151; 152; 153; 154; 155; 156; 157; 168; 172; 181; 182; 183; 185; 186; 192; 193; 199; 200; 202; 250; 252; 253; 254; 255; 260; 263; 264; 267; 269; 270; 272; 275; 277; 282; 285; 290; 292; 296; 297; 004.9; 007; 009; 044; 051; 056; 059; 061; 069; 070; 075; 076; 087; 299; 3 331. Subclasses: 107; 111; 008; 052; 1A 332. Subclasses: 102; 105; 110; 113; 116; 130; 135; 136; 146; 152; 164; 168; 177; 178 333. Subclasses: 103; 247 334. Subclasses: 015; 047 338. Subclass: 195 340. Subclasses: 146; 598; 634; 814; 815.45; 825 341. Subclasses: 118; 136; 143; 145; 156 346. Subclass: 150.1 347. Subclasses: 130; 238; 001; 059 348. Subclasses: 126; 294; 390; 391; 420; 801; 087 349. Subclasses: 140, 202, 041, 042, 047, 053 355. Subclass: 053 356. Subclass: 030 358. Subclasses: 261; 426; 482; 483; 513; 514; 037 359. Subclasses: 109; 248; 332; 342; 343; 344; 359; 360; 006 360. Subclasses: 051 361. Subclasses: 100; 196; 197; 198; 277; 519; 523; 525; 527; 537; 600; 697; 703; 717; 718; 723; 737; 763; 764; 783; 813; 820; 001; 056; 091 362. Subclass: 800 363. Subclasses: 108; 109; 114; 123; 125; 126; 127; 128; 131; 135; 159; 160; 163; 010; 027; 037; 041; 048; 049; 053; 054; 056; 057; 060; 070; 077 364. Subclasses: 232; 249; 468; 477; 488; 489; 490; 491; 578; 579; 715; 716; 748; 750.5; 754; 760; 787; 862; 927; 954; 514R
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Innovation in Global Industries: U.S. Firms Competing in a New World - Collected Studies 365. Subclasses: 103; 104; 105; 106; 114; 145; 156; 174; 175; 176; 177; 178; 179; 180; 181; 182; 183; 184; 185; 186; 187; 188; 189; 200; 201; 203; 205; 207; 208; 210, 212; 218; 221; 222; 225; 226; 227; 230; 233; 015; 049; 053; 096 368. Subclasses: 239; 241; 083 369. Subclasses: 121; 044; 047 370. Subclasses: 013; 060; 062; 085; 094.1 371. Subclasses: 005; 010; 011; 021; 022; 037; 040; 047 372. Subclasses: 043; 044; 045; 046; 047; 048; 049; 050; 075; 081 374. Subclasses: 163; 178 375. Subclasses: 118; 224; 351; 356 376. Subclass: 183 377. Subclasses: 127; 057; 069 379. Subclasses: 253; 287; 292; 294; 361; 405 381. Subclasses: 175; 015 382. Subclasses: 144; 145; 151 385. Subclasses: 131; 014; 049; 088 395. Subclasses: 182.03; 200; 241; 250; 275; 280; 290; 296; 309; 325; 375; 400; 403; 425; 430; 445; 500; 519; 550; 575; 650; 700; 725; 750; 800 396. Subclasses: 211; 236; 321; 081; 099 414. Subclass: 935 417. Subclass: 413 422. Subclass: 245 427. Subclasses: 457; 074; 080; 098; 099; 523; 524; 525; 526; 527; 528; 529; 530; 531; 532; 533, 534; 535; 536; 537; 538; 539; 540; 541; 542; 543; 544; 545; 546; 547; 548; 549; 550; 551; 552; 553; 554; 555; 556; 557; 558; 559, 560; 561; 562; 563; 564; 565; 566; 567; 568; 569; 570; 571; 572; 573; 574; 575; 576; 577; 578; 579; 580; 581; 582; 583; 584; 585; 586; 587; 588, 589; 590; 591; 592; 593; 594; 595; 596; 597; 598; 599; 600; 601 428. Subclasses: 209; 450; 457; 620; 641; 650; 680; 938 430. Subclasses: 311; 312; 313; 314; 315; 316; 317; 318; 319; 005 436. Subclasses: 147; 149; 151; 004 437. Subclasses: all 445. Subclasses: 001 455. Subclasses: 169; 180.4; 191.2; 193.3; 252.1; 331; 333 505. Subclasses: 190; 191; 220; 235; 329; 330; 703; 917; 923 510. Subclasses: 175 524. Subclass: 403 902. Subclass: 026