The spillovers we found may, however, reflect market or nonmarket exchanges between firms. We have in mind joint ventures, movement of technical personnel between firms, quid pro quo communication among technical personnel, and academic conferences. In these cases, the policy prescription is far from obvious. For example, suppose the spillovers occur solely through joint ventures. On the one hand, venture partners do not take into account any negative impact of their collaboration on other firms’ profits. On the other hand, if knowledge acquired within ventures spills over to nonmembers, then the government should encourage such ventures (5).

The U.S. government has taken several steps to encourage research on semiconductor technology (6). The Semiconductor Chip Protection Act of 1984 enhanced protection of intellectual property, and the National Cooperative Research Act of 1984 loosened antitrust restrictions on R&D joint ventures. Partly as a result of this legislation, Sematech was incorporated in August of 1987 with 14 founding members (AT&T Microelectronics, Advanced Micro Devices, International Business Machines, Digital Equipment, Harris Semiconductor, Hewlett-Packard, Intel, LSI Logic, Micron Technology, Motorola, NCR, National Semiconductor, Rockwell International, and Texas Instruments). With an annual budget of about $200 million, Sematech was designed to help improve U.S. semiconductor production technology. Until very recently, the Advanced Research Projects Agency contributed up to $100 million in government funds to Sematech.

How does Sematech function? Under its by-laws, Sematech is prohibited from engaging in the sale of semiconductor products (7, 8). Sematech also does not design semiconductors, nor does it restrict member firms’ R&D spending outside the consortium. Sematech members contribute financial resources and personnel to the consortium. They are required to contribute 1% of their semiconductor sales revenue, with a minimum contribution of $1 million and a maximum of $15 million. Of the 400 technical staff of Sematech, about 220 are assignees from member firms who stay at Sematech’s facility in Austin, Texas, from 6 to 30 months. Because the objective has been to bolster the domestic semiconductor industry, membership has been limited to U.S.-owned semiconductor firms. U.S. affiliates of foreign firms are not allowed to enter (a bid by the U.S. subsidiary of Hitachi was turned down in 1988). However, no restrictions are placed on joint ventures between Sematech members and foreign partners.

The Sematech consortium focuses on generic process R&D (as opposed to product R&D). According to Spencer and Grindley (7), “this agenda potentially benefits all members without threatening their core proprietary capabilities.” At its inception, Sematech purchased and experimented with semiconductor manufacturing equipment and transferred the technological knowledge to its member companies. Spencer and Grindley (7) state that “central funding and testing can lower the costs of equipment development and introduction by reducing the duplication of firms’ efforts to develop and qualify new tools.”

Since 1990, Sematech’s direction has shifted toward “sub-contracted R&D” in the form of grants to semiconductor equipment manufacturers to develop better equipment. This new approach aims to support the domestic supplier base and strengthen the links between equipment and semiconductor manufacturers. By improving the technology of semiconductor equipment manufacturers, Sematech has arguably increased the spillovers it generates for nonmembers. Indeed, Spencer and Grindley (7) argue that “[s]pillovers from Sematech efforts constitute a justification for government support. The equipment developed from Sematech programs is shared with all U.S. corporations, whether they are members or not.” These spillovers may be international in scope; Sematech members may enter joint ventures with foreign partners, and equipment manufacturers may sell to foreign firms.

According to a General Accounting Office (9) survey of executives from Sematech members, most firms have been generally satisfied with their participation in the consortium. The General Accounting Office Survey indicated that the Sematech research most useful to members includes methods of improving and evaluating equipment performance, fabrication factory design and construction activities, and defect control. Several executives maintained that Sematech technology had been disseminated most easily through “people-to-people interaction,” and that the assignee program of sending personnel to Austin has been useful. These executives also noted that, as a result of Sematech, they had purchased more semiconductor equipment from U.S. manufacturers. Burrows (10) reports that Intel believes it has saved $200–300 million from improved yields and greater production efficiencies in return for annual Sematech investments of about $17 million. The General Accounting Office (11) has stated that “Sematech has demonstrated that a government-industry R&D consortium on manufacturing technology can help improve a U.S. industry’s technological position while protecting the government’s interest that the consortium be managed well and public funds spent appropriately.”

Sematech has also drawn extensive criticism from some nonmember semiconductor firms. According to Jerry Rogers, president of Cyrix Semiconductor, “Sematech has spent five years and $1 billion, but there are still no measurable benefits to the industry.” T.J.Rodgers, the president and chief executive officer of Cypress Semiconductor, has argued that the group just allows large corporations to sop up government subsidies for themselves while excluding smaller, more entrepreneurial firms (10). A controversial aspect of Sematech was its initial policy, since relaxed, of preventing nonmembers from gaining quick access to the equipment it helped develop. These restrictions raised questions about whether research undertaken with public funds was benefiting one segment of the domestic semiconductor industry at the expense of another.

Another heavily criticized feature of Sematech has been its membership fee schedule, which discriminates against small firms. Sematech members, as noted earlier, are required to contribute 1% of their semiconductor sales revenue to the consortium, with a minimum contribution of $1 million and a maximum of $15 million. This fee schedule places proportionately heavier financial burdens on firms with sales of less than $100 million and lighter burdens on firms with sales of more than $1.5 billion. Many smaller firms such as Cypress Semiconductor say they cannot afford to pay the steep membership dues or to send their best engineers to Sematech’s Austin facility for a year or more. Even if these companies joined, moreover, they might have a limited impact on Sematech’s research agenda.

Sematech’s membership has also declined. Three firms have left the consortium, dropping its membership to 11, and another has reserved its option of leave. (Any firm can leave Sematech after giving 2 years notice.) In January 1992, LSI Logic and Micron Technology announced their withdrawal from Sematech, followed by Harris Corporation in January 1993. Press reports in February 1994 indicated that AT&T Microelectronics notified Sematech of its option to leave the consortium in 2 years, although a spokesman denied the company had definite plans to leave. All of the former members questioned the new direction of Sematech’s research effort, complaining that Sematech strayed from its original objective of developing processes for making more advanced chips toward just giving cash grants to equipment companies. Departing firms have also stated that their own internal R&D spending has been more productive than investments in Sematech.

The Performance of Sematech

Sematech’s purpose is to improve U.S. semiconductor firms’ manufacturing technology. As discussed, the rationale for the

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