U.S. government’s subsidy to the consortium rests on two premises: first, that the social return to semiconductor research exceeds the private return (meaning the private sector does too little on its own); and second, that government contributions to Sematech result in more semiconductor research being done.
We call the hypothesis that Sematech induces more high-spillover research the “commitment” hypothesis. Under this hypothesis, we would expect Sematech to induce greater spending on R&D by member firms (inclusive of their Sematech contributions). Firms need not join Sematech, however, and those that do can leave after giving 2 years notice. Firms should be tempted to let others fund high-spillover R&D. Under this hypothesis, then, the 50% government subsidy is crucial for Sematech’s existence. The commitment hypothesis both justifies a government subsidy and requires one to explain Sematech’s membership. Relatedly, a government subsidy could be justified on the grounds that not all U.S. semiconductor firms have joined Sematech, and that some of the knowledge acquired within the consortium spills over to nonmembers. Based on the commitment hypothesis, Romer (12) cites Sematech as a model mechanism for promoting high-spillover research.
Not mutually exclusive with the commitment hypothesis is the hypothesis that Sematech promotes sharing of R&D within the consortium and reduces duplicative R&D. We call this the “sharing” hypothesis. Under this hypothesis, Sematech’s floor on member contributions is crucial because without it, firms would contribute next to nothing and free ride off the contributions of others. The sharing hypothesis implies greater efficiency of consortium R&D spending than of independent R&D spending. From a private firm standpoint, Sematech contributions were all the more efficient when matched by the U.S. government. Under this sharing hypothesis, we would expect Sematech firms to lower their R&D spending (inclusive of their contributions to Sematech). This is because members should get more research done with each dollar they contribute than they did independently. Since their contributions to Sematech are capped at 1% of their sales (far below their independent R&D spending), the consortium should not affect the efficiency of their marginal research dollar. As a result, it should not affect the total amount of research they carry out.
Unlike the commitment hypothesis, the sharing hypothesis does not provide a rationale for government funding. Firms should have the appropriate private incentive to form joint ventures that raise the efficiency of their R&D spending. Perhaps fears of antitrust prosecution, even in the wake of the National Cooperative Research Act of 1984, deter some semiconductor firms from forming such ventures. The stamp of government approval may provide crucial assurance for Sematech participants such as IBM and AT&T. Still, a waiver from antitrust prosecution for the research consortium should serve this function rather than government financing.
What does the evidence say about these hypotheses? Previously (2), we estimated whether Sematech caused R&D spending by members to rise or fall. To illustrate our methodology, consider for a moment broad measures of the performance of the U.S. semiconductor industry. Sematech was formed in the fall of 1987. After falling through 1988, the share of U.S. semiconductor producers in the world market has steadily risen, and the profitability of U.S. semiconductor firms has soared. Some view this rebound as confirmation of Sematech’s positive role in the industry. But this before-and-after comparison does not constitute a controlled experiment. What would have happened in the absence of Sematech? We do not know the answer to this, but we can compare the performance of Sematech member firms to that of the rest of the U.S. semiconductor industry. Any factors affecting the two groups equally, such as perhaps exchange rate movements and the U.S.-Japan Semiconductor Trade Agreement, will be a function of the year rather than Sematech membership per se. And factors specific to each firm rather than to Sematech membership can be purged by examining Sematech member firms before Sematech’s formation. This is the approach we used to try to isolate the impact of the Sematech consortium on member R&D spending (2).
We found that R&D intensity (the ratio of R&D spending to sales) rose after 1987 for both members and nonmembers of Sematech, but that the increase was larger for nonmembers than for members (2). When we controlled for firm effects, year effects, and age of firm effects, we found a 1.4 percentage point, a statistically significant effect of Sematech on member firms’ R&D intensity. This result was not sensitive to the exact sample of firms or time period covered, or to the use of R&D relative to sales versus assets.
Is our estimated impact of Sematech on member firm R&D spending economically significant? In 1991, our sample of semiconductor firms had sales of $31.1 billion with $3.2 billion in R&D expenditures (a ratio of 10.3%). In that year, Sematech members accounted for two-thirds of sales ($20.7 billion) and R&D ($2.2 billion) in our sample, for a ratio of 10.6%. If Sematech reduced this ratio by 1.4 percentage points, then in the absence of the consortium, firms would have spent 12.0% of sales on R&D, or $2.5 billion, or $300 million more. In the absence of Sematech, according to this exercise, the overall R&D/sales ratio of the industry would have been 11.2% rather than 10.3% in 1991. Under this interpretation, Sematech reduced the industry’s R&D spending by 9%. (This whole exercise presumes that Sematech had no overall impact on semiconductor sales or on other firms.)
To summarize, we estimated a negative, economically significant impact of Sematech membership on R&D spending (2). This accords well with the sharing hypothesis, under which the consortium increases the efficiency of inframarginal member R&D spending. Under this hypothesis, Sematech members should replace any Sematech funding that the government withdraws. The evidence is less easy to reconcile with the commitment hypothesis, wherein Sematech commits members to boost their research on high-spillover R&D. One cannot reject the commitment hypothesis, however, because the two hypotheses are not mutually exclusive. The validity of the sharing hypothesis could be masking the fact that more high-spillover R&D is being carried out as a result of the consortium.
In a previous study (1), we found that most semiconductor production knowledge remains within the firm. Since semiconductor firms slide down related learning curves whether they produce memory chips or microprocessors, efficiency gains can be leaped from joint ventures. With this in mind, Sematech was formed in 1987. In our study (1), we also found that some semiconductor production knowledge spills over across semiconductor firms. These spillovers could justify government actions to stimulate semiconductor research. With this in mind, the U.S. government has funded almost half of Sematech’s budget. In another study (2), we estimated that Sematech induces member firms to lower their R&D spending. This suggests that Sematech allows more sharing and less duplication of research. Under this interpretation, it is not surprising that Sematech members have stated that they wish to fully fund the consortium in the absence of government financing. Moreover, this evidence is harder (but not impossible) to reconcile with the hypothesis that, through government funding, Sematech induces firms to do more semiconductor research.
1. Irwin, D. & Klenow, P. (1994) J. Polit. Econ. 102, 1200–1227.
2. Irwin, D. & Klenow, P. (1996) J. Int. Econ. 40, 323–344.