1

Segmentation and Spillovers in the Chinese Semi-conductor

Industry

Henry Chesbrough, Helen Liang

Haas School of Business, UC Berkeley

Aug 18, 2007

2

Outline

• Motivation, Background and Previous Findings of China’s Semiconductor Industry

• Research Questions• Existing Literature and Hypotheses• Data, Measurement, and Empirical Strategy• Empirical Results (To be finished)

– Semiconductor industry– Other industries

• Conclusion and Discussion

3

Background and Motivation

• Globalization of semiconductor industry– Expansion of production and R&D to

emerging market– MNCs compete and cooperate with local firms

• Knowledge transfer – Channels and effects of knowledge

transfer/spillovers– Changing landscape of intellectual property

protection regime in developing countries

4

Previous Findings – A Divided Industry

There are two very different industry segments operating in the Chinese semiconductor industry (Chesbrough 2005)

1. A Globally-oriented, globally competitive segmentthat employs advanced technologies and is gaining market share in world markets

2. A Domestically-oriented segment that employs backward technologies, lacks access to investment capital and management expertise, where the government is the largest shareholder of each firm

5

Knowledge spillovers between key segments of the

Chinese semiconductor industry

MNCs

Domestically-Focused Chinese firms

Globally-focusedChinese firms

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Research Objective

• Identify the size and trend of development of the two domestic segments

• Examine the effects of MNCs on the innovation and productivity of domestic segments

• Examine the moderating factors of learning and knowledge spillovers

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Research Question1. Size and trend

– How big are the two segments of the Chinese semiconductor industry, relative to each other? Is one growing faster than the other? How profitable are the two segments?

– Is there a trend of converging of the two segments within the Chinese industry, or are they diverging? Are they increasingly targeting the same market/customer base (within China or internationally) or not? Is the domestic oriented segment improving its technology, productivity, and profitability, relative to the globally oriented segment?

2. Knowledge spillover– What are the comparative rates of spillover between the MNCs and the globally-oriented firms

and the domestically-oriented firms? – Do the globally focused firms have higher absorptive capacity, and learn more from the MNCs? – How is semiconductor industry compared with other industries, tech-intensive vs labor-intensive,

domestic-oriented vs exporters? Textile, machinery, food processing, etc.

3. R&D efforts and output– What determines the R&D intensity at firm level?– How does R&D input translate into output? – How does R&D activity influence firm productivity and profitability?

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Outline• Motivation, Background and Previous Findings

of China’s Semiconductor Industry• Research Questions• Existing Literature and Hypotheses• Data, Measurement, and Empirical Strategy• Empirical Results (To be finished)

– Semiconductor industry– Other industries

• Conclusion and Discussion

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Existing Literature I

• Channels of spillovers: the role of industrial linkage– Within industry (+/-)

• Imitation/Tech transfer (+)• Personnel turnover and interaction (+/-)• Negative externalities not related to tech spillovers (-) : input, labor,

land, etc• Empirical findings on intra-industry spillovers:

– + in developed economies (U.S. and U.K.)– 0/- in developing economies (Aikton& Harrison99, Javorcik04)

– Downstream Upstream industries (buyer supplier) (+)• Customers provide support to suppliers: technology, mgmt skills

(Javorcik04) • Export (Blalock and Gertler 04 & 05)

– Upstream Downstream industries (supplier buyer) (+)• Better inputs and equipment higher productivity

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Existing Literature II• Moderating factors of spillovers

– Absorptive capacity• Firms’ previous investment/experience in R&D and

personnel/skilled workers (Cohen&Levinthal, Blalock&Gertler)

– Ownership structure of • knowledge source: wholly-owned MNC subsidiaries vs Joint

ventures• knowledge recipient: incentive structure in state-owned vs

private firms– Geographic distance to knowledge source

• Knowledge transfer is more effective at local level– Jaffe et al. 93: patent citations in U.S.– Keller 02: productivity benefit from other countries’ R&D

– Technology Gap between source and recipient

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Existing Literature III

• R&D intensity and output– R&D production function (Grilliches 1979) – Chinese firms’ R&D Performance (Jefferson et al,

2002)• A recursive 3-equation system:

– R&D intensity = previous performance– R&D output = previous R&D intensity– Performance/productivity = R&D output + L + K + M

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Hypotheses

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Outline• Motivation, Background and Previous Findings

of China’s Semiconductor Industry• Research Questions• Existing Literature and Hypotheses• Data, Measurement, and Empirical Strategy• Empirical Results (To be finished)

– Semiconductor industry– Other industries

• Conclusion and Discussion

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Data

• Firm level data: – Firms operating in China, Semiconductor

industry and other industries, 1998-2005– Source: Enterprise Survey, National Bureau of

Statistics, China

• Variables: – Input/output, R&D activities, patent

applications, new products, etc

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Descriptive Statistics • Size of the two segments vs. MNCs in semiconductor industry

(csic=415, 2002 version)– Output (v207, current price), employment (v210)– Export Ratio (v213/v209) to identify domestic-oriented and global-

oriented segments (ownership b10=110-190) • Global-oriented segment: export ratio >=50%• Domestic-oriented segment: export ratio <50%

– Compare with MNCs (ownership b10=310-340) and overseas Chinese-invested enterprises (b10=210-240)

– Compare with other industries • Trend of development:

– Growth rate of output, export ratio, and innovation output and input – Are the two segments following the same trend?

• 2-sample t-test on firm level average growth rate 1998-2005• Graph: average growth rate of each segment

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Measurement• Productivity and profitability

– TFP and labor productivity– ROA

• Innovation activity– Input of innovation: R&D funding (kj22), expenditure (kj28), personnel

(kj43), scientist and engineer (kj46)

– Output of innovation: # of patent application (kj77), patents granted (kj79), # of S&T projects (kj85), R&D projects (kj87), new product value (and as a proportion of output), new product value and export value

• Other moderating factors: – Absorptive capacity: previous cumulated R&D investment and

personnel?– Geographic distance to knowledge source

• Same city/province MNCs/global-oriented/domestic-oriented share of output/labor in own industry sector and vertically related sectors

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Model I: Productivity Spillovers

• A Translog Productivity Function with firm fixed effects (Liang 2007)

ln Yijrt = α+ß1*lnKijrt + ß2*lnLijrt + ß3*lnMijrt

+ ß4*Horizontal_FDIjrt + ß5*Downstream_FDIjrt + ß6* Upstream_FDIjrt

+ ß7*Controlijrt + αi + αt + ξijrt

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Model I: Independent Variables --Industrial Linkage

• Horizontal FDI share (+/-): – The share of sector output by foreign affiliates

• Downstream FDI share (+): – The share of sector output by foreign affiliates in the

downstream industries weighted by Input/Output coefficients, excluding own-sector

• Upstream FDI share (+): – Similar as downstream FDI share, excluding export in output

• Note: – Input/Output coefficients at 2-digit China SIC level – Obs. at 4-digit China SIC level

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Model I: Control Variables

• Fixed effects: sector fixed effects, year dummies

• Export ratio and export-oriented sector dummy

• Olley-Pakes proxy for un-observed productivity shocks – Concern: FDI goes to locations with quick learners– Use investment conditional on capital to identify un-observed

contemporaneous shocks– A third order polynomial of investment and capital

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Model I: Moderating Factors

• Moderating factors: – Ownership of knowledge source and recipient

• Estimate wholly-owned subsidiaries and joint ventures’ impact separately

• Estimate different ownership of domestic segments

– Distance to knowledge source• Compare city-level coefficients with province-level

coefficients (Liang 2007)

– Absorptive Capacity• Compare/control firm-level R&D expenditure/personnel • Proxy Tech gap with cumulative R&D expenditure

(alternatives: patent applications, # or projects) (Blalock and Gertler)

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Model I: Industry Analysis

• Does Semiconductor industry look like other industries?– Compare semiconductor industry result with

other industries– Compare tech-intensive with labor-intensive

industries

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Model II: Innovation Activities

• A Recursive 3-equation system (Jefferson et al 2002) (this function form need to be thought through)

– R&D intensity = previous performance– R&D output = previous R&D intensity– Performance/productivity = R&D output + L + K + M

– R&D output: to be measured with patent application, new product value, and export value.

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Empirical Strategy

• Identification– MNCs and entrants’ selection of industry and

location• No good instruments so far• Geographic distance absorbed in FE• Dynamic panel? Using lagged dependent variables

as instruments

– Survival Bias• Using balanced panel of firms introduce survival

bias• Inverse Mills Ratio? Propensity Score?

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Overview of the two segments in China’s semiconductor industry

• Size– The global-oriented segment has outgrown domestic-oriented segment in

number of firms, output, employment, and asset 1998-2005• Productivity, Profitability, R&D, and patent activity

– Labor productivity (value-added/employment) in the two segments improve by similar pace

– Domestic segment has higher R&D intensity in terms of expenditure and personnel

– But Global segment has more patent application and granted patents– Entrants in global segment are less profitable, while the opposite is true in

domestic segment• Export

– The share of global segment in export increases from 43% to 92% 1998-2005• Firm Age

– Firms are younger in global segment, and older in domestic segment– Overtime firm age decreases in both segments – indicating exit of older firms and

entry• Ownership composition

– Domestic segment is dominated by domestic-owned firms and global segment by foreign-owned firms; in both segments domestic ownership declines overtime

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Two Segments of China's Semiconductor Industry 1998-2005: Total Number of Firms

0

50

100

150

200

1998 1999 2000 2001 2002 2003 2004 2005

Year

Tota

l Num

ber o

f Firm

s

Number of Firms -- Domestic Number of Firms -- Global

Two Segments of China's Semiconductor Industry 1998-2005: Ratio of Firms

0.000.100.200.300.400.500.600.700.800.901.00

1998 1999 2000 2001 2002 2003 2004 2005

Year

Rat

io o

f F

irm

s

Number of Firms -- Domestic Number of Firms -- Global

Size of the two segments in China’s semiconductor industry – Number of Firms 1998-2005

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Size of the two segments in China’s semiconductor industry -- output 1998-2005

Two Segments of China's Semiconductor Industry 1998-2005: Total Output (in Billion Yuan)

0

50

100

150

200

1998 1999 2000 2001 2002 2003 2004 2005

Year

To

tal O

utp

ut

Output -- Domestic Output -- Global

Two Segments of China's Semiconductor Industry 1998-2005: Ratio of Output

0.000.100.200.300.400.500.600.700.800.901.00

1998 1999 2000 2001 2002 2003 2004 2005

YearR

atio

of

Ou

tpu

t

Output Ratio -- Domestic Output Ratio -- Global

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Size of the two segments in China’s semiconductor industry -- Employment 1998-2005

Two Segments of China's Semiconductor Industry 1998-2005: Total Employment (in persons)

0

50,000

100,000

150,000

200,000

250,000

300,000

1998 1999 2000 2001 2002 2003 2004 2005

Year

To

tal E

mp

loym

ent

Employment -- Domestic Employment -- Global

Two Segments of China's Semiconductor Industry 1998-2005: Ratio of Employment

0.000.100.200.300.400.500.600.700.800.901.00

1998 1999 2000 2001 2002 2003 2004 2005

YearR

atio

of

Em

plo

ymen

t

Employment Ratio-- Domestic Employment Ratio-- Global

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Size of the two segments in China’s semiconductor industry – Fixed Asset 1998-2005

Two Segments of China's Semiconductor Industry 1998-2005: Ratio of Fixed Asset

0.00

0.10

0.200.30

0.40

0.50

0.60

0.700.80

0.90

1.00

1998 1999 2000 2001 2002 2003 2004 2005

Year

Rat

io o

f F

ixed

Ass

et

Fixed Asset Ratio -- Domestic Fixed Asset Ratio -- Global

Two Segments of China's Semiconductor Industry 1998-2005: Total Fixed Asset (in Billion Yuan)

0

1020

30

4050

60

7080

90

1998 1999 2000 2001 2002 2003 2004 2005

YearT

ota

l Fix

ed A

sset

Fixed Asset -- Domestic Fixed Asset -- Global

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Productivity Labor productivity (value-added/employment) in the two segments improve by similar pace

Two Segments of China's Semiconductor Industry 1998-2005: Labor Productivity

(Value-added/employment, 1,000 Yuan/person, 1998 price)

0

50

100

150

200

1998 1999 2000 2001 2002 2003 2004 2005

Year

Lab

or

Pro

du

ctiv

ity

Labor Productivity -- Domestic Labor Productivity -- Global

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R&D and patent activity Domestic segment has higher R&D intensity in terms of expenditure and personnel

Two Segments of China's Semiconductor Industry 1998-2005: R&D Expenditure/Sales, R&D

Staff/Employment

0.00

0.02

0.04

0.06

0.08

1998 1999 2000 2001 2002 2003 2004 2005

Year

R&D Expenditure/Sales -- Domestic R&D Staff/Employment -- Domestic

R&D Expenditure/Sales -- Global R&D Staff/Employment -- Global

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R&D and patent activity Global segment has more patent application and granted patents

Two Segments of China's Semiconductor Industry 1998-2005: # of Patent Application and Granted

0.00

1.00

2.00

3.00

1998 1999 2000 2001 2002 2003 2004 2005

YearPatent Application (invention) -- Domestic Patent Granted -- Domestic

Patent Application (invention) -- Global Patent Granted -- Global

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Profitability Entrants in global segment are less profitable, while the opposite is true in domestic segment; profit plunged in 2001

Two Segments of China's Semiconductor Industry 1998-2005: Ratio of Profit

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1998 1999 2000 2001 2002 2003 2004 2005

Year

Rat

io o

f Pro

fit

Profit -- Domestic Profit -- Global

Two Segments of China's Semiconductor Industry 1998-2005: Total Profit (in Billion Yuan)

-2

0

2

4

6

1998 1999 2000 2001 2002 2003 2004 2005

Year

Tota

l Pro

fitProfit -- Domestic Profit -- Global

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Profitability Entrants in global segment are less profitable, while the opposite is true in domestic segment; exporting domestic firms are more profitable.

Profitable firm vs loss-making firms in the two segments Firm-year average (in million Yuan, persons)

-200

0

200

400

600

800

1000

1200

1400

Number of f irms Output Employment Export Profit

Global -- profit Global -- loss Domestic -- profit Domestic -- loss

Profitable firm vs loss-making firms in the two segments -- Firm Age

0

5

10

15

20

25

Firm Age

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ProfitabilityCompare profiting and loss-making firms

Firm-Year Average (in million Yuan, persons)

Global -- profit

Global -- loss

Domestic -- profit

Domestic -- loss

Number of firm-year 482 201 705 243

Firm Age 8.75 5.72 16.41 21.19

Output 759.56 506.24 589.39 244.63

Employment 1,286.61 943.17 1,279.82 1,031.42

Export 665.83 426.00 105.68 40.36

Profit 48.28 -59.44 50.06 -35.99

Return on Asset 0.08 -0.07 0.06 -0.05

Export Ratio 0.87 0.89 0.12 0.09

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ExportThe share of global segment in export increases from 43% to 92% 1998-2005

Two Segments of China's Semiconductor Industry 1998-2005: Ratio of Export

0.00

0.20

0.40

0.60

0.80

1.00

1998 1999 2000 2001 2002 2003 2004 2005

Year

Rat

io o

f E

xpo

rt

Export -- Domestic Export -- Global

Two Segments of China's Semiconductor Industry 1998-2005: Total Export (in Billion Yuan)

0

50

100

150

200

1998 1999 2000 2001 2002 2003 2004 2005

Year

Tota

l Exp

ort

Export -- Domestic Export -- Global

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Firm AgeFirms in global segment are younger, and in domestic segment older; overtime firm age decreases in both segments – indicating exit of older firms and entry

Two Segments of China's Semiconductor Industry 1998-2005: Firm Age

05

1015202530

1998 1999 2000 2001 2002 2003 2004 2005

Year

Av

era

ge

Ag

e o

f F

irm

s

Firm Age -- Domestic Firm Age -- Global

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Ownership compositionDomestic segment dominated by domestic-owned firms Global segment by foreign-owned firmsIn both segments domestic ownership declines overtime

Two Segments of China's Semiconductor Industry 1998-2005: Ownership Composition

0.00

0.20

0.40

0.60

0.80

1.00

1998 1999 2000 2001 2002 2003 2004 2005

Year

DomesticFirms -- Domestic OverseasChinese -- Domestic ForeignFirms -- Domestic

DomesticFirms -- Global OverseasChinese -- Global ForeignFirms -- Global