Segmentation and Spillovers in the Chinese Semi-conductor Industry

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
  Chinas 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 RD 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)
• A Globally-oriented, globally competitive segment
• that employs advanced technologies and is
  gaining market share in world markets
• 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
theChinese semiconductor industry
6
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

7
Research Question

• 1. 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. RD efforts and output
• What determines the RD intensity at firm level?
• How does RD input translate into output?
• How does RD activity influence firm productivity
  and profitability?

8
Outline

• Motivation, Background and Previous Findings of
  Chinas 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

9
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

10
Existing Literature II

• Moderating factors of spillovers
• Absorptive capacity
• Firms previous investment/experience in RD and
  personnel/skilled workers (CohenLevinthal,
  BlalockGertler)
• 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 RD
• Technology Gap between source and recipient

11
Existing Literature III

• RD intensity and output
• RD production function (Grilliches 1979)
• Chinese firms RD Performance (Jefferson et al,
  2002)
• A recursive 3-equation system
• RD intensity previous performance
• RD output previous RD intensity
• Performance/productivity RD output L K M

12
Hypotheses
13
Outline

• Motivation, Background and Previous Findings of
  Chinas 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

14
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, RD activities, patent
  applications, new products, etc

15
Descriptive Statistics

• Size of the two segments vs. MNCs in
  semiconductor industry (csic415, 2002 version)
• Output (v207, current price), employment (v210)
• Export Ratio (v213/v209) to identify
  domestic-oriented and global-oriented segments
  (ownership b10110-190)
• Global-oriented segment export ratio gt50
• Domestic-oriented segment export ratio lt50
• Compare with MNCs (ownership b10310-340) and
  overseas Chinese-invested enterprises
  (b10210-240)
• 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

16
Measurement

• Productivity and profitability
• TFP and labor productivity
• ROA
• Innovation activity
• Input of innovation RD funding (kj22),
  expenditure (kj28), personnel (kj43), scientist
  and engineer (kj46)
• Output of innovation of patent application
  (kj77), patents granted (kj79), of ST projects
  (kj85), RD projects (kj87), new product value
  (and as a proportion of output), new product
  value and export value
• Other moderating factors
• Absorptive capacity previous cumulated RD
  investment and personnel?
• Geographic distance to knowledge source
• Same city/province MNCs/global-oriented/domestic-o
  riented share of output/labor in own industry
  sector and vertically related sectors

17
Model I Productivity Spillovers

• A Translog Productivity Function with firm fixed
  effects (Liang 2007)
• ln Yijrt aß1lnKijrt ß2lnLijrt
  ß3lnMijrt
• ß4Horizontal_FDIjrt ß5Downstream_FDIjrt
  ß6 Upstream_FDIjrt
• ß7Controlijrt ai at ?ijrt

18
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

19
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

20
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 RD expenditure/personn
  el
• Proxy Tech gap with cumulative RD expenditure
  (alternatives patent applications, or
  projects) (Blalock and Gertler)

21
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

22
Model II Innovation Activities

• A Recursive 3-equation system (Jefferson et al
  2002) (this function form need to be thought
  through)
• RD intensity previous performance
• RD output previous RD intensity
• Performance/productivity RD output L K M
  
• RD output to be measured with patent
  application, new product value, and export value.

23
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?

24
Overview of the two segments in Chinas
semiconductor industry

• Size
• The global-oriented segment has outgrown
  domestic-oriented segment in number of firms,
  output, employment, and asset 1998-2005
• Productivity, Profitability, RD, and patent
  activity
• Labor productivity (value-added/employment) in
  the two segments improve by similar pace
• Domestic segment has higher RD 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

25
Size of the two segments in Chinas semiconductor
industry Number of Firms 1998-2005
26
Size of the two segments in Chinas semiconductor
industry -- output 1998-2005
27
Size of the two segments in Chinas semiconductor
industry -- Employment 1998-2005
28
Size of the two segments in Chinas semiconductor
industry Fixed Asset 1998-2005
29
Productivity Labor productivity
(value-added/employment) in the two segments
improve by similar pace
30
RD and patent activity Domestic segment has
higher RD intensity in terms of expenditure and
personnel
31
RD and patent activity Global segment has more
patent application and granted patents
32
Profitability Entrants in global segment are
less profitable, while the opposite is true in
domestic segment profit plunged in 2001
33
Profitability Entrants in global segment are
less profitable, while the opposite is true in
domestic segment exporting domestic firms are
more profitable.
34
ProfitabilityCompare profiting and loss-making
firmsFirm-Year Average (in million Yuan,
persons)
35
ExportThe share of global segment in export
increases from 43 to 92 1998-2005
36
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
37
Ownership compositionDomestic segment dominated
by domestic-owned firms Global segment by
foreign-owned firmsIn both segments domestic
ownership declines overtime