1 segmentation and spillovers in the chinese semi-conductor industry henry chesbrough, helen liang...
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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
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 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?
8
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
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 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
11
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
12
Hypotheses
13
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
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, R&D activities, patent
applications, new products, etc
15
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
16
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
17
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
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 R&D expenditure/personnel • Proxy Tech gap with cumulative R&D 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)
– 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.
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 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
25
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
26
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
27
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
28
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
29
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
30
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
31
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
32
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
33
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
34
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
35
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
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
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
37
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
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