Return to R&D Investment and Spillovers in the Chinese Semiconductor Industry: A Tale of Two Segments

Abstract

This study asks how a firm’s market orientation influences its returns to R&D investment and its capability to benefit from external technology opportunities brought about by the globalization of manufacturing and innovation activities. We use a panel of firm-level data on production and R&D activities to study China’s semiconductor industry. Building upon an earlier qualitative study, we find supporting evidence that this dynamic industry sector is characterized by two segments with very different market orientation: a domestically focused one with lagged technology, and a globally focused one employing advanced technology. While the former comprised the bulk of revenue and employment in the industry in 1998, the latter segment has grown substantially faster, and has now overtaken the former. We hypothesize that these two segments will differ in their R&D productivity, and ability to absorb external R&D. We test this hypothesis by examining the productivity consequence of in-house R&D investment and spillovers for each industry R&D investment. More specifically, we hypothesize that firms in the globally oriented sectors are more likely to receive higher returns to in-house R&D investment and positive spillovers from external R&D capital, especially from multinational firms, compared with domestically oriented firms. As a result, we expect that firms with higher in-house R&D capital will be more likely to receive positive spillovers from external knowledge. The empirical results support some but not all of our hypotheses. We find that firms in the global-oriented segment enjoy higher returns to R&D investment than those in the domestic- oriented segment and a larger positive spillover from external R&D capital. As the globally focused segment has grown to become the majority of firm activity in the industry, though, the competitive effects of more firms exporting appear to reduce the spillover benefits such firms enjoy from external R&D resources.