Limited Catch-up in China’s Semiconductor Industry: A Sectoral Innovation System Perspective

This article analyzes China’s semiconductor industry from the SSI perspective to find that in terms of catch-up in market shares and technology, China is showing only a limited success. The article explains the reasons for limited catch-up first in terms of the characteristics of the technology/knowledge regime of the industry where innovations are frequent and technologies are highly cumulative, which put a latecomer in a disadvantageous position. Furthermore, market for standard integrated circuit chips are not segmented but highly integrated, which implies no (low-end market) room for the latecomers. Therefore, it is more difficult for the latecomer firms to seize the market opportunity through marketing. The situation is getting worse with a continued increase of the required investment and shortened life cycles. Furthermore, the existing practice of Western countries restricting transfer of core technologies to communist countries like China has been aggravating the difficulties for China. In contrast to memory chips, the nature of ASIC chips are somewhat different, with relative longer cycle of technologies, and more divisions within markets specific to the needs of client firms. For this reason, some mainland Chinese firms, like SMIC and Huahong-NEC, are shown to gradually reduce the share of memory business and have been shifting towards the more ASIC-oriented foundry business. Although China’s semiconductor industry has faced many obstacles in their search for catch-up, some promising signs are emerging. First, continuing explosion of China market and its increasing importance after the global crisis will be acting as a factor to push for loosening restrictions of technology transfers to China. Second, China can expect an increasing flow of human capital equipped with up-to-date technology in this field by working with foreign firms and by educating and training its human capital in foreign countries. As these factors are combined with consolidation of domestic innovation system, such as, R&D capabilities of domestic firms, research organization and universities, China’s position is expected to rise and technology catch-up will become visible.