From Catching Up to Forging Ahead: China's Policies for Semiconductors

East-West Center Special Study, 2015

88 Pages Posted: 15 Mar 2016 Last revised: 16 Mar 2016

See all articles by Dieter Ernst

Dieter Ernst

East-West Center; Centre for International Governance Innovation (CIGI)

Date Written: September 8, 2015

Abstract

China, the world’s leading exporter of electronic products, faces a fundamental dilemma. It is the largest and fastest-growing market for semiconductors, the core component of those electronics products. Yet, at least 80 percent of the semiconductors consumed in China’s electronics products needs to be imported. As a result, China’s trade deficit in semiconductors has more than doubled since 2005 and now exceeds the huge amount it spends on crude oil imports.

To correct this unsustainable imbalance, China’s new strategy to upgrade its semiconductor industry seeks to move from catching up to forging ahead in semiconductors. The strategy calls for strengthening simultaneously advanced manufacturing and innovation capabilities in China’s integrated circuit (IC) design industry and its domestic IC fabrication, primarily through foundry services. Drawing on policy documents and interviews with China-based industry experts, this study takes a close look at objectives, strategy, and implementation policies of China’s new push in semiconductors and examines what this implies for China’s prospects in this industry.

The study shows that China’s new policy resorts to private equity investment rather than subsidy as the tool of industrial policy. The government participates in equity investment and claims it will do so without intervening with management decisions. In essence, this policy is expected to reduce the cost of investment funds for a selected group of firms, which is to form a “national team” in the semiconductor industry. China’s new policy to upgrade its semiconductor industry through innovation does not represent a radical break with its deeply embedded statist tradition. Within these boundaries, however, the study detects important changes in the direction of a bottom-up, market-led approach to industrial policy.

In response to the rising complexity and uncertainty of today’s semiconductor industry, the government seems more open to experimentation with new approaches to investment finance and flexible, bottom-up policy implementation, based on multilayered industrial dialogues with private firms. China’s policies to forge ahead in semiconductors, thus, provide an interesting example of its current efforts to move from investment-driven catching up to an innovation-driven development model. .

Keywords: China innovation policy, China semiconductor industry, China Industrial policy

JEL Classification: O14,O32,O53

Suggested Citation

Ernst, Dieter, From Catching Up to Forging Ahead: China's Policies for Semiconductors (September 8, 2015). East-West Center Special Study, 2015. Available at SSRN: https://ssrn.com/abstract=2744974 or http://dx.doi.org/10.2139/ssrn.2744974

Dieter Ernst (Contact Author)

East-West Center ( email )

1601 East-West Road
Honolulu, HI 96848-1601
United States

Centre for International Governance Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

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