China’s mercantilist strategy to grab market share in the global semiconductor industry is fueling the rise of inferior innovators at the expense of superior firms in the United States and other market-led economies. That siphons away resources that would otherwise be invested in the virtuous cycle of cutting-edge R&D that has driven semiconductor innovation for decades.
Semiconductors represent perhaps the world’s most-important industry, as they are the foundation of a wide array of products and services. Moreover, they play a key enabling role in emerging technologies such as artificial intelligence (AI), high-performance computing (HPC), 5G, the Internet of Things, and autonomous systems, among others.
Unlike industries in which China has already gained significant global market share—including high-speed rail, solar panels, and telecom equipment—China’s global market share and competitiveness in semiconductors, especially with regard to Chinese-headquartered firms, is still quite modest, with the global leaders largely based in Europe, Japan, South Korea, Taiwan, and the United States.
It is because of this that China has targeted the industry for global competitive advantage, as detailed in a number of government plans, including “Made in China 2025.” China has taken a wide range of steps to propel itself into becoming a major global semiconductor competitor. However, while some of these policy actions are fair and legitimate, most are not and are “innovation mercantilist” in nature, seeking to unfairly benefit Chinse firms at the expense of more-innovative foreign firms.
Competition can drive innovation, but only if it is market-based. When Apple came out with the iPhone and helped drive Blackberry from the market, this spurred innovation, because it was based on consumer demand for a better product, with innovation driving the change. In contrast, Chinese semiconductor firms lag significantly behind the global leaders, usually by two generations of chip development, and Chinese firms patent less than the global leaders. As such, Chinese chip sales largely depend on unfair support from the Chinese government; and each sale reduces the pace of global semiconductor innovation by taking market share and revenue away from more-innovative non-Chinese firms. In fact, this report estimates that without Chinese innovation mercantilist policies in the semiconductor industry, there would be more than 5,000 additional U.S. patents in the industry annually than there are now.
This report provides an overview of the semiconductor industry and the innovation dynamics driving it, including an explication of why innovation mercantilist policies harm innovation. It then describes Chinese innovation mercantilism in the sector and examines the deleterious effect of China’s policies on global innovation in the sector. Finally, it provides policy recommendations for how policymakers can address these challenges.
Stephen Ezell is vice president, global innovation policy, at the Information Technology and Innovation Foundation (ITIF)
To read the full report, please click here.