1. R&D Capabilities and International, Intra- National and Inter-firm Knowledge Diffusion in China: The Case of the Semiconductor Industry Rui Wang Seoul National University

2. Abstract  Using US patent citation data, the findings of this paper are as follows:  First, unlike in Korea and Taiwan, Chinese semiconductor R&D capability is dominated by foreign companies, universities, and research institutes.  Second, with regard to international diffusion, the knowledge sources of foreign companies in China are the Taiwanese companies, while the knowledge sources of the Chinese universities and research institutes are the American and Japanese companies.  Third, this paper found that the degree of intra-national knowledge diffusion in China is lower than that in Korea and Taiwan, reflecting the underdeveloped nature of its innovation system.  Fourth, with regard to inter-firm knowledge diffusion, there is little interaction between foreign companies and Chinese universities and research institutes.

3. 1. Introduction  The economies of more developed countries and regions in the world all began from the vigorous development of the semiconductor industry. The most representative of these developed countries are the United States, Japan, South Korea, and Taiwan. Thus it is quite natural for a number of researches to be undertaken in this industry.  PricewaterhouseCoopers’ report (2007)  Huang and Soete (2007)  Loy (2002)  Lu (2008)  Chesbrough and Liang (2008)  Jaffe and Trajtenberg (1999)  Almeida (1996)  Lee and Yoon (2006)

4. 1. Introduction  Using information on the patents granted by the US Patent and Trademark Office (USPTO), and following the methodology of Jaffe et al. (1993, 2000), Lee and Yoon (2006) explained that with regard to international knowledge diffusion, late entrant firms are more likely to learn from those firms just ahead of them rather than from the earliest entrant firms, such as with Japanese patents tending to cite American patents, the Korean to the Japanese, and the Taiwanese to the Koreans. The degree of intra-national knowledge diffusion is also closely related with the order of entry into the industry. The pattern of inter-firm knowledge also reflects the organizational difference.

5. 1. Introduction  Among the studies related to knowledge diffusion, we discovered that none of those studies have specific interests on the issue of international, intra-national and inter-firm knowledge diffusion in China.  Therefore, we will focus on the knowledge diffusion in China especially on the semiconductor industry.

6. 1. Introduction  Unlike in Korea and Taiwan, 60 percent of the Chinese semiconductor market is occupied by foreign companies, making the scale of indigenous companies small.  Therefore, one of the main hypotheses of this study is that foreign companies' semiconductor R&D capability in China will be stronger than that of indigenous companies.

7. 1. Introduction  At the same time, it is gathered from the literature that Chinese universities and research institutes have relatively strong R&D resources in genera, and actually over 30 percent of the semiconductor patents in China are granted to Chinese universities and research institutes.  Thus, we will also examine the related hypothesis that Chinese universities and research institutes have a stronger semiconductor R&D capability than indigenous companies.

8. 1. Introduction  On international diffusion, we will examine the hypothesis that the knowledge source of Chinese patents is the Taiwanese, as Lee and Yoon (2006) showed that Japanese patents tend to cite American patents, the Korean to the Japanese, and the Taiwanese to the Koreans.  On intra-national diffusion, we will examine the hypothesis that there is a much lower degree of intra- national diffusion in China than in Korea or Taiwan.  On inter-firm knowledge diffusion, we will examine the hypothesis that there is little interaction between foreign companies and Chinese universities and research institutes.

9. 2.1 The National Innovation System(NIS) of China  The NIS (also called the National System of Innovation) is the flow of technology and information among people, enterprises, and institutions, which is the key to the innovative process on the national level.  Liu and White (2001)  Liu (2002) gave a good observation about China’s Transition-era NIS in his paper. There are three characteristics of the Chinese NIS: 1) Learning economy (Lundvall); 2) Entrepreneurship-based economy; 3) The use of global knowledge and resources.  New OECD report (2007)  Liu et al. (2002)  Jin and et al (2008)  Motohashi (2008)

11. 2.2 The semi-conductor Industry in China  Chen (2003) provided a good overview of the history of the semiconductor industry in China.  Since the adoption of the policy of reform and opening up to the outside world in 1978, China has adopted many preferential policies to attract direct foreign investment.  Research in China made an updated version of the “China Semiconductor Industry Report, 2006" (2007). The domestic market scale of China's semiconductor industry was over $60 billion in 2006, $30 billion of which belonged to the 20 major manufacturers.

12. [Table 1] Top 20 Semiconductor Suppliers in Mainland China

13. [Table 2] Top 10 Packaging Plants in Mainland China

14. [Table 3] Nine Wafer Plants Formally Established in Mainland China

15. [Table 4] Top 10 IC Design Houses in China in 2005

16. 3.1 R&D Capabilities of the Semiconductor Companies in China  Eun (2007)  Ma et al. (2006)  Chesbrough et al. (2005)  2006-2007 Annual Report on Competition Strategies of Multinational Semiconductor Companies in China (2007)  Chesbrough and Teece (2005)  ChinaBizIntel (2008)  we can hypothesize that the R&D capability of semiconductor companies in China led by foreign companies is stronger than that of indigenous companies.

17. continue  Lee and Yoon (2006)  Xue (2007)  Eun, Lee, and Wu (2006)  Eun (2008)  As we know, “985 Program” and “Project 211” were initiated by the Chinese central government to strengthen the R&D capability of universities.  [Table 5]  The other hypothesis that we formed from this is that universities and research institutes have a stronger R&D capability than indigenous semiconductor companies.

18. [Table 5] Semiconductor-related Patents in the China Patent Information Center (CPIC) 2001~2006

19. 3.2 International Knowledge Diffusion  A report from PricewaterhouseCoopers (China's Impact on the Semiconductor Industry: 2006 Update) (2007) stated that separate from political considerations, studies have found an increasing degree of interdependence and interaction between China and Taiwan in the semiconductor industry.  There are other evidences of their symbiotic relationship.  Geppert (2005)  we hypothesize that the knowledge sources of foreign companies’ patents are the Taiwanese companies.

20. continue  Xue (2007)  Lv (2007)  A report by SIA  Normile (2005)  [Figure 2]  We stand by our hypothesis that the knowledge sources of Chinese universities and research institutes are the American and Japanese companies.

22. 3.3 Intra-national and Inter-firm Knowledge Diffusion  Lee and Yoon (2006) proved that more advanced or forerunning countries have a higher degree of intra-national knowledge diffusion than latecomer countries. Therefore, we hypothesize that there is a much lower degree of intra-national diffusion in China than in Korea or Taiwan.  [Figure 3]  Hence, we hypothesize that there is little interaction between foreign companies and Chinese universities and research institutes.

24. 4. Methodology, Data, and R&D Capabilities of the Innovators in China  we rely on the US Patent and Trademark office (USPTO) Patent Citation Database. The sources of the patent- related information used in this study are as follows:  Title and abstract of patent (www.uspto.gov)  Patent number  Issue date  Reference cited  Assignee name and country  Original inventor name and country  patents data used in this study are those including the words "semiconductor" in the abstract or title of the US patent document.

25. [Table 6] Number of Semiconductor-related Patents Granted by the USPTO

26. [Table 7] Major Assignees in the World Semiconductor Industry 1985-2006

27. [Table 8] Semiconductor Patents by Country and Year

28. [Table 9] Assignees' Country Code of Semiconductor Patents with Chinese Original Inventors by Year

29. [Table 10] Semiconductor Patents with both Assignees and Original Inventors 1988-2006

30. [Table 11] Sources of Knowledge in World's Semiconductor Patent by Source Country

40. Summary and Concluding Remarks  Focusing on in-house R&D capabilities as well as international, intra-national and inter-firm knowledge diffusion, this paper examined the directions, channels, and patterns of knowledge flows in the semiconductor industry in China. These are our findings:  First, unlike in Korea and Taiwan, China’s semiconductor R&D capability is dominated by foreign companies and Chinese universities and research institutes.

41. continue  Second, with regard to international diffusion, this paper finds that the knowledge sources of the semiconductor innovators located in China led by foreign companies are Taiwanese companies.  Third, this paper discovers that the degree of intra- national knowledge diffusion in China is lower than that of Korean and Taiwan, reflecting the relatively underdeveloped nature of the innovation system in China.  Fourth, with regard to inter-firm knowledge diffusion, there is little interaction between foreign companies and Chinese universities and research institutes.

42. Thank you*^_^*