The semiconductor value chain is incredibly complex and global in scope: not only is the production of semiconductors one of the most R&D-intensive activities, but it also spans several specialised tasks performed by different companies around the world. The largest semiconductor vendors are predominantly based in the United States, Korea, Europe, and Japan (e.g. Intel, Samsung, Infineon, and Kioxia), but many outsource capital-intensive manufacturing and assembly & testing activities to specialised firms located in Chinese Taipei, China, and Singapore. Some, like TSMC, have gone on to become technological leaders in providing the advanced chip-manufacturing services on which so much of the world’s smartphones and computers hinge upon. Companies like TSMC depend in turn on key suppliers of specialised, precision equipment such as Dutch company ASML, which produces the lithography machines that semiconductor foundries rely on.
Because chip production is innovation-driven, capital-intensive, and strategic, government involvement has long been a feature in the semiconductor industry. By the early 1960s, NASA had become the major customer for integrated circuits, ensuring robust demand for US producers. Around the same time, Chinese authorities established Wuxi Factory No. 742 as the state training ground for semiconductor engineers. In 1967, France created the CEA-Leti, a public research centre specialised in microelectronics, followed, in the 1970s and 1980s, by authorities in Japan, Korea, and Chinese Taipei who all supported semiconductor research and development (R&D) through public institutes such as ETRI and ITRI. Likewise, the United States established the Very High Speed Integrated Circuit programme in 1980 and the Sematech research and development consortium in 1987.
Government intervention is a part of the chip industry
A recent OECD report on semiconductors found that between 2014 and 2018, 21 of the largest semiconductor firms worldwide received more than USD 50 billion in government support. Of this amount, two-thirds took the form of government grants and tax concessions, including more than USD 15 billion in support of R&D spending and USD 20 billion in the form of concessionary income-tax rates and investment incentives. Another third of the support took the form of below-market finance, i.e. loans and equity obtained by firms at below-market conditions.
While all sampled firms enjoyed R&D support and some amount of tax concessions, below-market finance appears to be largely a Chinese phenomenon. This is especially the case following China’s decision to establish in 2014 a national integrated circuit investment fund and sister funds at provincial and municipal levels. These funds have since injected fresh equity into a number of important Chinese producers of semiconductors, including SMIC, Hua Hong, and Tsinghua Unigroup and their subsidiaries. There notably appears to be a direct connection between equity injections by China’s government funds and the construction of new semiconductor fabs in the country.
Lacking transparency of government support
One crucial issue from a policy standpoint relates to the lack of transparency on government support and below-market finance more specifically. Many governments fail to disclose the subsidies they provide, but this problem is exacerbated in the case of below-market finance as demonstrating the existence of such support requires comparison with a market benchmark, detailed methodologies for which have yet to be established or agreed. Information is also sometimes lacking on the ownership structure of firms, which can hide the true extent of government ownership of industrial producers.
Some forms of subsidies may be necessary, and this is true in semiconductors as in other sectors. Yet even R&D subsidies can distort markets if poorly designed and implemented. Analysis by Boeing and Peters shows, for example, that the R&D subsidies that China provided between 2001-11 were at times misused, thus undermining the effectiveness of R&D policies and implying that some amount of R&D support may have ‘leaked’ to other purposes such as production capacity expansion. While there are good economic arguments for supporting R&D, care should be taken to design R&D measures in a manner that improves societal benefits (i.e. innovation efforts that can increase productivity and well-being) while containing costs (i.e. competitive distortions).
China’s semiconductors still lag behind
While government equity injections in the semiconductor value chain have implications for trade and global competition, what they mean for trade rules, and subsidy disciplines more specifically, warrants closer investigation. By its very nature, below-market equity is probably among the hardest forms of support to identify and quantify. Enhanced transparency is therefore necessary and should focus, in particular, on:
- the extent to which governments own shares in semiconductor companies and their financial backers; as well as on
- the support policies that are in place in different countries. Unlike for some other industrial sectors, it is not always evident which semiconductor firms are state enterprises or government-invested.
At a broader level, the OECD’s work also raises questions about the role and effectiveness of government support in R&D-intensive industries characterised by short product cycles. This discussion has a particular resonance for China, which is trailing in semiconductor foundry technology despite relatively large government support, and which has long had policies that explicitly seek to support the development of the domestic integrated-circuit industry.
Jehan Sauvage currently serves as a Policy Analyst in the Trade and Agriculture Directorate of the OECD, where he specialises in questions related to market distortions and government subsidies in industrial sectors.
Christian Steidl is a Policy Analyst at the OECD, working on the analysis of various forms of government support for industrial companies.
This contribution is prepared in the context of the event series “Global China Conversations” of the Kiel Institute for the World Economy (IfW). On Thursday Dr. Sophia Helmrich (BDI), Jehan Sauvage (OECD), and Christian Steidl (OECD) will discuss the topic: “The Race for Technology Sovereignty: The Case of Government Support in the Semiconductor Industry”. China.Table is media partner of this event series.
The authors are writing in a strictly personal capacity. The views expressed are theirs only, and do not reflect in any way those of the OECD Secretariat or the member countries of the OECD.