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THE COMPETITIVE SEMICONDUCTOR MANUFACTURING HUMAN
RESOURCES PROJECT:
Second Interim Report
CSM-32
Clair Brown, Editor
10. How does Knowledge Flow? Inter-Firm Patterns in the Semiconductor
Industry
Melissa M. Appleyard
10.2 Why Would Rivals Share?
This section provides a framework for thinking about the costs and
benefits derived from knowledge-sharing. When discussing inter-firm
knowledge flows, I prefer the broad concept of knowledge-sharing,
which I define as the transfer of useful know-how or information
across company lines. Figure 10-1 depicts the knowledge-sharing decision faced
by a firm. If the firm decides to share a piece of technical knowledge,
it can do so publicly or privately, and either place legal restrictions
on its use or permit unrestricted use. If the firm determines that
the gains to exclusive use of the technical information outweigh
the gains to sharing, then the firm can resort to secrecy.
The primary mechanisms of inter-firm knowledge exchange examined
in this paper are arranged in Figure 10-2 in terms of access to and use of the shared
knowledge. Access to knowledge can occur either through public channels
: patents, reverse engineering, newsletters, popular press, trade
journals, and conference presentations; or through private channels:
e-mail, the telephone, face-to-face meetings, visits to other companies'
fabrication plants (fabs), consortia or benchmarking studies. Even
if access to knowledge is public, its use may be restricted by legal
constructs such as patents and non-disclosure agreements.
In constructing Figure 10-2, I assume that the use and dissemination
of knowledge obtained by visiting other companies' fabs or participating
in a consortium or benchmarking study face legal restrictions such
as non-disclosure agreements to a greater degree than "informal"
interactions via email, the telephone or face-to-face conversations.
Private-unrestricted knowledge-sharing is similar to private-restricted
in that costs are incurred to search for appropriate partners and
forge relationships, but the two modes differ in important ways.
First, there is limited legal recourse if the private-unrestricted
sharing relationship faces a problem such as opportunism. But the
minimal transactions costs associated with private-unrestricted
transfers compared to the costs of drafting a formal agreement,
may more than offset the costs of intermittent opportunism.
From the viewpoint of the firm, the decision whether or not to share
knowledge with another company depends on whether the expected benefits
from relinquishing the monopoly over the knowledge outweigh the
expected costs. That is, a unique piece of useful knowledge confers
monopoly rents upon the possessor by allowing her to lower her costs
of production relative to others in the industry. When she divulges
the information to a competitor, she gives up her monopoly over
the knowledge, and must share the rents, suffering "'competitive
backlash'" (Carter, p.156). As long as she expects her sharing partner
to reciprocate with knowledge that is as least as useful or some
other form of compensation, such as a licensing fee, she can justify
inter-firm disclosure.
For firm i at time t, the cost and benefit comparison
can be represented by the following,
Eit [B9L,R,A0]
>= Eit [C(D,T)]
The firm's expected benefit from sharing
the piece of knowledge, EitB, is an increasing
function of the following: revenue from licensing, L, legal rights
to use the recipient company's technology, R, and/or knowledge from
the recipient company, A. Firm i's expected cost of knowledge-sharing
at time t, EitC, increases with the decline
in profitability, D, and the transaction costs, T, associated with
the knowledge transfer.
Drawing on previous empirical studies, the cases listed in Table 10-1 capture the potential net benefits from knowledge-sharing.
When the knowledge-owner patents and then licenses the knowledge
to a market rival, Case III, L increases while the sharer's cost
advantage may fall, since the rival can legally use the knowledge.
Depending on pricing conditions, a fall in the sharer's cost advantage
may translate into a decline in profitability, an increase in D,
which will at least partially offset the benefits of L. A similar
outcome obtains when the knowledge-owner patents and then cross-licenses
the knowledge, Case IV, but instead of licensing revenue the sharer
receives rights of use, R, or, as many people in the semiconductor
industry claim, a promise not to be sued. Finally, in the know-how
trading case, Case V, the knowledge-owner benefits from acquiring
new knowledge, A, but must give up the monopoly rents associated
with the knowledge that it shares. As for the transaction costs
associated with the three cases, the cost of undertaking know-how
trading is, in general, much lower than the other two especially
in the presence of legal fees charged to draft and maintain licensing
agreements.
10.3 Cross-Industry Comparison
of Knowledge-Sharing: Semiconductors vs. Steel
To explain why different magnitudes of private knowledge-sharing
occur across industries, one needs to look more closely at the process
of innovation. The examination of both the pace and nature of technological
change and how it translates into increased performance in different
industries can illuminate why distinctive patterns coexist. I hypothesize
that if an industry experiences a rapid pace of technological change,
reflected by the average time between new product or process introductions,
private knowledge-sharing in that industry will be less likely.
Previous studies of knowledge-sharing behavior have focused largely
on manufacturing intensive industries with a slow pace of technological
change, in particular, the steel industry. However, when considering
the net benefit of knowledge-sharing in a research and development
intensive industry, such as the semiconductor industry, the net
benefits may exhibit much higher variances. In the semiconductor
industry, uncertainty surrounds the payoff to a particular piece
of knowledge due to difficulties in predicting: its useful life;
the breadth of its applicability across the industry; the ease with
which it an be incorporated into another company's process flow;
or whether it can be reverse engineered. Imperfect information may
lead a knowledge-owner to engage in knowledge-sharing when, in fact,
the ex post net benefit is negative. For example, if firm i licenses
a processing technique to a rival, it earns L. But if the rival
incorporates the technique much more quickly into its production
process than firm i had anticipated, firm i may face a steeper decline
in its profits, D, than initially anticipated.
In support of the above hypothesis, von Hippel (1988) finds ample
evidence that private-unrestricted know-how trading occurs in the
U.S. steel minimill industry, an industry with a slow pace of technological
change. In contrast, he finds such activity almost non-existent
among powdered metals fabricators and producers of the biological
enzyme klenow, which are industries that exhibit more rapid technological
change (p.83). As reported below, I have found evidence that knowledge
is shared on private channels linking semiconductor engineers, but
not to the degree reported by the studies of the steel industry.
Inventive activity in a fast paced industry, such as the semiconductor
industry, will occur in the top range of Table
10-1, with the opportunity to patent new ideas much more frequent.
In slower paced industries, such as the steel industry, technological
change is characterized by the accumulation of numerous incremental
improvements over a long time horizon, and so patent opportunities
are fewer. Patenting benefits a firm by establishing an enforceable
claim to rents that accrue to an innovation. Patents also give the
patent owners defined "bargaining chips" for technology swapping,
e.g., cross-licensing, represented by R in the expected benefits
function above. Also, if an industry exhibits rapid technological
change, it would behoove firms in that industry to share little
with their competitors so that they can maximize the size of the
"technical cushion" separating them from their competitors; thus
insulating themselves from a marked decline in profits, captured
by a rise in D in the expected cost function, if they were to engage
in "real-time," private and unrestricted knowledge-sharing.
Apparently refuting the hypothesis, though, is von Hippel's finding
that private trading is present in the U.S. aerospace industry,
a research intensive industry (von Hippel, p.83). Two reasons may
explain this finding: (1) much of the research is "basic," and thus
falls in the bottom category of Table 10-1; or (2) the nature of demand, which is primarily
fueled by U.S. government procurement. As von Hippel observes, the
aerospace companies maintain frequent contact until government contracts
come up for bid. After contracts are granted, informal knowledge-sharing
resumes (von Hippel, p.87). That is, when significant profits are
at stake, private knowledge exchanges taper off, but recommence
after the spike in demand dissipates.
The following statistics help to characterize the semiconductor
industry as knowledge intensive and rapidly evolving when compared
to the steel minimill industry.
1. The average number of patents/year/firm—Table 10-2. This chart illustrates the distinctive patterns
of knowledge creation in the semiconductor industry versus the steel
industry. For example, in 1992, Nucor received less than five patents
whereas LSI Logic received twenty. This difference is striking given
the relative size of the two companies: In 1992, LSI employed 20%
fewer workers than Nucor, with total sales less than half of Nucor's.
2. R&D expenditures as a percentage of total sales—Figure 10-3. Research, development and integration consumes
a large portion of the total costs associated with a new semiconductor
process. R&D expenditures consistently run over 10% of sales
in many integrated circuit (IC) companies in the industry. This
emphasis translates into a higher incidence of patenting and a higher
degree of secrecy in the semiconductor industry relative to the
steel industry.
3. Rate of price decline—Figure 10-4. When the 16 megabit DRAM chips were introduced
in late 1991, they ran nearly $300 per chip. By mid-1994, their
price had plummeted to just under $50. Their current price is under
$20 (The Economist, p.66). Since the penalty of late entry into
a product market is extremely high, semiconductor developers often
are reluctant to provide specific technical information to their
peers at competing firms.
Other industry characteristics, such as the nature of product markets
would also assist in distinguishing the two industries. In a few
major semiconductor product markets, such as microprocessors, where
standards are based on firm-specific architectures, one would predict
a higher level of secrecy. This is consistent with Rogers' findings
in his study of microprocessor producers in Silicon Valley (Rogers,
1982).
These characteristics of the semiconductor industry—active patenting,
large R&D expenditures, rapid price declines—reflect the frequent
introduction of new production processes and products. Given this
high frequency, the hypothesis proposed above would suggest that
private knowledge-sharing would be less likely in the semiconductor
industry than in the steel industry. Section 10.5 provides preliminary
findings that support such a conclusion.
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