Growth, Upgrading and Limited Catch-Up in China's Semiconductor Industry

Semiconductors represent a major building block of high-tech industry. This chapter analyzes the trajectory of China’s rapidly growing semiconductor sector, focusing on the interplay among global technology developments, Chinese government policy, and three groups of firms: purely domestic manufacturers, Chinese operations of multi-national corporations, and hybrid firms based in China but with offshore ownership and financing. China has pursued policies aiming to build a globally competitive domestic industry. Policy instruments include outlays on technical education, and more focused initiatives that channel investment funds, imported technology and product demand toward domestic firms, mostly state-owned ones. Despite strong government backing, domestic state-owned firms have generally failed to generate technological dynamism. Only the hybrids have delivered substantial technological advance. Recent policy initiatives continue to lavish resources on state-owned firms while limiting the capacity of potentially more innovative hybrid and domestic private operators to expand and upgrade. As a result, China’s semiconductor industry appears locked into a path that combines quantitative expansion with low financial returns and limited qualitative improvement. This trajectory offers little prospect for attaining China’s long-term objective of propelling domestic semiconductor manufacture toward the global frontier of technology and innovation.