MIT Sloan Professor Finds Superconductor Design Industry in China Not a Threat to U.S.

Study Finds Less Growth than Expected in Chinese IC Design Firms

CAMBRIDGE, Mass., January 13, 2009 — While competition with Chinese companies is increasing for many industries in the U.S., semiconductor design firms don't need to worry about losing market share or jobs to China yet. A recent study by a professor at MIT Sloan School of Management found that the semiconductor design industry in China has experienced only limited growth since it emerged in 2000.

Semi-conductors or “chips” are the brain power of almost every electrical system used from computers and toaster ovens to medical instruments and airplanes. From 2003 to 2008, MIT Sloan Professor Elena Obukhova studied the progress of semi-conductor design firms in Shanghai, specifically ones that focus on integrated circuit design also known as “IC design.” She found that while there was some growth among firms in Shanghai, which is the center of the semiconductor design industry in China, it was far less than many people expected.

“Around 2000, IC design in China was very hot and people thought this was a new frontier and that was followed by a lot of investment,” said Obukhova. “There were reports of how fast technology was diffusing to China, but the numbers I found suggest an industry in its infancy with problems indicative of a developing economy. It's growing, but very slowly and a lot of firms are still not profitable.”

For the study, between 2003 and 2005 Obukhova interviewed 80% of all the IC design firms in Shanghai. In 2008, she talked to industry insiders about the current state of all of the original firms. She also re-interviewed two-thirds of these firms. She found that four out of five firms were still in operation, one out of 10 firms was acquired, and one out of 10 firms was nonoperational.

While survival rates for firms were better than one might expect, firm growth was still slow. Among firms interviewed both in 2004 and 2008, the overall number of employees had increased. Since her original interviews, many small firms had grown into medium-sized firms. However, the number of large firms — those with more than 100 employees — remains small. In 2004, one out of five firms could be described as large, but in 2008 the number of large firms had increased to only one out of four firms.

When Obukhova looked at which firms were more likely to survive, they were companies with a foreign investor or companies with state-owned customers. “Foreign investors have deeper pockets and are able to continue investing in firms as they develop new products, and state-owned customers provide a stable source of demand,” she explained.

She also found that surviving firms had more “returnee” managers, Chinese who spent time in the U.S. and then returned to China. Among firms with two or more returnees, nine out of 10 survived. Among firms with no returnees, seven out of 10 survived. Firms with only one returnee had about the same chances of survival as firms without returnees.

However, while returnees may increase firms' survival rates, they didn't necessarily increase profits. Obukhova found that older firms, which tended to have all domestic managers, were the most profitable. Holding a firm's age constant, firms with returnees were no more profitable than other types of firms.

“This study has implications for policymakers in China because China has really favored returnee enterprises and a lot of expectations and hope have been placed on them, but the results are mixed,” said Obukhova. “The returnees are not necessarily the saviors of Chinese high-tech firms.”

She found that of the firms that were acquired, closed or became nonoperational, investment was the most important reason for their exit. “Another message for policymakers is that investment is extremely important. Chinese domestic investors still have short-term vision and foreign investors are playing an important role in this sector,” she said.

Obukhova added that her study supports the reports indicating that China's hot “bubble” is merely a “firecracker” for some industries. She said, “There was a lot of talk about how this industry in China is developing and whether or not it will affect the U.S. and become a threat with jobs going to China, but when you look at the numbers, the IC design industry in China is much less impressive than many people thought.”

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