China’s Semiconductor Market Grab Undermines Global Innovation, Threatening to Stall “Moore’s Law,” New Report Warns; More Than 5,000 U.S. Patents Per Year Already Sacrificed

WASHINGTON—Continued advances in semiconductor technology, which are critical to the pace of economic growth and progress of modern life, depend on a virtuous cycle in which leading firms invest earnings in cutting-edge research and development. But China’s state-directed strategy to capture market share in the global semiconductor industry is undermining that pattern, according to a new report from the Information Technology and Innovation Foundation (ITIF).

With a mercantilist formula of massive subsidies, intellectual property theft, and state-financed acquisitions of foreign semiconductor firms, among other tactics, China is fueling the rise of inferior innovators at the expense of superior firms in the United States and other market-led economies—and by taking their market share, China siphons away resources that would otherwise go in high-end R&D. Indeed, ITIF’s report estimates that, if not for China’s innovation mercantilist policies, there would be 5,100 more U.S. patents in the semiconductor industry today.

“China’s semiconductor policies seriously threaten the sustainability of Moore’s Law,” said Stephen Ezell, ITIF’s senior vice president for global innovation policy, who authored the report. “The semiconductor sector is one of the world’s most R&D-intensive industries. To keep investing so heavily in R&D, firms need access to large global markets where they can compete on fair terms—with value chains flowing smoothly, and intellectual property protected. That’s how they amortize and recoup their costs. So when they face excess, non-market-based competition, innovation suffers.”

The deleterious impact of China’s semiconductor mercantilism is already starting to become apparent, as ITIF’s report shows:

• China’s share of global value added in the global semiconductor industry grew fourfold from 2001 to 2016—from 8 to 31 percent, while the U.S. share fell from 28 to 22 percent.
• Chinese companies received 86 percent of the below-market equity provided by their nations’ governments from 2014 to 2018.
• Those subsidies have led directly to massive fabrication buildup—China is exepected to add 40 percent of global semiconductor manufacturing capacity over the course of this decade—creating overcapacity that will harm semiconductor companies attempting to compete on market-based terms.

In a vivid indicator of the impact of China’s mercantilist policies on the semiconductor industry, ITIF examined firms’ patent intensity (patents as a share of sales). The analysis found non-Chinse semiconductor firms had a patent intensity four times greater than Chinese semiconductor firms. Assuming that without unfair Chinese government policies these firms’ global market share would be one-third of what it is today, ITIF calculated that approximately 5,100 fewer U.S. semiconductor patents have been awarded per year than would otherwise be the case (out of about 19,500 issued annually).

To address the challenge that Chinese innovation mercantilism poses to the global semiconductor industry, ITIF’s report recommends a combination of domestic and international policy responses for the United States:

• Appropriate sufficient funding to achieve the semiconductor industry competitiveness objectives set in the recently enacted CHIPS Act.
• Triple federal investment in semiconductor R&D.
• Expand trade penalties for subidies at the WTO.
• Collaborate with allied nations on semiconductor export controls.
• Align foreign direct investment screening procedures.
• Enhance information-sharing efforts to combat foreign economic espionage and intellectual property, technology, or trade secret theft.
• Cooperate with allies on semiconductor development activities.

“China is undermining the global market dynamics that have underpinned a virtuous cycle of innovation in the semiconductor industry for decades,” said Ezell. “The United States and its allies need to work together to ensure the industry can continue evolving with private enterprises operating in market-oriented, rules-based conditions. All nations have a right to participate in the sector, but unless the contours of competition are consistent with WTO rules and principles, innovation will suffer.”

Read the report.