Exogenous shocks, industrial policy and the American semiconductor industry

Baldwin and Freeman (2022) observed that the past two years have been filled with exogenous shocks. They noted that researchers could use high-frequency data to study how these shocks affect global supply chains.

The impact of the war in Ukraine on the American semiconductor industry

One such shock occurred on February 24, 2022 when Russia invaded Ukraine. Ukraine supplies 90% of the neon and Russia supplies 30% of the palladium used by the American semiconductor industry.1 How have these supply chain shocks affected the US semiconductor industry? One way to look at this is to study how semiconductor stock prices have reacted. In theory, the stock price is equal to the expected present value of future cash flows. One can predict the course of stock prices using macroeconomic variables and then examine the difference between actual and expected prices after the war begins. Four useful variables for explaining sectoral stock prices are the country’s aggregate stock market return, the global aggregate stock market return, the change in the logarithm of the exchange rate, and the change in the logarithm of the price of crude. oil.

Figure 1 shows the performance of U.S. semiconductor stocks from February 24 through April 8, 2022. It also shows the predicted performance using regressions of semiconductor stock returns on the four macro variables through February 23. February 2022 and actual out-of-sample values ​​of the macro stock. variables to predict semiconductor yields thereafter. Real stock prices behaved roughly as expected given the macroeconomic environment. This indicates that the supply chain shocks caused by the war have not harmed the US semiconductor industry.

Figure 1 Actual and forecast prices of US semiconductor stocks after Russia’s invasion of Ukraine on February 24, 2022

Source: Datastream database and author’s calculations.

The Covid-19 pandemic and the CHIPS Act

The COVID-19 pandemic was another exogenous shock that hit the semiconductor industry. Initially, industries such as automotive canceled semiconductor orders. Then, as auto demand recovered faster than expected, automakers and other downstream industries faced shortages. Decision makers have realized the need for a reliable supply of computer chips. Military planners also noted that with so many of the world’s advanced semiconductors being produced in East Asia, there was a risk that these vital inputs to guided missiles, stealth bombers and other weapons can be cut off in the event of war or natural attacks. disaster.

The US Congress therefore began work on the CHIPS Act (Creating Helpful Incentives to Produce Semiconductors). The law would provide grants for the construction of semiconductor manufacturing plants (fabs) and funding for research and development.2 In an influential report, Varas et al. (2020) noted that the costs of a semiconductor fab (fab) in the United States are 30% higher than in Taiwan or South Korea. They attributed 40-70% of this cost difference to government incentives. It is not clear, however, whether the main reason that East Asian manufacturing is more competitive than US manufacturing is government largesse.

Why the Electronics Industry Succeeded in East Asia

In Thorbecke (2021, 2022), I investigate why electronics manufacturing migrated from the United States to East Asia. Government subsidies mattered less than facing competition. As American researchers invented transistors, CMOS (complementary metalloxide-semiconductor) chips, liquid crystal displays and other breakthrough technologies, Asian companies took advantage. American electronics companies were pampered with defense contracts and lacked the incentives to convert new technologies into marketable products. Asian companies, competing in demanding consumer markets, had to choose technologies carefully and use them profitably to produce desirable products.

Japan, Taiwan and South Korea have also invested in education. This allowed their engineers to quickly master semiconductor technologies. The region continues to lead in educational achievement. The latest Program for International Student Assessment (PISA) rankings were as follows: China 1st, Singapore 2nd, Macao 3rd, Hong Kong 4th, Japan 6th, Korea 7th, Taiwan 8th, and the United States 25th.

East Asian governments have also recorded minimal budget surpluses or deficits. Combined with high personal savings rates, large amounts of national savings were channeled into capital formation. This is important in the semiconductor industry, where heavy plant and equipment and R&D expenditures are required. By contrast, the US budget deficit has averaged 6.9% of GDP over the past 13 years and is expected to be about the same in 2022.

In Asian countries, industrial policy worked best where national survival was at stake. Taiwan’s security depended on economic growth (Yoshitomi 2003). Taiwan had a group of world-class researchers such as Wen-yuan Pan, the director of the prestigious David Sarnoff Laboratories. They worked for free to develop the semiconductor industry. South Korea faced the credible threat of invasion by 750,000 troops north of its border. South Korea had a patriotic and determined workforce that was determined to make Korea an economic giant (Pecht et al. 1997). Malaysia has not faced any existential threats. Its attempts to promote a cutting-edge semiconductor industry were foiled by redistribution priorities (Rasiah 2017). Willett (1997) observed that when a country’s survival is threatened, politics unites for the good of the nation. However, competition among interest groups, rent-seeking, and distributional struggles may predominate in normal times.

Industrial policies in countries like Korea also involved carrot-and-stick incentives. Only companies that managed to export continued to benefit from state-controlled credits. Hausmann and Rodrik (2003) note that of the ten chaebol initially receiving government benefits, only three continued to receive them ten years later.

CEO compensation at Taiwan Semiconductor Manufacturing Company and at Intel

East Asian economies have more equal income distributions than the United States. The CEO of the world’s most successful semiconductor company, Taiwan Semiconductor Manufacturing Company (TSMC), earned $447,000 in 2021. That’s about 10 times the average salary at TSMC. In contrast, Intel CEO Pat Gelsinger earned $179 million in 2021. That’s 1,711 times the average salary at Intel.2 His compensation was determined in part by Monte Carlo simulations indicating expected Intel stock price performance.4 Figure 2 shows how Intel’s stock price has actually changed since Gelsinger became CEO on Feb. 15, 2021, and how it should perform based on the four-factor macroeconomic model used above. As of April 8, 2022, Intel’s stock price was 27% below value when Gelsinger took over and 34% below what would be expected given the macroeconomic environment.

Figure 2 Intel’s actual and forecasted stock price after Pat Gelsinger becomes CEO on February 15, 2021

Source: Datastream database and author’s calculations.

Gelsinger argued that the weak stock performance occurred because Intel’s large investments in fabs reduced free cash flow. While this may be a contributing factor, the evidence in Figure 2 indicates that private investors are not optimistic about Intel’s prospects.

Entrepreneurs have played a key role in Asia’s success in electronics. Sharp’s Tadashi Sasaki pioneered the use of CMOS chips and sold millions and millions of calculators. Samsung’s Byung-Chull Lee has invested heavily in the production of Dynamic Random Access Memory (DRAM) semiconductors. These entrepreneurs took risks with no guarantee of reward. Intel rewards its CEOs before knowing if the risks they take will pay off. The US government intends to subsidize this business model. In terms of educational attainment, fiscal discipline, and employment incentives, the United States is also not following the playbook that has worked well in Asia. There are reasons to wonder whether the US approach to industrial policy will succeed.

Editor’s Note: The main research on which this column is based (Thorbecke 2021) first appeared as a Working Paper of the Institute for Economics, Trade and Government Research. industry (RIETI) of Japan.


Baldwin, R and R Freeman (2022), “Global Supply Chain Risk and Resilience”, VoxEU.org, 6 April.

Hausmann, R and D Rodrik (2003), “Economic development as self-discovery”, Journal of Development Economics 72: 603-633.

Pecht, M, JB Bernstein, D Searls, M Peckerar and P Karulkar (1997), The Korean electronics industry, Abingdon-on-Thames, UK: Routledge.

Rasiah, R (2017), “Malaysia’s Electronics Industry Industrial Policy Experience”, in J Page and F Tarp (eds), The practice of industrial policy: coordination between government and business in Africa and East AsiaOxford: Oxford University Press.

Thorbecke, W (2022), East Asia’s Electronics Sector: The Roles of Exchange Rates, Technology Transfer and Global Value ChainsCambridge: Cambridge University Press, forthcoming.

Thorbecke, W (2021), “The Semiconductor Industry in an Age of Trade Wars, Covid-19 and Strategic Rivalries”, RIETI Working Paper No. 21-E-064.

Varas, A, R Varadarajin, J Goodrich and F Yinug (2020), Government Incentives and US Competitiveness in Semiconductor ManufacturingBoston Consulting Group.

Willett, T (1997), “The Public Choice Approach to International Economic Relations”, Political Economy Lecture Series, Center for the Study of Public Choice, George Mason University.

Yoshitomi, M (2003), Post-crisis development paradigms for Asia, Tokyo: ADBI edition.


1 https://venturebeat.com/2022/02/24/ukraine-supplies-90-percent-of-us-semiconductor-grade-neon-what-it-means-to-chip-supply-chain/

2 https://www.csis.org/blogs/perspectives-innovation/chips-america-act-why-it-necessary-and-what-it-does

3 https://www.crn.com/news/components-peripherals/intel-ceo-pat-gelsinger-earned-179m-in-2021

4 https://www.ft.com/content/ac46c194-bad3-4577-8e22-6e184a4fbbd7

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