An Empirical Investigation of Process Innovation and Learning in Semiconductor Manufacturing: A Life-Cycle Perspective

Abstract

In many high-tech industries, product technology is rapidly evolving and innovation in the manufacturing process is becoming an increasingly critical requisite for firms to sustain long-term competitiveness and profitability. Unfortunately, given that firms invest billions of dollars in process-related research and development each year, the topic has received little research attention in accounting literature. To fill the gap in extent research, this study develops a learning curve model and empirically investigates the impact of production experience and investment in process innovation on manufacturing costs using a unique dataset consisting of 10 years' worth of quarterly data on five successive process generations from one of the largest semiconductor manufacturing companies in Taiwan. I integrate life cycle considerations into the analysis and test if the impact of process innovation and production experience on cost reduction differs across the technology life cycle. The empirical results indicate that manufacturing cost is negatively associated with cumulative production volume and cumulative investment in process innovation, supporting that process innovation and production experience both are important value drivers in the semiconductor manufacturing industry. I also find that investment in process innovation has a greater impact on cost reduction in the early stage of a technology life cycle and production experience plays a more important role in the mature stage, providing new evidence on learning effects and the value of process innovation.