Knowledge Intensity within Industrial Value Chain and Firm Performance: The Case of the Integrated Circuit Industry in Taiwan

Abstract

By examining the integrated circuit industry in Taiwan, this study addresses two sets of broad questions - (1) Does R&D (knowledge) expenditure have a positive impact on firm performance? Does differential R&D (knowledge) intensity have a differential impact on firm performance? And (2) Does R&D (knowledge) expenditure have externality effect on enterprises in the same segment and in different segments? Do firms investing more in their own R&D have better ability to exploit externally-generated knowledge than firms with lower R&D expenditures? The empirical evidence shows that IC (Integrated Circuit) Design firms have an R&D (knowledge) valuation parameter of $14.76, which is more than that of the whole IC industry ($8.78) and that of IC manufacturers ($1.80). The total benefit of each dollar of R&D (knowledge) expenditure to operation income (OI) for the IC design segment is $3.57, which is the highest among the three IC segments and is more than that of the whole IC industry (1.51). The inter-segments externality effects on the market value to book value ratio (MV/bv) and OI was found only in the IC Design segment. When the current overall R&D investment of the segment in IC design increases by 2.72 times, the spillover effect would result in a 2.48 increase on MV/bv and a 0.31 increase on OI. The firms belonging to high R&D (knowledge) input group in the IC Manufacture segment and the IC Package and Test segment will have a better capacity to absorb the spillover effect from the R&D (knowledge) activities of the IC design segment. The intra-segments externality effects of the R&D (knowledge) are that, on average, the effect of spillover dominates the effect of competition. To sum up, the R&D contribution of IC Design is obviously higher than the other two segments in the same value chain. This leads to a suggestion that the authority in Taiwan should re-consider their subsidy policy regarding the IC industry. The IC design segment is the link in the value chain that needs most attention from the government. This is especially true, if we explicitly account for the positive externality brought by the IC segment to the whole value chain.