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Cooperation and Demand-based Innovation in the Korean System Semiconductor Industry

Author Shin Jongwon et al. Date 2020.12.30 Page

For the past few decades, the semiconductor industry has evolved dramatically and technological advances in the industry are changing our daily lives. From consumer electronics such as smartphones and TVs to automobiles, semiconductors have become ubiquitous. But the technological advances have also changed the landscape of the industry’s business model. Traditionally, IDMs(Integrated Device Manufactures) have been the dominant players and responsible for everything from chip design to manufacturing in the semiconductor industry. But as technology advances, developing and manufacturing chips requires an astronomical amount of money. This led to the emergence of the fabless business model in the 1980s. 


Since fabless companies focus on chip design and lack fabrication facilities, their relationships with both set makers(e.g.: electronics companies) and foundries are essential for successful business. To keep their competencies and to meet market demands and needs, strong and committed bilateral cooperation with set makers and demand-based innovation are key elements. And for chip manufacturing, closer partnerships between fabless firms and foundries are essential.


Korea is home to sizable chip manufacturers such as Samsung and SK Hynix, and is the world’s top producer of memory chips. But its position and competitiveness in the system semiconductor industry is far behind its rivals. All this stems from the weakness of fabless businesses in Korea.


In this study, we investigate the current status of Korean fabless companies and their cooperation with set makers using unique survey data collected from 81 fabless SMEs. 


Our findings suggest that although Korean fabless companies are innovative compared to other Korean SMEs, they also face highly monopsonistic markets in which contractor-subcontractor relationships prevail in Korea. To foster and secure competitiveness in the fabless industry, demand-based innovation based on committed bilateral cooperation with set makers is of crucial importance. But only about 10% of fabless companies have developed new products in cooperation with their key customers in the past three years and their profit margins were undermined due to their weak bargaining positions in the monopsonistic market.


To this end, we recommend some policy directions as follows. First, to reduce searching cost and information asymmetry between set makers and fabless firms the active role of government as a matching platform should be more emphasized. Second, in order to achieve destructive innovation in emerging industries(e.g.: Artificial Intelligence and Autonomous Vehicles), the alliance program with set makers and fabless firms should be more carefully designed with consideration of their incentive compatibility and the profit-sharing rules of joint projects.