Questions No. 1
Does the rise of Japanese semiconductor companies during the 1970s and 1980s indicate that government industrial policy can play an important role in facilitating national competitiveness in industries targeted by that policy?
Answer
YES. This is ahead of argument that the Japanese government was the driving force behind Japan's success in semiconductors. If to summarize the whole case in one line then it should be said that Japanese government policy has made their firms as leader of the global chip making business. The fundamental point is enormous restriction in Green Field investment as well as high barrier to import semiconductors made by US. Ministry of International Trade and Industry (MITI) was in control to set rules about the FDI as well as the import tariffs and quotas. There were high import tariff on imported semiconductors. It is not only the tariff or quota to restrict the import of semiconductors in Japan. It required special permission from (MITI) to buy advanced integrated circuits from foreign companies even for the Japanese firms or dealers to import specific types of semiconductor that contains more than 200 circuits.
Japan government neither even allowed the US firms to invest in Japan, as entirely US owned company knows as green field investment. After the World War II Even extreme pressure from US Govt. could not convince Japanese government to erase the barriers. MITI consistently rejected all applications by US semiconductor firms to set up wholly owned subsidiaries in Japan. Japan Government argued only way to set up US semiconductor firms to be in business in Japan is joint ventures in which the US partner might have a majority stake, or to acquire equity in Japanese semiconductor firms but not the 100 percent. In addition MITI also added some other awful conditions in the name of preventing discrimination. On of those was like foreign firms have to give the license to all Japanese firms those are interested to produce circuits for foreign semiconductor making firms to avoid towards Japanese licensees. Japan was an attractive destination to US firms as Japan had a potential large market as well as also had certain factor endowment like skilled cheap labor. Moreover, on that time US might not have better destination in Asia other than Japan. Therefore lately but lastly US firms like General Electric, Fairchild, and Texas Instruments agreed to enter n the Japanese market by going for joint adventure with the local firms as they had no other option to enter in Japanese market.
Initially, US firms found that licensing is a profitable way to place their business in Japan as they were receiving an amount of 10 percent of the net earnings from the licensees by the end of 1060s. This amount was paid as the royalty to the US firms by the Japanese local firms. Actually in other words MITI's policy was to insist that if a foreign firm was going to license technology in Japan meaning they are allowing the local firm to know how to make those things. Gradually the policy of the MITI got successful. Slowly but surely very soon the US companies faced the Japanese local firms as their tough competitor. The firms that raised to the top this tough environment, such as NEC, were more than capable of going head to head with US semiconductor firms by the mid-1970s. The most significant reason of this competition is as they have learnt the same technology; the features were more or less similar. All the competition was in between the pricing. Better the efficiency the firms had more the earned as profit. Certainly the US local firm was more efficient in this field. They were able to sell their chips at a price less than the fair value. By 1988 Japanese firms had captured more than 80 percent of the world market for the most widely used integrated circuit in digital equipment, the DRAM, which once invented by Intel. No mater what ever the reason was this really matches with the product life cycle theory.
In conclusion it should be said that earlier it was the invention of US that made them the market leader but later by the great Industry policy of Ministry of International Trade and Industry of Japan, which made Japan as the market leader (holding 80% global market share) of this industry by late 1980s.
Questions No. 2
What explains the relative decline of Japanese semiconductor firms since 1988? Can it be attributed to the 1991 semiconductor pact or to other economic factors?
Answer
(Part - I)
In early 80s after experiencing a heavy defeat, US had understood that they are being out of the global marketplace in opposition to the competition of Japanese firms. US firms claimed that they were facing unfair competition from Japan. They blamed that the Japanese firms are selling semiconductors, especially DRAMs, at a worth of lower than fair market value. Even in market of United States Japanese firms are selling the products at much lower price than the US manufacturers. Where the technology was invented by Intel and once produced exclusively by US firms. Texas Instruments of US was holding the largest segment of market shares once upon a time. US found a great dispute of lowering the price in United State’s market by the Japanese firms. The concept was dumping. The Japanese firms were selling the semiconductors at less then market value just because to seize the market share even inside United States by lowering the selling price. Nevertheless, they were successful also in this policy as the case reported that Japanese firms were holding almost 80 percent of worldwide market share.
This time US put tremendous bargaining with Japan when they had realized themselves out of the market. Japan in fact learnt the technology from US and this time they had to cooperation too. In 1986 a trade agreement between the United States and Japan was resulted as the effect of negotiation to remove the disputes between two countries. Two important statements were in the deal. According to the arrangement Japanese firms were restricted to sell their product outside Japan at the lower rate than fair market value and the foreign countries must restrain 20% of the Japanese market share.
The agreement increased the price of semiconductor in US market but the foreign firms could not even grasp the Japanese market. When the agreement of 1986 came to end it was only 12 to 17 percent of market share in Japan hold by the foreign firms. The agreement between the United State and the Japan to eliminate the trade dispute in semiconductor industry reduced the market share of Japanese business in US market as the price of semiconductors increased in US market. However foreign countries were unable to catch market shares in Japan.
(Part - II)
In June 1991, the United States and Japan signed a new five-year pact to replace the 1986 agreement. More or less it was pretty much similar to the previous agreement of 1986. Only difference was with the price fixing. Japan opposed with the argument of fair market price outside the Japanese market, which is completely, goes against the free market economy. This time US agreed that Japanese firms could set price as they wanted to. However, this time Japanese market started to be captured by the foreign companies. The foreign share of the Japanese semiconductor market reached 20 percent in the fourth quarter of 1992. Although as soon as the agreement was taken place foreign firms were capable of getting the market shares of Japanese market actually this was not the consequence of the agreement. It really happened be cause of to reasons.
Firstly, since 1991 the value of the Japanese yen had strengthened by about 40 percent against the US dollar. It goes single-handedly with the economics theory as the currency appreciates foreign companies get the cost advantage. It happened in case of Japan’s case foreign countries got distinct cost advantage over their Japanese rivals.
Secondly, the companies of Korea and Taiwan, particularly Samsung, gained DRAM market share in Japan. Even in 1988 Samsung never produced DRAM but in 1994 got more than 12 percent of market share lot ahead of Japanese giants like Mitsubishi or NEC. The investment on plants of digital chip making was lot higher by the Korean and Taiwanese company compared than Japanese or US. South Korean firms invested 55 percent of the revenue from the semiconductor revenue whereas Japanese did only 15 percent. The aggressive move from South Korea and Taiwan made them able to grasp the market share of Japan. Still now from 1991 Japan is losing its market share in semiconductor business.
Also, The U.S. comeback in chips was due primarily to rapid growth in the market for microprocessors, the chips that act as the "brains" of personal computers. That market is dominated by Intel & Motorola. Intel's semiconductor sales increased from $1 billion in 1986 to about $4 billion in 1991, a gain that by itself is responsible for the U.S. share of the world market being about 5% higher than it otherwise would be. The Japanese attempt to develop its own microprocessor design standard – “TRON” failed in large part because there was no software to support it.
