High Tech R & D Subsidies

Sparked by concerns about their shrinking market share, 14 leading U.S. semiconductor producers, with the financial assistance of the U.S. government in the form of $100 million in annual subsidies, formed a joint R & D consortium -- Sematech -- in 1987. Using Compustat data on all U.S. semiconductor firms, we estimate the effects of Sematech on members' R & D spending, profitability, investment, and productivity. In so doing we test two hypotheses: the `commitment' hypothesis that Sematech obligates member firms to spend more on high- spillover R & D, and the `sharing' hypothesis that Sematech reduces duplication of member R & D spending. Whereas the commitment hypothesis provides a rationale for the government subsidies, the sharing hypothesis does not. We find that Sematech induced members to cut their overall R & D spending on the order of $300 million per year, providing support for the sharing hypothesis.