RESTRUCTURING THE AMERICAN SEMICONDUCTOR INDUSTRY - VERTICAL INTEGRATION OF DESIGN HOUSES AND WAFER FABRICATORS

Recent restructuring of the fabless design segment of the U.S. semicon ductor industry provides an opportunity to evaluate the role of transa ction costs and international ownership in the reorganization of produ ction systems. Beginning in 1993, a boom in global semiconductor deman d strained the capacity of manufacturing facilities and squeezed desig n firms' supplies of fabricated wafers. This study uses a transaction cost framework to explore the vertical integration of semiconductor de signers and wafer fabricators from 1994-1995. Integration into wafer f abricating was necessary because Asian governments, particularly those in Taiwan and Singapore, declined to subsidize a new round of semicon ductor manufacturing investment. Fabless design firms had to shoulder large portions of fabrication investment expense or face escalating tr ansaction costs if they relied exclusively on other firms for wafers. Some design firms bought fabrication facilities, and others entered ma nufacturing-equity joint ventures. On the other hand, several companie s cultivated relational contracts with manufacturers, and some continu ed to rely on spot market contracts for wafers. A probit model associa tes corporate attributes with those integration choices. The results s how that firm size related positively with integration into wafer fabr icating. Firms that committed large proportions of their revenues to r esearch and development were less inclined to integrate. Location with respect to Silicon Valley, the acknowledged premier center of the U.S . semiconductor industry, did not influence integration selections. Th e findings support the transaction cost theory of the firm and offer a different interpretation of the organization of the semiconductor ind ustry from that advanced by proponents of the flexible specialization thesis.