Toolkit Sharing and Industry Cyclicality: Evidence from DRAM Industry 2005-2014
Does toolkit license from incumbents facilitate the survival and growth of the latecomers? We argue that if industry cyclicality exists, toolkit licensing is detrimental to the survival of latecomers as well as low-performing incumbents. The DRAM industry, which is known as a cyclical industry, offers an unusual setting to test these competing hypotheses. During the period 2005-2014, Taiwanese companies experimented with a new business model, the DRAM foundry without an R&D unit. Since all these companies could not license new chip designs during the 2007-2009 downturn of the silicon cycle, we examine how an exogenous reduction of R\&D units during this period influenced firm-level performance. Using all the DRAM manufacturers’ profitability and technology data from iSuppli, DRAMExchange, and SEMI databases, we find that during a downturn, the void of the R&D units led to dramatically low profitability (-84%), which came from low systemic innovation which bridges product innovation and process innovation. The results highlight that the importance of product innovation may not decrease in a fast-changing technological environment.
Keyword: Schumpeterian competition, toolkit licensing, industry cyclicality, DRAM industry