American semiconductor firms are among the most competitive in the world, accounting for nearly half of global market share. Two of the top three companies worldwide by sales are U.S. firms.

The growth of the U.S. semiconductor industry can be attributed in large part to the growth of the global economy. Policies that have increased international trade and modernized the flow of goods across international borders have created unparalleled opportunities for the industry. Indeed, these emerging markets and economies are critical to the health and continued growth of U.S. semiconductor companies. Today, foreign markets account for 75% of U.S. semiconductors sales. Engineers from Boston to Dallas can collaborate 24 hours a day with colleagues around the globe in a constant development process.

With the benefits of this global growth, however, come challenges. While U.S. chipmakers still lead with 47 percent of the worldwide market, that number is down from 53 percent in 1998. The nation's share of total worldwide chip making capacity is also in decline, from 28 percent in 1999 to less than 25 percent in 2005.

Although America's share of total global chip production is in decline, in absolute numbers, U.S. production is growing. In fact, America's leadership erosion in chip production is the result of the strong growth of the chip industry in other countries.

Eighty-percent of new, state-of-the-art leading-edge chip fabrication plants either planned or under construction are abroad. And, the trend is not likely to reverse. China, which for some time been the world's largest market for semiconductors as a result of its enormous electronics production, has stated its intention of growing chip making capacity.

Economic and technological leadership have long been priorities of U.S. policymakers. Government support for basic research, schools and universities that train and prepare scientist and engineers, and policies that welcome direct investment allowed the semiconductor industry to flourish in this country and become the envy of the world. Competitor nations, however, are learning from America's playbook.

A number of foreign governments are outspending the United States in basic research. While U.S. expenditures on basic research in the physical sciences and engineering as a percentage of gross domestic product have been falling for years, countries in Europe and Asia are making it more of a priority. Japan, Israel and Sweden are just three examples of nations putting significant funding into basic research.
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Meanwhile, students in competitor and developing nations are outperforming kids in the United States in subject areas critical to technology leadership. Eighth graders in Korea, for example, outscored their U.S. counterparts by 85 points in a 2003 international math assessment. This is not an isolated example. And, while the semiconductor industry relies on electrical engineers more than any other sector, many qualified candidates with degrees from U.S. institutions are discouraged, and in some cases, prevented from working in the United States because of lengthy processes and policies that limit visa availability.
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The chip industry is very capital intensive. It costs about $3 Billion to build a state-of-the-art, leading-edge chip fabrication facility and the rapid rate of chip technology advancement makes equipment obsolescence a continuous challenge. As a result, a government's tax policies have a far greater impact on chip manufacturing citing decisions than do labor cost differences between nations. Other nations have recognized the strategic importance of the semiconductor industry and often offer rich incentive packages to attract research and manufacturing to their shores. Tax holidays, subsidies, accelerated depreciation, low interest loans and training grants are among the many incentives nations ranging from Germany to China make available to chip makers.
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America has been the historic leader in the semiconductor industry, and is home to some of the world's largest companies in the sector. However, the growth of foreign competitors, erosion of market share, and decline in leading edge capacity illustrate that this leadership cannot be taken for granted.