Investigating make-or-buy decisions and the impact of learning-by-doing in the semiconductor industry

Abstract

Learning-by-doing is an important concept in economics as it is one of the main driving forces of economic progress. However, corporate learning is a slow process, so outsourcing manufacturing can override the long-term benefits of accumulating productivity knowledge. Semiconductor industry is also strongly featured by the learning effect, however, due to high capital requirements of building fabs, there are companies that fully outsource, while others try to keep production in-house. The chosen business model now gets further importance due to bottlenecks and supply issues perceived in the industry since the COVID-19 outbreak. Accordingly, we model the make-or-buy decision problem of a firm that decides on the optimal mix of outsourcing and in-house production, considering productivity gain via learning-by-doing and the economic impact of resilience. By presenting numerical simulations, we aim to capture the pre-pandemic and the current state of the semiconductor industry. Our model highlights that tendencies of being fabless were reasonable in the past. Although recent industry conditions have made in-house production more beneficial, this optimal strategy may be fragile due to changes of relative production costs or the extent of economic impact of chip shortages, which may underline the relevance of government incentives aiming to revitalise semiconductor industry.

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