Report | September 1, 2023

Building the Infrastructure for Innovation: Three Lessons from the CHIPS and Science Act

A spotlight is on the U.S. semiconductor industry. After decades of decline, there is a wave of new investment from private industry and the federal government to jumpstart domestic chipmaking with the goal of making U.S. semiconductor production more cost competitive and technologically advanced. Whereas the United States did not have any chipmaking capacity at the most advanced nodes (<10nm) in 2019, TSMC (Taiwan) and Samsung (South Korea) have since launched greenfield foreign direct investment projects to establish new chip fabs at the 5nm node size that will enable the most advanced chips to be produced in the United States. Government and industry reports have underscored the potential for these investments to transform the U.S. economy. They highlight opportunities to rebuild domestic manufacturing capabilities, create high-wage jobs, and drive innovation in a sector with wide-reaching impact on the global economy.

There are three primary channels through which these investments can make an impact. For one, they can improve the productivity and technological capabilities of domestic semiconductor firms. They can also drive new domestic R&D that can generate innovative startup companies. And finally, foreign direct investment from firms like TSMC and Samsung can bring new knowledge and human capital to the domestic industry. In other contexts, foreign direct investment has led to spillover benefits, including increased productivity at domestic firms, higher wages among affected workers, and more regional innovation overall.

The three channels are linked: foreign direct investment has the potential to improve the competitiveness of domestic semiconductor firms and drive innovation in the ecosystem as a whole. The federal government’s CHIPS and Science Act is designed to maximize the impact of new investments like these through each of these channels. The Commerce Department, charged with implementing the CHIPS and Science Act, has developed an ambitious vision that aims to seize these opportunities. It has three core elements: i) building regional clusters around advanced chip fabs, ii) scaling a skilled and diverse workforce, and iii) strengthening U.S. technology leadership in the industry.

The CHIPS and Science Act provides an outline for what the government hopes to achieve, but the details of how to achieve it are waiting to be filled in. Past research on industrial policy and current U.S. manufacturing data identify obstacles that could stand in the way of success. But these obstacles are avoidable. This report provides three lessons that can guide the implementation of public investments and the structure of public-private partnerships to build on current momentum and avoid past mistakes.