Introduction

Because of lower production costs Asian countries are very attractive to locate electronic assembly activities. Countries, cities and companies try to create sustainable competitive advantages, to achieve sustainable economic growth. Knowledge and the ability to innovate are important to achieve sustainable economic development. Continuous innovation is one of the semiconductor industry's main characteristics. Semiconductors are components that provide the memory, logic and virtually all other intelligence functions in today's electronic systems. In this chapter, a comparison between China's and Malaysia's semiconductor industry is made. This comparison is chosen because China is showing the highest economic growth figures in the region while Malaysia is one of the most developed countries in Southeast Asia and an important player in the global semiconductor industry. The study tries to answer how sustainable the economic growth figures are and whether there is a move towards higher value-added activities. Three questions will be addressed, given both countries are competing for investments in this industry. First of all, are the actual semiconductor industries in both countries competing or rather complementary? Secondly, what can we say about the knowledge economy and other competitive conditions in both countries? This leads to the final question, which of these two countries will move up in the global value chain for semiconductors?

Value chains and innovation theories

Is the Malaysian semiconductor industry affected by the economic growth of China? We combine value chain and innovation theories with empirical data on the semiconductor industry to make a comparison between these two countries. We will analyze the effects of changing market conditions and shifting global demand and assess the importance of innovations. Knowledge is seen as key to economic growth and is also important for the semiconductor industry. Hence innovation is relevant to improve competitiveness. Firms achieve competitive advantage through innovation, defined as: “improvements in technology and better methods to or ways of doing things” (Porter, 1990). Innovation is mostly a result of organizational learning, as well as formal research and development (R&D); it always involves investment in developing skills and knowledge and usually in physical assets and marketing effort. According to Porter (1990), innovations can shift competitive advantage when rivals either fail to perceive the new way of competing or are unwilling or unable to respond.