Increased specialization has been the name of the game in the semiconductor industry since its birth in 1947. The $439 billion business is made up of firms of all stripes.1 Some design and manufacture chips in-house. Others specialize in manufacturing or design. Still others fabricate parts of chips. Then there are equipment manufacturers, material suppliers, and component subcontractors—and research centers that drive innovation.

The industry’s specialization is an example of a bedrock principle of economics: the division of labor, or the separation of work into its component tasks. Perhaps best exemplified by the late-19th-century assembly line, it was first described by Adam Smith in his 1776 treatise The Wealth of Nations, which outlined how the division of labor improves workers’ skills, saves time, and enables further technological advancement. In the case of the semiconductor industry, it accelerated the development of more advanced chips, which in turn enabled new...

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