ENCOURAGING KNOWLEDGE-INTENSIVE INDUSTRIES: WHAT AUSTRALIA CAN DRAW FROM THE INDUSTRIAL UPGRADING EXPERIENCES OF TAIWAN AND SINGAPORE
John A. Mathews Macquarie Graduate School of Management
Report commissioned by the Australian Business Foundation
August 1999 CONTENTS
Page
Foreword 3
Executive Summary 5
Abbreviations 9
1. Introduction: What is there to learn from Asia in 1999? 11
2. Industrial upgrading in Taiwan 15
3. Case study: Taiwan's innovation alliances 35
4. Industrial upgrading in Singapore 57
5. Case study: Singapore's cluster development strategies 76
6. Common institutional elements: Industrial upgrading and institutional learning 83
7. Concluding remarks: A way forward for Australian firms and institutions 94
2 FOREWORD
Professor John A. Mathews of the Macquarie Graduate School of Management was commissioned by the Australian Business Foundation to research and prepare a paper that would offer some practical examples of industrial upgrading of relevance for Australia.
The paper submitted describes and analyzes the industrial and technological upgrading practices of firms and public institutions in Singapore and Taiwan. These two nations are of particular interest because they have weathered the recent Asian financial crisis well. Their institutional strategies are robust and have important lessons for other countries, including Australia.
The Australian Business Foundation is Australia's newest, independent, private sector economic and industry policy think-tank. It is sponsored as a separate research arm by Australian Business, the pre-eminent business services organisation.
The mission of the Australian Business Foundation is to strengthen Australian enterprise through research and policy innovation. It does this by conducting ground-breaking research, which it uses to foster informed and well-argued debates and imaginative policy solutions and initiatives. The end goal is to advance the store of knowledge about how best to generate future growth, prosperity and jobs for the widest reach of the Australian community.
In commissioning this research paper on the experiences of industrial upgrading undertaken in Taiwan and Singapore, the Australian Business Foundation sought to bring together a level of detailed knowledge concerning the industrial policies and programs of these two countries that had never been published in Australia before.
The brief also included a requirement for an analysis which tested the cultural relevance of the actions taken by Taiwan and Singapore for the Australian situation and an assessment of their implications for both Australian business management practices and for public policy settings.
The Australian Business Foundation's aim in commissioning this research paper from Professor Mathews was to foster greater understanding as to how best to boost Australian firms' innovation capabilities and to capture value from building and sustaining high growth, knowledge-intensive industries.
The author is eminently qualified to write on the topic commissioned. Professor Mathews teaches graduate programs in International Management, the Management of International Industries in the 21st Century, Global Strategic Management, International Human Resources Management, Strategic Behaviour and Organizational Behaviour in Sydney, Singapore and Hong Kong on behalf of the Macquarie Graduate School of Management. He has taught visiting programs at the Australia-Asia Management Centre at the Australian National University, Canberra and in the Korean European MBA program, Seoul.
3 His research interests focus on the dynamics of international business, with particular reference to the rise of new high technology industries in emerging areas such as East Asia. In his research, Professor Mathews has focused on the institutional capacities of firms and governments in East Asia; the sources of the Asian financial crisis; the internationalization processes of firms, particularly of latecomer firms from the Asian region; and the theoretical explanation for latecomer firms' success in terms of management and organizational theory (such as the resource-based view of the firm). He has published papers on these topics in leading scholarly journals including California Management Review (in 1997 and 1999), Academy of Management Executive, Organizational Dynamics, Cambridge Journal of Economics, Journal of World Business and Human Systems Management.
Professor Mathews has a major research study being published worldwide by Cambridge University Press in 1999, co-authored with Professor Dong-Sung Cho of Seoul National University on the rise of new, high-technology industries in East Asia, taking the semiconductor industry as major case. The book, entitled Tiger Technology: The Creation of a Semiconductor Industry in East Asia, is to be published in October 1999.
Narelle Kennedy Chief Executive Australian Business Foundation
4 EXECUTIVE SUMMARY
Australian firms, like their counterparts elsewhere, are concerned with the building of innovation capabilities in knowledge-intensive industrial sectors. Successive reports to government as well as to industry associations stress the gap between the potential that could be realized by Australian high technology exporters and the actual performance registered -- albeit impressive in several cases.
Traditional concerns with business inputs (such as taxation, costs of labor, and costs of essential services) fail to get to grips with the real issues. A better focus is the improving of business outputs through enhancing the capabilities of the firms themselves and the institutional environment in which they operate.
In the Asia-Pacific region, some outstanding successes have been registered in advanced technological fields such as semiconductors, computers and communications. The case of Taiwan, which has risen to become the world's third largest producer of IT hardware and fourth largest producer of semiconductors, is striking. Singapore too has grown from a poverty stricken former colony to a technology powerhouse, based on judicious attraction of multinational investment and relentless attention to industrial upgrading. Both these cases in Australia's region are all the more striking in that these countries have come through the recent Asian financial crisis more or less intact, suffering a downturn only due to their regional exposure. This means that their technologically sophisticated firms have come through the toughest test of all -- a major economic recession in the region -- and been found resilient and robust.
The lesson to be drawn from this is not that these firms were 'special' in some way, but that they drew strength from their institutional environment, which had been created painstakingly, and renovated and upgraded, continuously over the preceding decade. This study draws on the experience of firms in Taiwan and Singapore, within these institutions and policy frameworks, with a view to formulating some general conclusions as to what kinds of industrial institutional frameworks best suit highly innovative firms.
The study finds that the key to the successful restructuring and upgrading engaged in by firms in Singapore and Taiwan, lies in the institutional environment which shapes their decisions. Both countries have fashioned a set of institutions which drive firms in these economies towards an outward, export orientation and towards endless technological upgrading -- rather than allowing firms to take the easy option of competing on the basis of cost minimization. The institutions found in these countries shape firms' decisions along the following lines.
Technology leverage
Firms in Taiwan and Singapore regard the world as a 'technology marketplace.' They are constantly scanning the technological horizon for new developments, with a view to inserting themselves as players. They are less concerned with developing new knowledge themselves, as with keeping up with the knowledge that is generated by others, and incorporating this knowledge in their product and service strategies. Public sector R&D institutes are established whose main mission is not 'blue sky' scientific research but 5 technological scanning and technology transfer, through systematic management of technology diffusion to firms. Institutional frameworks are shaped to encourage and facilitate this rapid technology diffusion. Prime examples are the R&D consortia that are formed in Taiwan for brief periods (one or two years) to ensure that small and medium- sized firms remain abreast of major technological developments and fashion their product offerings in accordance with these developments. It is the public and private institutions of technology leverage that are most characteristic of Taiwan and Singapore's industrial upgrading approaches.
Financial leverage
Some development bank or investment vehicle charged with the mission of identifying worthwhile strategic investments, such as those which further the goals of catching up, and organising the financing required has also been present in all the cases we have examined. Thus, in Taiwan there was the China Development Corporation. In Singapore, there has been the Singapore Development Bank (spun off from the EDB in the 1960s) and such novel institutions as the Cluster Development Fund. These operate either through the mobilisation of domestic savings or through mobilising international bank syndicates and the issuance of debt instruments such as depositary receipts.
Nurturing environment for the formation of knowledge-intensive firms
The creation and sustenance of knowledge-intensive firms is not left to the vagaries of 'market forces' in Taiwan and Singapore. Like CSIRO in Australia with its strategy of promoting spin-off ventures, public sector bodies in Taiwan and Singapore have very successfully formed and nurtured new technology-intensive firms. In some instances new industries were created through this process -- such as the semiconductor industry in Taiwan, which was started by spin-offs from the public sector laboratories of the Industrial Technology Research Institute (ITRI). Infrastructure like science-based industry parks are established which offer firms that locate there tangible benefits in terms of tax concessions, assistance with recruitment of skilled labor and incubators for small, high-tech startup firms.
Industry cluster strategies
In Taiwan and Singapore, firms and even industries are not promoted on their own, but in relation to each other. It is connections and linkages that are prized above all -- upward and downward linkages in the value chain, and horizontal linkages between firms providing complementary products and services. Industry clusters become self- perpetuating and self-renewing once a sufficiently rich set of interconnections have been established. Taiwan actively promotes its IT and semiconductor clusters, and Singapore has focused its industrial promotion activities on key clusters like electronics and semiconductors, chemicals and precision machinery. Multinational investment in these clusters is especially encouraged, and local firms encouraged to form to take advantage of the supply linkages thus generated. If an economy can be judged by the richness of its inter-connections, then the Taiwanese and Singaporean industrial economies have already broken through an important network threshold.
6 Investment attracting vehicles
Industry clusters are created and seeded through the attraction of foreign investment as well as the encouragement of local firms. Bodies such as Singapore's Economic Development Board, termed collectively economic development agencies, provide institutional continuity as well as investment knowhow in attracting investments by multinational corporations. Investments are targeted towards activities which provide opportunities for capturing benefits from spillovers and linkages within designated clusters. The investments are sometimes sweetened with partial equity investment from public sector funds (such as Singapore's Cluster Development Fund) but more usually they are secured through close institutional attention being paid to every need of the investor, ensuring that investment is trouble-free.
Industrial upgrading incentives and discipline
Industrial policies and incentives are couched not in terms of 'picking winners' or dealing with individual firms (on the pattern of bounties and other targeted forms of assistance). Rather it is couched in a process of strategically selecting certain sectors and shaping the institutional environment to encourage investment in that sector and to encourage continuous upgrading by firms to keep abreast of the moving world technological frontier. Incentives are provided in terms of tax benefits, tax credits, and upgrading allowances, while discipline is enforced by holding firms to stated performance targets. The bodies dispensing these benefits (such as the Industrial Development Bureau in Taiwan) are subjected to rigorous audit by other arms of government, such as the Ministry of Finance.
Industry self-organization
Industries are encouraged to form their own industry associations as intermediaries between government and private firms. These frequently play quasi-regulatory roles, and act as organizing vehicles for R&D consortia and other industrial upgrading structures. Government deals with industry largely through these self-organizing associations rather than through individual firms making submissions.
Skills upgrading and technical training
In Taiwan and Singapore it is understood that it is the inputs to the production process that determine the quality of the outputs. Local skills and knowhow are constantly replenished and upgraded through targeted programs. Institutional innovations have been implemented in Taiwan and Singapore to ensure that there is a supply of skilled staff for the high technology, knowledge-intensive industries which are increasingly the source of wealth-generation in these economies.
Market shaping and creation
Markets for knowledge-intensive products frequently have to be conjured into existence, rather than left to the operation of 'market forces.' In Taiwan, the early firms in the semiconductor sector were created deliberately by public sector agencies, in advance of any demand from the private sector. A good case of market shaping is currently provided 7 by the development and nurturing of an electric-powered vehicle market in Taiwan by government agencies, both as an industry promotion exercise and as an environmental protection policy. Taiwan promises to become one of the world's leaders in 'clean' power supplies for two-wheeled and four-wheeled vehicles in the next century.
Export promotion
The collective enhancement of export performance through institutions such as Taiwan's China External Trade Development Council and Singapore's Trade Development Board have been a significant source of institutional support for firms seeking to break into export markets. Austrade has played a comparable role in Australia.
Lead agency
The key to the overall success of the institutional frameworks in Taiwan and Singapore is that they operate not just as individual elements but in a coordinated fashion, with a strategic lead being provided by a lead agency -- in Taiwan's case, the Council for Economic Planning and Development and in Singapore's case, the Economic Development Board. It is in this systemic coordination that the principal institutional capacity of these East Asian technologically upgrading economies resides.
In short, it is firms which generate the wealth in Singapore and Taiwan and they do so through making their own strategic decisions. But they operate within an institutional environment which biases them towards investing in strategically important industries, and in technological upgrading, that has the effect of enlarging their strategic options.
Firms are then free to choose to pursue this or that technological feature as their own distinctive strategy -- provided they are operating at close to the technological frontier. It is technologically unsophisticated, cost-minimizing, backward-oriented business strategies that are discouraged by this institutional framework.
Taiwan and Singapore are chosen for this study because of the strength of their institutions, and because they have successfully engaged in industrial upgrading, weathering even the recent financial turmoil in Asia. The study is focused on bringing out the innovation-building practices evident in these countries, seen from the perspective of their relevance for Australia. There are no cultural impediments to Australia learning institutional lessons from these successes in our Asia-Pacific neighbors.
As a country, Australia pioneered many of the institutional innovations which have since been adopted and adapted in countries like Singapore and Taiwan -- institutions such as close public-private collaboration in promoting industry R&D and productivity improvement in Australia's rural industries. It is in recognizing that these institutional strengths have not been transferred across to manufacturing in Australia that creates the need for an informed and wide-ranging comparative institutional perspective.
This study is designed to contribute to the development of such a comparative perspective on the tasks of institution building in Australia in the early years of the 21st century.
8 ABBREVIATIONS
Taiwan
CCL Computing and Communications Laboratory (a part of ITRI) CDC China Development Corporation CEPD Council for Economic Planning and Development CETRA China External Trade Development Council CIST Chung-shan Institute of Science and Technology ERSO Electronics Research Service Organization (a part of ITRI) IDB Industrial Development Bureau (a part of the MoEA) III Institute for Information Industry ITRI Industrial Technology Research Institute MoC Ministry of Communications MoEA Ministry of Economic Affairs NSC National Science Council OESL Opto-Electronics Systems Laboratory STAG Science and Technology Advisory Group TEAMA Taiwan Electrical Appliances Manufacturers Association (pre-1995) TEEMA Taiwan Electrical and Electronic Manufacturers Association (post-1995) TSIA Taiwan Semiconductor Industry Association TVMA Taiwan Vehicle Manufacturers' Association
Singapore
CDF Cluster Development Fund (operated by EDB) CSM Chartered Semiconductor Manufacturing DBS Development Bank of Singapore EDB Economic Development Board (formed 1961) IDS Innovation Development Scheme ILC International Logistics Centre IME Institute for MicroElectronics (formed 1991) LIUP Local Industry Upgrading Program MTI Ministry of Trade and Industry (formed 1979) NCB National Computer Board NSTB National Science and Technology Board NTP National Technology Plan (1991) NUS National University of Singapore PLE Promising Local Enterprises program SISIR Singapore Institute for Standards and Industrial Research STG Singapore Technology Group TECH Semi. DRAM Consortium: Texas Instruments, EDB, Canon, Hewlett-Packard TDB Trade Development Board Technology and general
ASICs Application-Specific Integrated Circuits CD-ROM Compact Disc - Read Only Memory (for PC) CNC Computer Numerical Control (for machine tools) DFI Direct Foreign Investment DVDs Digital Video Discs DRAM Dynamic Random Access Memory (integrated circuit) FPDs Flat Panel Displays HDD Hard Disc Drive (for PC) HDTV High Definition Television HTI High Technology Industrial upgrading IC Integrated Circuit ("chip") IT Information Technology LCDs Liquid Crystal Displays (an instance of FPD, used in laptop PCs) MNCs Multi-National Corporations NSEL National System of Economic Learning PC Personal Computer TTF LCDs Thin Film Transistor LCDs VLSI Very Large Scale Integration (of integrated circuits) WBT Windows-based terminal
10 1. INTRODUCTION: WHAT IS THERE TO LEARN FROM ASIA IN 1999?
The building of innovation capabilities by firms is widely understood to be the key to success in wealth generation. Whereas business in Australia has often focused its analysis on the costs of business inputs, through reducing taxation levels or costs of inputs such as electric power and transport, the reality is that business success is generated through a clear focus on the quality and innovative potential of outputs.
It is the firms which are able to generate the core competences needed to support continuous innovation and upgrading of products and technology that are found to have the most sustainable competitive advantages.
Central to the vision that sees companies as generating the future wealth of Australia, based on their own innovation capabilities and abilities to cooperate in networks, clusters and alliances, is a set of models of what constitutes best practice in this emerging area.
While Australian firms clearly have much to learn from US models of innovation such as the Silicon Valley cluster around Stanford University and Boston’s 'Route 128' around MIT, or the 'Cambridge phenomenon' of high-tech firms launched by associates of Trinity College and other progressive Cambridge institutions, these are generally mature systems of innovation that make emulation very difficult. Other models of technological upgrading linked to foreign investment as well as local R&D are needed to complement these well-known US and UK cases. Such models lie to hand in Australia’s Asia-Pacific neighbors.
Despite the gravity of the Asian financial crisis of 1997 and its continuing aftermath, some countries in the region have come through the crisis relatively better than others. The cases of Taiwan and Singapore spring to mind. These countries have engineered a remarkable improvement in the level of their technological capabilities over the course of the past three decades. Most recently, through their institutional and regulatory frameworks, they have managed to avoid the worst effects of the 1997 financial crisis. They are dipping towards lower growth in 1999, but this is because of their trade and investment links to the wider region, rather than to any intrinsic problems of their own economies.
Industrial upgrading in Taiwan and Singapore
Since the Plaza Accord of 1987, when international currencies were realigned and the yen appreciated against the US dollar followed by the Taiwan NT$ and the Singapore $, Singapore and Taiwan have lost their earlier cost competitive advantages. They have been forced to rely instead on technological and industrial upgrading capacities.
In the case of Taiwan, the industrial upgrading efforts since 1987 have been prodigious, turning Taiwan into a genuine 'high technology' island whose semiconductor and IT
11 industries now rank with the world’s best. In the case of Singapore, its continued openness to selected foreign investment has seen its industries systematically upgraded in terms of responsibilities (eg expanding from single product facilities to regional production headquarters to regional customer support headquarters and R&D centres) and in terms of technological capabilities. The public sector has steadily enhanced its own investments in state of the art research facilities that are linked closely to domestic companies’ upgrading efforts and the upgrading of multinationals’ activities.1
The twin examples of Taiwan and Singapore have many ingredients of great interest for Australian firms as they seek to become global, sophisticated players. The strategies of the firms themselves are of interest, in their ability to link themselves to technological trajectories generated in Silicon Valley or elsewhere in the industrial heartlands. Of even greater interest is the complex network of alliances spun between the public and private sectors in these countries, designed not to 'pick winners' in some crude sense, but to sustain the dynamic of technological innovation in industry at large.
Global technology scanning
Taiwan’s Industrial Technology Research Institute (ITRI) for example, is comparable in size to Australia’s CSIRO. It sees its mission as being a global technology scanner and filter, keeping itself abreast of technological developments around the world and forging capabilities in these technologies within its own laboratories. Its aim is to spin them across to Taiwan’s private sector as rapidly as possible through short-lived R&D alliances with small and medium-sized Taiwan manufacturing firms. In this way, ITRI can sign technology licensing deals with the world’s leading multinationals, and ensure that Taiwan’s nimble manufacturing firms gain access to these licenses and produce state of the art products for export -- in some cases, even before the originating multinationals can do so.2
Likewise in Singapore, the strategy of selective upgrading of foreign investment, and the active encouragement of backward linkages into the Singaporean economy (eg through local supply of components and services to multinationals), linked to major collaborative R&D programs fostered by key public sector research institutes gathered together under
1 This study is based on numerous visits to both Taiwan and Singapore over the period 1994 to 1999. The scholarly support of several institutions needs to be acknowledged, including Chung-Hua Institution for Economic Research, Taipei (under successive Directors Dr Joseph Lee and Professor Chao- Cheng Mai); the Academia Sinica and in particular the Sun Yat Sen Institute for Social Science and Philosophy (ISSP), Taipei; and the Centre for Management of Technology at the National University of Singapore (under its Director, Professor Poh-Kam Wong). Most of the institutions discussed in this paper have been extremely generous in providing materials and staff for extensive discussions. In particular, ITRI in Taiwan, under its President, Dr Chin-Tay Shih, has been extraordinarily helpful on several occasions, while the Economic Development Board in Singapore has hosted several visits, the most recent in October 1998 being sponsored by Mr Lai Yeow Hin, Deputy Director for the Electronics Division. Aspects of this research have been conducted under an Australian Research Council grant (on high technology industrialisation in East Asia). Research assistance has been provided at times by Ms Teresa Poon and by Ms Elizabeth Thurbon. 2 For example, in the case of the Personal Computer based on the PowerPC microprocessor, as discussed below.
12 the umbrella of the National Science and Technology Board (NSTB), represents a powerful model of a 'national system of innovation' that is of great relevance to Australia.
Industrial clustering
Singapore in the 1990s has reconceptualised its industrial economy as a series of clusters -- focused around the three major industrial areas of electronics/semiconductors, chemicals/petrochemicals and engineering. Its industrial strategies have been conceived and implemented in terms of promoting and strengthening these clusters. Programs have been developed to enhance the skills base needed by firms in these clusters. Specialized infrastructure has been provided -- such as the 'wafer fabrication parks' created in Woodlands, Tampines and Pasir Ris for semiconductor firms, and the new Jurong artificial island for the petrochemical sector. Other programs enhance and promote the linkages between firms (upstream and downstream) that generate the dynamics and vitality of industrial clusters, increasing the density of interactions between firms.
It is now widely agreed that industrial clusters, like those being promoted assiduously and successfully by Singapore, will constitute the dominant competitive paradigm in the 21st century. Michael Porter, for example, writing in the Harvard Business Review in November/December 1998, describes the economic map of the world today as being dominated by clusters -- critical masses, in one place, of unusual competitive success in particular fields.3
In both Taiwan and Singapore we see two master exponents of this emerging paradigm. Taiwan's Hsinchu Science-based Industry Park, for example, has until recently been home to the entire semiconductor cluster in Taiwan, which itself was fourth largest in the world, and benefited enormously from its proximity to the two universities of Tsinghua and Chiaotung as well as the laboratories of ITRI. Likewise the Singapore Science Park, and its more recent extension, has generated a dynamic cluster of multinational firms linked to local suppliers and new entrepreneurial firms, deriving support again from the nearby Nanyang Technical University as well as the industry promotion institutions of Singapore such as the Economic Development Board.
Institutional lessons for others -- including Australia
This study was commissioned by the Australian Business Foundation to examine and analyze the strategies and institutional frameworks of technological upgrading and innovation fostered in Taiwan and Singapore, viewed from the perspective of their relevance for Australia.
The project focused on the methods these countries have used to ensure that firms make continuous efforts to upgrade their technological and industrial capabilities, as they long ago left behind any residual cost competitive advantages.
3 See Michael Porter, 'Clusters and the new economics of competition,' Harvard Business Review, Nov/Dec 1998, pp. 77-90.
13 Their experience contrasts markedly with that of Hong Kong, where industrial and technological upgrading has slackened off over the past decade, due largely to the ability of companies to seek low-cost manufacturing in southern China, and to the refusal of the public sector in Hong Kong to act as collective risk-taker in technological upgrading programs.
It is this differential experience of these East Asian countries over the course of the past decade that is of great relevance to Australian firms, which likewise are subject to the temptation to seek to compete on the basis of lower costs rather than on capabilities in innovation and customization.
Australia has pursued many effective industry promotion strategies and has developed world class institutions such as CSIRO and, in the 1990s, numerous Collaborative Research Centres. Nevertheless, there remains the sense that the country lacks the clear focus on long-term manufacturing excellence and upgrading that characterizes policy and firms' strategy in Taiwan and Singapore. There remains also the sense that Australia looks to North America and Europe (and specifically the UK) for its industrial models, rather than to countries closer to us in the Asia-Pacific region.
It is to provide a further comparative dimension to the development of policy in Australia that this study has been written. The aim is not to promote Singapore and Taiwan as appropriate models, but as sources of institutional lessons which can be adapted, and applied, with success in Australia.
14 2. INDUSTRIAL UPGRADING IN TAIWAN
Behind the Taiwanese industrial 'miracle' there lies an unrelenting pressure on firms to continuously upgrade their technological and market access capabilities. The alternative course, of allowing firms to retreat to least cost strategies, such as through out-sourcing all their production to China, has been seen, rightly, by the Taiwanese authorities as a downward slippery slope. To keep firms operating a continuous 'fast follower' strategy, operating at the technological frontier (with all the headaches of constant adjustment that this imposes), is one of the genuine unsung achievements of the Taiwan economic system. It is worthwhile to inquire into the combination of incentives and disciplines, provided through a set of policies and institutions, which could achieve such an extraordinary outcome.
Taiwan's industrial performance …
And extraordinary it is. This tiny island of 21 million people, has produced for year after year world record industrial growth figures, manufacturing export figures, and trade surplus figures -- all based on manufacturing prowess. During four decades of high speed growth, from the late 1950s to the late 1990s, Taiwan's annual growth rate averaged 8.6 percent -- a remarkable performance. This has meant that its per capita GDP has soared from a paltry US$196 in 1952 to US$12,439 in 1995 -- and it has continued to grow thereafter, even in the midst of Asia's financial crisis. Its GNP in 1995 actually amounted to US$264 billion -- compared with Australia's GNP in the same year of around US$300 billion. 4 This meant that from 1952, when Taiwan's modernization really began, to 1995 its economy has multiplied 156-fold. Per capita GNP has multiplied over the same period 62-fold.
The growth rates have also achieved some remarkable peaks and troughs. Double-digit growth, first shown to be feasible by Japan, was achieved by Taiwan in 1964, when it hit 12.2 percent. This was truly the industrial takeoff for the island. Even in the 1980s, when it was maturing as an industrial nation, it achieved growth of 12.7 percent in 1987. Taiwan, because of its oil dependence, suffered a precipitous drop in growth in 1973, and again in 1979, associated with the OPEC oil price increases -- but in each case, its recovery was rapid. This must be attributed to the flexibility of its myriad manufacturing enterprises, which are the key to Taiwan's rapid adjustment capabilities.
… based on manufacturing prowess
Manufacturing remains the bedrock of Taiwan's economy and its industrial activity, accounting for over 90 percent of industrial production in 1995.5 Taiwan's total exports
4 Taking the Australian GDP in 1995 to be around A$450 billion (on a production basis), and deflating by an exchange rate of around 0.70 to the US$. 5 The corresponding figure for Australia, according to the Australian Bureau of Statistics report 'Australia Now: A Statistical Profile' is that manufacturing contributed 13.6 percent of industrial production in 1996/97, or a total of A$61.1 billion out of Australia's GDP of A$449 billion.
15 reached a value of US$112 billion in 1995, with just on 98 percent of this accounted for by industrial products! 6 This confirms that Taiwan's miracle has been 'man made' and not based on supposed 'comparative advantages' in certain kinds of resources.
By the 1990s Taiwan was notching up world leadership positions in several very important industries. Its outstanding achievements have been in the information technology (IT) industry, where it has grown to become the world's third largest producer, behind only Japan and the USA, and ahead of such industrial giants as Germany and Korea. Taiwan's output of IT products in 1997 reached US$16.4 billion, plus $7.7 billion representing production undertaken in China making it the country's most important foreign exchange earner. Its 900-plus computer, peripherals and components firms together employ around 100,000 people in highly skilled, demanding manufacturing jobs. The final assembly part of the operation, which accounts for only a very small part of the total value-added, tends to be undertaken close to the final market, ie in Europe, North America or Japan, rather than in Taiwan. Thus these manufacturing jobs are genuine, high-skill manufacturing jobs, which provide a foundation for prosperity.
IT industry central …
Taiwan IT manufacturers continue to break world records in their penetration of world markets. In computer monitors, for example, they held over 50 percent of the world market in 1996 (and the situation has not changed since, despite the crisis). In keyboards, they held over 60 percent of the world market. In the motherboards which form the heart of PCs, they held over 70 percent. In handy scanners, they held an astonishing 95 percent of the world market -- through the efforts of firms such as Umax and Logitech.
Taiwan's IT industry is even an export surplus performer with respect to Japan. According to the Japanese authorities, Taiwan has now supplanted Singapore as Japan's second largest supplier of IT products, behind only the USA. 7 While Taiwan became a major player in PCs and scanners in the 1980s, it has continued to penetrate one IT sector after another in the 1990s. First it was laptop PCs, where Taiwan rose to become third largest producer in the world of these extremely sophisticated and (until recently) high value-adding products.
Then it was CD-ROMs, which Taiwan started to penetrate in the mid-1990s, and has rapidly become a major force, capturing 60 percent of the world market by 1998 [We shall look at the CD-ROM industry in detail in a moment, as an example of Taiwan's industrial upgrading capacities.]
6 By contrast, Australia's manufactured exports in 1996/97 were estimated by the ABS to be A$30 billion (15% of goods produced overall), or around US$20 billion -- less than one fifth of Taiwan's manufactured exports. 7 This should not be taken to mask the fact that, overall, Taiwan is in severe trade deficit with Japan, mostly for high tech components that feed into its range of manufactured output.
16 And in the late 1990s, Taiwan has become a major force in flat panel displays, particularly in thin film transistor liquid crystal displays (TFT LCDs) now the dominant component in laptop PCs and many other display applications -- becoming the third force in this case after Japan and Korea (and well ahead of European and US suppliers).
But this is not all. In the integrated circuits (ICs) which feed into this wealth of IT products, Taiwan has also become a world force, holding fourth world position after the USA, Japan and Korea -- and again, ahead of European giants like Germany. Taiwan broke into the market for integrated circuits in the 1980s, when several new firms like UMC, TSMC, Winbond and Macronix were founded. These firms produced either highly specialized logic and analog ICs, or acted as third party producers ('silicon foundries') for IC firms that lacked fabricating capacity of their own. This latter business has in fact grown, in size and sophistication, ever since TSMC was founded in 1986 as the world's first wholly dedicated IC foundry. It has been a spectacular success, becoming Taiwan's first $1 billion-plus semiconductor firm, and expanding to operate several wafer fabrication facilities in Taiwan and now around the world as well (eg in Camas, Washington, and in 1999 in Singapore).
In the 1990s Taiwan's IC industry has moved relentlessly up the capability ladder, breaking into the extremely demanding memory chips (DRAM and SRAM) business, for example. It has also broken into the data switching business, on the basis of new, fast ICs developed in Taiwan by firms such as D-Link and Accton. This is high technology performance that is substantial in its breadth of coverage and its depth of technological capabilities. Anyone who tried to pass off Taiwan today as a lowly 'second string' industrial island would be very wide of the mark.
The paradox in all this is that Taiwan's high technology firms are still barely known outside the country. They are not big brand promoters -- with the exception of the one Taiwan IT company that has pursued a worldwide brand presence, namely Acer. For the most part, Taiwan's achievements in high technology are the fruit of anonymous enterprises, which work not so much to bring branded products to retail markets, as to seek out business as suppliers to other manufacturers usually as original equipment manufacturing (OEM) suppliers, but increasingly as more sophisticated ODM (Own Design and Manufacture) contractors. Industrial upgrading in Taiwan
Taiwan's achievements in high technology in the 1990s are the fruit of repeated upheavals in its industrial structure over the course of the past four decades. These upheavals have seen the overall composition of the country's industrial output change drastically.
The 1950s -- creating a manufacturing base
In the 1950s, the main industrial upheaval was the creation of manufacturing as an alternative to agricultural activity, which until then had been the main export earner in
17 Taiwan. While the KMT government took steps to control the 'commanding heights' of the economy with state-owned enterprises in strategic sectors such as electric power, oil and communications, it allowed thousands of small firms to operate in market niches, and in particular in export markets. At first, these SMEs produced agricultural goods and processed goods. But under the influence of the then-conventional doctrine of import substitution, more and more firms were encouraged by government incentives to move into production of light industrial goods which would reduce imports (and their drain on foreign exchange earnings).
1960s: the shift to export orientation
The 1960s saw a flourishing of export activity in light industrial goods, and a shift away from import substitution as strategy towards export promotion. Again it was myriad SMEs that led the way, contracting with large industrial firms in the US and Europe as well as Japan to supply goods on an OEM basis. The Taiwan government regulated and promoted the activity of SMEs in the 1960s through the Small and Medium-sized Enterprise Guidance Regulations, first issued in 1967. Very much as in the case of Italy, these regulations defined SMEs and made such firms eligible for various tax concessions. The Regulations have been revised regularly ever since.8
A number of export processing zones were established in Taiwan in the 1960s, to promote export activity and inward investment by MNCs. The first (in the world) was established at Kaohsiung, the southern port. The concept of export processing zone was simple but revolutionary. Like the 'free ports' established in the 19th century by Britain, eg Penang and Singapore, in which all duties were suspended, the EPZs lifted all duties on incoming and outgoing manufactured goods, with the aim of promoting such export- oriented manufacturing activity. In this they were wildly successful. Exports increased during the 1960s at an annual rate of 27.4 percent, powered by an average rate of growth of industrial output of 16.4 percent. The EPZs were quickly emulated by Taiwan's competitors, such as Korea. In achieving a secondary aim of promoting linkages into the domestic economy (eg through supply contracts with MNCs) they were less successful in Taiwan -- but have been very successful in this respect elsewhere, such as in Singapore.
1970s: industrial upgrading
Based on the solid gains of the 1960s, the 1970s saw wrenching industrial restructuring in Taiwan, as the government shifted to the promotion of capital- and technology-intensive industries -- all in the pursuit of industrial upgrading. Without such a shift Taiwan would have been caught in the 'Hong Kong trap' of remaining tied to light industrial output. New basic industries such as steel and petrochemicals were promoted, partly through state- owned enterprises like China Steel and China Petroleum establishing the upstream production activities that would then feed into downstream industrial production. In the late 1970s the drive towards raising the country's infrastructure was accelerated with the
8 In 1995 they were revised again, so as to define small and medium-sized enterprises as ones employing fewer than 200 workers, having a capital less than NT$60 million (around US$2.2 million), and an annual revenue less than NT$80 million (around US$3 million).
18 Ten National Construction Projects -- including steel, shipbuilding and petrochemicals complexes as well as development of communications, electric power and transport improvements. This was the heavy industrial foundation for Taiwan's nimble manufacturing SMEs. Through the 1970s, despite two major downturns associated with oil shocks, Taiwan averaged 14.1 percent annual growth in industrial output.
1980s: high technology industries
The 1980s saw further wrenching adjustments with the seeding and development of high technology industries. The outstanding example of this was the semiconductor industry: integrated circuits (ICs) became the new symbol of Taiwan's evolution towards advanced status. New companies were being spun off from Taiwan's public sector research utilities (chiefly ITRI) while a major source of support was the creation of the Hsinchu Science- based Industry park opened in 1980, as a conscious public-sector emulation of Silicon Valley in California. Businesses locating on the Hsinchu park were eligible for considerable tax concessions linked to their introduction of new technologies, and were expected to sustain a higher level of R&D expenditure than for firms generally in Taiwan. These measures had their effect. By 1990, high tech products, including electronics, IT and electrical machinery, accounted for no less than 40 percent of total exports. Meanwhile the government was winding back much of the earlier protection that had been offered to infant industries, to expose industries to the full force of world competition, in a controlled and measured process of deregulation and liberalization.
… and more upgrading
As if all this were not enough, Taiwan was faced with another forced round of restructuring after the 1986 Plaza Accord considerably revalued the East Asian currencies (including the New Taiwan dollar) with respect to the US dollar and European currencies. Industries which were battling to survive at the old foreign exchange level, as domestic costs rose, were forced once again to upgrade, or go under. This process has continued into the 1990s, with Taiwanese industry being overhauled, creating new high technology subsectors (such as memory chips and communications chips in semiconductors, or CD- ROMs and flat panel displays in IT products) and upgrading the technological capabilities of existing sectors such as in machine tools and electronics.
This brings the story up to 1997 and 1998, when Taiwan, along with the rest of Asia, was plunged into its worst financial crisis in 50 years. The interesting feature of this story as regards Taiwan, is that it was well protected against the ravages of such a crisis, having been very cautious in liberalizing its financial system -- so much so, that by early 1999, one could say that Taiwan had escaped the crisis virtually unscathed, apart from the effects transmitted by a downturn in its Asian markets (an effect felt by all countries in the region, including Australia).
Overall, Taiwan's industrial restructuring and upgrading efforts can be captured in the following statistic. Technology-intensive industries accounted for just over 20 percent of industrial output in 1981. Ten years later they had expanded to account for just over 30
19 percent of industrial output. By the year 2002 it is estimated by the Ministry of Economic Affairs that they will account for 40 percent of industrial output. This is industrial transformation on a grand scale. And it reveals just how serious Taiwan is in recreating itself as a 'high technology manufacturing' island in the 21st century. 9
So much for the story in outline. But the Taiwan case comes to life when we sharpen the focus to look at specific industries. There are many to choose from, but let us examine in a little more detail the IT industry, the semiconductor industry, and the automotive industries, to see what institutional pattern has underpinned Taiwan's successful industrial restructuring and upgrading in these three sectors.
Key industries and upgrading cases within them
Taiwan has assiduously sought to target and acquire technological capabilities in industries with strategic significance -- in the sense that they have multiplier effects that ripple throughout the economy. Japan pursued a similar strategy a decade before Taiwan -- and thereby forced Taiwan to be even more selective in the industries and technologies it chose. Consider the following industries as representative of the strategy: semiconductors; information technology; and automotive. Other industries such as petrochemicals, plastics, new materials, and biomedical would reveal similar findings.10
Semiconductors
Taiwan's involvement in the semiconductor sector goes back to the 1960s, when packaging and then test operations were started in the country by multinationals, sparking emulation by local companies. High value-adding wafer fabrication was initiated by the Taiwanese themselves, as an act of public policy, through the public sector Industrial Technology Research Institute (ITRI). Its electronics laboratory, the Electronics Research Service Organization (ERSO), entered into a technology transfer arrangement in 1976 with the US firm RCA, which for a royalty fee made available its then-obsolete 7-micron IC product and process technology and trained a cadre of Taiwanese engineers.
9 As an aside, consider how this makes nonsense of neoclassical economic growth models which, 'for convenience' assume constancy in proportions of industrial output. The most salient fact of Taiwan's recent development experience is that its proportions of industrial output have not remained constant, but indeed have been changed through wrenching restructuring -- guided, coordinated and driven by state agencies. 10 On Taiwan's industrial strategies and evolution, see for example, Yu Tzong-shian, The Story of Taiwan: Economy (Taipei, Government Information Office, 1999); Yang Ya-Hwei (ed) Industrial Development and Policies in Taiwan (Taipei, Chung-Hua Institution for Economic Research, 1998); and the chapter by Otto Lin, 'Science and technology policy and its influence on economic development in Taiwan,' in Henry S. Rowen (ed) Behind East Asian Growth: The Political and Social Foundations of Prosperity (London and New York, Routledge, 1998). On individual Taiwan industries, see Taiwan Industrial Outlook 1998, published jointly by the Ministry of Economic Affairs and the Industrial Technology Information Service (IT IS) of Taiwan's Industrial Technology Research Institute (ITRI), Hsinchu.
20 ERSO/ITRI spun off Taiwan's first mainstream semiconductor company in 1980, the United Microelectronics Corporation (UMC), which located on the newly established Hsinchu Science-based industrial park, located close by ITRI/ERSO. From these modest beginnings a mighty industry has flourished in Taiwan. By the late 1990s its IC fabrication industry and related activities notched up sales of nearly $10 billion, or around 7 percent of the world total. The Taiwan IC industry is expected to continue to grow fast, as major memory chip investments were coming on stream in the late 1990s.
What is the evidence that the Taiwan semiconductor industry has continued to upgrade, rather than 'coast' on the basis of its initially leveraged technologies. One kind of evidence can be sought in the way more sophisticated sectors such as memory chips (DRAMs) have been entered, where the initiative for technology transfer has been taken by the private sector firms themselves. A second line of evidence concerns Taiwan's entry into new IC sectors such as communications and multimedia chips, which did not exist when Taiwan made its initial technology leverage efforts.
Taiwanese DRAMs
Taiwanese firms mastered DRAM technology only in the 1990s. Earlier efforts to enter the industry, by firms such as Quasel, Mosel and Vitelic, all failed. (Quasel disappeared as a company; Mosel and Vitelic merged in the 1990s and have since become strong DRAM producers.) The supporting infrastructure and skills -- in a word, the absorptive capacity of the Taiwan semiconductor industry -- was not at that time able to support the demands of advanced DRAM fabrication. But the absorptive capacity was being enhanced by the activities of semiconductor firms in various non-memory devices, which rapidly deepened their experience. Judicious targeting by the Taiwan public agencies (such as the Industrial Development Bureau and ITRI) ensured that as many of the steps as possible in the semiconductor value-chain were being covered (such as IC design, mask production, and supply of specialist materials and equipment).
The decisive contribution to raising the industry’s absorptive capacity to produce DRAMs was made by ERSO with its Submicron project, in which a major pilot fabrication plant was built and subsequently passed across to the private sector (thus accounting for the launch of the new firm, Vanguard International Semiconductor Corporation). In the 1990s, one Taiwan firm after another announced the intention of becoming a DRAM producer, based on technology transfer agreements with US or Japanese firms. Thus the initiative for moving to the next stage of semiconductor capabilities was taken by both the private and public sectors, with the initiative gradually moving to the private sector as the industry matures.11
11 Further details are contained in the forthcoming study by John A. Mathews and Dong-Sung Cho, Tiger Technology: The Creation of a Semiconductor Industry in East Asia (Cambridge, Cambridge University Press, 1999).
21 Taiwan communications chips
Likewise in the communications chips sector, Taiwanese firms have utilized various forms of technology leverage to become players in this most sophisticated of chips, where the challenge is to meet international standards for data transmission protocols. In the 1980s, before the industry’s absorptive capacity had reached the appropriate level, some small firms tried to enter this industry as ‘knock off’ practitioners, taking US or Japanese products and copying them to sell for a lower price. Strict enforcement of property rights put a stop to this. A new wave of Taiwanese ventures in this sector emerged in the 1990s, driven by technology leverage taking place through both the public and private sectors.
In the private sector, firms like Silicon Integrated Systems entered the fast Ethernet data switching IC business by licensing technology from one of the leading US firms, National Semiconductor. In the public sector, ITRI’s ERSO and CCL have developed Ethernet switches and the ICs to drive them, and then formed R&D alliances with small firms to pass across the technology for rapid commercialization. Firms such as DLink and Accton have prospered through this process. (We discuss below how the CCL-led consortium allowed firms such as Accton and D-Link to get their start in Ethernet switches.)
The point to emphasize here is that there is a coherence to these continuing leverage processes. They evolve as competences are accumulated. The earlier competences in basic semiconductor fabrication and marketing, which themselves were leveraged mainly via the public sector, serve as a platform for later, more specialized and sophisticated devices, which are leveraged through both the public and private sector. Private firms come to take more and more of the initiative in such leveraging, while the public sector laboratories serve as the repository of technical capabilities, which can be upgraded and diffused across to the private sector through R&D alliances. Information Technology products
The Taiwan IT industry continued to expand and upgrade in the second half of the 1990s. In 1997 its output reached US$16.4 billion, for production in Taiwan, plus $7.7 billion for production of IT products by Taiwan firms in China -- making an output of $24,1 billion, which continued to place Taiwan in third place behind Japan and the US. While most of the IT firms are small by world standards, the biggest are now very large. Acer is the big success story, accounting for worldwide sales of IT products of $6.7 billion in 1997.
Components and motherboards
Taiwan is by far the world's largest supplier of IT components for personal computers and other IT products like scanners. Its supplies of motherboards, for example, accounted for 76 percent of the world market in 1996 (MIC/III data). The individual firms however
22 are barely known, even though some of them are now growing to be very large. First International Computer (FIC) founded as a two-person operation in 1980, now racks up annual sales revenues of around $1.5 billion. Yet over 80 percent of these sales are to OEM customers, and are sold under the brand of other leading firms such as Compaq or IBM.
Compact discs: CD-ROMs
CD-ROMs are another of the most significant value-adding components to feed into PCs, both desk based and laptops. Taiwan had to import virtually all its CD-ROMs from Japan up until the mid-1990s, by which time determined efforts had been mounted to create an indigenous Taiwanese industry. The difficulties involved here were considerable, revolving around the extremely rapid technological turnover in this sector, and the extremely demanding optoelectronic and precision machinery capabilities required.
To provide a basic level of capability the public R&D laboratories at ITRI sponsored some key technological transfer projects, funded partly by various programs of the Ministry of Economic Affairs, and partly by contributions from interested firms. From 1993 to 1996 ITRI ran several concurrent technology development projects, some in- house and some in the form of development consortia with private firms (nine of whom collaborated regularly with ITRI from 1993 to 1996.
Taiwan's first CD-ROMs were produced in 1994, when they accounted for only 1 percent of world output, but they have grown spectacularly on the solid foundations laid by the MoEA and ITRI, accounting for 9% of world output in 1995, doubling to 18 % in 1996, and 26 % in 1997. On the basis of value produced, it was claimed that by 1998 Taiwan's market share had risen dramatically to over 60 percent, as leading firms in Japan and the US withdrew from the increasingly price-competitive market. This means that Taiwan moved from being a non-participant in CD-ROMs to the world's leading producer in five years -- surely a record in an industry that is well used to such remarkable reversals.
Flat panel displays
While Taiwan was increasing its penetration of the laptop PCs sector, it was unable to penetrate into the key component segment of flat panel displays, which were dominated by Japanese firms including Sharp, Fujitsu, Toshiba and Matsushita. This meant that much of the value-added in notebook PCs was lost to Japan and represented a drain on Taiwan's balance of trade. Efforts by ITRI/ERSO to launch a Liquid Crystal Display (LCD) industry in Taiwan in the early 1990s were frustrated, partly due to lack of sufficient absorptive capacity, and partly due to resistance from semiconductor incumbents.12 But in the second half of the 1990s one Taiwan firm after another committed to LCD production, as it became clear that Thin-Film Transistor (TTF) LCDs were becoming the technological standard for notebook PCs, and as Japanese firms
12 One of ITRI's principal adversaries in its bid to secure government funding for the launch of a major LCD consortium in the early 1990s, was none other than UMC -- the company that ITRI created in 1980 to seed the semiconductor industry.
23 sought to outsource and ‘second source’ much of their LCD work to Taiwanese firms. By the late 1990s, through these several efforts, Taiwan was moving to establish itself as the world’s third largest supplier of TTF LCDs, after Japan and Korea – all of whom were considerably in advance of US and European firms in terms of mass production.
Photonics Industry and Technology Development Association of Taiwan (note the significance of the name of this industry association -- it is not just concerned with protection of trade rights) has been formed to promote this newest subsector of the Taiwan IT industry. Production of flat panel displays of all kinds has exploded in the latter half of the 1990s, reaching NT$155 billion in 1998 (around US$5 billion) and an estimated NT$200 billion in 1999 (around US$6.7 billion). Leverage has been effected by Taiwan firms from Japanese and US sources, as follows:
· UMC (Unipac Optoelectronics) Matsushita · Tatung (Chung-Hwa Picture Tubes)_ Mitsubishi · Acer Display Technology IBM · Winbond Toshiba
Many of these alliances reflect earlier alliances struck on other technological upgrades, such as Winbond and Toshiba collaborating on DRAM technology.
Next generation: digital versatile discs
Digital video discs (or digital versatile discs: DVDs) represent the next technology set to supercede CD-ROMs, and Taiwan is already positioning itself for this eventuality. The standards which will govern its introduction to the marketplace are being set by leading US firms, such as IBM and Intel, leading Japanese firms such as NEC, Matsushita and Sharp and the Korean firms, Samsung and LG. These firms form a DVD Forum Steering Committee to set standards for video, audio and computer data storage and transmission using DVDs. In March 1998, Taiwan became a player in this process, through ITRI being elected to the Steering Committee. ITRI followed this up by signing an agreement with Matsushita of Japan to establish a DVD Verification Laboratory in Taiwan. Thus ITRI continues to steer the entire Taiwan industry towards its next technological goal.
Automotive industry
The automotive industry in Taiwan has been characterized by a large number of participants (11 companies in 1994 producing 400,000 cars, ie on average only 40,000 each) each of which is quite small and incapable of making the investment needed to develop self-sufficiency in critical components like engines and powertrains. The industry was based mainly on local companies with Japanese partners, such as China Motor Co(CMC)., Yulon Motor Co.(YMC) and San Yang Motor (SYM).13 Some success was achieved in developing local branded products, eg the VARICA van and small delivery truck line produced by CMC, which used a Japanese 1-litre engine. But
13 CMC has a 35 percent equity tie-up with Mitsubishi Motor; YMC a 25 percent tie-up with Nissan; and SYM likewise a 25 percent tie-up with Honda.
24 efforts to develop the core engine and powertrain components by these firms had been frustrated - and some attempts, as in the case of the Yulon group’s 'Feling' branded car, with its own engine, had failed in the marketplace.14
Thus by the 1990s the automotive companies were anxious to find a way to develop their own capabilities in the core components of engine and powertrain. The driving influences were, firstly their own desire to become fully fledged automotive companies; the prospects of the opening China market, from which they would likely be excluded if they did not have their own components; and the looming prospects of tariff protection being wound back under GATT and then WTO rules.
Engines
An attempt to forge an alliance to produce a common 2-stroke engine by Taiwan's automotive companies in the 1980s had failed. Continuing dependence on their Japanese partners meant that they were more inclined to cooperate to produce a 4-stroke engine in the 1990s. The three companies were prepared to find common ground through their trade association, the Taiwan Automotive Industry Association (the TVMA), which made an approach to the government and ITRI in 1990/91. This was the beginning of a long process, involving the companies, ITRI's Mechanical Engineering Laboratories, technology partners in Europe and the USA (such as Lotus in the UK) and marketing outlets -- but not the Japanese principals -- which culminated in the launch of a common engine and a joint company to produce it, the Taiwan Engine Company, mainly for the emerging China market.
The story of this R&D alliance is told in greater detail below. Here it suffices to note that Taiwan has eventually broken through as an independent engine and powertrain producer in the automotive industry, after several decades of being a 'second-source' supplier for Japanese automotive firms. This illustrates the limits to the Taiwan approach to technology leverage, as well as the possibility for extending those limits through assiduous application of institutional learning techniques.
Electric motor cycle
The motorcycle industry has grown rapidly in Taiwan, along with rapidly increasing usage of motorcycles in cities as a means of personal transport. This has become a major source of air pollution - if not the dominant source, at least in the cities themselves. Thus there is great pressure to develop alternative urban transport systems, such as metro systems - and electric vehicles. The Taiwan EPA is maintaining this pressure by issuing stringent emission controls on motorcycle exhausts (stepwise reductions in allowable levels of carbon monoxide and nitrogen oxides in 1988, 1991,and 1998), and requiring that 2 percent of sales of motorcycles by the year 2000 be electric vehicles.
This in itself constitutes the platform for a new industry with both domestic and export prospects - protected by the emission controls which constitute very effective non-tariff
14 The Feling car had a fuel injection engine upgraded by YMC from a Nissan carburetor engine.
25 trade barriers. Thus the Energy Committee of the MoEA targeted an electric motorcycle as a strategic product, and funded the formation of a consortium of companies to produce such a vehicle.
Taiwan's leading motor cycle producer, Kang Yang Motor Co. announced its intention of launching its new all-electric powered motor cycle at the end of 1998. This resulted from a successful collaborative alliance fostered by ITRI, with the full financial support of the MoEA which is interested in generating a new industry as well as encouraging non- polluting engined vehicles.
The Kang Yang product is being supported at its launch with an environmental subsidy of between NT$16,000 and 22,000 per vehicle, allowing it to sell initially at the modest price of NT$40,000. In this way MoEA is deliberately shaping the market for this emergent product, on grounds of social desirability.
Kang Yang teamed up with 10 local automotive components and motor cycle companies to establish an R&D Center in Taipei that will support the emerging industry. Initial capital of NT$200 million has been subscribed by all participants. Behind this achievement lies a carefully orchestrated R&D alliance, which again is described in detail below.
Taiwan's deployment of industrial upgrading incentives
Taiwan has left little to chance in its industrial upgrading approaches. Targeted approaches for particular industries were used throughout the 1960s, 1970s and 1980s, offering firms in the selected sectors various kinds of incentives and tax concessions in return for upgrading technology, improving the quality of output, expanding exports, and so on. By the end of the 1980s these targeted approaches were being seen as having decreasing impact, and in any case they were easily identified as being 'unfair' in terms of GATT rules.
In 1991 a new Statute for Upgrading Industries was introduced, making companies eligible for tax benefits if they made investments in such industrial upgrading measures as performing R&D, training of personnel, introduction of automation, establishment of brandname products, pollution control, recycling and energy conservation.
The 1990s has seen further programs introduced, aimed at promoting Taiwan as an Asia- Pacific regional manufacturing centre, through raising (and rewarding) higher levels of investment in R&D, further integrating investment operations and actively promoting certain fundamental investments, and promoting industrial cooperation through the signing of 'industrial cooperation agreements' with major multinationals looking to do business in Taiwan. Within this overall framework, the Ministry of Economic Affairs, and in particular its Industrial Development Bureau, has formulated a series of 5- and 10- year plans for improving quality levels in manufacturing, promoting industrial automation and for the technological upgrading of local companies in traditional industries.
26 The major innovative program of the 1990s was the identification by the IDB of Taiwan's Top Ten Emerging Industries, which were singled out for special promotion in the 1991 Six Year National Development Plan. These industries are: communications, information, consumer electronics, semiconductors, precision machinery and automation, aerospace, advanced materials, specialty chemicals and pharmaceuticals, specialty medical devices, and pollution control.
Long discussion led to the selection of these industries, conducted both internally within the IDB and its sister agencies, and externally through such vehicles as the Science and Technology Advisory Group (STAG). This latter group dates back to the landmark 1979 Science and Technology conference convened by K.T. Li, and brings together leading technologists and scholars from around the world for two days of intensive discussion every two years.
The Top Ten industries were identified as being those which would drive Taiwan's high technology development into the 21st century. In 1995 the IDB announced a revised listing, estimating that these Ten Industries generated output of US$47 billion in that year, and would be expected to produce output of just under $75 billion in the year 2000 (as shown in Table 2-1).
Table 2-1 Development objectives of the Top Ten Emerging Industries
Industry 1995 production 2000 production (e) Annual growth US$ billion US$ billion Percent Communications 2.4 3.3 8.3 Information 17.2 30 14.9 products Consumer 2.0 2.3 3.6 electronics Precision 8.1 12.0 10.3 machinery/automati on Semiconductors 9.0 14.0 11.7 Aerospace 1.1 2.0 16.1 Advanced materials 1.7 2.5 10.1 Specialty chemicals/ 5.2 7.5 9.6 pharmaceuticals Specialty medical 0.1 0.15 10.7 Pollution control 0.2 0.4 18.9 Totals 47 74.1 12.1
Source: Industrial Development Bureau, 1997 'The development and upgrading of manufacturing industries in Taiwan,' Industry and Innovation, 4 (2): 277-301. ______
27 Institutional elements in these upgrading experiences
Taiwan has developed a complex and innovative set of institutional vehicles which drive the industrial upgrading process. These are generally mixed public sector/private sector entities. Four are worth singling out in this context:
· technological support (ITRI); · infrastructure (Hsinchu park); · R&D alliances; and · industry associations.
Technological support: ITRI
The powerhouse behind Taiwan’s entry into information products, semiconductors and other advanced technologies generally is the Industrial Technology Research Institute (ITRI). It is the most visible and dynamic institution in Taiwan’s national system of innovation. As a national research institute, ITRI is chartered with the mission of undertaking applied research to accelerate the industrial development of Taiwan. Thus it is charged with working as closely as possible with Taiwan’s private sector. It conducts pre-competitive research on projects sponsored by the Ministry of Economic Affairs with a view to transferring the outcomes to the private-sector non-exclusively. It also conducts short- and medium-term research that is sponsored by private firms. It is engaged with industry associations in the formation of various R&D collaborative consortia, designed to bring Taiwanese firms abreast of world technological best practice.
The business of ITRI is not research so much as technology transfer. It is arguably the most capable institution of its kind in the world in scanning the global technological horizon for developments of interest to Taiwanese industry, and then executing the steps required to import the technology (eg under license, or through joint development), absorb and adapt it, involve Taiwanese firms in projects that utilize the new technology, and finally transferring across products, equipment and know-how to Taiwanese firms who will take over its further commercial development. This is not so much a ‘national system of innovation’ as a ‘national system of economic learning’ of prodigious effect. Programs undertaken by ITRI were designed both to facilitate the creation of new industries, as in the case of semiconductors (but also fine chemicals, pharmaceuticals, optoelectronics, aerospace), and to upgrade existing industries.
In the latter case, a good example is ITRI’s efforts to upgrade the technologies used in bicycle fabrication (such as carbon fibre). Taiwan had built a good position in bicycle production, but it was declining in the 1980s as domestic costs rose. ITRI made determined efforts to acquire carbon fibre technologies and pass them across to the declining industry, which has revived in astonishing fashion on the strength of the new materials.
28 The semiconductor industry has certainly been ITRI’s greatest ‘industry creation’ success story. Through ERSO, ITRI was centrally concerned in the promotion of the private sector development of the semiconductor industry, through its initial pilot wafer fabrication facility, and then through subsequent spin-off ventures: United Microelectronics Corporation (UMC: 1979), Taiwan Semiconductor Manufacturing Corporation (TSMC: 1986), Taiwan Mask Corporation (TMC: 1988) and Vanguard International Semiconductor Corporation (VISC: 1994). ITRI has been actively promoting other technologies and industries which in many cases build on the prior success with semiconductors - such as in flat panel displays.
Infrastructure provision: Hsinchu Science-based Industry Park
Underpinning all these Taiwanese high technology firms lies the phenomenon of the Hsinchu Science-based industry park. All the semiconductor companies have their fabrication and design facilities there, clustered around the foundry facilities of TSMC and the research and design facilities of ITRI/ERSO and the leading national technical universities of Chiaotung and Tsinghua. So too do many of the leading IT firms such as Acer Inc and Acer peripherals as well as specialists like Logitech.
The Hsinchu park was entirely an initiative of the Taiwanese government, and modelled quite explicitly on the success of the Stanford Research Park in California’s Silicon Valley. To many observers, such as the US Semiconductor Industry Association (SIA), Hsinchu has taken the best features of Silicon Valley and adapted them to the Taiwanese situation. Taiwan's National Science Council established the Park in December 1980, to attract investment in high technology industries of the future. Ease of access, clean environment, good housing and educational facilities, as well as land made available by the government, and generous investment and taxation allowances, were the inducements offered. The park has been an outstanding success, and continues to offer an extremely supportive environment for all the firms located there.
Hsinchu Park offers firms an attractive working environment and living conditions (much better than the crowded conditions of cities like Taipei and Kaohsiung) as well as proximity to technical expertise. Because it is government-owned, it also offers firms which settle there a range of special benefits, such as: low-interest government loans; R&D matching funds; tax benefits; special exemptions from tariffs, commodity and business taxes; government purchase of technology abroad for transfer to participating companies; government equity investment of up to 49 percent of enterprise capitalization; and access to government laboratories and test facilities located in the Park.
A second science park: Tainan
Hsinchu was by the mid-1990s chock-a-block. The park’s existing 360 hectares have been entirely used up. A third-stage has extended its reach by another 200 hectares – but this too was fully booked even before any soil was turned. This led the National Science Council to create a second science-based industry park at Tainan in southern Taiwan. 15
15 This is based on a 660 hectare property formerly owned by the Taiwan Sugar Corporation.
29 First stage construction began at the beginning of 1996, and completed by 1998. The park accommodates firms in four major industrial sectors: microelectronics and ICs, precision machinery, biotechnology and agriculture. The latter two are based on the abundant agricultural resources of southern Taiwan, to which value can be added by high technology firms.
Investment in the infrastructure of the second park is likely to be of the order of NT$80 billion (US$2.9 billion), channelled from the Hsinchu park’s own operating fund, and from loans raised using existing assets, rather than through fresh government appropriations. This is a case where infrastructure expansion is achieved independently of government appropriations, and where regional development policy is reinforcing industry development policy – a goal which many countries have found difficult to achieve.
CIST intelligent science parks
Most recently, the Taiwan military academy, Chung-shan Institute of Science and Technology (CIST) has founded two very successful 'intelligent' science-based industry parks in Taoyuan, near Taipei. These are the Ching-shan and Lung-yuan parks, established in 1996. They now house more than 100 small firms developing 'dual use' commercial and military technologies, as spin-offs from projects undertaken at CIST. A third such park was opened in March 1999 at Taichung, in central Taiwan. The success of the CIST initiatives owes much to the institutional learning accumulated through the National Science Council's parks established at Hsinchu and Tainan.
R&D alliances
The way in which ITRI's laboratories forge alliances with the private sector, and in particular with small and medium-sized enterprises, so that they can commercialize technologies acquired through ITRI's scanning role, is one of the most interesting features of Taiwan's industrial upgrading system. The alliances have evolved from their inception in the 1980s, to become highly sophisticated devices for the rapid dissemination of new technological capabilities through Taiwanese industry. Original fieldwork by the author in investigating 20 of these R&D alliances, incorporating five case studies, is reported in the next section.
Industry associations
Industry associations are one of the striking features of the East Asian model of economic and industrial adjustment. They are particularly well developed in Taiwan, where they play a highly significant role as intermediaries between state agencies and the firms -- or, to paraphrase Okimoto, 'between the MoEA/IDB and the market.'16 While the role of
16 See Okimoto's treatise on industrial coordination and technological upgrading in Japan: D. Okimoto (1989) Between MITI and the Market: Japanese Industrial Policy for High Technology. Stanford: Stanford University Press.
30 industry associations has been extensively discussed in the case of Japan, their role in Taiwan's industrial upgrading experiences is perhaps less well known.
The key condition needed for routine negotiation to take place between government agencies and business is for the variety of interests represented by firms, with their different strategies and capacities, to be amalgamated into a single expression of interest, in an industry association.
This the primary function of industry groups, in Taiwan as anywhere else. The difference is that the industry groups in Taiwan have struggled to claim the representation rights that they have to enjoy, and once recognized, come to play an important role in co-evolving industry strategy with the relevant state agencies. All the important industries mentioned so far -- IT, semiconductors, automotive -- have generated their own industry associations which act as the essential interface between firms and government agencies, and thereby help to drive the process of industrial upgrading.
Co-evolution of government-business relations as technological capability expands
How are the relations between government agencies and industries in Taiwan to be characterized? As opposed to the perception of ‘cronyism’ as characterizing government- business relations in East Asia, the reality of the relationship observed in the creation and upgrading of high technology industries in Taiwan is one of ‘governed interdependence.’17 By this phrase is meant a productive and complementary relationship, in which each side provides a necessary complement to the other: government agencies need the private sector for implementation of policies, while the private sector needs public agencies for coordination of catchup activities, particularly in financial allocation and risk sharing and technological upgrading.
The point is that the relations between public and private sector are not fixed, but evolve along with the industry which is being created. It is a case of co-evolution of the firms and public agencies (linked bilaterally and in clusters), each of which adapts to changes in the others, thus stimulating a mutually dependent process of change and development. Taiwan’s semiconductor industry provides a test case of this co-evolution of government- business relations. 18 Government strategies for the creation of the industry have been open and explicit, with the government agencies such as ITRI and the Industrial Development Bureau (IDB) being equally insistent that firms must learn to survive and prosper in a world of fierce competition. It is striking that government assistance to the industry -- the nurturing of enterprises while in a fledgling state -- never moved beyond this to encompass trade protection or rescue of enterprises which hit operational difficulties.
17 For discussion of the concept of 'governed interdependence' by the scholar who introduced the term, see Linda Weiss, The Myth of the Powerless State (Ithaca, NY, Cornell University Press, 1998). 18 On the creation of Taiwan’s semiconductor industry, see John A. Mathews, 1997 'Silicon Valley of the East: How Taiwan created a semiconductor industry,' California Management Review, 39 (4): 26-54.
31 Indeed the history of the creation of the industry in Taiwan is littered with bankruptcies -- such as that of Quasel in the mid-1980s -- where government refused to intervene to rescue the company in distress. In Taiwan it is understood that this would completely defeat the goal of public policy which is to ensure that firms become independent of nurturing assistance as soon as practicable, and are able to hold their own in international competition. But the forms of nurturing and public coordination evolve as the industry becomes established.
The early years in the semiconductor sector saw ERSO and its pilot plant play a leading role in acquiring technological capability and then in propagating that capability as fast as possible to the private sector, through spin-off ventures and through staff leaving to take up employment in semiconductor firms. With the close of the Submicron project in the early 1990s, ERSO no longer played a major role in providing leading-edge pilot plants. This is something that the major companies could provide for themselves. Neither was financial assistance needed in the launch of new companies and ventures. Most of the new DRAM initiatives, for example, have been privately funded, or in some cases assisted by public investment vehicles that came to act like venture capital funds.
While Taiwan's public investments in technological upgrading may be small by international comparisons, nevertheless its institutions have developed an interesting way of accounting for, and justifying, their investment in the 'common good' of upgrading.
Taiwan's model of recovery of public investments
Taiwan developed a highly innovatory approach to evaluating the worth of public investments in industry creation and upgrading. Such investments are not seen as having to be immediately ‘cost-effective’ in paying for themselves. Rather the government looks to the long term, for a return in taxes paid by companies that are successfully launched. The idea of this ‘Taiwan model’ of recovery of public investment, is depicted in Figure 2-1.
The model rests on the twin propositions that:
(a) Private R&D expenditure will eventually exceed public R&D expenditure; and
(b) Company tax revenues will eventually exceed public funds paid out as R&D support.
These are realistic propositions, and account for the public support granted ITRI's programs of R&D leadership to date. The actual revenue and expenditure figures for the semiconductor industry are shown in Figure 2-2.
32 Figure 2-1 Taiwan model of recoupment of public investments
$ Company revenues
Company tax revenue
Private R&D
Public R&D
Time Source: Mathews and Cho (1999) ______
Figure 2-2 Return on public R&D expenditure in Taiwan semiconductor industry
R&D 800 '00 NT million
700 Company revenues
Public R&D 600 Private R&D
500
400
300
Private R&D 200 commences
100
0 1975 1980 1985 1990 1995 ______
33 Over the 18-year period, 1977-1995, a cumulative total of NT$12.7 billion was spent in R&D funds by government through ERSO/ITRI to develop and sustain the semiconductor industry, while the cumulative revenues of the companies which received technology transfer assistance has amounted over the same period to NT$225 billion. This is a near 20-fold return to the country as a whole.
To see how Taiwan's institutions bring together the various players -- firms, public agencies and industry associations -- for purposes of industrial upgrading, we turn to look in detail at the distinctive institutional innovation in Taiwan -- its R&D alliances.
34 3. CASE STUDY: TAIWAN'S INNOVATION ALLIANCES
As the costs and risks of research and development mount, so firms in the industrial heartlands of the USA, Europe and Japan have sought new organizational forms to reduce and share these risks. Inter-firm R&D collaborative alliances have flourished, and with them new institutional foundations and facilitative mechanisms have been discovered. The common feature shared by all such partnerships is that they influence the dynamics of innovation in such a way that the future competitive position of at least one of the partners, and potentially of all the partners, is improved.
The microelectronics, semiconductor and computer sectors have been in the forefront of these developments, driven by the Schumpeterian competitive dynamics of rapid product turnover and diminishing process technology life cycles that characterize these sectors. Governments have played key roles in the successful R&D consortia in all the advanced countries -- as in the case of Sematech in the USA, in the VLSI and many other joint R&D programs in Japan, and in ESPRIT, EUREKA and other collaborative programs in Europe.19 These developments, whether they be called R&D alliances, or strategic technology partnerships, or simply collaborative innovation networks, are the subject of a growing scholarly literature.20
From the perspective of the practising manager, what is of interest in such inter- organizational alliances is not so much their efficacy (which can be taken as established), but the conditions in which their efficacy can be captured by the participant firm and the competitive advantages created or sustained. It is at this micro level of analysis that the dynamics of R&D collaboration may best be explicated, with full reference to the strategies of the participants and their mutual adaptations as the process of collaboration unfolds.21
19 On R&D collaboration in the USA, see for example: M.L. Katz and A.J. Ordover, 'R&D cooperation,' in M.N. Baily and C. Winston (eds), Brookings Papers on Economic Activity (Washington, DC: Brookings Institution, 1990): 137-203; or A.N. Link and L.L. Bauer, Cooperative Research in U.S. Manufacturing: Assessing Policy Initiatives and Corporate Strategies (Lexington, MA: Lexington Books, 1989). On R&D collaboration in Japan, see for the case of the computer industry, Martin Fransman, The Market and Beyond: Information Technology in Japan (Cambridge, UK: Cambridge University Press, 1990/1993); and for R&D collaborative structures more generally, Mariko Sakakibara, 'Cooperative research and development: Theory and evidence on Japanese practice,' (PhD dissertation, Harvard University, 1994). On the case of R&D collaboration in Europe, see for example EIRMA (European Industrial Research Management Association), Cooperative R&D in Industry, Working Group Reports No. 38 (Paris: EIRMA, 1989). 20 For a general discussion, with many examples, see Mark Dodgson, Technological Collaboration in Industry: Strategy, Policy and Internationalization in Innovation (London and New York: Routledge, 1993); and for examples of studies of innovation networks in both East Asia and the West, see the special issue of Journal of Industry Studies on 'Innovation Networks: East meets West' (Vol. 3, No. 2, Dec 1995). 21 See for example the detailed analysis of the unfolding dynamics of R&D collaboration in a single European instance, namely the case of inter-firm collaboration to create an automotive adhesives industry in Germany in the late 1980s, involving chemical firms, automotive firms, steel firms, and public sector research institutes, as provided by J. Hausler, H.-W. Hohn and S. Luetz, 'Contingencies of innovative networks: A case study of successful interfirm R&D collaboration,' Research Policy, 23 (1994): 47-66.
35 Of great interest in this regard is the series of collaborative R&D ventures that have emerged in Taiwan, within a quite distinctive institutional framework. Unlike the case of many of the collaborations between established firms in the US, Europe or Japan, where mutual risk reduction is frequently the driving influence, in the case of Taiwan it is technological learning, upgrading and catch-up industry creation that is the object of the collaborative exercises.
Origins of the R&D alliances
The Taiwan R&D alliances were formed hesitantly in the 1980s, but have flourished in the 1990s as institutional forms have been found which encourage firms to cooperate in raising their technological levels to the point where they can become world-class competitors in advanced technology industries. Most of these alliances are in the information technology sectors, covering personal computers, work stations, multiprocessors and multimedia, as well as a range of consumer products and telecommunications and data switching systems and products -- but they have also emerged in non-related sectors such as automotive engines, motor cycles, electric vehicles, and now in the services and financial sector as well.
Over a dozen such alliances could be counted as operating in Taiwan in the mid-1990s, bringing together firms, and public sector research institutes, with the added organizational input of trade associations, and catalytic financial assistance from government. Thus in Taiwan, as in Japan, one may hazard the observation that R&D collaboration is increasing in intensity as the knowledge-intensity of products and processes increases.
Taiwan’s high technology industrial success rests on a capacity to leverage resources and pursue a strategy of rapid catch-up. Its firms tap into advanced markets through various forms of contract manufacturing, and are able to leverage new levels of technological capability from these arrangements. This is an advanced form of 'technological learning', in which the most significant players have not been giant firms (as in Japan or Korea), but small and medium-sized enterprises whose entrepreneurial flexibility and adaptability have been the key to their success.
Underpinning this success is the efforts of public sector research and development institutes, such as Taiwan’s Industrial Technology Research Institute (ITRI) which since its founding in 1973 has acted as a prime vehicle for the leveraging of advanced technologies from abroad, and for their rapid diffusion or dissemination to Taiwan’s firms.22 This cooperation between public and private sectors, to overcome the scale disadvantages of Taiwan’s small firms, is a characteristic feature of the country’s technological upgrading strategies and the creation of new high technology sectors such as semiconductors.
22 On Taiwan’s technology transfer strategies, see Otto Lin, 'Development and transfer of technology in Taiwan ROC,' in O. Lin, C.T. Shih and J.C. Yang (eds) Development and Transfer of Industrial Technology (Amsterdam: Elsevier, 1994).
36 Behind many of these successes lie some remarkable institutional structures favoring collaborative product development, which is Taiwan’s own adaptation of the R&D alliance. 23 Taiwan’s dominance of mobile PCs for example, rests on a public-private sector led consortium that rushed a product to world markets in 1991. Taiwan’s strong performance in communications products such as data switches, which now dominate in PC networks, similarly rests on a consortium which worked with Taiwan’s public sector industry research organization, ITRI, to produce a switch to match the Ethernet standard, in 1992/93.
New alliances continue to be formed in the 1990's
These successes are being followed up by many more such R&D alliances in digital communications and multimedia areas. Taiwan is emerging in the second half of the 1990s as a potentially strong player in the automotive industry, particularly in the expanding China market, driven by its development of a 1.2 liter 4-valve engine. Again, this is the product of a public-private collaborative research endeavor involving three companies, which have now jointly created a new Taiwan Engine Company to produce the product. The commercial development of an electric-powered motor cycle, first made available in 1998, is likewise the product of a carefully orchestrated R&D alliance. Thus, the R&D consortium is an inter-organizational form which Taiwan has perfected as a vehicle for catch-up industry creation and technological upgrading. The microdynamics of the operation of these consortia, is therefore a matter of some substantial interest.
Of course, the R&D collaborative ventures account for only a small proportion of Taiwan’s high tech successes, many of which are due to companies’ own R&D or to private collaborative ventures between firms, for example between a Taiwanese firm and advanced firms in Europe, Japan or the USA. But where Taiwan is doing very well, as in Laptop PCs, there is frequently a public-private R&D alliance to be found at the beginning of the sector’s development. Taiwan is learning from, and in some ways improving on, the R&D consortia that can be found in Japan, the USA and Europe.
Organizational foundations of the R&D alliances
The basic model of the Taiwanese alliances is the construction of a process in which R&D costs can be shared, and risks reduced, through bringing many small firms into a collaborative alliance with each other and with ITRI (ie with one of its operating laboratories). It is ITRI which provides the anchor for the alliance and the principal technology leverage vehicle. Thus, the Taiwan R&D alliances differ from their counterparts in the USA, Japan and Europe, in that their goal is rapid adoption of new technological standards, products or processes developed elsewhere and their rapid diffusion to as many firms as possible.
23 On Taiwan’s R&D alliances generally, see Linda Weiss and John Mathews, 'Innovation alliances in Taiwan: A coordinated approach to developing and diffusing technology,' Journal of Industry Studies, 1/2 (1994): 91-101.
37 But their organizational form owes much to the R&D collaborative vehicles developed in the leading industrial centres, particularly in the way that Japan has structured relatively short-lived R&D alliances with clear technological goals (as in the 1976-79 VLSI project). 24
As in the leading cases in Europe, the USA and Japan, government plays an important role as facilitator and provider of catalytic funding -- but in Taiwan a significant portion of costs is borne by participant firms. The central hypothesis of the paper is that the Taiwan alliances, while being formed for very different purposes, share many of the fundamental features of the R&D alliances established in the advanced industrial countries.
Over 20 R&D alliances can be identified as having been formed in Taiwan over the course of the past 15 years, as illustrated in Table 3-1. Five are asterisked; these we shall look at in some detail in the following discussion. One striking feature worthy of immediate notice is their relatively small budgets. In all, the twenty consortia have accounted for a budget of no more than NT$4 billion, over 15 years, with government input of no more than NT$2.3 billion -- or around US$100 million, equivalent to just one year’s government subsidy of the 10-year Sematech program in the USA.25
Thus, these figures reveal just what a 'David and Goliath' struggle it has been for Taiwan to take on US firms in high technology industries -- and they underscore the significance of the Taiwan achievements, which clearly owe as much to organizational finesse and learning as to dollar subsidies.
24 There is by now a large literature on the VLSI project and its organization. For a representative account, see D. Okimoto, T. Sugano and F. Weinstein (eds), Competitive Edge: The Semiconductor Industry in the US and Japan (Stanford: Stanford University Press, 1984). 25 On Sematech’s budget and its appropriation, see Sematech, A World of Opportunity: 1996 Annual Report (Austin, TX: Sematech, 1997).
38 Table 3-1 R&D alliances in Taiwan: 20 cases 1983-1997
Alliance Year(s) Companies Max. Budget NT$ m Electronics and information technology 1. PC 100 (IBM PC XT-compatible) 1983-1984 5(9) 40 2. PC 400 (IBM PC AT-compatible) 1984-1985 3 24 3. Workstation (Sun SPARC-compatible) 1989-1991 2(3) 150 4* Notebook PC 1990-1991 46 100 5. Graphics terminal 1991-1993 34(9) 25 6. Palmtop PC 1991-1992 16 50 7. Pentium server 1991-1993 2 50 8* Taiwan NewPC (PowerPC) 1993-1997 40 250
Consumer electronics and communications 1 * Ethernet switch 1993-1996 5(8) 75 2. Digital loop carrier 1992-1994 3(4) 60 3. LCD consortium 1995-1997 4 230 4. HDTV 1994-1996 11 250 5 Interactive TV 1995-1997 21 200 6. V5 Network access standard 1996- 12 150 7. High speed loop access system 1996- 14 120
Mechanical engineering/materials 1* 1.2 L engine 1992-1997 4(3) 1,400 2. *Electric scooter 1991-1996 10 500 3. 250cc motorcycle engine 1996- 2 600
Software/services 1. Java-based Internet products 1996- 24 250 2 Electronic commerce 1996- 61 300
* Case study (..) Second-stage participation
Source: ITRI; industry interviews ______
Evolution of R&D alliances in Taiwan
Like Taiwan’s industrial upgrading efforts more generally, the R&D alliances are the fruit of experimentation and some early failures. Some of the early R&D collaborative efforts, inspired no doubt by Japanese cases such as the VLSI program of 1976-1979, were hardly successful. In the beginning of the 1980s, the newly established Institute for the Information Industry (III), for example, initiated a project called Software Engineering Environment Development (SEED), which brought together 32 member
39 firms and the agency with some ambitious goals to establish technical standards for Chinese-character processing and software - but in the end there was little to show for these efforts. Likewise an early effort by ITRI to involve automotive firms in the development of a 2-stroke engine, to provide a technological foundation for a mooted Taiwanese automotive industry, was also an almost complete failure.26
But the characteristic feature of Taiwan and its institutions is pragmatism and the ability to learn from mistakes. These two failed R&D alliances were not the last word on the subject. Characteristically, for the Taiwanese these failures led simply to a search for a more effective institutional framework that could combine collaboration with competition. Rather than giving up on alliances on the grounds that they 'did not work', they instead searched for a better way to make them work.
In the 1980s and 1990s there have been many more such initiatives, most of which can be traced to the various research laboratories of ITRI - ERSO, CCL, OESL and MIRL. 27 Some of these have been more successful than others - but all seem to have learned organizational lessons from the early cases where government contributed all the funds and research tasks were formulated in generic and overly ambitious terms for the companies to take advantage of them. The more recent R&D alliances have been more focused, more tightly organized and managed, and have involved participant firms much more directly in co-developing a core technology or new technological standard which can be incorporated by the companies, through adoption and adaptation, in their own products.
The current period of R&D alliances traces its origins to a series of 'multi-client projects' initiated by ITRI (in particular its computer laboratory, ERSO) in the early to mid-1980s to develop IBM-compatible PCs. Taiwan missed out completely in mainframe and mini- computers. But in the early 1980s computer engineers in ERSO were highly aware of the possibilities in the new PC sector, based on the emergence of firms in microprocessor- based product areas such as calculators, game machines and the early microcomputers. IBM introduced its PC in August 1981 with a non-proprietary open architecture. IBM’s product was a great success, and opened the possibility for component standardization and legal cloning through 'IBM-compatible' machines -- a concept first realized by Compaq, which demonstrated an IBM PC XT-compatible machine at the 1982 US Comdex. This created an opportunity which Taiwan was quick to seize.
In 1983 there was no concept of the 'R&D alliance' within ITRI. The norm was for ITRI to develop new technologies and then advertise their availability to existing firms or to develop the technology and then spin it off into a new firm (as done with the first semiconductor firm, UMC, in 1980) or to perform contract work for individual companies, sometimes merging into co-development work.
26 See Jiann-Chyuan Wang, 'Cooperative research in a newly industrialized country: Taiwan,' Research Policy, 23: 697-711, for a brief description of these two projects and their shortcomings. 27 These are, respectively, the Electronics Research Laboratory (ERSO); the Computing and Communications Laboratory (CCL: spun off from ERSO in 1990); the Optoelectronic Systems Laboratory (OESL); and the Mechanical Industry Research Laboratory (MIRL).
40 Within ERSO there was interest in developing the IBM-compatible machine as indeed there was in some of Taiwan’s emerging IT companies such as Acer. Thus a development agreement was signed between Acer (then Multitech) and ITRI/ERSO - but at the insistence of the Ministry of Economic Affairs, which saw the potential for many Taiwan firms to become involved in this emerging industry, the project was extended to become a 'multi-client project'. This was the organizational prototype of the R&D alliance. This initial effort had partial success in developing a generic product standardized around certain core components - but it was too late for the market, and was plagued at the time by intellectual property rights disputes.
The next chance came with IBM’s announcement of a powerful new PC system in August 1984, the PC AT, again with open architecture and by now standardized components, such as DOS operating system and Intel 286 microprocessor. This was a technological leap that was eminently suited for emulation by ERSO’s new organizational form of the multi-client project. No sooner was IBM’s new machine announced than ERSO moved to establish a new multi-client project to emulate it. A consortium was established in October 1984 to build the new IBM machine. Three companies were enrolled as participants.28 Formal contracts were signed in December 1984. A prototype machine was transferred to the companies by July 1985, less than a year after IBM’s announcement.29 This project was considered a great success, both in terms of the technology development and transfer and in terms of the business generated. The stage was now set for ITRI, and its newly established Computing and Communications Laboratory (CCL), to take the next step in upgrading Taiwan’s technological capabilities beyond the simplest PCs. We can date the R&D alliances proper from this stage.
Case studies of Taiwan’s R&D alliances in the 1990s
1) Notebook PC (1990-1991)
Background and rationale The PC market was fragmenting in the late 1980s, and Notebook PCs (mobile PCs) represented an important development, pioneered by Toshiba, in which Taiwan firms could reasonably hope to make an impact -- but where no firm at this point possessed the needed capabilities.30 The prospects for Taiwan companies in this new field seemed remote, given the multiple proprietary standards which were emerging, and the high density of the product design and assembly process calling for different and more advanced skills than those involved in producing desktop PCs.
28 The firms involved were Systek; Tatung; and Copan. This was the project through which Tatung, then a leading electronics firm in Taiwan, made its entry into the PC business. 29 This time, ERSO sent engineers to Washington to discuss with IBM and US Customs representatives how copyright infringement challenges could be avoided; they were instructed in the ‘cleanroom concept’ (in which software engineers work in a room without any IBM code accessible) which was adopted. 30 Initial interest in this area was shown by Tatung, which developed a prototype notebook PC in 1989, in conjunction with ERSO, and exhibited it at the CeBIT trade fair in Hanover.
41 CCL’s senior officials saw this as an opportunity to develop a further multi-client project for the Notebook PC to give the industry greater technological and commercial momentum. The idea was to settle on certain key components as standard and help to build a mass production industry on this basis. This did indeed turn out to be an effective strategy, helping the Taiwan Notebook PC industry into its leading world position today.
Consortium process A completely new organizational approach was tried for this Notebook PC project, marking the point where the multi-client projects were being recognized as genuine R&D alliances or consortia. In this case, CCL developed draft specifications for a 'common machine architecture' and announced the new project to interested firms. CCL negotiated with the trade association, the Taiwan Electrical Appliance Manufacturers’ Association (TEAMA), to become involved as coordinator.31
This may have seemed a small step at the time, but in organizational terms it represented a considerable enlargement of the scope of the alliance - and an institutional entrenchment of its legitimacy within the industry. As things turned out, no fewer than 46 companies elected to join the consortium - some clearly more for informational purposes than for any serious intention of manufacturing. 32 In July 1990 a formal consortium was established, the Taiwan Handheld PC Consortium (THPC), with capital of NT$50 million (just less than US$2 million) subscribed by member firms.
The overall strategy was for CCL and the consortium to develop a 'common machine architecture' for its prototype, which would translate into a series of standardized components which could be produced by Taiwanese manufacturers through mass production. This was the key innovation of laptop PC consortium, which had the effect of translating what would have been a 'niche' product for Taiwanese manufacturers into a mass-produced product where Taiwanese manufacturing efficiencies could be brought into play.
Once the serious engineering work began, the prototype was produced rapidly (building on the earlier work with Tatung) within four months and exhibited to great acclaim at the Comdex computer show in the USA in 1990. The prototype consisted of a number of standardization decisions regarding the key components, such as: motherboard (and chipset); screen (LCD); keyboard; battery; connectors; and adapters.
Many of these had to be imported from Japan. Their adoption by the consortium meant that the Japanese suppliers would see their business expand and would respond quickly to orders from Taiwanese firms. Those components which could be sourced locally were targeted as important industrial upgrading initiatives. For example, Acer Peripherals succeeded in developing its own Laptop PC keyboard (separately from the consortium), which was an important breakthrough -- for Acer and for other Taiwanese firms which
31 Now the Taiwan Electrical and Electronic Manufacturers’ Association, TEEMA. 32 The initial entrance fee was set at only NT$1.2 million. A slightly higher fee of NT$1.8 million was set for later entrants.
42 could source from Acer. Other components suppliers, such as Proton (for power supply) did very well out of their participation in the consortium.
Outcome The prototype was transferred rapidly into mass production. Market sales took off rapidly, both in Taiwan and abroad; more than 500,000 units were produced and shipped in 1991. Thus, a notebook PC industry in Taiwan was launched thanks to the consortium. CCL followed up the earlier product development work with extensive training programs offered to engineers employed by consortium member firms.
However, the initial success quickly generated problems. Several consortium members found themselves selling virtually identical products (given that the prototype had been so close to a commercial product) and price competition rapidly became the main means for producers to differentiate their products. This led to excessive competitive pressures, and some of the less experienced PC firms which had entered the industry via the alliance exited, or went bankrupt. This was hardly a desirable outcome. Further attempts to extend the alliance, to produce a second generation Notebook PC, foundered on the emerging differences between the manufacturers, and the formal consortium was disbanded in 1991.
2) NewPC consortium (1993-1997)
Background and rationale The Taiwan PC industry has been very successful, but has limited itself up to the 1990s to 'Wintel' architectures, with the exception of an attempt to enter the workstation segment of the market on the basis of Sun SPARC-compatible machines, in the late 1980s. There are of course alternatives to the Windows-based architectures developed by Microsoft and Intel. One such is the PowerPC microprocessor developed by IBM and Motorola and used by Apple. It made sense for the Taiwan IT industry to develop capability in the PowerPC architecture, at several levels, in case it took off and established itself as a genuine alternative to Intel and Microsoft products, and in order to use the PowerPC platform as a way of accessing Apple product platforms, which had until recently been legally inaccessible for Taiwan PC firms.
For their part, IBM and Motorola recognized the significance of extending their global reach through encouraging Taiwan IT firms to develop a range of PowerPC-based products. IBM and Motorola were therefore approached by CCL in 1992, with a view to licensing the PowerPC to a group of Taiwan PC firms. By dealing with ITRI/CCL in a once-off licensing agreement, the US firms could avoid having to deal with a lot of individual, small Taiwanese companies. Negotiations over the character of the technology transfer process were prolonged, with a final agreement not being signed until late 1993. To show their commitment, the US firms jointly established a PowerPC Technical Centre in Taiwan (the first outside the USA) in the period 1994 to 1996, to provide technical assistance to Taiwan firms seeking to adopt the PowerPC platform. 33
33 Apparently Digital Equipment Corp (DEC) also approached ITRI/CCL with a view to licensing its Alpha processor, a rival to the PowerPC. However DEC was reportedly not willing to offer the same level
43 The consortium process This is one of the more complex ITRI R&D alliances, formed to promote a standard system platform based on the PowerPC microprocessor. Technology transfer from IBM and Motorola was effected through CCL, on behalf of Taiwanese firms generally, in the form of a comprehensive licensing agreement. This agreement set the terms of the development process. It provided for development of products based on the PowerPC processor, but not of the processor itself. Thus the consortium was designed to produce such PowerPC-based products as rapidly as possible. On the original model of the Laptop PC consortium, the NewPC consortium was allowed to span several steps in the system- product value chain, including production of chipsets (platform), add-on cards, components and software as well as final PC system producers. This was a further organizational innovation, making the NewPC consortium considerably more complex than its predecessors at ITRI.34
The NewPC consortium was a large affair, involving 40 Taiwan IT companies as well as ITRI/CCL, the trade association TEEMA and the US partners IBM and Motorola. The 40 Taiwan IT companies were grouped in four classes, depending on their position in the value chain, focusing on either platform details (ie chipset), add-on cards, components or software.35 Its structure is illustrated in Figure 3-1.
Figure 3-1 The structure of the NewPC consortium
core: R&D
small firms CCH large firms IBM ERSO foreign firms IDB industry association Motorola eg TEEMA consortium
Source: Author of technology support as IBM and Motorola, and so their processor was not chosen for the NewPC consortium. (DEC has since been acquired by Compaq.) 34 In this it is comparable to the Electric Scooter consortium developed at the same time in MIRL. 35 The firms involved in the four working groups were: Platform working group (ie chipset): Umax; FIC; Tatung; Mitac; Datatech (DTK); UMC; plus new members - Asustek Computer Inc and Universal Scientific Industrial Co.(USI);
Add-on card working group: Umax; FIC; Mitac; UMC; Asustek; Elitegroup; Macronix; Accton; Leadtek; Philips Taiwan; MicroMax; National Semiconductor Taiwan
Component working group: UMC; Winbond; Macronix; Sunpull; Chupond Precision; MicroMax; Philips Taiwan; NS Taiwan
Software working group: Umax; Tatung; UMC; Elitegroup; Datatech; Accton; Taiwan Autodesign; Welltronix; Leadtek; Sunsoft; Philips Taiwan; National Semiconductor Taiwan
44 Most of the leading IT firms in Taiwan were involved except Acer, which elected to ignore the PowerPC, and in any case consider itself capable of developing its own new products (with some exceptions, such as its participation in the Server alliance with Intel). Some leading companies did not join -- presumably for fear of offending Intel.36 Based on the earlier experience with the Laptop PC consortium, membership in each of the working groups was limited to a maximum of nine firms, to avoid excessive competition. Thus the alliances learn from each other, from one generation to the next.
An important distinguishing feature of the NewPC consortium is that it has followed an agreed roadmap for technological development.37 This is linked directly to the contribution of the two multinational partners; they have raised the technological sophistication of the whole consortium process. In 1995 IBM, Motorola and Apple announced the Common Hardware Reference Platform (CHRP) for the PowerPC, which henceforth provided the baseline for PowerPC-based products, ie chipsets and motherboards. This was subsequently licensed to CCL and has since been embodied in a prototype PC system that was exhibited by the NewPC consortium at the Taipei Computer Exhibition in June 1996. Thus the Taiwan consortium has moved along a trajectory provided by the multinational partners.
Organization Important lessons were learnt from the Laptop PC experience. In the NewPC consortium, membership of the Platform working group (the most important of the consortium) was restricted to a maximum of seven companies, all of whom were required to have considerable prior expertise and technological capabilities as well as their own marketing channels. Thus the quality and quantity of the membership was regulated by the consortium organizers -- an important innovation.
Outcome In terms of business generated, the PowerPC itself has not yet made a significant dent in the dominance of the 'Wintel' standard promoted by Intel and Microsoft. Thus the products of the alliance are still at the 'potential' stage of business evolution -- apart from the Apple cloning, which was growing fast until Apple itself, under the influence of Steve Jobs, reversed its stance and refused to continue licensing its Powerbook architecture. This was a major setback for the Taiwan firms pursuing Apple clone strategies, particularly Umax. On the other hand, some products utilizing PowerPC microprocessors have emerged from the alliance. These include the PowerPC Internet access box and the Windows-based terminal (WBT), both of which are expanding rapidly in their own product niches.
36 Other participants kept a low profile for similar reasons; for example, First International Computer participated via its subsidiary, Formosa Industrial Computing, while Umax sent its subsidiary, Prolab Technology, to the software working group. 37 Initial products were based on the PowerPC 601 processor; subsequent PCs and servers were based on PowerPC 603 and 604 versions, while workstations and servers were based on versions 620 and 604 enhanced processors.
45 The Internet access box is designed for use with a TV set at home or with a computer monitor in the office. These are simple devices consisting of the processor, a modem and a connection port to a phone socket as well as a lead to the display device. Japanese firms are producing such devices using Taiwanese firms as OEM suppliers, incorporating the PowerPC. Since they do not offer computing power, they are free to use simpler operating systems than the 'Wintel' standards which dominate PCs. This is their principal attraction -- simplicity of access and operation.
Another kind of product utilizing the PowerPC is the Windows-based Terminals (WBTs). These are again simpler devices than full PCs and normally dedicated to some routine processing function -- like displays in supermarkets or fast food outlets. The WBT market is rapidly expanding, after the eclipse of earlier 'dumb' terminals by machines with processing power. 38
Thus the consortium must be rated a qualified success -- despite the failure of the PowerPC to displace the 'Wintel' dominance of the worldwide PC market. It was in the first place an insurance policy for the Taiwanese in case the PowerPC did effect an incursion into the PC market.
It has had several highly significant indirect effects. It has equipped major firms with the technological capabilities to develop products based on a major microprocessor and given them deep insights into the workings of the operating systems based on this processor. It has generated profitable product lines for the companies, both through their own PowerPC-based products and through the opening up of Apple Powerbook clones. It has assisted Taiwanese companies to move into product segments like Internet access boxes and Windows-based terminals which would otherwise have been inaccessible. And it has further raised the international profile of the Taiwan PC industry so that it is seen to be a player in the technological development of the sector.39
3) Ethernet switch (1992-1996)
Background: The 1980s saw the emergence of computer networks, and with them emergent possibilities for digital data transmission systems either modeled on existing analogue electrical switching systems used for telephone traffic or based on new data architectures.
Computer networks have been based on a number of transmission and interconnection protocols, amongst which Ethernet (developed originally at Xerox PARC) is the dominant open standard. Early networks were based on hub or ring architectures, in which all computers could communicate with all others.
38 ITRI/ERSO had been involved in producing an earlier generation terminal based on the Unix operating system -- the X-Terminal -- in the late 1980s and early 1990s. The Windows-based terminal (WBT) has come to replace the X-terminal -- but this early experience was invaluable for the Taiwan producers. 39 For further details on the NewPC consortium, see John Mathews and Teresa Shuk-ching Poon, 'Technological upgrading through alliance formation: The case of Taiwan’s New PC consortium,' Industry of Free China, 74/6 (1995): 43-58.
46 Taiwan firms were quick to become involved in these technologies, with the assistance of ERSO; for example Accton (an unofficial ERSO spin-off of 1988) was an early participant with its ‘Etherhub’ products. In the 1990s computer networks became so complex that switching systems needed to be introduced, together with drastically increased capacity (‘bandwidth’) for data flow. Switching systems enable two computers to communicate, separately from all others in the network. This represented a ‘quantum leap’ in data network technology which it was essential for Taiwan firms to master. So CCL took the initiative in acquiring the technology, and forming a consortium for its dissemination.
Consortium process The technological core of the emerging Ethernet switch technology was threefold:
a) the open Ethernet standards themselves (as published by IEEE in the USA); b) the chipset embodying these standards; c) the hardware providing the physical switching link between computers.
In 1992 CCL initiated a project to build up its technological capability in this area. No source of technology transfer was needed, as Ethernet technology had previously been mastered (eg through the earlier Ethernet hub-based systems). In 1993 CCL let the industry know of this project (via alerting the trade association, TEAMA) and initially five companies enrolled in a product development consortium: Dlink, Accton, Cnet, RPTI and Long Shine. Of these, DLink and Accton already had prior technological capabilities, which they wished to extend and upgrade through this project. Three further companies joined the project at a later date.40
The first versions of the Ethernet switch were embodied in a customizable chipset, later reduced to a single Application Specific IC that could be manufactured locally by Taiwanese IC firms. Condensing the chipset to a single ASIC chip was the critical technology challenge - spurred by US companies such as VLSI Technology that led the way with this kind of innovation. CCL used its own funds to develop the ASICs, on the ‘fast follower’ strategy, and provided them for a fee to the Taiwan industry. The consortium participants took over this technology, and developed their own adapted or improved versions of the ASIC technology for themselves.
Outcome This was one of ITRI’s most successful R&D alliances. The data switching business based on Ethernet standards is growing fast world-wide and Taiwan has produced at least two leading specialist suppliers in Accton and DLink. Both companies have benefited considerably from their involvement in the CCL alliance(s). Accton in the mid-1990s embodied its own ASIC chips in Ethernet switch products, such as its ‘backbone switches’ and ‘segment switches’.41
40 The firm Long Shine later dropped out, due to financial difficulties not linked to the project. 41 Products include the ES3008-TX, a smart, fast Ethernet switch with multiple ports utilizing 10 Base-T interface protocols ; and similar variations.
47 These are profitable, high value-adding products that represent a welcome upgrade from Taiwan’s accustomed role as supplier of the least value-adding components in high technology systems. The MoEA-funded phase of this project ended in 1996; since then CCL has continued to maintain and develop its own expertise, further improving its ASICs, and developing expertise in rival technologies to that of Ethernet, such as ATM standards.42 This led to continuing close relations between CCL and the companies - one of the less visible outcomes of successful R&D alliances.
4) 1.2 liter, 4-cylinder, 8-valve engine (1992-1997)
Background and rationale The IT sector is by no means the only advanced technology sector to have benefited from R&D alliances in Taiwan. The automotive industry has also made most effective use of such arrangements in its efforts to break into a highly competitive field. The automotive industry in Taiwan is characterized by a large number of participants (11 companies in 1994 producing 400,000 cars, ie on average only 40,000 each). Each of these companies is quite small and incapable of making the investment needed to develop self-sufficiency in critical components like engines and powertrains. Three automotive firms sought assistance to develop a common 4-stroke engine, as described above.
Consortium process The project was initiated at the instigation of the industry association, the TTVMA, whose members (and particularly the China Motor Corporation) would provide the customers for a collaboratively developed engine. Thus this was a relatively simple -- albeit large and important -- consortium, where the participants were clearly identified and the market for the product was guaranteed in advance. The years 1991 and 1992 saw ITRI/MIRL undertake a feasibility study, in which a group of engineers from the companies and ITRI undertook overseas study missions, and identified three leading engine companies as sources of technology: Lotus (UK then independent now a subsidiary of General Motors); Porsche (Germany) and Ricardo (UK). Teams of engineers from ITRI and the companies made extensive assessments of these companies and drew up details of the technology transfer aimed for -- including targets for quality, cost, product simplicity and vehicle matching, as well as processes such as production of technical manuals and training of engineers.43 In the end, Lotus made the most attractive offer, and was accepted. A formal Technical Assistance Agreement (TAA) was signed between ITRI/MIRL and Lotus in January 1992.
At the beginning of 1994 the prototype engine was handed to the four company participants. Rather than each company then seeking to develop and commercialize the engine on its own, a proposal to form a joint (common) engine company was mooted.
42 Asynchronous Transfer Mode (ATM) standards represent a rival for Ethernet switching standards for intra-network operation. For example, CCL has a current project designed to develop an ATM Internet switch. 43 In ITRI this is called a Request for Proposal document; it provides the topics on which an agreement is to be sought with a potential client or consultant.
48 This was a momentous proposal, that promised to put the Taiwan automotive industry on the solid technical foundations that had been sought but not attained over the previous two decades. The companies studied this proposal for 18 months (while undertaking their own market and technology feasibility studies) and eventually agreed to form the joint engine company in July 1995. An office was established to plan and implement a production facility for the engine.
Outcome The consortium successfully launched a common engine company, the China Engine Company (CEC) in 1995, and it became operational in 1996.44 The venture is capitalized to a level of US$60 million (which again illustrates the tiny scale of the Taiwanese industry initiatives compared with their counterparts in Europe, the US and Japan). The company’s initial plans were to produce a 1.2 liter, four cylinder, 8-valve gasoline engine, commencing in 1997, to reach a capacity of 73,000 engines per year by the year 2000. In fact the first engines of commercial standard were produced in February 1997.
This has been by Taiwan standards a large project, with a total budget of around NT$1.4 billion (US$50 million). Over the course of the project, there have been equal contributions from government and industry -- with the MoEA providing over 80 percent of the budget initially, and the companies increasing their share (and commitment) as the project progressed. The companies had to put up NT$50 million (ie around US$2 million) each to participate in the project. This was a relatively small sum for the profitable automotive companies, with a potentially very large return for them if the project succeeds and opens up the China market as a result.
5) Electric scooter (1991-1996)
The background to the emergence of an electric motor cycle in Taiwan has been described earlier. Once again, it is a consortium organized by ITRI, and instigated by the MoEA, which lies behind the new market development. Participants in this consortium included three sets of parties: the government agencies -- ITRI/MIRL (MoEA); the industry association -- Taiwan Transportation Vehicle Manufacturers Association (TTVMA); and the ten companies, grouped as:
* Motorcycle companies (6): Kymco; San Yang; Taiwan Yamaha (three largest, accounting for 90 percent of sales in Taiwan); plus Taiwan Suzuki; Giant Yeh; Kang Yang.
* Components companies (4): electric motor and controls - Shih Lin; Taigene batteries - GS; Walsin Technology.
44 The consortium members, CMC, YMC and SYM each took 20 percent equity, with financial institutions taking 35 percent (Chiaotung Bank 15 percent, and the China Development Fund 20 percent), and an auto parts manufacturer, Sengton Transportation Implements Co taking the remaining 5 percent. Yu Tien, while a member of the consortium faced financial difficulties and is not an equity holder in the China Engine Company (Hua-Chin Machinery Co.)
49 This consortium was initiated in 1990 by the Energy Committee of the MoEA, with an initial feasibility study. A formal consortium was formed in 1992, named ZES 2000, and ITRI/MIRL produced a prototype vehicle, the EC1, in 1996.45 Engineering options were chosen from the perspective of local supply and market accessibility, eg lead acid batteries because of their availability. The consortium involved an advanced organizational design, in that it spanned several phases of the value chain in producing an electric scooter - namely batteries, electric motor and final vehicle assembly.46
The project has been driven by market considerations all along, and is unusual in that it has involved customer surveys conducted to ascertain the likely acceptance of an electric vehicle produced. The project took a local 50cc scooter as benchmark and adapted it to improve its electrical and mechanical efficiency, increase its battery density and capacity, reduce the scooter weight and drag characteristics and improve the scooter’s reliability and safety.
Design of a product for ease of mass manufacture was a constant factor. A six month test program was initiated in July 1995. Over 30 ITRI employees were asked to drive the ZES 2000 scooter and log their responses on controlled questionnaire forms each week. The test vehicle was rated well for smoothness of ride, low noise and zero exhaust emission. Most found the long hours required for charging the battery overnight as acceptable, while some objected to the low acceleration capabilities of the vehicle.
ITRI/MIRL continued with further development work, for example to extend the charging cycle time (giving scooter riders a longer ride between battery recharging sessions) with a higher density battery such as the EV battery. This resulted in significant changes to the propulsion system. Thus ITRI/MIRL improved the prototype which minimizes the product engineering costs to be borne by the scooter companies if and when they make a decision to produce a commercial version of the scooter themselves.
Market prospects This is a case where government regulations are creating a new market (ie by EPA regulations) and where government regulations could shape the market in future. The critical techno-economic issue is battery charging. One option being considered by the government is an infrastructure where batteries are owned and operated (ie charged, stored and recharged) by a utility, eg TaiPower, and leased to cyclists. In this system, cyclists could deposit their used batteries at depots located in or near petrol service stations and pick up a freshly charged battery. Such an infrastructure system would greatly enhance the attractiveness of the electric vehicle (eliminating the need for overnight battery charging at home and extending the driving range of scooters virtually without limit - similar to the case for gasoline-driven vehicles now). The export prospects for such electric scooters would be expected to improve rapidly in the 21st century, as emission controls in polluted cities are implemented and as countries like China and India switch from manual bicycle transport to motorcycle transport.
45 The vehicle is named after the MoEA Energy Committee, which drove the project. 46 In this it resembles the NewPC consortium within ERSO, which also pioneered the joint involvement of companies spanning several links in the value chain.
50 A prototype product was produced and tested in 1996/97 by the EPA to assess its cleanliness. This prototype has been passed to the consortium members who are assessing their technical and marketing options. This is the organized and orchestrated process that lies behind the announcement at the end of 1998 that Kang Yang is to produce a series of electric scooters.
Benefits conferred by the Taiwanese R&D alliances
Let us now draw on these case studies to develop a more general understanding of the workings of these R&D alliances in Taiwan. 47 The pattern of the alliances is that a group of firms join with ITRI to establish capability in a new technology or new set of standards for an existing technology. The alliances have evolved from a fairly simple organizational structure, where ITRI identifies the technological issues and develops the specifications and prototype and hands this over to interested firms. This has progressed now to one where there is a lengthy process of co-development between ITRI and partner firms, spanning several stages in the value chain. The role of the firms has evolved from their being fairly passive recipients to co-developers (and co-funders) to the point where firms themselves are taking the initiative, as in the SET consortium.
All the models involve ITRI securing access to a new technology on behalf of Taiwanese firms -- usually a technology source located overseas in the US, Japan or Europe. This is common to the operation of all the R&D alliance organizational forms. ITRI thereby acts as the 'vehicle' or gateway for Taiwanese firms to access a technology that would otherwise be beyond them -- and at the same time, offers a single point of contact for a large advanced firm (such as IBM or Intel or Motorola) which can license its technology to Taiwanese firms without having to deal with many small firms simultaneously. The benefits which the alliances confer on companies are both direct and indirect.
Direct benefits:
· Acceleration of process of product development or technology acquisition The cases reveal how rapidly many of the R&D alliances achieved their technical goals. It is a reasonable hypothesis that firms on their own could not have reached the same technical levels on their own.
· Gaining access to new sources of technology, eg from foreign advanced companies Many of the alliances involve a foreign advanced company as source of technology, eg IBM and Motorola (PowerPC); Intel (XMP multiprocessor architecture); Lotus (1.2L engine design); Sun Micro (SPARC Workstation). In each case the consortium, via ITRI, has a better chance of securing a technology transfer agreement than companies acting on their own.
47 For the study on which this section is based, see John A. Mathews, 'Technological upgrading through collaboration: The case of Taiwan's R&D alliances' mimeo, April 1997.
51 · Reducing and sharing R&D costs Building a single prototype on behalf of several firms clearly saves them the costs of acquiring knowledge separately and building separate prototypes. In terms of public benefit, the existence of the R&D consortium clearly saves costs of duplication, without incurring penalties of long-term reduction of competition.
· Information gathering and sharing The alliance provides a natural forum in which relevant technological and market intelligence may be gathered and shared -- again saving on costs of information collection and processing. The emphasis on gathering of technological intelligence and its rapid dissemination to interested parties within the consortium solves one of the vexing problems of non-collaborative R&D, viz. how to ensure that information reaches the relevant firms.
· Development and standardization of components One of the hidden barriers to entry into a new field for small companies is that they cannot standardize on components and thereby strike a good deal with potential suppliers. The alliance can solve this problem by making the component selections (ie standardizing on certain components and not on others) and then negotiating supply agreements with vendors on behalf of the firms as a group. As noted above, this enabled the Laptop PC consortium, for example, to transform what would have been a 'niche product' into a standardized product suitable for mass production. This is a subtle but effective way of accelerating diffusion of an innovation and of generating national competitive advantages where at the outset there appear to be none.
· Strengthening of bargaining power with suppliers The alliances provide a means through which ITRI can bring member firms into closer relations with suppliers and negotiate better deals with them through offering bigger orders on behalf of the consortium as a whole. This is a straightforward application of economies of scale being captured by the consortium - but in purchasing rather than production.
· Systematization of the product development process ITRI project officers are trained to impose a product development methodology on the consortium process, starting with clear specifications, milestones and performance reviews. For many firms, this would be their first introduction to such a systematic approach to new product development. This is one of the most significant intangible benefits conferred by participation in the alliances.
· Creation and sustaining of market interest In many of the alliances, the key to success lies not so much in efficient production as in efficient marketing. The alliances offer several advantages in this regard. For example, the prototype can be exhibited by ITRI at representative trade fairs to promote interest in the new product, and thereby generate commercial interest - as in the case of the Laptop PC or the New PC based on the PowerPC microprocessor.
52 Indeed, orders can be taken by ITRI and farmed out to the relevant firms within the alliance. Thus the potential market for the product is broadened. Likewise, ITRI can promote the technological capabilities embodied in the new product, in media reports, on behalf of the consortium as a whole. These are activities which would normally be beyond the capacities of any individual member, but can be accomplished by the consortium acting as a totality. These activities take the R&D consortium to the point where it could evolve into a marketing consortium.
Indirect benefits
· Demonstration effect -- showing Taiwan firms that it is feasible to utilize a particular kind of technology or produce a particular product The technological upgrading effect of the alliances rests on their ability to demonstrate the feasibility of doing something new. This is where a public sector repository of technological capabilities plays a vital role, in that the 'demonstration vehicle' needs to be a neutral party.
· Replenishment effect - R&D alliance acting as vehicle for bringing new companies into an industry (reducing the barriers to entry) The alliances provide an institutional alternative to free market mechanisms for the diffusion of innovations -- and it would appear, a much more efficient mechanism. 48 In effect, the alliances provide a unique institutional vehicle for bringing new firms into an industry with minimal pain and disruption and commitment. Another way of saying this is to point to the possibilities for diversification provided by the alliances for existing firms: they can learn about a new technology or field in a relatively painless way before committing to enter that field. The alliances thereby play an indirect role as replenishers of the energy within an industry, and thus as enforcers of competition, by exposing incumbent firms to the competitive effects of new entrants.49 This is yet another of the paradoxes of the alliances -- through collaboration they heighten competition and also reduce excessive competition between the member firms.
· Innovation effect -- the alliances act to stimulate R&D in member firms Far from firms learning to economize on R&D expenditure through joining R&D consortia (a common assumption in the economics literature), the experience in Taiwan indicates that firms rapidly acquire a taste for R&D and an appreciation of its competitive benefits through participating in alliances. They thereby tend to increase the scale of their own R&D activities, even as they participate in the alliances. This is what may be termed the 'innovation effect' of the alliances. It is enhanced as firms conduct more and more of the development work within their own facilities -- which is a trend encouraged in Taiwan by ITRI.
48 Note however that the scholarly economic literature has not yet been able to model or indeed account for this subtle range of effects of R&D collaboration. For a review of the (still limited) state of the art, which is concerned almost entirely with issues to do with costs and their sharing, see Morton Kamien, Eitan Muller and Israel Zang, 'Research joint ventures and R&D cartels,' American Economic Review, 82/5 (Dec 1992): 1293-1306. 49 This is the source of the sometimes strident objections made by existing firms to the formation of new ITRI consortia.
53 The Taiwan alliances are not formed for the long-term, as in Europe or the USA. Rather, they are highly pragmatic and are dissolved as soon as their immediate goal is accomplished. Indeed they do not even have a specific institutional form; in most cases they are structured simply as non-profit incorporated entities, or even more simply as ITRI 'projects' which are subject only to parliamentary budgetary oversight.50 Anti-trust considerations are not considered relevant.51
Yet the collaborative features of the Taiwan alliances do not preclude competition. On the contrary, they are recognized as being simply a 'temporary' suspension of competitive hostilities in a certain product area for a certain period of time and do not preclude the maintenance of competition between member firms in other areas, even while the alliance is in operation. For example, the members of the Interactive TV consortium are actively competing in a range of consumer and IT products while collaborating in the development of specific iTV capabilities.
Thus the success factors of the Taiwan R&D consortia come full circle. They start with clear and precise aims and finish with an appreciation of their short and delimited duration. The one factor depends on the other. It is the clear aims which enable the participant firms to suspend competitive hostilities within a clearly demarcated area, without concern that this would undermine competitive pressures more generally; and it is the cap on the duration and scope of the collaborative consortium that enables such clear aims to be formulated, providing the participants with strong incentives to realize the joint aims for their own competitive advantage and for the benefit of the country as a whole. These features of the Taiwan R&D alliances are summarized, and displayed in cyclic form, emphasizing their mutual dependence, in Figure 3-2.
50 Note that this oversight role can be played in a highly critical fashion. Thus ERSO’s proposals for a major Liquid Crystal Display (LCD) project in the early 1990s, which it was anticipated would result in the spin-off of a new world-class LCD producer to match Japanese and Korean capabilities, was snuffed out due to the objections of industry incumbents which at that time did not have LCD businesses of their own, but entertained plans to enter the industry. (A scaled-down LCD project was launched subsequently in the mid-1990s.) 51 Indeed the question elicited some astonishment, when raised with ITRI officers. Of course, antitrust protection figures in the legal protection offered R&D consortia in each of the advanced countries: USA, Japan and Europe. Legal issues emerge in Taiwan, however, when foreign firms participate in an alliance and then raise objections to technology being shared with other Taiwanese firms; this is the outcome of one of the alliances concerned with telecommunications products. For a comparison between the legal frameworks governing R&D collaboration between the USA, Europe and Japan, see S. Martin, 'Public policies towards cooperation in research and development: The European Union, Japan and the United States,' in W. Comanor, A. Goto and A. Waverman (eds) Competition in a Global Economy (London: Routledge, 1996).
54 Figure 3-2 Success factors in R&D alliances: The Taiwan case
1. Clear, precise and 10. The alliances offer attainable goals for collaboration as a temporary suspension of competition, and each alliance enhance competitive processes through opening fields up to new entrants 2. Products produced are generic and pre- competitive in scope 9. Alliance members adopt the joint products according to their own business strategies, building 3. Strong technological on their prior capabilities leadership provided from a neutral party
8. Alliances target products suited to a 'fast follower' business strategy 4. Alliances span several steps in the value-chain
7. The alliances offer tangible and intangible 5. Government oversight to membership benefits lend credibility and legitimacy 6. Alliances are self- governing, calling for commitment and involvement by participants
______
These features of the Taiwan R&D alliances can be argued to have very general validity. They have clearly had considerable success in Taiwan itself, when utilized for the specific purposes identified, namely as an exercise in 'fast followership' to catch-up with innovations generated elsewhere. But this is a strategy that has wide applicability, both in the newly industrialized countries that are seeking to become players in advanced technologies, and also for firms in the advanced industrial countries as well.
The conditions which have generated the R&D alliances in Taiwan, namely rising levels of knowledge-intensity and an increasing pace of product and process innovation, are precisely the conditions faced by firms throughout the world. Thus, the organizational solution formulated in Taiwan is likely to have wider and more general applicability.
But of course, not all the Taiwan R&D alliances have been successful. Some have been failures in terms of their own goals and targets. Some have been unsuccessful, not because of lack of effort or coordination on the part of the member firms, but because the world did not behave as expected, or a market did not develop as expected (as in the case of the HDTV consortia and the graphics terminal consortium).
55 In other cases, consortia have been unsuccessful because of lack of supporting infrastructure: for example in the case of efforts to launch laser fax machines and hard disc drives. Here the problem was not so much the alliance itself as the lack of a rich network of precision engineering and machinery firms needed to sustain such industries.
Yet even where R&D alliances in Taiwan have been less than successful, they have contributed their experience and this has been absorbed and applied in the design and implementation of future alliances. Thus, the Laptop PC consortium was recognized as clearly having too many participants with too little experience - but this was corrected in subsequent consortia. Likewise the trade association was not involved in earlier consortia -- but its involvement has been found to be so beneficial, in terms of expanding the scope of the potential participation by firms and in securing the legitimacy of the alliances, that its involvement is seen as important in later alliances.
Thus, the alliances represent a form of advanced 'economic learning' in two senses. Firstly, in the sense that there is an underlying improvement from one generation of alliance to the next. And secondly, in the sense that the knowledge generated is held by a number of firms and agencies in the 'space' that exists between firms and agencies, ie in inter-organizational space. 52 It is in the capability to organize this space, through various forms of consortia, alliances, trade associations and keiretsu, that East Asian economies appear to have stolen a march on their Western competitors.
The Taiwan alliances work because of the benefits -- both tangible and intangible -- outweighing any disadvantages, such as knowledge 'leakage' to competitors. The alliances do not reduce competitive forces overall, but actually achieve an appropriate blend of collaboration with competition that experience indicates is needed by any viable economy. Thus the Taiwan model -- embodied in the ten success factors identified -- provide the starting point for more realistic modeling of the economic effects of such alliances, grounded in an improved understanding of the real dynamics of collaborative ventures in high technology competition.
52 On the concept of 'economic learning' as a process of inter-organizational learning within an institutional framework, see John Mathews, 'Organizational foundations of economic learning,' Human Systems Management, 15/2 (1996): 113-124.
56 4. INDUSTRIAL UPGRADING IN SINGAPORE
Singapore's strategy and manufacturing performance
Singapore presents the traveller today with the image of a bustling, confident and wealthy city – a ‘tropical city of excellence’ as it calls itself. One statistic tells the story: in 1960, Singapore was a struggling Third World economy, with a per capita income of $1,300; by 1995 it was classified by the OECD as a ‘dynamic Asian economy’, with a per capita income of nearly US$25,000.53
In 1996 the OECD upgraded the classification to count Singapore as a ‘developed country. In the late-1990s, Singapore has a thriving manufacturing industry, based mainly on electronics, of which semiconductors forms a core activity, as well as chemicals and petrochemicals and engineering. The contrast is compelling for anyone who knew Singapore in the 1960s, when it was struggling with such issues as communal violence, achieving independence from Britain, and negotiating entry to the Malaysian federation (followed by quick exit in 1965).
Singapore has become a powerhouse of manufacturing, which it sees, correctly, as the foundation of its future prosperity. Over the 30-year period, 1965 to 1995, manufacturing output expanded at an annual rate of 21 percent, with output reaching S$80.1 billion in 1995. There was a marked dip in output in 1985-87, which caused widespread concern in Singapore and accounted for considerable changes in strategies and policies – as we shall discuss below. (Figure 4-1, first panel).54
Much of this manufactured output was exported, so that direct exports grew by 19 percent a year, to reach S$50 billion by 1995 (Figure 4-1, second panel).55
The electronics, petroleum products and fabricated metal products industries have been the mainstay of Singapore’s manufacturing, accounting for at least half of output in the 1970s and 1980s. By 1995 the electronics industry cluster was dominant, accounting for over half of manufacturing output(Figure 4-1, third panel).
53 The equivalent in Singapore dollars was S$34,459, at the average exchange rate of S$1.41 = US$1.00 in 1995. 54 Output of the manufacturing sector as a whole, in Singapore’s currency, was S$113 billion, which is equivalent to US$80 billion at the 1995 average exchange rate of S$1.41 = US$1.0. Value-added was S$35.4 billion. 55 Value-added in manufacturing was $25.1 billion; as a proportion of total manufacturing output of $80.1 billion, it was 31.2 percent – a remarkably high proportion, reflecting the substance of Singapore’s manufacturing activities. Value-added is output net of material inputs, and represents the true economic worth of activities.
57 Figure 4-1 Manufacturing in Singapore, 1965-1995
(1) Output (2) Direct exports (3) Output of selected industries: electronics, petroleum, fabricated metal products
Chart 1 Output
120
100
80
60 $ billion 40
20
0 1965 1970 1975 1980 1985 1990 1995
Chart 2 Direct exports
80 70 60 50 40
$ billion 30 20 10 0 1965 1970 1975 1980 1985 1990 1995
58 Chart 3 Output of selected industries
60
50
40 Electronics 30 Petroleium
$ billion Fabricated Metal Products 20
10
0 1975 1980 1985 1990 1995
Source: Singapore 1965-1995. Review of 30 Years of Development. Singapore: SNP Corporation.
The health of manufacturing in Singapore is reflected in the investment committed each year. Even during the world cyclical downturn in semiconductors and electronics in 1996/97 and the Asian financial downturn of 1997/98, investment in Singapore has held up remarkably, registering S$8.5 billion in manufacturing in 1997.56 This was up 4.3 percent on the previous year's total. Most of this investment is from multinational corporations, from Japan Europe and the USA, putting in place world-class facilities for manufacturing, R&D and logistics.
Singapore has no intention of allowing itself to be ‘hollowed out’ to become nothing but a services hub and counts on continued growth in manufacturing into the 21st century. The aim of its current 'Industry 21' programs, spearheaded by the Economic Development Board, is to maintain manufacturing as a vital and dynamic part of the Singapore economy, contributing no less than 25 percent of GDP in the medium-term and 20 percent in the long-term .
Singapore’s manufacturing industries are made up almost entirely of the activities of multinational corporations, supplemented by some powerful state-owned corporations such as Keppel and Singapore Technologies and by an increasing number of entrepreneurial indigenous Singapore high technology firms like Creative Technology.
The multinationals kicked the whole process off. They came in the 1960s for cheap labor and stable working conditions. They stayed on and steadily upgraded the scope and depth of their activities. Wave after wave of multinationals have arrived from the USA, from Japan and latterly from Korea and Taiwan as well. Singapore turned the practice of leveraging skills and technological knowledge from these companies into a high art.
56 For comparison, Australian manufacturing firms registered investment of the same amount in that year -- in an economy five times larger than Singapore's.
59 Before looking at this process in detail, it is worth reviewing the technological and market depth of Singapore's manufacturing industries.
Singapore's manufacturing industries
Electronics cluster
The electronics cluster of industries in Singapore now spans several key high technology areas, including some of the world's most advanced semiconductor fabrication facilities and the world's highest concentration of manufacturing of hard disc drives. The electronics cluster in 1997 produced an output of S$63.4 billion, made up of sectors as follows:
Data storage and imaging (eg HDDs) 42 percent Computer, communications and consumer electronics 30 percent Semiconductors 17 percent Modules, devices, components (eg contract manufacturing) 11 percent.
The electronics sector itself has seen sustained growth – at an explosive rate of nearly 40 percent a year in the 1970s, moderating to 19 percent average in the 1980s, and to 16 percent in the period 1990-1995 (Fig 4-2).57
Employment in the electronics cluster has remained more or less stable at around 125,000 workers. These are high-skilled, knowledge-intensive jobs, not just simple 'final assembly' jobs because Singapore concentrates so intensely on producing the high value- added components like semiconductors and hard disc drives.
While 'output' is the commonly watched indicator, it suffers as an index of industrial health from not discriminating between industrial activities early in the value-chain and those late in the chain. Malaysia, for example, appears to have a very high 'output' of semiconductors, but in fact it is only the last step of the value-chain that is achieved in Malaysia, namely packaging and assembly. The Economic Development Board in Singapore understands very well that what really counts is the value-added -- output less input -- and it has been monitoring this assiduously for the electronics sector. Indeed value-added in the Singapore electronics cluster has been steadily increasing since the mid-1980s, rising to $15 billion in 1995, or fully one quarter of output. This is very high by international standards.
57 Output of electronics reached $41.3 billion in 1995 – and value-added in Singapore (output net of material inputs) reached $11.0 billion, contributed by a workforce of 128,700. In Singapore’s own currency, output of the electronics sector in 1995 was S$58.2 billion, while value-added was S$15.5 billion (Economic Development Board, private briefing).
60 Figure 4-2 Electronics industry in Singapore, 1980 – 1995 $Bill
150 60 Workers
125 50 Output
Value-Added 100 40
75 30
50 20
25 10
0 0 1980 1985 1990 1995
Source: Economic Development Board ______
In hard disc drives, Singapore has had spectacular success in attracting the cream of multinationals like Seagate and Conner peripherals, to make itself the most concentrated source of HDDs in the world. This in itself is no mean achievement and depends on the capacity of Singapore's thriving precision engineering sector to provide the support services needed for HDD manufacture, such as in production of spindles, micro-motors and bearings.
Semiconductors
Yet more impressive, if that is possible, is Singapore's achievement in semiconductors. Its core semiconductor industrial cluster now encompasses a number of IC wafer fabrication facilities and test and assembly facilities, but alongside them have grown indigenous silicon foundries and test and assembly operations. While neighboring countries like Australia missed out entirely on IC wafer fabrication as an industry, Singapore now boasts no less than 11 advanced wafer fabrication facilities producing chips, operated either by multinationals or by the indigenous Chartered Semiconductor, a part of the state-owned Singapore Technologies Group (Table 4-1).
61 Table 4-1 Integrated Circuit fabrication facilities in Singapore, 1985-1999
Year Company Wafer size Products
1985 SGS 6 inch Logic ICs 1989 Chartered Fab I 6 inch Foundry 1993 TECH Semi I 8 inch* DRAMs 1996 Chartered Fab II 8 inch** Foundry 1997 TECH Semi II 8 inch DRAMs 1997 Chartered Fab III 8 inch Foundry 1998 SGS-Thomson 8 inch ASIC/Logic ICs 1998 Chartered Silicon Partners 8 inch ASIC/foundry 1998 Hitachi/Nippon Steel 8 inch DRAMs 1998 Silicon Mfg Partners 8 inch ASIC/foundry 1999 Philips/TSMC 8 inch ASIC/foundry
*Won Semiconductor International 'fab of year' award in 1993 **Won Semiconductor International 'fab of year' award in 1996 ______
Singapore understands how hard it is to secure international investment in wafer fabrication facilities.58 By the end of 1995 it had secured four such facilities from three operators – Chartered Semiconductor, the TECH DRAM facility at Woodlands and the STG-Thomson facility, with the new one rising beside it in 1996. There were also commitments from Hitachi-Nippon Steel for a wafer plant producing 8-inch wafers for 64M DRAM fabrication. 59 With investments of up to $1 billion in each fab, countries fight hard to secure these facilities. Singapore is therefore making substantial investments in the creation of two wafer fab ‘parks’ for the late 1990s and early 21st century.60
The EDB's wafer fabrication parks
The EDB supports semiconductor investment with specially constructed and serviced wafer fabrication ‘parks.’ One such park was established in 1995 at Woodlands, on the northern perimeter of Singapore, and looking across the water to Malaysia. This houses the TECH DRAM facility and Chartered’s new IC fabrication facilities and provides each company with room for expansion.
58 Wafer fabrication is sought for its technology driving potential, as much as for its economic contribution: value-added per worker for wafer fabrication averages $500,000 – 600,000 pa, compared with the average of $80,000 – 90,000 for IC testing and assembly. 59 A proposed fab from Hitachi-LG Semicon was abandoned in 1996 due to the downturn in the memory chips market. 60 See John A. Mathews 1999, 'Silicon Island of the East: Creating a semiconductor industry in Singapore,' California Management Review, 41 (1).
62 A second park was announced in 1995 for Tampines, an area just five minutes from the Changi International Airport. Each park is designed to hold seven to ten facilities each – making an anticipated total of fourteen to twenty such facilities by the turn of the century. This would indeed make Singapore the ‘Silicon Island’ of SEAsia.61
The EDB also plays an active role in promoting investment in wafer fabrication, through becoming an equity partner itself.62 To support such investments, in 1994 Singapore established a S$1 billion Cluster Development Fund, managed by the EDB, and now expanded to S$3 billion.63
Heavy and chemical industries
While Singapore has not sought to develop typical 'heavy' industries such as steel and automotive, it has nevertheless aimed successfully at certain heavy 'niches' such as shipbuilding and repair, aerospace (particularly maintenance) and petrochemicals. All these are based on some form of value-adding to its operations as a major port.
Chemicals
Singapore aims to be a world-class hub for the petroleum and petrochemicals industry, with expected output of $75 billion by the year 2010. In petrochemicals, for example, Singapore's present capacity is 1 million tonnes per year. The EDB plans to expand this to 3 million tonnes in the immediate future.
The centrepiece of this new industry is Jurong Island, an artificial construction that amalgamates seven natural islands. Multinational petroleum companies have flocked to the facilities created, as well as Singapore's indigenous operators. The deliberate cluster effect created by the EDB has meant reaping all kinds of synergies, such as upstream feedstock linking to downstream processing. A causeway has been constructed linking Jurong Island to mainland Singapore.
61 The Tampines development is in two parts, with Phase 1 being ready for tenant firms to start construction in mid-1996, and Phase 2 in 1998. Both parks are being supplied with dedicated power substations and reliable water supply, as well as another park reserved for semiconductor support and ancillary activities (such as supply of specialty chemicals). The EDB is guarding against wafer fab overcapacity by seeking to attract a portfolio of IC fabrication activities. For example, TECH is producing DRAMs, while CSM is producing to contract (as a ‘silicon foundry’), while SGS-Thomson is producing logic and non-DRAM memory chips. 62 It has invested in both the TECH joint venture (taking a 24 percent stake in this venture) and in the expansion of Chartered Semiconductor Manufacturing (CSM) granting S$100 million to CSM for its second fab. It has since also invested in the Hitachi/Nippon Steel 64M DRAM venture, announced in 1998. 63 This Fund has three purposes: to facilitate investments in strategic projects in Singapore; these will enhance core capabilities of local industry clusters (as in the case of CSM’s foundry operations); to accelerate the development of local enterprises; again, the EDB investment in CSM’s second foundry serves this purpose; and to undertake strategic investments with local and multinational companies which will strengthen Singapore’s links with the SE Asian region.
63 Output of the chemicals cluster in 1997 was S$27 billion, made up as follows:
· Petroleum refining 54 percent · Petrochemical 16 percent · Specialty and industrial chemicals 12 percent · PBH 9 percent · Materials 9 percent.
In 1997, for example, Celanese Singapore, a member of the Hoechst Group, became the seventh Vinyl Acetate Monomer (VAM) production facility in the Celanese company. Its new start-up facility in Jurong was opened in July 1997. In the same year, Exxon Chemicals announced that it would build a US$3 billion ethylene cracker refinery. While Merck & Co. announced that it planned to establish a US$300 million pharmaceuticals bulk production facility to meet worldwide demand for its products.
Engineering cluster
The precision manufacturing cluster achieved output of S$16.2 billion in 1997. This was made up from:
· Precision engineering 65 percent · Marine engineering 21 percent · Aerospace engineering 11 percent · Process engineering 3 percent.
The cluster is dominated by large multinationals such as Philips, which operates a state- of-the-art Philips Machine factory to provide the worldwide group with precision machining and tools, destined for example for the semiconductor industry which is taking off in Singapore and the region. In 1997, for example, the Japanese Yokogawa corporation invested S$30 million in a new engineering facility and S$24 million in a new software R&D division. While Nidec Corporation invested S$30 million in a new facility for the engineering of spindle motors (needed in CD-ROM and HDD drives).
There is no question, then, that Singapore has emerged with a thriving manufacturing industry. How was this created, and what was the role of government agencies and policies in shaping the development? This has all been carefully overseen and coordinated by Singapore’s Economic Development Board (EDB), the city-state’s prime industrialization agency. 64
64 On the history and mode of operation of the Economic Development Board, see L. Low et al (1993) Challenge and Response: Thirty Years of the EDB (Singapore, Times Publishing, 1993) and Edgar Schein, Strategic Pragmatism: The Culture of Singapore's Economic Development Board (Cambridge, MA, MIT Press, 1996).
64 Origins of Singapore's manufacturing miracle
The roots of Singapore’s present success go back to the mid-1960s, when the foundations were laid for a modern manufacturing sector. Already in 1960, just a year after its election and before formal independence, the Singapore government under Goh Keng- Swee’s economic stewardship, invited a UN-led study team to examine and evaluate the city-state’s economic prospects. This study, now known as the First Economic Plan for Singapore, prepared under the guidance of Dr Albert Winsemius, recommended the establishment of an Economic Development Board to accelerate (or rather, initiate) industrialization. 65
The Economic Development Board (EDB) was duly founded in August 1961, with an initial capital budget of S$100 million. It has been central to Singapore’s development and industrial upgrading ever since. Its early efforts were directed towards ‘import substitution’ -- in line with the thinking at the time. Thus the EDB looked to establish Singapore-based enterprises to compete with imports.
Over the course of the next three years, the EDB carved out of the swamps of Jurong the first industrial park for Singapore, where it was envisaged that its early industrial enterprises could be located.66 The collapse of federation with Malaysia in 1965, when Singapore found itself out on its own and friendless, led to these preparations becoming even more frenzied.
But it was not domestic firms that Singapore was now seeking to attract, but investments from multinationals, which were seen as the only feasible source of rapid employment growth. The preparatory steps put in place were rigorous and comprehensive: they covered such matters as provision of infrastructure; development finance; investment incentives for foreign firms; active sourcing of investment; labor and human resources; as well as acquisition of technical skills through university and technical training.
Infrastructure
The EDB was charged with the primary responsibility of attracting foreign manufacturing investment as top priority. Once the first industrial estates had been established, the Jurong Town Corporation was spun off from the EDB to take charge of these lands and their management. The Corporation, along with the Singapore Housing Board, provided extensive worker housing for the employees in these new industrial estates. The Public Utilities Board was created in 1963 to ensure reliable and cost-effective supply of utilities – power, water and gas – to the industrial estates.
65 The report -- 'A proposed industrialization programme for the state of Singapore', United Nations Survey Mission -- was delivered to the Singapore government in June 1961. Dr Winsemius, an economics professor from The Netherlands, has remained a good friend of Singapore, and has been invited back on several occasions to give his views on the island’s development. 66 An idea of the scale of operation, and the uncertainty surrounding it, can be gleaned from the remark attributed to Goh Keng-Swee, Minister of Finance, that if the millions of dollars spent on development resulted in vast tracts of empty wasteland, then Jurong would be known to Singapore’s posterity as "Goh’s folly." See L. Low et al, op cit (1993): 58.
65 Development finance
The Development Bank of Singapore was also established, spun off from the EDB in 1968, and equipped with funds. Half the equity was owned by the government and half by a consortium of commercial banks. Henceforth this finance institution was to provide a key vehicle for assisting with the establishment of new ventures in Singapore, particularly ventures which met the government’s goal of raising the technological level of the island’s economy.
Investment incentives
Tax breaks and other incentives for investing companies were formalized in the 1967 Economic Expansion Incentives (Relief from Income Tax) Act. This reduced the corporate tax rate from 40 percent to 4 percent on export-generated profits, for up to 15 years, in approved manufacturing occupations. Thus the government was able to maintain tight control over the incentives, to ensure that they were working as anticipated and not as an encouragement for rentier activities. In effect, taxation revenues were being foregone in favor of employment and technology transfer -- in the expectation that tax would be recouped subsequently from those placed in employment and from the MNCs themselves once they were established.
Active sourcing of investment
The EDB was refocused in 1968 as primary agent for attracting foreign investment. In this capacity it opened new offices, starting with one in New York, and sent abroad missions to argue the case for Singapore as a desirable investment location. It followed up with offices sited in the world’s financial capitals. Nothing was left to chance in Singapore’s drive to industrialize.
Labor and human resource
On the labor and human resources front, the issue of union militancy was met head on – but not with the kind of repression meted out in Korea. The PAP government leaders tirelessly put the case that unions and their members stood to gain more from economic growth and prosperity than from strikes and rioting in the streets. The militants were isolated, while gung-ho employers were curbed with the introduction of industrial arbitration. Fairness was emphasized as the goal of this system. It was complemented by training initiatives, which demonstrated that worker skills and hence prospects could be improved other than through union militancy. Eventually, in 1968, with the support of the national trades union congress (NTUC), the Employment Act was passed, establishing an industrial relations system favorable for rapid industrial development.
66 University and technical training
Singapore spared no effort in its upgrading of its own technical training activities. A Technical Education department was created in the Ministry of Education in 1968, charged with the responsibility to drastically upgrade the throughput of technicians. The EDB made technical training and 'manpower development' (now called 'human resource development') one of its principal priorities, forming a Manpower and Training Unit for the purpose.67 Another spin-off from the EDB’s training efforts was the Singapore Institute of Management, founded in 1964.68 Enrolments in technical and educational training programs expanded dramatically.69
Immigration by professionals
Perhaps even more significantly, Singapore recognized that the real bottleneck to its rapid development would be, not skilled workers, but skilled engineers and managers. In order to make up the immediate shortfall, it liberalized its immigration and work permit systems for foreign professionals being employed by foreign firms. This proved to be an astute move on the part of Singapore, solving one of the hidden problems that bedevil MNC operations.
These then were the foundations upon which Singapore’s industrial development and technological upgrading was based. The results of these preparations were readily apparent. Between 1966 and 1973, Singapore’s real GDP grew by 13 percent per annum – a record, even for East Asia. At the beginning of the process, in 1959, industry accounted for 13 percent of a small GNP; by 1975 it accounted for 35 percent of a much larger GNP. The spectacular growth in the industrial sector not only solved Singapore’s unemployment problem, but actually created labor shortages. By the early 1970s it was necessary to import guest workers from Malaysia.
Singapore found quick success in attracting multinational semiconductor operations, based on the careful preparatory steps that had been taken. The semiconductor industry in Singapore started with chip assembly plants established by US-based multinationals such as Texas Instruments and National Semiconductor. They were soon followed by other US firms such as Hewlett-Packard, and by Europeans such as SGS (now SGS-Thomson).
67 This was in fact the main thrust of the recommendations made by Dr Winsemius in his second visit to Singapore in 1970: output of engineers, accountants and other professionals would have to be drastically upgraded to keep up with potential demand. At the same time, Singapore relaxed its restrictions on immigration and work permits, particularly for foreign professionals. Thus Singapore was planning its future high technology skill needs contemporary with similar exercises underway in Taiwan and Korea. 68 Initial funding was provided by the Ford Foundation. The Singapore Institute of Management has since grown to play a major role in upgrading the competences of managers in Singapore, offering courses in conjunction with the world’s leading tertiary institutes. 69 Between 1959, when the People's Action Party (PAP) government was elected, and 1975, total student enrolment in Singapore increased from 306,000 to 522,000. The increase was largest in the fields of secondary and tertiary education. Enrolment in secondary schools increased from 49,000 to 176,000. Enrolment in tertiary institutions – the two universities and polytechnics – increased from 5,000 to 18,000. There was, moreover, a strong practical and technical bias towards these tertiary enrolments, in keeping with the needs of an expanding and developing economy.
67 The Japanese came in the 1970s, with firms like NEC establishing their own chip packaging and assembly plants. After the initial employment stimulus provided by these investments had been absorbed, Singapore started to insist that future operations have a substantial skill component; otherwise they should go elsewhere, for example to Malaysia. Singapore also insisted on companies raising technological levels within existing operations. Some MNCs saw this as being in their own interests and were happy to comply.
As the early approach of attracting investment indiscriminately in order to mop up unemployment and kick start a process of industrialization began to achieve its goals, so attention turned to a more strategic approach to take the city-state beyond labor-intensive activities.
The framework for seeding of semiconductor capabilities was established by the EDB itself, through a number of initiatives. In 1975 it embarked on a targeted promotion strategy, and published Singapore’s first list of priority industries which would henceforth receive favored treatment – including electronics and semiconductors (but not including heavy industries like chemicals or shipbuilding). Thus Singapore was picking up on a strategy that had been pioneered by Japan and was being utilized to great effect by Korea and Taiwan at the time. The list of priority industries indicated where government support would be focused, with a view to securing the maximum leverage of technologies and skills.
Economic restructuring
By the end of the 1970s, economic restructuring out of labor-intensive industries in Singapore was proceeding in earnest.70 A new Ministry of Trade and Industry (MTI) was formed to take charge of the process, formulating relief programs for the industries being run down while the EDB maintained its targeted programs to promote the industries of the future, particularly electronics and semiconductors.
In 1980 the Second Economic Plan was launched by the MTI, reflecting Singapore’s new emphasis on technology-intensive industries, and the achievement of higher levels of productivity and of quality. In response to this, in 1981 the EDB published a revised list of priority industries, emphasizing those which promised higher levels of investment in R&D. Again electronics and semiconductors were top of the list. The multinationals which had settled in Singapore, and the new ones arriving in the 1970s, were the source for the implantation of skills and technologies in the Singapore economy.
The transfer of technologies and skills was not a one-way street. Singapore itself had to set the tone and direction of leverage. In this second phase, Singaporean agencies insisted that MNCs provide adequate skills transfer, mostly through on-the-job training and sending technicians back to firms’ headquarters for training.
70 The same experience of restructuring had occurred in Japan two decades before, and in Korea and Taiwan, it was still underway.
68 A policy of high wages was implemented in the early 1980s, partly to induce firms to invest in greater levels of training and to force out firms that wished to pursue simple, low-cost assembly operations without skill or technology transfer. This was backed by the initiative of the Skills Development Fund, which initially imposed a levy of 4 percent of payroll on firms; the funds accumulated were used to upgrade skills, particularly in the small and medium-sized contract firms which had sprung up throughout Singapore to supply parts and services to the multinational operations.
These requirements were underpinned by massive investments by Singapore itself in industrial training, financed out of the Skills Development Fund. In addition to the efforts of the Ministry of Education, and of the EDB’s Manpower Services Division, there were major initiatives taken in establishing focused industrial training institutes in partnership with leading MNCs. Three such institutes were established by the EDB working closely with Philips, with Tata and with Brown-Boveri. Because of the close association with the MNCs, these institutes could provide short training courses in subjects such as precision engineering and electronics assembly, utilizing the latest industrial equipment.
The Skills Development Fund, backed by its payroll levy, ensured that these new institutes would actually be used for advanced training purposes. This proved to be a very effective way of ensuring that firms would see a coincidence of interest between their own needs for skilled operators and the upgrading of Singapore’s general technological level. Thus, even in the most basic provision of industrial skills training, Singapore was able to leverage the required resources from the MNCs.
How has Singapore maintained its relentless focus on industrial upgrading?
The 1985/86 recession was a turning point for Singapore. It revealed weaknesses in the previous high-wage policy, which had had the desired effect of forcing technological and business upgrading, as well as improving worker welfare, but had made life very difficult for the smaller firms in Singapore struggling to survive.
The recession underlined Singapore’s extreme dependence on multinationals and catalyzed a new approach that would be oriented more strongly to the encouragement of local enterprises. The new strategy was outlined by the Ministry of Trade and Industry in its 1986 document The Singapore Economy: New Directions. The new phase was marked by an intense effort to propagate knowledge-intensive activity, with the EDB again spearheading the new effort, utilizing a range of vehicles and avenues, including:
- Direct leveraging from multinationals: local industry upgrading; - Further MNC investment in a broader functional range of industrial activities; and - Propagation from Singapore’s state-owned enterprise sector. 71
71 By 1985 the EDB had become a victim of its own success, and it too was revitalized in 1986 with the new charter, to be implemented under a new chairman, Philip Yeo.
69 Direct leveraging: local industry upgrading
Rather than offer general incentives to small firms, the Singapore approach to local industry upgrading was to utilize the multinationals, encouraging them to enter into closer supply relations with local firms. The government sought to facilitate such developments through a Local Industry Upgrading Program (LIUP), which provided benefits to small firms in selected local industries. Multinationals were encouraged to enter into long-term supply contracts with such firms, upgrading their quality and reliability and technological levels in the process. Small firms supplying maintenance services, components and equipment to the semiconductor MNCs particularly benefited by this new approach.
Further MNC investment in a broader functional range of industrial activities
All these initiatives in direct leveraging activities have not distracted Singapore and the EDB from the basic strategy of attracting multinationals and pressuring them to broaden the range of their activities. This remained the bedrock of Singapore’s development strategy. The later they came, the more stringent the requirements imposed on the multinationals by the Singapore government. The Singapore authorities were acquiring more maturity and confidence in dealing with MNCs as it became clear that Singapore had something important to offer.
Take the case of Linear Technology as typical of the later arrivals. The company is the world’s leading supplier of high-performance linear analog ICs, which are needed in huge numbers to provide links between real-world operations and the digital operations of computers. The company was founded in 1981 and first came to Singapore in 1989, when it opened a small testing and finishing operation in leased premises in Kallang. Since then, Linear Technology has expanded these operations to become a significant provider of test and finish operations for the company’s global activities. It has added two further functions of IC design and warehousing and distribution to the Asia-Pacific and in 1994 it further upgraded the Singapore operation to make it Linear’s regional headquarters for the Asia-Pacific. These activities complement the IC assembly plant built at the same time in Penang, Malaysia.
For early arrivals such as SGS-Thomson and Hewlett-Packard, the process of broadening the scope of their Singapore operations continued unabated. There was a common interest between the firms and the Singapore authorities. The firms were looking for greater efficiencies and responsibility to be exercised by their Asia-Pacific operations, while the government agencies were looking for higher levels of functional responsibilities to be transferred in the interests of knowledge leverage.
SGS-Thomson, for example, continually expanded its activities since the building of the IC fabrication plant in 1985. The plant’s technological capabilities were broadened to encompass MOS ICs in 1988, and several R&D projects have since been located at the Singapore operation. By the mid-1990s the firm had designated Singapore as the lead
70 centre for three such world-wide projects.72 In the 1990s SGS-Thomson established its regional headquarters in Singapore, in recognition of the growing significance of Asia- Pacific in the company’s world operations.
In the case of Hewlett-Packard, the operation in Singapore was continually upgraded, and by the mid-1990s ranked as the most advanced manufacturing and engineering centre in the city-state. It has a staff size of 8,000, with activities spanning such HP products as palmtop computers, integrated circuits, opto-electronic components, inkjet printers, keyboards and computer peripherals and network software. Indeed by the mid-1990s, the Singapore operation held global responsibility for two of HP’s product lines, namely mobile printers and hand-help products (such as personal data assistants), meaning that it carries responsibility for all stages of these products, from R&D, through manufacturing, to marketing and customer support.
Thus, Hewlett-Packard has been one of the multinationals which has given most justification to the soundness of the Singapore version of the developmental resource leverage strategy. In pursuing its own interests in SouthEast Asia, it has also accommodated the needs of Singapore for transfer of skills, technology and resources.
Propagation from Singapore’s state-owned enterprise sector.
Central to the Singapore strategy for the implantation of high technology capabilities, has been its utilization of the large firms which have grown within the State-owned sector. This sector, established in the 1960s as a far-sighted Singapore initiative, has proven to be the seedbed for many of Singapore’s present high technology indigenous firms, such as Keppel Corporation and Singapore Technologies Group.
The Singapore Technologies Group (STG), which can be taken as typical of these firms, was founded early on in Singapore’s evolution as a defense equipment producer, but one which was forced from the beginning to operate along sound commercial lines. Under Goh Keng Swee’s leadership, firms like STG were encouraged to diversify, taking on commercial contracts where these would not interfere with their basic equipment manufacturing and supply functions and to act as technology leveragers in their own right.
Thus Singapore rapidly acquired skills and technologies in the fields of ship repair and maintenance, shipbuilding, weapons manufacture, aircraft maintenance – all within a carefully controlled and nurtured commercial environment. The Chartered Semiconductor Manufacturing operation is the outstanding product of this development. Industrial upgrading in the 1990s
It is only in the 1990s that the Singapore government has taken steps to prepare the city- state for 'advanced country' status and to accelerate the shift towards 'knowledge-
72 They covered a design project for digital signal processing (DSP) chips; streamlining the wafer fabrication process; and new packaging operations.
71 intensive' industries. This has involved for the first time sustained investment in Singapore’s own R&D facilities, set up in the public sector on the Taiwan model. The framework for the new strategy, which would take Singapore around the 'next lap' of its development trajectory, was issued by the Ministry of Trade and Industry in 1991.73 The Next Lap strategy called for more adventurous industrialization policies needed to take Singapore to a qualitatively higher-level of technological and commercial sophistication.
One approach was to consider how Singapore’s various industries could be conceived as 'clusters', and to formulate government policy in future in terms of the identification of gaps that needed to be filled if clusters were to operate effectively. Based on Porter’s notion of industry clusters, the EDB started to formulate plans for encouraging certain industrial 'clusters' in Singapore rather than single industries.74
This cluster-oriented study was conceived as part of a wholesale renewal of Singapore's policies and programs to support its manufacturing and industrial development generally. Five of these programs were formulated to take Singapore into the 21st century. They were:
1) The Manufacturing 2000 program, which aims to keep manufacturing contributing at least 25 percent of GDP and at least 20 percent of employment by the year 2000. In 1995 manufacturing accounted for 25.3 percent of GDP and the employment share of manufacturing was 24 percent.
2) The International Business Hub 2000 program, which aims to encourage firms to make Singapore the site for their regional headquarters.
3) The Promising Local Enterprises (PLE) program, which aims to foster the development of indigenous local firms, at least 100 of which are expected to grow to the point where they produce $100 million in turnover within 10 years.
4) The Regionalisation 2000 program, which aims to establish high technology industrial parks in Riaus (Indonesia), Suzhou and Wuxi (China), Bangalore (India) and Vietnam.
5) The Co-Investment program which establishes a fund from which the EDB can make equity investments in strategic projects. By the end of 1995 over $200 million had been committed under the Cluster Development Fund in eight projects involving both MNCs and ‘promising local enterprises’.
73 This was the 1990s Strategic Economic Plan, prepared by an economic planning committee convened in 1989. See Ministry of Trade and Industry, The Next Lap (Singapore: MTI, 1991). 74 See Michael Porter, The Competitive Advantage of Nations (1990). Note however that Porter made a very negative judgment concerning Singapore’s prospects in his 1990 study; this is taken up again below in the discussion of the viability of Singapore’s approach.
72 Framework of public support in the 1990s
Thus it could be said that by the late 1990s Singapore was finally taking the necessary steps to support a genuine innovative capability and to promote the self-sustaining efforts of its own companies. It was taking the necessary steps to establish high technology foundations that complemented but were independent of the activities of its multinational clusters. If this was ‘too little, too late,’ as claimed by Michael Porter, then it was certainly making up for lost time. Its initiatives covered the following issues.
Innovation support
The innovation thrust is designed to promote and support the development of new ideas and projects, through provision of major new resources to the NSTB to promote innovation activities in Singapore companies and by entrepreneurs.75
Overseas expansion
The regional promotion thrust is designed to replicate Singapore’s high technology activities and strategies abroad, in a series of ‘technology parks’ being jointly developed in India, China, Vietnam and Indonesia. The EDB for example co-invested with Hitachi Semiconductor, which already operates an advanced plant in Singapore, to attract the Japanese firm to the China-Singapore Suzhou Industrial Park. It is anticipated that Singapore’s high technology activities will take place in several continents by the 21st century.
Process capabilities enhancement
Central to the deepening of ‘absorptive capacities’ are continual investments in process capability enhancement, which Singapore is now promoting through the public sector, as stimulus for similar developments in private firms. These programs are focused on Singapore’s critical high technology industries. Thus in 1996 the National Science & Technology Board launched its Semiconductor Process Capability Development (SPCD) program, a $200 million scheme to upgrade companies’ capabilities in wafer fabrication, lithography and display process technology. The first contract under the scheme was awarded to Chartered, to develop 0.25 micron wafer capabilities at its Woodlands fabrication facility, in conjunction with the Institute for Microelectronics and tertiary institutions.
Deepening of skills base
The skills thrust is concerned with anticipating the labor and skills needs of high technology industries. In 1995 the EDB and NSTB initiated several specialist skills development programs specifically in the area of IC wafer fabrication skills to ensure that
75 A $500 million Innovation Development Scheme (IDS) was launched at the end of 1995. Under the scheme, companies can seek reimbursement of 50 percent of the costs involved in undertaking innovation activities in products, processes, applications or services.
73 new wafer fab projects being sought for Singapore would be able to draw on reliable skilled labor.76
That a promotion framework such as this is needed at all is a sign that Singapore considers its high technology activities to be very vulnerable -- as indeed they are. It competes vigorously for new investment by multinationals, but is now actively encouraging the efforts of its local firms as well.
The practical engagement of these programs is striking. They are complemented by an array of reforms to administrative infrastructure and relentless IT upgrading, which when combined with Singapore’s clean and efficient administrative procedures, makes for a formidably competitive manufacturing centre. But no one is more aware of the vulnerabilities of Singapore than its own elite. It was able to pass through the 1997/1998 Asian financial crisis virtually unscathed, but nevertheless anticipated major downturns in 1998 simply because of its regional ties. These are the realities of Singapore’s existence.
Industry 21: A Knowledge-based Economy
The Economic Development Board's vision for Singapore in the 21st century is as a knowledge-based economy. Its Industry 21 (I21) plan is designed to keep Singapore competitive and abreast of the major trends around the world.
According to the EDB, 'Industry 21, launched in June 1998, is a set of six programs devised to promote Singapore's economic growth into the next millennium. In the next 10 years, knowledge driven industries under Industry 21 will contribute 40 percent of Singapore's annual GDP, and create 20,000 to 25,000 jobs every year. Of these, manufacturing and exportable services will create 5,000 to 10,000 jobs a year. Two out of every three jobs will be for knowledge and skilled workers in the manufacturing sector and three out of four in the exportable services sector.' 77
The six programs encompassing the Industry 21 package, some of which were previously announced and have been bundled into this set, are:
· Cluster development -- designed to create and promote inter-sectoral linkages, and backed by the S$3 billion Cluster Development Fund.
· International business -- to tap into global and regional hubs.
· Promising local enterprises -- to build up local entrepreneurship.
· Headquarters -- a continuing effort on Singapore's part to attract MNC headquarters to Singapore.
76 The NSTB launched a $30 million Semiconductor Manpower Development Initiative in 1996, designed to encourage young Singaporeans to pursue post-graduate technical studies in semiconductor engineering, at the National University of Singapore and the Nanyang Technological University. 77 Economic Development Board, Annual Report 1998.
74 · Innovation -- science and technology programs supported by the National Science & Technology Board to generate like industrial clusters in the future.
· Resource development -- to produce the skills base in the workforce needed for knowledge-intensive production.
Undoubtedly what has underpinned Singapore’s success is not a reliance on 'market forces' but the continuous interventions of state agencies like the EDB, and latterly the NSTB, in shaping and fostering the industry’s development. Long before the World Bank recognized the complementarity of market-led development and state intervention, Singapore’s agencies had been strenuously intervening to attract investment and 'encourage' upgrading (through the carrot of incentives and the stick of threatened banishment from Singapore).78 This process has continued right into the 1990s, through such initiatives as the $3 billion Economic Development Assistance Scheme (1995 to 2000), out of which the EDB has created its Cluster Development Fund and the NSTB has launched its Semiconductor Process Capability Development program, amongst other initiatives.79
Singapore thus leaves nothing to chance in its strategies of leverage and supports them with the institutional capacities embodied in its first-class agencies like the Economic Development Board, the National Scienxe & Technology Board, Trade Development Board and many others.
It follows that other countries seeking to replicate Singapore’s success would likewise have to invest their energies and resources in developing comparable institutional capacities. This is a tall order. It will prove to be the means for separating the successful from the unsuccessful in pursuing such leverage strategies in the future.
78 The World Bank finally came to terms with this complementarity in its 1993 report, The East Asian Miracle (Washington, DC: The World Bank). 79 The Cluster Development Fund is described above. The Semiconductor Process Capability development program is a S$200 million program launched to help upgrade companies’ capabilities in wafer fabrication, lithography and display technologies. The first contract under the scheme was awarded to Chartered, to develop 0.25-micron wafer capabilities at its Woodlands facility, in conjunction with the Institute for Microelectronics and tertiary institutions.
75 5. CASE STUDY: SINGAPORE'S CLUSTER DEVELOPMENT STRATEGY
Singapore in the 1990s has been highly influenced by cluster development concepts, as promoted for example by Harvard's Michael Porter. Its 'Manufacturing 2000' strategy, formulated in the early 1990s by the Economic Development Board, is an expression of the cluster development concepts in action. The M2000 study, and the programs which have emanated from it, has a clear strategic objective: to maintain manufacturing as a significant activity in Singapore, accounting for 25 percent of Singapore's GDP in the medium-term (ie by the year 2000) and for 20 percent in the long-term.
The strategic aim of the strategy is to prevent the 'hollowing out' of Singapore's industries, which has been feared in the world's centres of advanced manufacturing, such as the USA, Japan and Europe, but which has also been felt in East Asia, particularly in Hong Kong.
Singapore's EDB has no intention of allowing Singapore to become the 'Manhattan' of SouthEast Asia, responsible for finance and services but giving up on manufacturing. The EDB understands very well that the best and most highly skilled jobs are located in high value-adding manufacturing jobs, and that these actually generate the best service jobs such as engineering consultancy.
The M2000 study identified three key clusters around which Singapore would build its future manufacturing prosperity. They are: electronics and semiconductors; chemicals; and engineering (all described earlier). The EDB's efforts to attract manufacturing and R&D investment and to build entrepreneurial small companies in Singapore have been tightly focused on these three clusters ever since. This is strategically a highly sophisticated approach, and compares most favorably with the 'scatter gun' approach found in other countries (including, let it be said, Australia).
Rationale for cluster development
The case for focusing industrial development policies on clusters of activities, with each step in a value-adding chain feeding into other steps, is by now overwhelming. But it is still only practised by the most sophisticated industry promotion agencies -- including those found in Taiwan and Singapore.
Recognition of the advantages of clusters goes back to the 19th century. The British economist, Alfred Marshall, for example, noted how several European 'industrial districts' had emerged with superior competitive advantages, such as Sheffield in England for steel cutlery and Solingen in Germany for fine steel products. He formulated the basic theoretical advantage for firms in such districts as being 'positive externalities', meaning that each firm was able to derive advantages from the proximity of other firms
76 conducting related activities (upstream or downstream) and from the knowledge that was 'in the air' in such districts.80
The same advantages have been observed in the 20th century to accrue to multitudes of small and medium-sized firms clustered in industrial districts in Italy -- such as in the textile district of Prato, near Florence -- and in R&D intensive locations like California's Silicon Valley or North Carolina's Research Triangle Park.
The terms used to describe the advantages derived by firms from clustering are 'agglomeration economies' or 'positive externalities' or 'spillover effects' as well as cumulative effects summarized as 'locational economies.' Spillover effects are the 'free' benefits that are captured by one firm through the activities of another. The term is commonly used to account for the benefits of foreign direct investment, which certainly lies at the core of the Singapore clusters.81 A considerable literature has now built up on these matters -- despite the under-recognition by governments of the enormous practical significance of clustering, both for advanced as well as developing economies.82
Focusing on the value chain
The fundamental concept that holds together a cluster of firms is that of the 'value chain' that links downstream to upstream industrial activities. Take the case of clothing and textiles. In yarn production there are various stages of fibre preparation (eg wool scouring and cleaning) leading to production of finished yarn. In textile production there are stages of dyeing, knitting or weaving, and textile finishing, that can be done separately by separate firms (as in an industrial district like Prato in Italy) or can be done in an integrated operation within the confines of a single 'vertically integrated' firm.83 An important link with both are the services supplied by specialist chemicals houses (for dyes); by specialist machinery and equipment suppliers (eg suppliers of looms and CNC control systems); and by fabric designers and fashion marketing specialists. These all add value in a complex chain that starts with raw materials and ends with finished products being supplied to the market.
80 Alfred Marshall, Principles of Economics (London, Macmillan, 1890; 1920). 81 On spillover effects, see the work of the Swedish economist Magnus Blomstrom, now deputy head of the Stockholm School of Economics -- for example, M. Blomstrom and F. Sjoholm, 'Technology transfer and spillovers: Does local participation with multinationals matter?' Working Paper #6816, National Bureau of Economic Research, Washington, DC, 1998; or for a full survey of the economic literature on this topic, M. Blomstrom and A. Kokko (1998), 'Multinational corporations and spillovers,' Journal of Economic Surveys, Vol. 12, pp. 247-277. 82 For a useful review, see Jane Marceau, 'Clusters, chains and complexes: Three approaches to innovation with a public policy perspective,' in Mark Dodgson and Roy Rothwell (eds) The Handbook of Industrial Innovation (Cheltenham, UK, Edward Elgar, 1994). Professor Marceau makes the point that clusters, chains and complexes all give policy makers a different 'lens' or framework for viewing the interactions that drive economies and innovation. 83 On the industrial district of Prato, seen from a cluster perspective, see Linda Weiss and John Mathews, Structure, strategy and public policy: Lessons from the Italian textile industry for Australia, UNSW Studies in Organisational Analysis and Innovation, No. 4 (Sydney, University of NSW, 1991).
77 Cluster theory has been studied in numerous contexts, most famously by Porter and his associates at Harvard, but also by European groups such as GREMI (which developed the 'filiere' concept to describe an industrial chain of activities spanning an entire economy) and numerous Italian theorists such as Brusco, with his fundamental contribution of seeing the Italian industrial districts as 'technically decomposed but socially integrated.' 84
Public policy that is 'cluster-oriented' or 'value-chain' oriented seeks to determine which are the value chains that dominate in any given economy and where 'gaps' can be identified and potentially filled. It is in closing these 'gaps' (such as the supply of specialist chemicals in a textile district) that public policy can make all the difference, over and above what 'market forces' would achieve acting on their own. 85
Cluster advantages increase with the technical sophistication of production systems. While there might not be much advantage to having a steel mill next to a white goods factory, because their linkages are standardized, the situation is quite different for very knowledge-intensive integrated circuit design, IC fabrication and customization by IT and electronics firms, for example.
It is the possibility of enhancing productivity and time to market by bringing specialists from such firms locationally together to work in cross-disciplinary and cross-firm teams that the real advantages of locating in 'Silicon Valley' type environments emerges.
Enhancing the value of clusters
Porter's 1998 contribution in Harvard Business Review identifies three major advantages that accrue to firms when they are part of clusters. These are that:
· clusters drive productivity improvements; · they drive the direction and pace of innovation; and · they stimulate the formation of new businesses.
In these ways, clusters are superior to their alternatives, which are either atomized firms interacting at arm's length in the marketplace or the vertically integrated firm, which seeks to bring all activities within itself.
84 On Porter's work, see his study The Competitive Advantages of Nations (New York, The Free Press, 1990) and subsequent developments such as his 1998 HBR article, op cit. On the GREMI group, see for example P. Aydalot and D. Keeble (eds) High Technology Industry and Innovative Environments (London, Routledge, 1988) and more recently, V. Sabourin and I. Pinsonneault, 1997, 'Strategic formation of competitive high technology clusters,' International Journal of Technology Management, 13 (2): 165- 178. On the Marshalian 'industrial district' and Brusco's contribution, see F. Pyke, G. Becattini and W. Sengenberger (eds) Industrial Districts and Inter-Firm Cooperation in Italy (Geneva, International Institute for Labour Studies, 1990) and in particular the paper by Brusco: 'The idea of the Industrial District: Its genesis', pp. 10-19. 85 See the discussion on this point by the World Bank study, 'Industrial structures and the development of small and medium enterprise linkages' edited by Saha Dhevan Meyanathan (Washington, The World Bank, EDI Seminar Series, 1994).
78 The first case suffers from the lack of stimulus that comes from clustering and long-term relations, while the second suffers from atrophy and inertia associated with large overheads and size.
Porter makes the point that clusters promote both competition and cooperation.
"Rivals compete intensely to win and retain customers. Without vigorous competition, a cluster will fail. Yet there is also cooperation, much of it vertical, involving companies in related industries and local institutions. Competition can coexist with cooperation because they occur on different dimensions and among different players."86
It is worth mentioning this explicitly, because it represents a fundamental change in stance on the part of Porter, who in his earlier work tended to downplay cooperation in clusters, or treated it as something which weakened the competitive impulse. This change in his perspective is welcome, because it makes his work more applicable to the real developments in clusters that have occurred in east Asia, and in particular in Singapore and Taiwan.
The critical resources that are common to clusters, or regional agglomerations, or 'industrial districts' are knowledge resources -- frequently found in a great university or in the human resources processes of skills acquisition. The well-known cases involve the clustering of firms in Silicon Valley around Stanford University and the University of California at Berkeley, while on the US East Coast the cluster of firms around Boston's Route 128 all drew from the knowledge resources available in MIT.
In the East Asian cases we are considering, the Hsinchu Science Park in Taiwan has drawn heavily on the intellectual resources of the nearby Tsinghua University and Chiaotung University, as well as the laboratories of ITRI, while in Singapore the manufacturing clusters have drawn on industrial training centres established jointly by the EDB and multinationals, as well as new technical universities like Nanyang.
The Singapore industrial clusters
The focus by Singapore's industry promotion agencies, principally the EDB, on three industrial clusters -- electronics/semiconductors, chemicals and engineering -- is based on all the advantages identified above, combined with an intelligent appreciation of what can be achieved by public policy intervention. The cluster focus identifies the key value- adding steps that already exist, and even more importantly, identifies the value chain 'gaps' that could be remedied by attracting either local or international firms to 'plug' the gap.
86 Porter 1998, op cit, p. 80.
79 Semiconductors cluster
In the case of semiconductors, Singapore has in the past actively sought investment in the 'back end' of the fabrication chain, namely assembly and packaging, and in the 'front end' namely wafer fabrication or the laying down of circuits through complex photolithographic techniques. In between there are numerous steps which Singapore's EDB has actively encouraged, in order to make the semiconductor value-chain more complete -- such as photomask production and silicon wafer production. The state of the semiconductor cluster in Singapore in 1998 is shown in Table 5-1.
Table 5-1 Firms making up the IC industry cluster in Singapore: 1998
IC Design MNEs: AMD, Fujitsu, Harris, HP, Hitachi, Linear Tech, Lucent, Motorola, NEC, Philips, SGS-Thomson (STMicroelectronics), Sharp, Siemens, Silicon Systems, Sony, Temic, Toshiba Local firms: Azfin, Serial Systems, TriTech
IC fabrication MNEs: SGS-Thomson (STMicroelectronics), TI-HP-Canon (TECH Semiconductor), HP, Hitachi/Nippon Steel, Philips/TSMC Local firms: Chartered Semiconductor Manufacturing (CSM), Chartered Silicon Partners (CSM-HP), Silicon Manufacturing Partners (CSM-Lucent)
IC test and assembly MNEs: AMD, Adaptec, Lucent, Brooktree, Delco, Fujitsu, HP, Linear, Matsushita, NS, NEC, Philips, Seiko-Epson, SGS-Thomson, Siemens, Silicon Systems, Unitrode Local firms: KES-Rood Technologies (Sunright group), STATS (Singapore Technologies), UTAC
IC support and ancillary services MNEs: Photronics (IC masks), Wacker Siltronic (wafers) and others Local firms: Advanced Systems Automation (ASA), Ever Technologies, Manufacturing Integration Technology (MIT), MBE Technology, Natsteel Electronics, International Semiconductor Products (ISP) and others
Source: Adapted from EDB ______
The Economic Development Board counted nearly 50 companies as being involved in this sector in the mid-1990s. These companies employed 20,000 staff, many of whom are highly skilled. Output reached $9.0 billion (S$12.5 billion) in 1995 – most of which was accounted for by multinational assembly, testing and packaging operations, as well as some wafer fabrication and foundry activity. The value-added in Singapore reached $2.8 billion (S$4.0 billion). All of this is value-added within multinationals or under contract to multinationals. There is as yet no branded semiconductor product produced by a
80 Singapore indigenous firm. The range of chips produced is impressive, from DRAMs (TECH) through logic chips and ASICs to mainstream logic and memory products (SGS- Thomson).
The R&D and training infrastructure to support and reproduce these operations in Singapore is also being developed. The Institute of Microelectronics (IME) was established as a centre of excellence in 1991, with funding largely from the National Science and Technology Board (NSTB). It is expected to work with firms in pre- competitive R&D in highly focused consortia.87
Supporting industries have been or are being established to provide specialized materials and equipment for the semiconductor industry. 88 The major inputs that had hitherto been lacking in Singapore were masks (reticles) and wafers – both of which were covered by announcements in 1995. The announcement that the US firm Photronics would establish a mask-making plant in Singapore – the first in SEAsia – was a major boost to the island’s semiconductor industry. 89 These supporting and ancillary activities add to the depth of the semiconductor cluster in Singapore – thereby making it even more favored as a location for high technology semiconductor and IT industry development. This is the power of ‘increasing returns’ at work.
The chemicals cluster
In the case of chemicals, the cluster process has been actively promoted through the provision of major infrastructure, in the form of the creation of the artificial island of Jurong, and the linking of one kind of chemical processing with another on this island, to achieve substantial economies of proximity.
Singapore, through the EDB, has poured enormous efforts into building the Jurong facility, and in attracting multinationals to it, as part of a long-term vision of the city- state's prosperity. The petrochemical cluster bases its rationale firmly on Singapore's status as the premier port of SouthEast Asia, and thus on its existing shipping links, which are fundamental to the economics of petrochemicals.
87 It has signed research partnerships with several of the major companies already operating in Singapore (such as AT&T, Siemens, SGS-Thomson, Toshiba and NEC, as well as Chartered of Singapore), thereby leveraging the skills of these companies across to Singapore technicians and engineers. In 1995 it formed eleven Singapore-based MNCs and local firms into an Electronic Packaging Research Consortium, to conduct further leading-edge collaborative research and development work, on the model of the product development consortia that are formed in Taiwan. 88 These include: masks, lead frames; burn-in and testing services; bonding wires; automated equipment; ceramic packages; epoxy resin manufacturing; gas and chemical supplies; wafer fab equipment; and cleanroom design and installation. 89 Masks are the silicon templates used to trace the circuit designs onto chips; a separate mask is needed for each layer of the circuit. A single blemish in the mask can ruin a whole production run of wafers.
81 The engineering cluster
In the case of precision engineering, there has been relentless effort by the EDB to build up the technological capabilities of Singapore's engineering specialists, and their capabilities in precision engineering. It is this cluster which supports further development in the electronics cluster. For example, both hard disk drive production and CD-ROM drive production call for the services of precision engineering firms for spindles and miniature motors. It is Singapore's ability to provide such services locally which largely accounts for its success as a world concentration of HDD production -- rather than this business being monopolized by Taiwan, which still lacks the precision engineering infrastructure that has been so carefully cultivated in Singapore.
Public promotion of clusters in Singapore
All these developments are backed financially and technologically by public policy initiatives in Singapore. Technologically they are backed by the creation of a series of public sector R&D facilities in the 1990s, targeted clearly on the emerging clusters. For example, the semiconductor cluster has been targeted by the Institute of Microelectronics. This institute, which has its own cleanrooms, works collaboratively with firms based in Singapore, both multinationals and indigenous firms, to pursue technological upgrading projects of common interest.
In financial terms, the EDB has created a Cluster Development Fund, initially capitalized at S$1 billion and since expanded to $3 billion. It is the CDF that has enabled Singapore to attract investments in front-end wafer fabrication activities that generate further cluster pin-offs (such as in TECH corporation for production of DRAMs, and in new ventures such as Chartered Silicon Partners, an advanced Application-Specific IC facility being built as a joint venture between Singapore's Chartered Semiconductor manufacturing and Lucent Technology of the US.
But more fundamental is the underlying work of the Economic Development Board itself, which has conceived the cluster strategy, is responsible for implementing it and exercises constant vigilance in attracting appropriate investments for Singapore in the strategic clusters and in providing an interface between the firms involved and the Singapore public authorities. More than any other institution, the EDB has been responsible for the success of Singapore's efforts to create manufacturing industries and to ensure that they are continually upgraded.
82 6. COMMON ELEMENTS: INDUSTRIAL UPGRADING AND INSTITUTIONAL LEARNING
While the differences between the approaches taken by Taiwan and Singapore to their industrial upgrading are clear and important, the underlying similarities in their strategies and institutional frameworks are also striking. The fundamental differences involve the variety of institutional vehicles chosen for their upgrading strategies.
In the case of Taiwan, it is the public sector research laboratories, led by those of ITRI, which have played the role of technology transmission agency on behalf of the economy as a whole. They have driven the process of technological diffusion through such novel institutional devices as the rapid creation and dissolution of R&D consortia that bring the ITRI laboratories into direct contact with small and medium-sized enterprises and industry associations.
In the case of Singapore the emphasis has been quite different, in that the target of the government's interventions has been the attraction of multinationals. But this has been with a clear goal in view, namely the systematic and relentless leveraging of technological capabilities from the MNCs, to be channeled across to indigenous Singapore firms, through a progression of capabilities that moves along two dimensions - - technical and market oriented capabilities. The idea illustrated in Figure 6-1.
Figure 6-1 Map of technology diffusion: leverage from MNCs
Market expansion
Integrated Exports production and marketing
Domestic Production production and product development
Functional expansion
The commonalities reside in the way that both countries have fashioned a set of institutions which drive firms in these economies towards an outward, export orientation, and towards endless technological upgrading -- rather than allowing firms to slip into lazy habits as domestic suppliers only, looking to compete simply through low costs, or worse, through monopoly positions.
83 The strategic decisions made by firms
Firms in Singapore and Taiwan make strategic decisions for themselves. They are not under any compulsion to follow this or that strategy as laid down by public authorities. But where there are clearly desirable national directions for firms to follow, as in the case of industrial upgrading (for example from manual machine tools to computer-aided numerically controlled machine tools) then incentives are provided and disciplines imposed when firms seek some form of government assistance.
Firms which are established in Taiwan and Singapore have a clear perspective as to how they may insert themselves within global production chains. They pursue strategies, for example, as contractors to other firms, not seeking to produce a product or a brand of their own. This means they are often invisible in the eyes of the wider public. But they generate wealth nonetheless, and are subjected moreover to the constant upgrading discipline of having the toughest international firms as their industrial customers.
The trends towards industrial contracting as a leading-edge business strategy are intensifying, rather than diminishing. New firms arise in Silicon Valley each month pursuing some innovative form of industrial contract strategy. Innovative firms in Australia are likewise pursuing such strategies -- such as Bluegum, Australia's largest electronics contract manufacturer, which acquired the computer manufacturing facility vacated in Wangaratta by IBM and added it to its thriving industrial contracting business.90
… are shaped by the institutional frameworks within which firms operate
The institutional frameworks that have been found to work effectively in Taiwan and Singapore have been tried and tested through an evolutionary sequence of trial and error, learning and improvement. They did not spring ready made from some convenient formula. Indeed, as we saw in Chapter Three, early examples of Taiwan's R&D alliances were failures. Characteristically, for the Taiwanese these early failures led to a search for more effective institutional frameworks in which firms could be enrolled so that collaboration could be combined with competition. There is an important lesson here. In Australia debate tends to be polarized between advocates of one kind of solution or another, without much room being left for learning, adaptation and evolution.
Likewise we noted that the institutional frameworks developed in Taiwan and Singapore are not based on dominance by the private sector over the public, or public over private. Rather there has been a continuous co-evolution of responsibilities and behavior which is captured by Weiss in the phrase 'governed interdependence.'91 The strength of the collaboration between the public and private sectors lies in their mutual obligations and complementary resources.
90 See the articles "A future for our factories" and "Contract manufacturing: an old idea is new again" by David Forman, in "Tales from Silicon Valley" published electronically by the Australian Business Foundation: www.abol.net. 91 See Weiss 1998 op cit.
84 Now, the World Bank’s ‘East Asian miracle’ report attributed East Asian success to good macroeconomic management and to ‘market friendly’ interventions.92 While these elements were certainly present in the rise of high technology sectors, they do not take us very far in understanding high technology industrialization and upgrading as seen in Taiwan and Singapore. Once the central role of learning is acknowledged, the issue of the institutional setting in which it takes place becomes unavoidable. In our examples of the manufacturing industries which have seen continuous upgrading and diversification in Taiwan and Singapore, the common institutional elements have been as follows:
Technology leverage
Some public sector R&D institute whose main mission is the scanning of the world’s technological developments and rapidly building a capability in these new techniques, for the purpose of diffusing them to the private sector as fast as possible, has been present in all the semiconductor cases. Examples are ITRI in Taiwan, with its specialist laboratories such as ERSO and CCL; or the NSTB with its specialist laboratories such as the IME in Singapore.
Financial leverage
Some development bank or investment vehicle charged with the mission of identifying worthwhile strategic investments, such as those which further the goals of catching up, and organizing the financing required, has also been present in all the cases we have examined. Thus in Taiwan there was the China Development Corporation. In Singapore there has been the Singapore Development Bank (spun off from the EDB in the 1960s) and such novel institutions as the Cluster Development Fund. These operate either through the mobilization of domestic savings, or through mobilizing international bank syndicates and the issuance of debt instruments such as depositary receipts.
Industry cluster strategies
Firms and even industries are not promoted on their own in Taiwan and Singapore, but in relation to each other. It is connections and linkages that are prized above all – upward and downward linkages in the value chain and horizontal linkages between firms providing complementary products and services. Industry clusters become self- perpetuating and self-renewing once a sufficiently rich set of interconnections have been established. Taiwan actively promotes its IT and semiconductor clusters and Singapore has focused its industrial promotion activities on key clusters like electronics and semiconductors, chemicals and precision machinery. Multinational investment in these clusters is especially encouraged and local firms encouraged to form to take advantage of the supply linkages thus generated. If an economy can be judged by the richness of its inter-connections, then the Taiwanese and Singaporean industrial economies have already broken through an important network threshold.
92 See the World Bank, The East Asian Miracle (New York, Oxford University Press, 1993).
85 Nurturing environment for the formation of knowledge-intensive firms
All the cases of semiconductor industry formation have involved provision of suitable infrastructure, such as the Hsinchu Science-based Industry Park in 1980 and its successor, the Tainan park in the late 1990s. Or, the Singapore science parks in Jurong and the new semiconductor fab park in Woodlands, as well as taxation and R&D incentives schemes designed to facilitate the formation of new firms. In the case of Taiwan’s ITRI, this has extended in the 1990s to the creation of a multi-storey ‘incubator’ building on the ITRI campus, designed to house the operations of new technology-intensive firms, started mainly by ITRI staff.
Investment attracting vehicles
Bodies such as Singapore’s Economic Development Board (or Penang’s Penang Development Corporation in Malaysia) -- termed collectively economic development agencies -- have been central to the process of attracting and monitoring investment in high technology activities by multinationals.
The East Asian agencies have been so successful in attracting multinational investment that they have been paid the compliment of emulation in other parts of the world, such as Scotland, Wales and Ireland, where the economic development agencies have all played major roles in attracting foreign investment to these areas formerly stricken with industrial decline.
Industry self-organisation
Bodies such as the TEEMA and more recently, TSIA in Taiwan, have emerged to provide a means for communication between government and firms, and to fashion a consensus over new directions for the industry to move in. It is such a capacity for an industry to self-organize, for more than merely defensive ends, that is an important factor in the ability of the industry to be continuously upgraded and thereby to sustain its competitiveness. This has not been such a strong feature in Singapore, where multinationals have their own global agendas and do not need national industry associations.
Industrial upgrading incentives and discipline
In none of the cases of manufacturing industry creation or upgrading that we have examined in Singapore or Taiwan have public agencies been content to create new firms or seed technologies without at the same time setting in place processes for continual technological upgrading and enhancement. The world technological frontier moves ahead relentlessly, and firms and agencies need to be focused on keeping up with these developments, through all the means of open technological communication available.
86 Skills upgrading and technical training
Technological capabilities rest on an infrastructure of specialist industrial training which again is not created by markets, but calls for institutional innovations to ensure that firms can employ skilled staff and engineers as they need them. Singapore for example created specialist training centres in alliance with selected multinational corporations. In the 1990s it has underpinned its expansion of wafer fabrication activities with a specialist technical training program funded through the EDB.
Market shaping and creation
In all the cases of semiconductor industry formation in East Asia, markets for the products did not exist initially. They had to be conjured into place, to complement the markets in advanced countries which acted as the export drivers for the nascent industries. Thus institutions like III in Taiwan helped to create a public and private sector market for IT products, by driving the associated standards for IT use in government agencies for example. In Singapore a similar role was played by the National Computer Board.
Export promotion
The collective enhancement of export performance through institutions such as Taiwan's CETRA (China External Trade Development Council) or the TDB (Trade Development Board) in Singapore has also been a significant source of institutional support as firms in East Asian countries seek to enter new markets.
Lead agency (Johnson’s ‘pilot agency’)
Since industry adaptation and adjustment depends for its success on coordination, the need for some form of pilot or lead agency to set the overall strategic directions and coordinate the activities of the various agencies and trade/industry associations, is apparent. The outstanding example in East Asia has been Japan's Ministry of International Trade and Industry (MITI), analyzed in Chalmers Johnson's famous work, MITI and the Japanese Miracle.93 Prominent examples in our cases, playing comparable roles, are the CEPD in Taiwan and the EDB in Singapore.
On their own, these agencies and organizational innovations are not so remarkable, and easily replicated (as for example, the economic development agencies which have been emulated in Europe, such as the Welsh Development Agency). What is remarkable is the total system formed by their interaction and mutual support. It is this systemic character of the elements that accounts for the capacity to learn. It is the adaptability of the total
93 See Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925- 1975. (Stanford, Stanford University Press, 1982).
87 system that counts, with the facility to improve adaptation over time as experience is gained and stored in appropriate institutional form, generating what may be called ‘institutional capacity.’94
Key features of this process of creating new knowledge-intensive industries through leverage and learning make it very different from the conventional view of knowledge generation within the individual firm, or from the view of technological ‘diffusion’ as instigated by the innovators and leading to ‘transfer’ to the recipients. Five features of the process may be identified, making sense of the kinds of institutional innovations remarked upon in the cases of Taiwan and Singapore. 95
1. New industries created as deliberate act of public policy
New high technology industries are created in Taiwan and Singapore not through the spontaneous diffusion of industries or production systems from advanced countries, but as a deliberate act of policy designed and implemented by the countries themselves, working within the technological dynamics of the industries concerned.
The creation and upgrading of a high technology industry involves creating the institutions of technology leverage. There is as yet hardly any discussion in the economic literature of industry creation as a deliberate act of public policy. Yet this is clearly what is at stake in the case of the emergence of high technology industries in East Asia. The process of industry creation starts with the creation not of firms or technology agencies but of an institutional framework which provides a pattern or template for subsequent industry growth. The process of high technology industrial upgrading is concerned not with individual products or even individual technologies, but with the development of a capability to handle an expanding range of increasingly sophisticated products and technologies that are ‘knowledge-intensive.’
2. Industries created through management of technology leverage and diffusion
The process of high technology industry creation in Taiwan and Singapore is achieved through the management of technological diffusion, via imitation, leverage and learning, rather than through R&D-led knowledge generation by individual firms.
The generation and diffusion of knowledge is equivalent conceptually to the notion of ‘innovation’ – except that the Western literature on innovation has an overwhelming bias towards the first stage, namely knowledge generation. It was the genius of Japan and the other East Asian countries to realize that the emphasis should really be placed on the second stage, diffusion, since this is where national wealth (as opposed to the wealth of an individual person or firm) could be generated. Thus the processes of industrial and
94 See the working paper on this topic produced as part of the 'Building Institutional Capacity in Asia' research project of the Research Institute for Asia-Pacific (RIAP) of the University of Sydney: John A. Mathews and Fred Argy, 'Building Institutional Capacity in Asia,' Working Paper #1, BICA project, RIAP, March 1999. 95 Adapted from the forthcoming book by John A. Mathews and Dong-Sung Cho, Tiger Technology: The Creation of a Semiconductor Industry in East Asia (Cambridge, Cambridge University Press, 1999).
88 technological upgrading are concerned with the establishment of institutional frameworks designed to accelerate diffusion of technical knowledge and its uptake by sophisticated firms.
The focus on the diffusion of technology (knowledge) carries with it a commitment to develop an institutional framework which is concerned not with the generation of knowledge within firms, but with the management and acceleration of the process of diffusion itself. This is the perspective that has informed the establishment of public sector research institutes and the formation of technology consortia, all of which constitute various institutional forms for the management of diffusion of technological capabilities.
3. Focus on enhancement of firms' technological capabilities
Technological capability is enhanced through resource leverage, harnessing collaborative networks as well as competition between sophisticated firms in a developmental, ‘catchup’ institutional setting.
Technological upgrading in a high technology setting is fundamentally a process of leverage – of skills, technology, knowledge – from the advanced to the ‘relatively less advanced.’ The leverage is conceived and executed by firms and agencies within the relatively less advanced countries themselves. In this sense, its emphasis and focus is quite the reverse of the usual description in the Western literature of ‘technology transfer,’ which takes the perspective of the technology exporting nation. While labor and capital can be ‘hired’ (labor exacting a fee in the form of wages, and capital in the form of interest or dividends) knowledge can only be generated internally, or leveraged from outside. It is external leverage that is the defining feature of high technology upgrading.
The contractual forms within which knowledge is leveraged vary, from simple licensing arrangements to much more complex collaborative arrangements and joint ventures. The vehicles of technological upgrading are sophisticated firms. However large and significant may be the role of public sector agencies in the preparatory stages of the process, the goal is the creation of sophisticated firms capable of engaging with real technologies producing real products in real markets – as quickly as possible. These firms are the primary vehicles of high technology upgrading. . The firms need to be sophisticated enough to attract capital investments for high technology activities, and to act as leveraging vehicles, such as in securing licenses to advanced technologies and products, or in managing intellectual property portfolios.
4. Industries promoted through 'nurturing' rather than traditional protective measures
89 The process is effected through industry ‘nurturing’ rather than ‘protection,’ with industry policy evolving as the industries themselves take root and diffuse, via a ‘governed interdependence’ between state agencies and industries.
Industries being created through leverage call for ‘nurturing’ by public agencies to assist firms and induce them to enter new high technology sectors by reducing the risks and costs of entering. The ‘nurturing’ can consist of provision to firms of: infrastructure support (eg technology parks, high-quality power and water supplies); low-cost loans and tax breaks to stimulate investment and R&D; and technology leverage services, such as development assistance through public-sector research labs.
Japan utilized the full gamut of ‘infant industry’ protective measures, such as excluding foreigners from the domestic market, use of tariffs, and so on. But then Japan was the first country in Asia to penetrate to the core of advanced technologies. Korea utilized such measures to a lesser degree; it did take measures to protect the home market, and exercized pressure on foreign joint-venture partners in the 1970s to withdraw, leaving the field to Korean firms. It did insist on technology transfer arrangements as quid pro quo for allowing foreign firms access to its domestic market, particularly in the case of telecommunications. It did employ tariffs on semiconductor products – but had liberalized its trade and capital regimes for this sector by the mid-1980s.
Taiwan pursued a much more liberal strategy. It never imposed a tariff on semiconductor products. It did not exercize preferential purchasing of Taiwanese products. The role played by the state in this case was very much one of ‘collective entrepreneur.’ Singapore, in keeping with its reliance on direct foreign investment (DFI) by MNCs, pursued the most liberal of all strategies – no tariffs’ no currency restrictions. But Singapore was not ‘open slather’ in its approach. Its government agencies such as the EDB were very active in ‘guiding’ investment into Singapore, and in leveraging skills from the potential and existing investing firms. It was the sophistication of the ‘nurturing’ devices utilized by the East Asian countries in the ‘seeding’ and ‘diffusion’ phases of developmental resource leverage of the semiconductor industry, that accounts for its successful creation.
But such nurturing strategies call for levels of ‘institutional capacity’ that far exceed the capacities exercized in simpler matters such as setting tariff levels or enforcing competition.
5. The process of high-technology industry creation is endless
The process of industrial upgrading is iterative, with each cycle leading to the enhancement of technological capabilities and ultimately to industrial sustainability, accomplished within national systems of economic learning. In all the cases of industrial upgrading in Taiwan and Singapore examined, transition to high technology industry was an over-riding goal of public policy, to which other issues were subordinate. In the case of Japan, the effort was conducted under quasi military conditions of focused effort by a single-minded system of state agencies. In the case of
90 Taiwan, the state went to extraordinary lengths to coax the private sector into eventually exposing itself to the risks of high technology industry activity. In the case of Singapore, the government’s role was critical in determining the opening to the MNCs, and then in fashioning the opening itself.
One of the lessons of the semiconductor industry creation in East Asia is surely that high technology upgrading is effected more efficiently when there are public sector coordination and risk reduction processes and mechanisms available than when they are not. This calls into play the institutional setting in which high technology upgrading is effected – which, at bottom, rests on the country’s institutional capacity in an economic sense, and the level of sophistication of ‘governed interdependence’ between the players involved. The more sophisticated this network of institutions, the faster the economic learning. The less sophisticated, correspondingly the slower is the rate of economic learning, and the less certain the outcome of the upgrading. The more sophisticated the firms, the more they are able to leverage themselves abreast of the technological frontier through collaborative alliances and technology development consortia.
While some authors have discussed such issues utilizing the notion of a national system of innovation, we choose not to use this term since our emphasis is on knowledge diffusion rather than generation. Hence a new term is preferable, national system of economic learning (NSEL).
The point is that economic learning is accomplished not by firms working individually, or even in isolated collaborative networks (such as private consortia) but in ‘industrial systems’ that provide structure and process between firms and the market, or between firms and the state. The process of economic learning takes place at a level ‘higher’ in aggregate than that of organizational learning. While the latter is essential to successful economic learning, it is only a part of the story. The point about economic learning is that there are structures (institutions) that operate between firms and the market, or between firms and the state, which enable their activities to be coordinated (or orchestrated), in a manner which approximates the capacity of a company management to coordinate and the operations of the different divisions of a company.
The process of technological upgrading (as depicted here) is a process without end. There will never come a time when a country can state that it has attained a degree of technological sophistication that calls for no further advance. This would contradict our basic Schumpeterian view of the workings of the capitalist economy – let alone our basic sense of reality. Yet there is a goal to this process. The goal is to achieve a state of ‘sustainable innovation’ in a particular technological field. In such a state, a country’s firms will have become so sophisticated that they can enter into collaborative technological alliances with other sophisticated firms around the world. Such alliances, far from indicating a state of ‘weakness’ or ‘dependence,’ in fact represent an advanced state in which foreign firms are prepared to collaborate with the newcomer in the pursuit of common technological goals.
91 The process of industrial upgrading is never-ending. No sooner has a country acquired a capability in one technology, than the field moves on to the next. Capabilities in ICs in the semiconductor industry have been succeeded by capabilities in Liquid Crystal Displays, and in the mid-1990s by capabilities in multimedia and HDTV, and so the sequence continues. The point is that leveraging, once learnt, can become a permanent way of life for a company and for a country. It is practised initially to gain access to technologies or skills that are beyond its reach. Once having become a player, collaboration within networks is practised as a way of staying abreast of activities which individually would be beyond the reach of even a large and advanced player.
The process of leverage and learning is one involving an iterative process of expanding technological capabilities. Each iteration broadens and deepens the technological capabilities which serve as foundation for yet a further iteration. This process may be depicted as in Figure 6-2, which shows (a) the upward spiral of capability enhancement by firms and agencies in latecomer nations, and (b) a cross-section of this spiral, showing the complex patterns of inter-organizational institutional relations involved.
Figure 6-2 The process of industrial upgrading
Expanding cone of Development capability enhancement Consortium
External firms or agencies
Core: R&D institutes, public agencies Inner ring: Small and medium sized firms Outer ring: Large firms Foreign firms Consortia Industry associations
______The process described is thus an endless upward spiral of expanding technological capabilities, nurtured and disciplined through complex and sophisticated institutional
92 frameworks, involving public institutes, private firms, consortia, industry associations and government departments. This is the complex that we choose to describe as a national system of economic learning. This notion captures the pattern of ‘supra- organizational’ structures and processes that have been created in the East Asian countries – supra-organizational patterns such as inter-firm networks, industry and trade associations, product development consortia, cross-subsidizing integrated firms and clusters.
It is these structures which provide the framework which facilitates, encourages, disciplines – in a word, accelerates – the processes of organizational learning that are undertaken within individual firms.
93 7. CONCLUDING REMARKS: A WAY FORWARD FOR AUSTRALIAN FIRMS AND INSTITUTIONS
This paper is not centrally concerned with Australian firms and institutions. But some remarks as to what conclusions might be drawn in Australia from the successes of Taiwan and Singapore in promoting their capabilities and industries, are in order. Let me make just five points for the benefit of Australian decision makers and political leaders.
A focus on manufacturing
The first point to note is that success in manufacturing requires a focus on manufacturing as a strategic goal. Australia's manufacturing industries appear to be declining, both in absolute and relative terms, and something drastic has to be done to revitalize them. Most of the industries discussed in this paper -- semiconductors, including wafer fabrication, memory chips, silicon foundries, and associated specialist equipment and materials supplies, hard disc drive production, flat panel displays, CD-ROMs -- are virtually absent in Australia. This is not to say that these are the only industries that we should be focusing on in Australia. But they are at the technological cutting edge, and our absence from them carries repercussions downstream as well. Governments have not successfully promoted the need for firms to be involved in these kinds of cutting edge manufacturing activities. Those firms which were involved, such as AWA Industries, have withdrawn, selling out their interests to overseas competitors.96
By contrast, we can see that in the cases of Taiwan and Singapore, both countries which have felt extremely vulnerable in geopolitical terms (Taiwan from mainland China; Singapore as an isolated city-state expelled from Malaysia), the governing elites resorted to manufacturing prowess as a means of securing their national identity and self- sufficiency. The drive to succeed in manufacturing has flowed from these premises. This is not to say that Australia 'needs' a national crisis of identity in order to focus on manufacturing. But it does mean that a strategic focus on manufacturing as a national goal (or at least a state goal) would be a good place to start the revitalization process.
A long-term outlook achieved through institutional innovation
Secondly, a focus on manufacturing cannot be of a short-term character, addressed by macroeconomic concerns with budget deficits, balance of payments, tax levels and all the other paraphernalia which clutter public debate in Australia. A focus on manufacturing calls not for a one-year or even a three-year program, but for a ten-year and twenty-year strategy. This has not been unknown in Australia in the past. In the early decades of the 20th century, Australia's agricultural industries were built through painstaking attention being paid to their long-term prospects, by governments and by farmers' associations.
96 AWA operated a small silicon wafer foundry in Sydney, for example, but investment was never at a level to make it internationally competitive. It was sold in 1997 to the US semiconductor firm Quality Semiconductor Inc, and renamed Quality Semiconductor Australia (QSA). QSI was taken over in 1998/99 in the USA by the firm IDT, which therefore became the owner of QSA.
94 The successes of CSIRO in the post-war period were built on a 10- and 20-year vision for improving the productivity of these rural industries. But this long term vision has been poorly translated across to manufacturing.
By contrast, we see in Taiwan and Singapore the effects of long-term strategies. Taiwan built its semiconductor industry from a standing start to become fourth largest in the world, over the course of 20 years, from around 1975 to 1995, through consistently long- term strategies. What was put in place first was the infrastructure needed for success, in terms of technological capabilities and manufacturing skills, embodied either in public sector facilities (in the case of Taiwan) or in multinational activities (in the case of Singapore).
The immediate objection to a long-term view being needed is a cultural one. It is that Australia is a democracy, and governments have three-year time horizons at the longest. But this is beside the point. What Taiwan and Singapore created were institutions which embodied the long-term view -- institutions like ITRI and its laboratories, or the IDB or the CDC; and in Singapore the all-important and pervasive Economic Development Board, which has been operating continuously for 36 years and has been the anchor of Singapore's manufacturing success.
It is institutions which count for a long-term vision. We have long-term institutions in Australia, like CSIRO, and they have played a very important role in Australia's development. Latterly CSIRO has been encouraging spin-off ventures, in the same fashion as is practised by, say, ITRI in Taiwan. 97 In the 1990s, new and innovative institutions have been created, such as the Collaborative Research Centres (CRCs), which also take the long view. Yet the fact remains that Australia's institutional support for commercialization of innovations remains weak. Many of the technical innovations crafted within CSIRO have ended up in foreign hands -- an unthinkable outcome in Taiwan or Singapore.
So some form of institutional embodiment of a long-term manufacturing strategy needs to be created in Australia, to kick start a manufacturing renaissance. One does not have to look beyond Singapore's Economic Development Board for the appropriate model. This is an outstanding national institution, staffed by savvy and highly sophisticated young graduates, which has a presence in every financial capital in the world. It is its worldwide network of offices which ensures that the message that "Singapore is good for manufacturing" is always being heard and getting through to the right boardrooms. There appears to be no cultural or other impediment to our creating a comparable institution in Australia.
97 An internal study conducted on behalf of the CSIRO Institute of Information Science and Engineering, by Ms Lyndal Thorburn, found that over the decade 1985 to 1995 a total of 42 firms could be described as "spin-off" ventures linked to CSIRO. They were started by former CSIRO staff and they relied on expertise developed within CSIRO. Yet CSIRO does not publicize these spin-offs, and the wealth they contribute to the Australian economy remains uncomputed. The Thorburn study is summarized in Lyndal Thorburn, Experience using spinoff companies in technology transfer, Les Nouvelles, March 1998, pp. 10-14.
95 Firms and the upgrading of their capabilities the focus of policy
This links with the third point, that a focus on manufacturing and innovation does not have to translate into a traditional 'industry policy' approach concerned with tariffs, bounties and all the other institutional impediments to good business practice with which we have burdened ourselves in Australia in the past. Rather, it needs to be translated into simple and effective strategies to support the development of industry clusters and upgrading of technologies by firms themselves.98 Good institutions are needed which can fashion these programs and adapt them as necessary.
Australian governments and policy makers have shown a receptivity to innovative kinds of industry strategies, such as in the Factor F program that stimulated pharmaceuticals development, and the Button automotive and steel plans of the 1980s, or the recent 'Supermarkets to Asia' program and the START program. These are all excellent initiatives in themselves. But they do not connect together, and need to be placed in a much more focused, systematic and long-term institutional context.
Not lower business costs, but improved business outputs
Fourth, Australian firms, and the governments which seek to represent their interests, need to focus less on the costs of business inputs, and more on the effectiveness of their business outputs. So much business debate in Australia is concerned with the 'unacceptably high' cost of this or that business tax -- leaving unspoken the assumption that if costs are all that count, then businesses must be pursuing second-rate 'least cost' business strategies. Business strategies based on innovation, quality and timeliness -- as pursued by Australia's best firms, particularly the 'emerging exporters' -- are far superior. The brutal fact of the matter is that business imposts could be reduced to zero, and some businesses in Australia would still be unable to compete -- because they lack innovative strategies and lack the institutional support that shapes markets and business strategies in countries like Taiwan and Singapore. A forward-looking industry strategy would be clearly focused on outputs, and would reward or discipline firms according to their achievement on this measure.
Government leadership and vision: setting the direction
The final point is that governments in Australia need to govern -- they need to show the leadership and set the vision that the private sector can then work towards achieving. We seem to suffer in Australia from a 'governmental cringe' where elected officials cringe in the presence of business, always fearing to offer a lead in case this is seen as 'anti- business' or elitist. But this helps neither business nor government. What we see in Taiwan and Singapore is a healthy and sustained dialogue between the partners, with government constantly offering a guiding vision and shepherding investment by the private sector towards accomplishing that vision.
98 These points are further developed in the ABF study by Jane Marceau, Karen Manley and Derek Sicklen, The High Road or the Low Road: Alternatives for Australia's Future (Sydney, Australian Business Foundation, 1997).
96 Industry associations provide the vital 'missing link' in this dialogue, forcing the government to take into account the real concerns of firms, but forcing firms as well to rise to meet the challenges presented. Industrial upgrading is the toughest challenge firms have had to meet in Taiwan and Singapore, and the governments there have been forcing firms to engage with the challenge, not shirk it.
Consider once again the remarks of Michael Porter in his 1998 Harvard Business Review article. He argues that in successful manufacturing countries, business and government "together create the conditions that promote growth" and that governments "should strive to create an environment that supports rising productivity." This is not old-fashioned 'industrial policy' involving picking 'winners' but a clear focus instead by government agencies on the inputs needed by firms if they are to be successful in knowledge- intensive industries. He says:
Governments -- both national and local -- have new roles to play. They must ensure the supply of high-quality inputs such as educated citizens and physical infrastructure. They must set the rules of competition -- by protecting intellectual property and enforcing antitrust laws, for example -- so that productivity and innovation will govern success in the economy. Finally governments should promote cluster formation and upgrading and the buildup of public or quasi-public goods that have a significant impact on many linked businesses.99
The striking feature of these remarks is how closely they fit the actual practices of Taiwan and Singapore. These governments, for all their strategic intention to create specific industries and specific sectors within these industries, never made the mistake of trying to do this in a way which substituted for the efforts of firms themselves, or for the realities of world market forces. Their approach was always to create (or rather 'shape') the conditions in which firms would be induced -- cajoled, led, disciplined -- to engage in endless industrial upgrading. Clusters were created through the seeding of appropriate institutions and technological capabilities, and encouraging the formation of linkages. These are simple but straightforward policy measures that a country neglects at its peril.
In a Silicon Valley these things can be done entirely through the private sector -- although even Michael Porter subscribes to the view that government plays a role in shaping the clusters in Silicon Valley as well. But Taiwan and Singapore never made the mistake of supposing that they were at the stage of development of a Silicon Valley. They understood, more clearly than anyone else, that they had to catch-up in the first instance, and that to do so they needed to create the appropriate catchup institutions.
This is the fundamental conclusion that Australian firms and institutions can draw from their experience. We need in Australia to create appropriate long-term institutions to focus the efforts of firms on industrial catchup and technological upgrading.
99 Michael Porter, 1998, op cit, pp 89-90.
97 Where to start? A one-paragraph policy on 'industry promotion' is all that is needed by any state or federal government in Australia today. It would state:
We undertake that within one month of assuming office, we will create a new institution modeled on Singapore's Economic Development Board, to promote investment in innovative Australian business sectors. It will create, as one of its first priorities, a science-based industry park modeled on Hsinchu in Taiwan. It will provide a regular comprehensive report card on Australia's wealth creating efforts through foreign and domestic investment and the spinoffs they generate, designed to focus Australian public debate on the country's long-term industrial future.
98 John A. Mathews Associate Professor in International Management Macquarie Graduate School of Management Macquarie University Sydney NSW 2109
Tel: 02 9850 9016 (switch) 6082 (direct) Fax: 02 9850 7698 email: [email protected] URL www.gsm.mq.edu.au/staff/faculty/home/john.mathews
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