CHAPTER 1 INTRODUCTION Following Schumpeter‟S (1939

CHAPTER 1 INTRODUCTION Following Schumpeter‟s (1939) exposition of the importance of understanding the coevolution of technology, firm and industry structure, evolutionary economists have taken on this dynamics to view economic growth as a differentiating, non-linear and complex process (Nelson, 2008). Taken together, any attempt to understand firms‟ successful transformation from technological followers to leaders requires a profound unravelling of the sectoral innovation system associated with technological leaps. Economic growth, thus, is not an aggregate phenomenon; rather, it is determined by the country‟s different sectors, each characterized by its own dynamics (Nelson & Winter 1982; Nelson 2008). The integrated circuit (IC) industry has undergone major structural changes since its infancy in the 1950s, which is largely attributed to changes in firms‟ business models and technologies. The industry began life dominated by large-scale vertically integrated companies, referred to as the „integrated device manufacturers‟ (IDMs) in the United States. Born in the Bell Laboratory, ICs were first commercially produced by Fairchild. Subsequently, multinational corporations (MNCs) like Fairchild, Intel, International Business Machines (IBM), National Semiconductor and Advanced Micro Devices (AMD) internationalized their operations to East Asia since the 1960s. Since the emergence of the world‟s first pure-play foundry in Taiwan in 1987, the industry experienced a change of manufacturing landscape as firms began to vertically disintegrate to specialize in specific scopes. Since 2005, the IC industry experienced increasing stability of innovators and increasing concentration of innovations. 1 A pure-play foundry is a „dedicated‟ chip-fabrication service provider which fabricates wafers for other IC firms without its own brand name. By introducing the innovative business model, Taiwanese firms pioneered the disintegration activities to set into motion horizontal specialization in the IC industry. Veblen (1915) and Gerschenkron (1952) pioneered the notion of latecomer effect. In addition, according to Gerschenkron (1952), the more backward a country is, the shorter period it requires to catch up with the forerunners. The extant literature on the catch-up experience of Korean and Taiwanese firms with those in the more technologically advanced nations have focused on the advantages latecomers enjoy in reaching the technology frontier (Amsden, 1989; Mathews & Cho, 2000; Lee & Lim, 2001). The remarkable story of Taiwan Semiconductor Manufacturing Company (TSMC) started when its architect, Morris Chang, helmed the administration of the Hsinchu Science Industrial park to fashion the launching of the firm in 1987 as a joint venture (JV) with Phillips. In the space of 25 years from its establishment in 1987, TSMC had become the largest pure-play foundry company in the world, enjoying in 2011 an annual revenue advantage of more than USD10 billion over the world‟s number two pure-play fabrication foundry, i.e. United Microelectronics Corporation (UMC) (Gartner, 2012). Other latecomer countries in Southeast Asia such as Malaysia are trying to grow through technological upgrading. The Malaysian government realized its role to foster a knowledge-based nation by upgrading the country‟s human capital (NEAC, 2010). To create such a supportive environment, the government has set up a number of meso- organizations, including public research institutes, such as, the Malaysian Institute of Microelectronic Systems (MIMOS) in 1985 to mimic the catch-up route of Taiwan. Unfortunately this remains as a vision unrealized due to the severe lack of the right strategies to manage and transfer technologies (Rasiah, 2010). 2 This study begins with a macro-level analysis by examining the evolutionary processes that have defined the IC industry through the lens of changing technological regimes. The study goes on to examine latecomer resource acquisition strategies through industrial structural change to catch up and leapfrog incumbents. Lastly, the study attempts to advance existing understanding by a micro-level analysis to explore why certain latecomer firms forge ahead to eventually become industry leaders while others remain at the catch-up or keep-up stages. 1.1 Statement of Problem Despite starting as a contract manufacturer since 1987, the pursuit to reach the technology frontier has driven Taiwanese IC firms to target scale- and knowledge- intensive research and development (R&D) activities. However, while the IC industry has undergone major structural changes, research focusing on this transformation process has remained scanty. While there are a number of works that examine particular industries to identify Schumpeterian cycles of innovation, few have actually attempted to discuss the industry‟s changing technological regimes. Consequently, the mechanisms behind the industry‟s transitional process after the emergence of the first pure-play foundry have remained vague. Also, existing research have lucidly discussed how several latecomer firms have caught up technologically in many industries by stressing the role of institutions (Amsden, 1989; Mathews & Cho, 2000). However, several questions have remained unaddressed as latecomer countries like Malaysia tried to mimic the Taiwan catch-up model by spinning off pure-play foundries but failed. This indicates that the success or failure of a latecomer‟s catch-up also depends very much on firms‟ resource acquisition strategies and how they link with the complex mechanisms evolving in the industry, including 3 choices of organizational boundary, industrial structural changes and changing value systems. This thesis seeks to address this gap. While existing studies have provided useful examples of how latecomer firms have caught up technologically in many industries, they do not help much in addressing the popular questions of: „Why do firms differ and how does it matter?‟ (Nelson, 1991). More often than not, the question of why firms‟ performances diverge through time despite a similar start-up and catch-up model has been overlooked. This area of study can generate significant strategic and managerial implications as it demarcates the boundary between becoming an industry leader and becoming just a latecomer firm that has successfully caught up. 1.2 Research Aim The development of the Taiwan IC industry has been a crucial factor in the successful transformation of the nation into a high income country. However, the story of the Taiwan IC industry has not been easily replicated elsewhere. In fact, several latecomer countries like Malaysia have not been able to even come close, despite after years of attempting to mimic the Taiwan catch-up model. In light of the remarkable catch-up experience of Taiwan in the IC industry, it is significant to extend the existing scope of studies. This includes the understanding of how the technological environment of a specific industry is changing in time; latecomer resource acquisition strategies, as well as, how certain latecomer firms could successfully be transformed to become an industry and technology leader. Extending these research areas could have important policy and managerial implications to other latecomer countries or firms who are seeking ways to catch up. Latecomers must consciously make strategic choices to upgrade their capabilities with the potential 4 for extending beyond the firm to the national level. Because it is necessary to learn from Taiwanese IC catch-up strategies, the problems identified above shall not be ignored. 1.3 Research Questions Three research questions are identified in this study. Technological regime has always been used as a useful conceptual tool to examine the technological environments of innovating firms. To explain the transitional process of firms between different technological regimes, firms‟ choices of organizational boundaries shall not be ignored especially when the industry experienced vertical disintegration process due to the emergence of the latecomer‟s contract-manufacturing model. The first research question is, how does a high-tech manufacturing industry transit between different technological regimes and can the industry‟s technological regime be endogenous to firms? This question requires the mapping of the technological differences between the industry‟s downstream and upstream firms, how firms‟ choices of vertical boundaries are impacted, the resulting industry patterns of innovation, and how a technological regime eventually becomes endogenous. The answer to this research question has important implications for the subsequent analysis in this study. It is important to establish the importance of changing technological regimes, as it provides the fundamental pillar to understand and analyze innovative actives in a high-tech manufacturing industry. The second research question seeks to examine how, in particular institutional support and start-up strategies, structural changes of a high-tech manufacturing industry affect latecomer catch-up processes. To examine this question, the study incorporates the mechanisms of changing value systems and resource acquisition strategies into the analysis. Since strategies embodied in business models can collectively cause changes to industrial structures, it is also important to include a study of specialization in different production stages. 5 The third research question seeks to identify the underlying causes of diverging achievements over time of firms with similar

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