London School of Economics and Political Science Re-examination on the Role of the State in the Development of Taiwan’s Small and Medium-Sized Enterprises, 1950- 2000 : The state, market and social institutions Ting Ting Chang A thesis submitted to the Economic History Department of the London School of Economics for the degree of Doctor of Philosophy, August 2011. Declaration I certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work. Abstract Much research has been devoted to the story of Taiwan’s post-war economic development. The neo-classical economists argue that its government created a free market economy which led to rapid economic growth. The revisionists, Robert Wade and Alice Amsden, address the role of the state in formulating and leading the economic miracle. One of the characteristics of the Taiwanese economy was that the small and medium-sized enterprises (SMEs) were found in great numbers (around 90%) in Taiwanese manufacturing industry. These SMEs were export-oriented and contributed greatly to the export growth in the 1970s and the 1980s. The success of the Taiwanese manufacturing SMEs was usually attributed to the market and the development policies which the state established and enforced. However, the existing literature ignores (1) the further development of the SMEs after the late 1980s; (2) the role which Taiwanese society played in the rise and the development of the SMEs. This ignorance over-estimates the role of the state in the development of the SMEs in the post-war era. The present dissertation re- examines the argument of the neo-classical economists and the revisionists by finding a historical pattern and tracing the further development of the SMEs after the late 1980s. To what extent did the market established by the state and the state development policy supported the rise and the development of the Taiwanese manufacturing SMEs from 1950 to 1980? What puts into question the influences of the state on the SMEs after the late 1980s? Why did the state have limited influences on the SMEs after the late 1980s? The dissertation finds that Wade and Amsden over-estimated the role of the state in the rise and development of the SMEs by explaining the limited influences of the state on the SMEs after the late 1980s. The research, by clarifying the relation of the state, market and social institutions from the historical pattern, demonstrates that the social institutions are adapted to the changing environment and continuously provided important financial sources to facilitate the SMEs’ business operations from 1950 to 2000. Acknowledgements It would not have been possible to write this doctoral thesis without the help and support of the kind people around me. Above all, I would like to thank my family who has given me their unequivocal support throughout. I am thankful to my supervisor, Dr. Kent Deng, my PhD tutor, Dr. Max Schulze and Head of Economic History Department, Professor Janet Hunter, whose encouragement, guidance and support enabled me to complete this thesis. I am most greatful to Carlos Brando for providing me constructive and critical advices. Last, I would like to thank my friends, Coskun, Hsiao-Hui, Ling, Pei, Rajiv and Xun, for their support and company. Re-examination on the role of the state in the development of Taiwan’s small and medium-sized enterprises, 1950-2000: the state, market and social institutions Table of Contents Part I. Introduction .................................................................................................................... 1 Chapter 1 Historical Background, 1949-1980 ....................................................................... 4 1-1. Post-war Industrialisation of Taiwan 1945-1980 ....................................................... 5 1-2. Results of the Economic Development and the Contribution of the SMEs to the Taiwan’s Rapid Economic Growth ................................................................................. 12 Chapter 2. Literature Review .............................................................................................. 18 2.1. The Role of the State and the Market in Taiwan’s Economic Development ........... 19 2-2. The Role of the State and the Market on the Rise and the Development of the SMEs ......................................................................................................................................... 23 2-3. Problems in the Existing Literature .......................................................................... 25 2-4. Hypotheses ............................................................................................................... 29 Chapter 3. Theoretical Framework and Methodology ........................................................ 30 3-1. The State, the SMEs and the Social institutions ....................................................... 31 3-2. The Role of Social Institutions in East Asian Post-War Economic Development ... 33 3-3. Institutional Changes and Culture in Historical Contexts ........................................ 37 3-4. Political Transformation and Its Impact on the Trade and Investment Policy ......... 43 3-5. The Impact of the Changing Political System .......................................................... 46 3-6. The Impact of the Changing Political System on the Trade and Investment Policy 47 3-7. Definitions of the Terminology ................................................................................ 51 3-8. Methodology ............................................................................................................ 53 3-9. Scope Limitation ...................................................................................................... 57 3-10. Notes and Data Sources ......................................................................................... 57 3-11. Notes on the Spelling of Chinese Names and Terms ............................................. 61 Part II. Constructing a Historical Pattern ................................................................................ 62 Chapter 4. Market, Trade and the Historical Heritage of the Social Institutions, 1522-1945 ............................................................................................................................................. 63 4-1. The Tributary System and the Rise of Taiwan ......................................................... 63 4-2. The Tribute Trade and the European Forces ............................................................ 67 4-3. The Dynamics for Zheng’s Trade and the Continuing Support for Ming Zheng Trade in Taiwan ............................................................................................................... 70 4-4. The Impact of the Qing Policy on Taiwanese Trade and Business Society, 1684- 1985 ................................................................................................................................. 74 4-5. The Impact of the Japanese Colonial Policy on Taiwan’s Trading and Business Society ............................................................................................................................. 78 4-6. Conclusion ............................................................................................................... 80 Part III. Where Did the Support Come From? The Rise and Development of Manufacturing SMEs, 1950-1980 .................................................................................................................... 85 Chapter 5. The Role of the State in the Rise of SMEs, 1950-1970 ..................................... 86 5-1. The Rise of Chiang Kai-shek and the Construction of the Party-state Institution ... 87 5-2. Chiang Kai-shek and the KMT in Taiwan, 1949-1975 ............................................ 90 5-3. The Changing of Development Policies: from ISI to EOI, 1954-1959 .................... 95 5-4. Direct and Indirect Support for the Development of SMEs ................................... 102 5-5. Conclusion ............................................................................................................. 108 Chapter 6. The Role of the Market and the Social Institution in the Rise and the Development of the SMEs, 1950-1980 ............................................................................. 112 6-1. The Formal Institutions and the Development of the SMEs .................................. 112 6-2. The Capital Formation of the Manufacturing SMEs .............................................. 114 6-3. The Subcontracting System and the Social Institutions ......................................... 117 6-4. Conclusion ............................................................................................................. 120 Part IV. The State’s Influence: the Conflict of Interest between the State and the SMEs, 1980- 2000 ....................................................................................................................................... 123 Chapter 7. The Changing Market and the Economic Interest of the SMEs, 1980-2000 ... 124 7-1. Taiwan’s Economic Miracle and Worries under the Prosperity ............................ 124 7-2. The Determinants of Taiwanese Outward Investment ........................................... 132 7-3. Conclusion ............................................................................................................. 135