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