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Analysis of the role of government in Taiwan's industrialization and economic development

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Analysis of the Role of Government in Taiwan’ s
Industrialization and Economic Development
by
Syuping Wang
A Dissertation presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(POLITICAL ECONOMY AND PUBLIC POLICY)
August 2001
Copyright 2001 Syuping Wang
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UMI Number: 3054821
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UNIVERSITY OF SOUTHERN CALIFORNIA
The Graduate School
U niversity Park
LOS ANGEI.ES, CALIFORNIA 90089-1695
This dissertation, written by
Under the direction o f hSX.. Dissertation
Committee, and approved b y all its members,
has been presented to and accepted by The
Graduate School, in partial fulfillment o f
requirements for the degree o f
DOCTOR OF PHILOSOPHY
D out o f Graduate Studies
&a te August- 7, 2001_________
D ISSE R T A TION COMMITTEE
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Syu-ping Wang Harrison Cheng
ABSTRACT
ANALYSIS OF THE ROLE OF GOVERNMENT IN
TAIWAN’ S INDUSTRIALIZATION AND ECONOMIC
This dissertation studies whether or not it is effective for the state to target
industries. We try to find out answers from case studies of Taiwan's industries, and
will analyze according to different factors such as different industrial sectors,
government policies, and international and domestic conditions. From this study we
try to leam what attitudes and policies the government should adopt in promoting
industrial development.
This qualitative analysis here will establish a historical narrative o f the
process o f state intervention, which will identify the timing, forms and degree of
state interv ention, analyze the rationale behind intervention or non-intervention, and
the consequent impact on industrial sectors. In our study of Taiwan's semiconductor
industry success, we found that the key factor is to find a niche, a sector where
Taiwan has competitive advantages in order to develop into a profitable,
growing and successful business. It is not necessary that the targeted sector must be
the most important or embody state-of-the-art technology in the relevant industry. In
our study of the development of Taiwan’ s automobile industry, we found that the
ineffective intervention from Taiwan's government was in fact effective in
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successfully guiding and promoting Taiwan's economy by efficiently allocating
resources to improve economic development.
Basically, this study has made several contributions by providing additional
information for the exploration of the industrialization path of East Asian NICs as it
indicated that government promotion efforts could improve the targeted industry
sector when it is matching its own competitive advantages and domestic demands:
while the interv ention should be limited in scope and time in the
sector which has no local niche and is against domestic business culture.
Moreover, this study has provided additional contributions to the debate
between neoclassical, market-oriented and state interventionist theories. This study
filled in a hole within the debate between these two schools of thoughts, as it
indicated that government intervention, sometimes, is needed in guiding the economy
into more value-added, technology-intensive industries.
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To my parents
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Acknowledgments
I would like to thank Professor Harrison Cheng, chair of my dissertation
committee, for his thoughtful comments, enthusiastic support and excellent guidance
during the entire period of my academic studies at USC.
I would also like to express my gratitude to Professor John Elliott and
Professor Stanley Rosen for their helpful suggestions and encouragement.
Thanks to Professor Ming-Deh A. Huang for his support and help.
Thanks to my parents. They have supported my academic studies with
unlimited enthusiasm, help and valuable advice. I am also grateful to my sister and
brothers for their assistance.
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TABLE OF CONTENTS
DEDICATION ii
ACKNOWLEDGMENTS iii
LIST OF TABLES v
LIST OF ABBREVIATIONS vi
CHAPTER 1 Introduction 1
CHAPTER 2 Theoretical Discussion of State intervention 9
and Industrial Policy
CHAPTER 3 An Overview of Government’ s Role in 48
Industrialization
CHAPTER 4 The Role o f State in the Development of 80
Taiwan’ s Semiconductor Industry
CHAPTER 5 Taiwan’ s Government’ s Policy upon the 125
Development of Taiwan’ s Automobile Industry
CHAPTER 6 Conclusions 165
BIBLIOGRAPHY 172
iv
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List of Tables
Table 3.1 Taiwan’ s economic summary, selected years 74
Table 3.2 The Changes of GDP in Taiwan, selected years 74
Table 3.3 The Changes of Industry Structure in Taiwan’ s 75
manufacturing sector
Table 3.4 The Exports of Tech-intensive industries in 75
the manufacturing sector
Table 3.5 Industry summary, selected years 76
Table 3.6 Trade Balance (US$ Billion) selected years 76
Table 4.3.1 The Performance of Taiwan’ s semiconductor industry 115
Table 4.3.2 TSMC performance 116
Table 4.3.3 UMC performance 116
Table 4.4.1 Taiwan DRAM firms’ loss in first half of 1998 118
Table 5.3.1 Taiwan’ s carmakers’ market shares vs. tariff changes 158
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List of Abbreviations
AMD Advanced Micro Devices (U.S. firm)
ASIC Application-specific integrated circuit
C&A Cowhey & Aronson
CBC Central Bank of China
CPC Catching-up product cycle
CSPP Computer Systems Policy Project
DARPA Defense Advanced Research Projects Agency
DRAM Dynamic random-access memory (memory chip)
DSP Digital signal processor
ERSO Electronics Research and Service Organization
IC Integrated Circuit
IDB Industrial Development Bureau
IT Information technology
ITB International Trade Bureau
ISI Import-substitution industrialization
LDCs Less developing countries
MB Megabyte
MITI Ministry of International Trade and Industry
MOEAMinistry of Economic Affairs
MOF Ministry of Finance
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MS Master degree o f Science
NICs Newly industrializing countries
NSC National Science Council
NTU National Taiwan University
OECD Organization for Economic Cooperation and Development
OEM Original Equipment Manufacturing
OSTA Office of Science and Technology Advisors
R&D Research and development
SRAM Static random-access memory (memory chip)
STAG Science and Technology Advisory Group
TAC Technical Advisory Committee
TNC Transnational corporation
TRBs Technical review boards
TSMC Taiwan Semiconductor Manufacturing Co.
UMC United Microelectronics Corp.
VHD-TV Very High-definition television
VLSI Very Large Scale Integration (ICs)
VRA Voluntary export restraint agreement
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Chapter 1 INTRODUCTION
1.1 INTRODUCTION TO THE PROBLEM
There is much discussion about how some East Asian countries achieve high
growth rates and economic booms. Many researchers attributed East Asia’ s success to
active state intervention, arguing that government played an important role in these
countries’ economic development. However, there is also neoclassical interpretation
of the success of these East Asian newly industrializing countries (NICs). For
example, some scholars argue that Malaysia, Singapore, Korea, Taiwan, Hong Kong,
and Japan all are relying extensively on private markets and are thriving; but, India,
Indonesia, and Communist China, all are relying heavily on central planning, and
have experienced economic stagnation (Friedman, 1980: 57).
Porter also argues that "[significant government policy intervention has
occurred in only a subset of industries, and it is far from universally successful even
in Japan and Korea." (Porter, 1990: 4) He indicates that government indeed plays a
role in international competition, but not a starring one; he uses Japan’ s targeting of
aircraft industry (which began in 1971) and software industry (1978), and Korea’ s
aggressive targeting of chemicals and machinery as examples to show that
government’ s intervention often failed to yield significant international positions
(Porter, 1990).
However, there are other scholars who think that government’ s role is
important. Borrus, Tyson and Zysman stated that "[i]n our view the rapid emergence
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of the Japanese industry as a world-class competitor was not an unexpected outcome
of the forces of free trade but rather a planned result of a concerted policy effort."
(Borrus, Tyson and Zysman, 1986: 91) Meaney also argued that "the state was
indeed the decisive actor in the development of Taiwan’ s semiconductor industry."
(Meaney, 1994: 172) There are different comments on the performance of Taiwan’ s
industrial targeting. Some advocate that the targeted research program of integrated
circuits was very costly in financial terms and "drained off some of the best
university graduates into programs with low returns." (Dollar and Sokoloff, 1994:
10) They argued that research program and production of integrated circuits carried
out by public enterprises "was largely unsuccessful"; mass production has always
fallen behind the major producers, especially Japan, "though it has had some success
in the area of custom-made computer chips." (ibid.)
No matter how economic growth in East Asian countries is interpreted, it is
generally recognized that, in all these East Asian countries, including Japan,
Singapore, and South Korea, industrial development was under the state’ s promotion
and participation. Taiwan’ s government also has played a key role in its industrial
development and economic growth, however, Taiwan has experienced a smoother
path during its development process and suffered less in the Asian financial crisis in
1997 than Thailand and South Korea. Some scholars have indicated that, while
promoting the industrial development, Taiwan’ s government adopted a less-
interventionist attitude. But, in another point of view, its government officials have
been less effective in protecting, promoting and demanding private enterprises than
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Korea (Chu, 1987). What are the differences of Taiwan’ s state intervention from
others’ that has made Taiwan suffer less during East Asia's financial crisis and
contribute to Taiwan’ s successful industrialization?
This study will investigate the industrial policies of Taiwan’ s government,
explore government’ s intervention process, and try to provide more findings in
addition to the current viewpoints and studies.
1.2 THE CENTRAL RESEARCH QUESTION
There are many studies about state intervention on economic development.
Some argue that the state has contributed to the success of East Asian NICs; some
disagree (Wade, 1990). And, there are both successful and failed cases of
government intervention and industrial targeting. State intervention has been
successful in improving some industry sectors like the textile industry in East Asian
countries such as Taiwan, South Korea, and Indonesia. But some East Asian
countries failed in achieving the same miraculous growth and gains in other sectors.
Is it because these failed sectors which have been under promotion and intervention
are not compatible with the national comparative advantages? Or are the miraculous
gains just accidental and by luck and the intervention process has some defects?
This dissertation studies whether or not it is effective for the state to target
industries, if it is effective, why; if it is not, why not. We try to find out answers from
case studies of Taiwan’ s industries, and will analyze according to different factors
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such as different industrial sectors, government policies, and international and
domestic conditions. From this study we try to learn what attitudes and policies the
government should adopt in promoting industrial development.
This dissertation will focus on evaluating the role o f Taiwan’ s state in
industrialization by studying the effects of government industry policies on the
performance of two industrial sectors, the semiconductor-related industry and the
auto industry in order to find out what are the main factors in the success or failure of
government industrial policy in guiding industrial development. These two sectors
are chosen because both are technology and capital intensive. Also, both are under
government promotion in most East Asian countries.
Thus, this study tries to contribute to the search o f success formula in
industrialization by investigating what kinds of state intervention are effective in
promoting economic development and industrialization, and finding the appropriate
degree, timing, and sectors for the state’ s intervention in designing and
implementing industrial policies.
To achieve our conclusion, this study will analyze according to the following
division. However, they are all interrelated in influencing state intervention and the
performance of Taiwan’ s industrialization.
In regard to the state’ s intervention degree:
This study will analyze government officials’ attitudes and actions, examine
their consideration of risks and the impacts on future industrial upgrading in guiding
their decision-making, and the importance of the correct vision and direction in
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contributing to success compared with the importance of capital spending. This study
will examine state intervention with respect to subsidies, credit supply, protection
policies, etc.
Concerning Taiwan’ s comparative advantage:
This study will evaluate the effects of state intervention relative to national
competence. We shall investigate whether intervention would work better when the
state first finds the advantages, the niches, the direction, before it designs and
implements promotion policies to achieve gains in financial and technological terms.
This study will examine national competence in terms of the competitiveness in
different industry sectors, including human capital, R&D (research and development)
ability and spending, production costs, pricing ability, entry barriers, international
competitors, etc.
On the private sector’ s orientation toward industrialization:
We shall analyze Taiwan’s private business leaders’ attitudes toward
industrialization, and the culture and proclivity in the decisions in investment and
start-up of new firms and industrial projects. This study will analyze the interaction
between the government and the private sectors’ leaders, and how the interaction
shapes Taiwan’s industry policies and industrialization process. We shall also
examine how the business culture in Taiwan affects the state’s industrial policies,
emerging small- and medium-sized business and Taiwan’s industrialization.
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13 CONTRIBUTION OF THE STUDY
Many developing countries have tried to become developed countries from
industrialization. However, some cases show that the state can effectively promote
the economic and industrial development, while, other cases show that state
intervention may be one of the factors that damages the economic and industrial
development. This study tries to analyze different factors related to state intervention
in order to understand and evaluate the effects and impacts of state intervention and
to provide insights and guidelines for policy makers in considering, designing and
implementing industry promotion. Thus, this study tries to compare mainly the cases
of Taiwan’ s auto and semiconductor sectors’development to find some lessons for all
developing countries in their path to become developed countries.
1.4 SCOPE, RESEARCH METHODOLOGY, AND DATABASE
This study will focus on Taiwan’ s industrialization, it will also use other East
Asian countries for comparison when necessary. It will analyze the development
from 1960 to present, and will focus on the discussion of the government industrial
policies and the performance of Taiwan’ s different industrial sectors. This study will
focus on the evaluation of the effects of government industrial policies and the role
of risks and reward in the decision-making process.
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The methodological approach in this research is to analyze and compare
empirical data and statistics and use case studies of different industrial sectors to
draw inferences. I will collect and summarize data which are related to the
performance of the industry sectors under state intervention from Taiwan, and other
countries. This qualitative analysis here will establish a historical narrative of the
process of state intervention, which will identify the timing, forms and degree of
state intervention, analyze the rationale behind intervention or non-intervention, and
the consequent impact on industrial sectors to assess my arguments.
The variables used in the qualitative analysis will include net profits, total
revenues, productivity, and market shares, input costs, output prices, export
surplus/deficits, unemployment rate, etc.
1.5 ORGANIZATION O F TH E STUDY
This dissertation is organized as follows. Chapter 1 will describe the problem
that 1 intend to study, and the argument (hypothesis) I propose, purpose, contribution,
scope, methodology, database and organization of the study. Chapter 2 will
review and integrate the literature discussing the general theory of state intervention
and economic development and industrialization, and government technology
policies, in order to formulate a theoretical framework for my empirical analysis of
industrial development in Taiwan. I will apply this theoretical framework to the case
study of Taiwan in the following chapters.
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Chapter 3 presents an overview of general state intervention and industrial
promotion in Taiwan and other countries, during the period 1960-1997. From the
empirical overview, I shall explore the factors which contribute to the success or
failure of state intervention and promotion on economic development and
industrialization. Chapter 4 studies the impacts of government industry policies on
the semiconductor industry in Taiwan. This will investigate whether careful
evaluation and sufficient support from the state, and choices made in the
development of the semiconductor industry by the state can be shown to be important
to the success of Taiwan’ s semiconductor industry.
Chapter 5 will present the case of Taiwan’ s automobile industry’ s
development. From this case study, we will study why the government was not so
aggressive as Korea, or as other sectors such as the semiconductor industry. This will
analyze how Taiwan’ s government officials make decisions on allocating scarce and
limited capital to different sectors, in different degrees and times. This chapter will
also examine state intervention policies and processes, and assess the hypothesis by
comparing the two cases of these sectors. Chapter 6 includes summaries and
discussion of findings from the study, and implications of this study for future
decision-making in the process of economic development and industrialization.
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Chapter 2 THEORETICAL FRAMEWORK
There are many theories and debates about the role of the state in economic
development and industrialization, and different countries adopt different policies
and attitudes toward the management, promotion and regulation of economy and
industry according to their own cultures, environment and theories which they
believe to be the most appropriate.
This chapter will present different theories about the role of the state in
economic development and how the state can guide industry to achieve greater
productivity, how to utilize scientific and technological innovations in academic
institutes and industry to produce new or better products to enhance revenues and
profitability of enterprises and promote economic development and modernization.
The following theoretical discussion about the role of the state in economic
development and industrialization, and how the state can improve efficiency,
incentives, competition and performance, will constitute the theoretical framework of
my dissertation.
2.1 Theoretical Discussion of the role of the state in economic development
and industrialization
2.1.1 The general theory of the pro-market school
These arguments generally come from the neoclassical school which argues
that the state should restrict its functions to maintaining order and setting rules. It
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argues that, due to the corruption of most government officials, state intervention
may result in more problems than market failures. So neoclassical economists
advocate a night watchman approach as the role of the state.
Generally, neoclassical school recognized the thought of Adam Smith, that
"the invisible hand" of market forces can allocate resources efficiently and achieve
maximum aggregate welfare for the overall society. Smith advocated that
government should take some necessary actions about free trade and infrastructure to
promote the economic growth. Smith claims that free trade will expand the market
and provide demands for over-supply to soak up excess supplies of all countries and
gain profits; the wide extent of the market can promote more division of labor and
thus improve productivity of labor; finally, the output per capita increases. However,
Smith indicates that it may be desirable to adopt free trade slowly to reduce disorder
caused by sudden introduction of free trade; and retaliation is justified when some
foreign countries impose high duties and restrain free trade. Smith also argues that
when a particular industry is needed for defense of the country, it may be optimal to
put some burden on foreign countries. Although Smith believed that some
government policies, such as tariffs and other restraints on international commerce,
are major sources of monopoly power and special privilege, many of Smith’ s
successors have believed that the proclivities toward monopoly in market capitalist
economies, are sufficiently strong that the sustenance of competition might possibly
require government action (Elliott, 1973: 65-66). Neoclassicists generally follow
Smith’ s arguments and assume further that the market system provides the best
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mechanism for redistributing resources, given an initial endowment (Caparaso &
Levine, 1992: 83). They believe that the competitive market will increase the
available choices, and ensure all individuals freedom to pursue their highest level of
satisfaction through voluntary transactions to achieve an optimum of social welfare.
Neoclassicists argue when welfare-improving transactions are voluntary and no
externalities exist, markets can fully function and allow maximal scope for free
exchange and thus efficiency. Neoclassicists believe that after the state establishes
the proper institutions to ensure efficient allocation of resources, market mechanisms
can bring about capital investment for economic development and result in he social
optimum in most cases. The proper institutions which can provide efficient allocation
of resources are competitive markets, especially domestic markets integrated with
international markets (Wade, 1990: 10). Neoclassical
theory argues that when "prices reflects social opportunity costs, profit incentives
will drive the economy to its maximum production potential." (Wade, 1990: 10)
Thus, neoclassical economists suggest that East Asian’ s higher economic growth is
due to more efficient resource allocation than other LDCs, with more freely
functioning markets. They indicate that these countries get prices ’ right’ through
closer integration of domestic markets with international markets (Wade, 1990: 29).
However, some interventionists argue that the state can influence resource allocation
in order to achieve some long-term national interests which may not create short
term profit maximization. Some argue that government can purposely get prices
W ong’ and use non-price means to change the behavior of market agents in order to
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produce higher investment, and thus faster application of more advanced technology
into actual production to stimulate growth, like those East Asian NICs. (ibid.)
Amsden also indicates that, "[i]n late-industrializing countries, the state intervenes
with subsidies deliberately to distort relative prices in order to stimulate economic
activity." (Amsden, 1989: 8)
Ferguson has pointed out the importance of competition in the market
mechanism; he argued that competition can improve efficiency even if enterprises are
under state ownership and cannot be privatized. He indicates that, due to
competition, a firm without good performance will go bankrupt or be bought out by
another company, Ferguson argues that this can act as an allocation mechanism for
scarce entrepreneurial and managerial talent since takeovers can let good
management teams acquire control of progressively larger quantities of resources.
He advocates that it is competition that leads to innovation which, in turn, produces
better products while lowering costs. Thus, he opposes state protection.
Market Failure
Neoclassicists indicate that state intervention could be allowed in some area
where markets fail to provide optimal outcomes. When externalities exist, the
producer's costs are either higher or lower than the social costs; the state can use
different policies such as fines, subsidies, or regulation to bring about optimal output.
Legal actions can also be used to limit the externalities, but they work only under a
well-defined property rights system. Furthermore, the private sector may not want to
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provide public goods since the cost will be larger than the benefits for any individual.
Due to the importance of public goods, such as education and defense, government
has to step in to produce them, but some neoclassicists pointed out that, governments
may not succeed in providing them satisfactorily; and, the private sector has provided
some public goods, such as private education. When firms merge or collude and
affect the market by decreasing output and increasing price, the optimal level of
utility is not attained. Since the market itself is incapable to correct this, government
has to intervene.
However, many economists argue that, even when markets fail, the state
intervention may produce a worse outcome than market failure. Some neoclassical
economists think that there are few inherent market failures and government often
causes some market imperfections; they do not think that politicians can "resist the
temptation to misuse economic powers" and be able to discover opportunities which
private entrepreneurs have missed (Wade, 1990: 13). Deepak Lai argues that
imperfect markets are often superior to imperfect planning. He says that "neo
classical economics is likely to be more applicable to developing than to developed
countries," since developing countries do not have large reserves such as past savings
in the developed countries to delay the necessary price adjustments in a changing
economic environment, furthermore, state interventions in promoting development in
developing countries are more likely to fail than those in developed countries, since
these countries are governed for the interests of their rulers as well as for the welfare
of the ruled (Lai, 1983: 106-8).
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International Trade
Neoclassicists argue that protection in international trade will distort the
market function and optimal resource allocation. They think that, "trade protection
can undercut other national objectives like the upgrading of manufacturing efficiency
and productivity." (Okimoto, 1989: 9) Basically, neoclassical theory supports the
theory of comparative advantage and argues for free trade with little or no barrier to
imports and no price distortion so that to sell domestically is more profitable than to
sell abroad. Neoclassical economists suggest that free trade will put the domestic
economy under international competitive pressures and this can stimulate technical
change, economies o f scale, indigenous entrepreneurship, and a higher rate of
growth. Krueger argues that export promotion strategies create better growth
performance than import substitution strategies (Krueger, 1980). In this study,
Balassa also indicates that "countries applying outward-oriented development
strategies had a superior performance in terms of exports, economic growth, and
employment." (Balassa, 1980: 27) They indicate that, in countries with abundant
labor supplies, the private sector will employ labor-intensive production to maximize
their profits, and export labor-intensive products when trade distortion does not exist.
They believe that when a country’ s production focuses on those things wherein it has
a comparative advantage, resource utilization can be maximized, and income and
economic growth will be improved. As the labor-intensive industry needs more labor
than it supplies, the real wages will increase; and the country can gain experiences in
production and improve its productivity, costs and technical skills. Thus, the
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country’ s comparative advantage changes according to the changed allocation and
scarcity of resources.
Balassa indicates that international specialization and division of labor in the
production process will ensure low-cost manufacturing and efficient import
substitution (Balassa, 1980: 38). Balassa argues that changes in educational and
capital stocks can cause changes in one country’ s comparative advantages. Also, Bela
Balassa argues that when a country learns and accumulates enough technical skills, it
can begin to upgrade its industrial development from light manufacturing to more
advanced industries, and leave space for countries with less advanced industrial
development to enter light manufacturing. Thus, without trade distortion, every
country can benefit from developing industries with comparative advantages and let
other countries produce products according to their competence. Thus, "shifts in the
pattern of international specialization in response to the changing structure of
comparative advantage" can result in the efficient resource allocation and higher
economic growth rates, with benefits to all countries at different levels of industrial
development (ibid.: 39).
This gradual upgrading of comparative advantages is also discussed as to how
Japan developed its industry with catching-up product cycle (CPC). Yamazawa
indicates that Japan first developed light industry, and then gradually upgraded to the
next level such as heavy industries; and began import substitution and then expanded
to exports (Yamazawa, 1990: 20). Yamazawa describes this development over three
stages: in the first stage, Japan exported primary products and imported light
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industrial goods, then it exported light industrial goods and imported heavy industrial
goods and raw materials, finally it exported heavy industrial goods and imported raw
materials. According to Yamazawa, the late-industrializing country first introduces a
new product by import, and produces domestically through imitation or borrowed
technology. This domestic production can substitute for imports and provide local
consumption. With continuous domestic manufacturing, the domestic firms can
begin large-scale production through increasing market shares and begin to produce
improved quality with lower prices than the imported product; then the domestic
firms can began to export. As Yamazawa argues, when "the export/production ratio
exceeds the import/demand ratio, the sector moves to . . . being a net exporter"; thus,
even if local demands slow down, the production can expand with increases in
foreign demands (ibid.: 18). Finally, as the sector becomes mature, other late-
industrializing countries begin to their own production for import substitution. Thus,
the local and foreign demands will begin to decrease for the exporting country, the
CPC can enter into a reverse import stage, as other late-industrializing countries'
products compete with the exporting country and substitute its products in its market,
the local firms’ production will begin to contract (ibid.: 31). There are also
arguments about if the development of East Asian nations can follow this CPC
model as Japan does. However, Yamazawa suggests that "the backward economies
of East and Southeast Asia provided a market for Japan when its new industries
reached the export stage. Today’ s developing countries, in contrast, have difficulties
finding similar economically backward markets for their exports." (ibid.: 232) Thus
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he indicates that today’ s developing countries may need direct foreign investment to
promote their technology and management skills to overcome these difficulties.
However, there are different opinions about the effects of free trade. Some
economists provide theoretical arguments which contend that in imperfect world
markets and increasing returns to scale, "a country’ s growth can be faster if it restricts
trade to some degree"; and, some economists argue that the correlation between
export orientation and faster growth is weak; they have found the correlation exists
clearly only when world demand is increasing rapidly (Wade, 1990: 15-17).
Krugman has indicated some positive effects of trade protection. Krugman
argues that, since output affects marginal cost, and marginal cost affects output too,
so these positive, accumulated effects confirm the US businessmen’ s arguments that
Japanese export success is partly due to its protected home market under the
assumptions of (1) oligopolistic and segmented markets which allow firms to charge
different prices in different markets, and (2) economies of scale. Krugman argues
that if a firm has received protection in home market to ensure its market share over
the foreign firm, then home firm can reduce the marginal costs and occupy bigger
market share in other unprotected markets by charging higher prices in home market
and lower prices in other markets to increase its market share (Krugman, 1992).
Furthermore, Krugman argues that the extreme pro-free-trade position has become
untenable (Krugman, 1986: 15). He indicates that, because of economies of scale,
advantages of experience, and innovation, some sectors can earn much higher return
with the same labor and capital than others. He suggests that, in this complex world,
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we need to update the conventional framework about free trade, and successful
activist trade or industrial policy is possible (ibid.).
Thus, some economists propose that some countries, such as those in East
Asia, having tremendous economic growth and macroeconomic performance, have
benefited more from industrial policies, managed trade and East Asianness, than
from strongly outward orientations (Wade, 1990: 18). Furthermore, neoclassical
economists argue that lower price distortions can help growth. But Bradford suggests
that policies matter for growth, monetary and fiscal policies affect the real price of
investment as well as trade and exchange rate policies contribute to export-oriented
growth (Bradford, 1987: 199). Bradford argues that deliberate price distortion may
stimulate economic growth, and that the newly industrialized countries (NICs) have
achieved higher growth due to their governments lowering the cost of investment
goods by public policies. These policies include monetary and fiscal policies
affecting interest rates, credit allocations and subsidies to stimulate both demand and
supply of investment goods, and then encouragement of capital accumulation,
industrialization and structural change (Bradford, 1987: 186).
Wade indicates that, even if some countries demonstrate higher growth after
trade liberalization, the direction of causation is unclear, and, "this beneficial
consequence of free trade cannot be considered universal." (Wade, 1990: 20) Some
economists also indicate that when economic growth slows down and full
employment was not in prospect, then trade would now allocate unemployment, in
this case, free trade could cause economic, social and political confrontation
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(Bienefeld, 1982: 40). Bienefeld argues that long periods of sustained economic
expansion may result in overinvestment because early warning signals in the credit
allocation mechanism may be effectively obscured, industrial overcapacity may cause
falling rates of profits and rising unemployment (ibid.: 40-41). Bienefeld states that
economic success is dependent on the maintenance of a favorable investment climate
to sustain rapid innovation, combined with coordinated and effective national
policies concerned with marketing, exchange rates, subsidies, foreign aid and
education/technology. In the absence of such an environment the mere creation o f big
firms is no solution (ibid.: 41-42).
2.1.2 Pro-intervention arguments
There are some other arguments which offer more room for the state’ s
participation in economic development. These include Keynes’ theory and the
structuralist school. These arguments indicate that sometimes markets fail to provide
socially desirable goods and services and justifies the intervention of the state. They
argue that the state rather than markets can provide public goods such as
macroeconomic stabilization, correct and regulate externalities and incomplete
markets and information, and decide an allocation of resources which is more likely
to be socially just and Pareto-efficient.
For example, Keynes argues that the market does have defects and needs the
state to intervene when markets fail. His theory is different from the classical
economic theory. The Keynesian theory argues that the imbalance between supply
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and demand will happen due to the market's failure to provide proper overall
demand. If the market fails systematically, then the self-regulating market
mechanism claimed by classical and neoclassical theories is not accurate and society
cannot fully utilize its productivity and resources. Thus the Keynesian argues "that
stability and adequate market functioning can be assured by the introduction of
automatic mechanisms, and thus by administrative rather than political means."
(Caparaso and Levine, 1992: 101) The Keynesian thinks that the reproduction
process of capitalist economies is not stable and is vulnerable to cumulative
movements: "instability characterizes capitalist economies because processes within
such economies (movements of output, investment, employment, and price) tend to
be self-reinforcing or cumulative." (ibid.: 103)
Keynes argues that in order to stabilize these cumulative movements,
property relations and contracts need to be changed, but this (1) requires moving
away from a pure property system by invoking the state as regulator of fundamental
contractual relations and (2) allows the state to interfere in the production process
and redistribute wealth. Thus, the scope for market self-correction is limited and
more direct state interventions are justified. Furthermore, the Keynesian argues that
the expectation of demand and profitability affects investment decisions more than
the interest rate and savings. Thus, according to Keynesians, the state should
stabilize the aggregate demand, output, and employment (and other aspects of the
economy) through taxes, spending, and borrowing to modify the links between
income, employment, and consumption (Caparaso and Levine, 1992: 121).
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Late Industrialization
Some scholars indicate that, based on the historical study of the industrial
development of Europe, industrialization processes in a backward country is different
from that in more advanced countries, more state actions in late industrializing
nations are needed to promote industrialization by establishing investment banks,
state enterprises to make up for less well-developed market environment
(Gerschenkron, 1962). Gerschenkron indicates that, in the nineties, the banking
system in Russia could not conceivably succeed in attracting sufficient funds to
finance a large-scale industrialization; the standards of honesty in business were so
disastrously low, fraudulent bankruptcy had been almost elevated to the rank of a
general business practice. Supply of capital for the needs of industrialization required
the compulsory machinery of the government, which, through its taxation policies,
succeeded in directing incomes from consumption to investment (ibid.: 19-20).
"The agents of industrialization shifted from private entrepreneurs during the
first industrial revolution in England, to investment banks in Germany and then to
the state in Tsarist Russia." (Griffin, 1989: 101) Gerschenkron also advocates that if
a country is more behind the early industrializing countries, then its government
needs to take a more active role in promoting industrialization and growth and
overcoming market rigidities.
Some argue that most European countries did not adopt free trade policies as
did England; they protected domestic firms, and made investment planning in
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developing industrialization. They took measures to increase the value-added of raw
materials, develop mass production, achieve economies of scale, and establish capital
goods industry. After the domestic firms have developed enough competitiveness,
then the states can reopen the domestic market (Griffin, 1989: 101-102).
Furthermore, from studies of Germany, Japan, Sweden and the United States,
scholars argue that successful implementation in those four countries of a national
strategy of industrialisation depended upon the ability of the sovereign state, in
collaboration with a powerful industrial class, to control and promote the conditions
of growth. Institutional support provided by investment banks, a directed technical
education system, labour control, selective protection policies, and the borrowing and
adaptation of new technology for further domestic innovation, were all part of the
larger project to achieve national industrial development. (Griffin, 1989)
In the United States, there are similar opinions, as Hamilton advocated that
state can have a greater role than Adam Smith proposes, his rationale for state
intervention is that the late-start U.S. needs aid and assistance of a pro-business
powerful, centralized federal government to catch up and compete with the early-
start England. (Hamilton, 1964/1790) He indicates that the state should guide the
economic development and provide all means to foster economic development by
public investment in transportation and communication, and tariffs to protect
domestic infant industries against foreign mature industries. Because these infant
industries are generally new, emerging industries which have great potentials for
further development. Amsden also suggests that, the institutions of late
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industrialization that underscore its success, are the following: an interventionist
state, large diversified business groups, an abundant supply of competent salaried
managers, and an abundant supply of low-cost, well-educated labor (Amsden, 1989:
8). She indicates that, for countries with late-industrialization, the state displays
extensive intervention to promote industrialization (Amsden, 1989). These measures
include providing subsidies to strategic industries, support to large firms, protection
of domestic business from foreign competitors, and supplies of cheap labor and
capital.
Structuralist School
Theorists in the structuralist school also propose significant involvement of
the state in guiding industrialization. They argue that "the range of state intervention
should vary according to the moment and the situation." (Wang, 1995: 17) This
school points out that markets are efficient only under exceptional circumstances,
and different nations may have different kinds and degrees of market failure, which
needs different interventions. Basically, structuralists indicate some structural
problems and propose some appropriate state interventions as follows.
(1) Rigidity
In the structuralists' view, the market does not always work as the
neoclassical school claims. They argue that, in many LDCs, there exist many
structural problems, such as inelastic supply and demand, rigid production structures,
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restricted factor movements, insufficient entrepreneurs, and lack of infrastructure in
foreign exchange and communication. Thus price mechanisms may not work, and
markets by themselves cannot achieve efficient resource allocation. This justifies
administrative action to manage change, and to generate necessary influence to
compensate these problems by providing public investments and appropriate
incentives to encourage private investments (Little, 1982: 20-1; Todaro, 1985: 388).
(2) Bad Terms of Trade
Other economists also point out that most LDCs, even though they have
achieved political independence, they are economically and technologically
dependent on the more advanced capitalist economies. They indicate that structural
problems like overpopulation, subsistence agriculture, and political domination by
feudal elite trap LDCs in a self-perpetuating state of underdevelopment, a vicious
cycle of poverty, " [international market imperfections increase inequalities among
the developed countries and less developed countries as the developed countries tend
to benefit disproportionately from international trade." (Gilpin, 1987: 275)
This is because, as they claim, that most LDCs produce mainly commodity
like goods with low price elasticities to exchange for capital goods with high income
and price elasticities from the advanced industrial countries. The structuralist theory
of underdevelopment argues that these deteriorating terms of trade adversely affect
the economic development of the LDCs, and need the state’ s intervention to adopt
import-substitution industrialization (ISI) and protection of domestic infant industries
by tariffs and manipulated exchange rates, export diversification, a redistribution of
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income to increase consumer demand for relatively low-priced manufactured goods,
encouragement of foreign investment in manufacturing (Roxborough, 1979: 28-35;
Gilpin 1987: 273-277).
However, economists indicate that there are some problems associated with
ISI in the Third World, for example, the technologies available to the LDCs may
need massive outlays on capital while employing few people, which is not
concordant with LDCs’ comparative advantage based on a large supply of labor.
Furthermore, the technologies introduced from the advanced nations may need large
economic units to achieve economies of scale in operation, but many underdeveloped
countries’ market size is not big enough to utilize the plants’ full capacities, and thus
some resources would be wasted (Roxborough, 1979: 34). However, Roxborough
indicates that a common market and regional planning agreements between groups of
Third World countries can solve the problem of market size (ibid.).
Another problem is that, as Roxborough has argued, in most LDCs, the
income gap is big, those who demand for manufactured goods are from a few
wealthy people with luxury tastes and a high import content, which are not
conductive to the development of a sound economic base. What is needed for LDCs,
for example, is buses and trucks; however, "the entire productive structure of the
multinational corporations is geared to these high-income commodities", such as
luxury automobiles (Roxborough, 1979: 35). And, scholars argue that, this is backed
up with a massive apparatus of advertising and mass communication which means
that, when people in the Third World manifest their free choices in a market place
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dominated by the values of the countries of advanced capitalism, they do so by
purchasing precisely those commodities which are dysfunctional for balanced
economic growth (ibid.). Thus, scholars argue that, in Latin America, the attempts at
industrialisation via the substitution of imports led to increasing balance of payments
problems, increased foreign penetration of the economy, increasing unemployment,
widening rather than narrowing income differentials, greater vulnerability of the
economy to cyclical movements, and a continuing dependency on the export of a
limited range of raw materials or agricultural products (ibid.).
Since industrialization can encourage economic development through higher
productivity and accelerating accumulation, many structuralists suggest protecting
infant industries; because establishment of new industries provides not only private
benefits but also social net benefits due to effects of complementarities, external
economies and linkages to other related upstream or downstream industries through
cheaper input prices or technological diffusion (Hirschman, 1958: 100). Hirschman
indicates that there is interaction not only between industries, but up and down and
across the whole of an economy’ s input-output matrix during the process of
development. An increase in the output of A may increase the profitability of the
production of B, thus an investment may bring about pecuniary external economies,
and its private profitability understates its social desirability. Furthermore,
development policy should maintain tensions, disproportions, and disequilibria, if it
wants to keep the economy moving ahead, because profits are a sign of disequilibria,
and will call for more investment and expansion (ibid.: 65-9).
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(3) Support for Industrialization
Structuralists indicate that, for developing countries, large-scale investments
(e.g. R&D, education, job training, and infrastructure) and big industrial decisions
need the guidance and participation of the state. They also use France, USA, Japan,
and the East Asian nations as examples to support their arguments. Economists
indicate that agriculture and service need less capital and technical skills than
industry; thus when engaging in industrialization, governments have to intervene to
raise more physical and human capital to promote higher value-added industrial
sectors, since accumulation of factors of production is the fundamental cause of
industrialization. As industrialization succeeds, resources will shift from labor-
intensive, low-technology sectors into capital-intensive, higher-technology sectors
(Dollar and Sokoloff, 1994: 5-6).
Structuralists argue that the necessary skills and technology for
industrialization need the state’ s participation to establish systems of education and
generate sufficient scientists and technicians (Solo, 1967: 482-3). Furthermore, they
advocate that industrialization needs technology transfer for LDCs, this needs
knowledge to evaluate the costs and benefits of different technology transfer, and to
modify and improve the imported technologies to fit the specific needs of the LDCs.
All these things need the state’ s participation to provide relevant services and
infrastructure for scientific learning and progress (ibid.: 421- 4).
(4) Social Base
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Structuralists argue that, when a country is in transition, for example, from
central-planning to a market economy, or from an agrarian to industrialized
economy, it needs state interventions to establish necessary "political, ideological,
and moral bases" and alleviate problems such as inflation, unemployment, and
resource misallocation, since the transition will not be smooth and will be "too slow
to meet the present urgent needs." (Wang, 1995: 19-20) Structuralists also advocate
that "[mjindless liberalization would only do harm to marketization", since a
successful transition needs a stable macroeconomic environment to develop through
correct direction, sequence of events, and pace of change (ibid.). They indicate that,
for new developments to proceed smoothly, some social reconstructions which
recognize new values supportive for economic development are needed, and these
need state elite’ s guidance (Solo, 1967: 389-390).
(5) Welfare Programs
Structuralists point out that, in some countries, the gaps between regions, or
the gaps between the poor and the rich, are huge, and the population is aging rapidly.
They indicate that the gap could impair overall efficiency, and jeopardize political
stability. They propose that the state should use fiscal transfers, some policy tools,
and social welfare programs to improve the situation. They indicate that, for
example, during 1930s’ depression in the United States, the government became a
welfare state in providing safety nets for its people (Solo, 1982: 60-63).
The Timing for Stopping Intervention
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However, most scholars advocate that the protection of infant industries
should be temporary, the state should let domestic firms compete with foreign firms
after a period of time, the domestic industries should increase their productivity and
experience during the period of protection instead of expecting longer or permanent
protection.
Porter argues that, in the early stage, government can play an important role
in channeling scarce capital into selected industries, promoting risk taking through
implicit or explicit guarantees of assistance, stimulating and influencing the
acquisition of foreign technology, and employing temporary protection, although it
will not succeed without active domestic rivalry and corporate and individual goals
that support investment (Porter, 1990: 671-2). However, when the nation moves to a
more advanced stage such as an innovation-driven one from the factor- and
investment-driven stages, earlier temporary protection may only encourage
dependence, government’ s role must shift from being a decision maker to becoming a
facilitator. Government intervention must then decrease; otherwise, the upgrading of
industry will be blocked. Porter argues that this principle has been violated by many
governments, because they are unwilling to give up power or, sometimes, they are
under pressures from protected domestic firms to continue old policies (ibid.: 671-3).
Moreover, many scholars advocate that state action should provide a fully
developed market for private sectors, by reducing the uncertainties or risks faced by
entrepreneurs, generating information about investment and sales opportunities, and
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instilling an expansionist psychology in the people, and the capitalist developmental
state should "avoid becoming the captive of its major clients, who are the
representatives of big, privately owned businesses." (Johnson, 1987: 141, 1S6) And
the state should gear to developmental goals, and let the private sector gear to profit
maximization. However, the developmental state usually implement industrial policy
which penetrates into the microlevel, as Johnson implies. When the state expands its
influence in the economic activities of different sectors, and individual enterprises,
coalition between state and firms may emerge, state agencies can give discretionary
treatments, such as tax exemption and bank credits to firms based upon their
relationship with the state rather than performance and necessity. "Such a system
could well be subject to corruption." (Johnson, 1987: 159)
Sakong also has argued that state intervention becomes less proper as
development proceeds, since "first, the entrepreneur's gap-filling ability increases,
and second, the missing inputs are marketed or more easily available." (Sakong,
1993: 46)
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2.2 Technology policy
The above section discusses the general ideas of the debate of the state's role
in economic development. This section will focus on discussions about whether or
not the state should design and implement technology policy to achieve the goal of
promoting industrialization and technological development. It will also include the
discussion about whether the state should implement generic/functional or
strategic/sectoral policies; and arguments about what options the government can use
to effectively guide and promote industry without distorting the adequate functioning
of the free market.
Policy or No Policy
Many scholars argued that there is no need to establish industrial policy to
promote national competitiveness. These authors retain a preference for the free
market structure over government industrial planning (Clinger, 1984: 3-5). They
advocate that Japan’ s successful industrial development in the postwar period owed a
lot to the huge saving rate, aggressive business leaders and modem technology rather
than government’ s industrial policy (Schultze, 1984: 12). They further argue that
government is not able to identify the right industrial structure in carrying out an
industrial policy; and government does not have clear criteria to decide which
industries to protect or restructure in governing a systematic government policy
(ibid.: 15, 17). However, many scholars indicate some reasons for government to
intervene in the emergence and growth of high-tech industries, and propose a new
knowledge-based, growth-oriented technology policy.
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The scholars who advocate state involvement argue that n[t]he issue isnlt
whether to have a technology policy; it’ s what kind." (Branscomb, 1992: 2) They
indicate that vision, ideas and knowledge are critical to future success, and
governments need to nurture the creation o f these things. Peter B. Evans also has
argued that "[njowhere in the world has high technology industry emerged and grown
without government involvement"; thus he indicates that the real question is what are
the effects of different government technology policies (Evans, 1989: 31)? And he
also indicates that the past Latin American protective greenhouse policies have
helped local firms overcome risk aversion and provided them valuable bargaining
leverage when forming alliances with transnationals (ibid.: 32).
Other scholars argue that there is a collective stake in the production of ideas;
and it is ideas that drive growth in the long run; thus, the best contribution
government can make is to support institutions which help support the creation of
ideas (Farrell & Mandel, 1992: 72). They advocate that competitive advantage no
longer belongs to the biggest or those blessed with abundant natural resources or the
most capital, and "those nations which excel at creating new knowledge and
transforming it into new technologies and products will prosper in years to come."
(ibid.) Thus, these scholars suggest that a country like the United States needs an
economic vision geared toward the future global economy; and the United States
should have an industrial policy to nurture and promote technology and industry
(ibid.: 70).
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When US firms were in a less competitive situation compared to Japan’ s giant
corporations in the 1980s, many scholars felt it urgent to have more state
participation in industry development. They argued that America’ s technological edge
is melting away as other nations invest heavily in science and engineering. They
believe that the government must keep stoking the fires of invention, or else "we
won It have anything new 20 years from now." (ibid.: 72)
Some scholars indicate that, in fact, many advanced countries, such as the
US, already has had a technology policy and "spends more than $70 billion every
year pursuing it," it takes the form primarily of government spending on defense-
related R&D and on the development of military technologies, but the unaided and
unplanned diffusion of defense technology to commercial companies is simply too
slow, too inefficient, and too narrowly restricted to constitute an effective strategy for
competitiveness (Branscomb, 1992: 2, 4). Thus scholars indicate that a new
technology policy is needed and what they advocate is a knowledge-based growth
policy which would not call on government to choose winners and losers; nor would
it create bureaucracies or protect stumbling companies from foreign rivals (Farrell &
Mandel, 1992). They indicate that the knowledge-based growth theory should not
favor any particular industries to avoid interfering with market, and enable industry
and government to be partners for the ideas-driven growth (ibid.).
Generic vs. Strategic
Basically, there are two kinds of industry policies, a functional or horizontal
industrial policy which would try to encourage the accumulation of factors to
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promote industrialization through general measures such as subsidizing research and
development, investment in public education, promoting saving; while a sectoral or
industry-specific industrial policy targets selected industries, state interventions in
resource allocation and create competitive advantages for selected industries, through
measures such as import protection, subsidized credit and public investment to
preferred industries (Kasper, 1994: 23; Wade, 1990). Some sectoral policies lead the
market when the government makes plans about which products or technologies
should be promoted, and puts public resources or influence into these sectors; but
when the government accepted the private firms’ proposals or requests to support
new products and new technologies, these sectoral policies follow the market (Wade,
1990: 28).
Neoclassical economists believe that few market failures can be cured by a
sectoral industrial policy, but they support functional policies and indicate that,
government should focus on the general planning of the physical, social and
psychological environment of private agents rather than the planning of these agents’
strategies and actions. Thus, most economists think that, when following neoclassical
arguments, many LDCs should reduce the size of government and implement more
economic liberalization and privatization. Cohen and Noll also suggest that
government should promote generic research and create independent sources of
technical knowledge to expand the range of technological options available for
industry, and separate these programs institutionally from basic scientific research
and from operational responsibilities (Cohen & Noll, 1991: 389-392). They argue
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that government R&D commercialization programs sometimes are over optimistic
about the ultimate results of all R&D projects, and compare the proposed program
with a very narrow range of alternative technological pathways (ibid.: 367). They
indicate that this narrowness is due to the necessity for the technologists to obtain
support of political leaders and interest groups. They advocate that it is near
impossible to manage both the politics and economics of large-scale
commercialization projects, they indicate that reasonable economic and performance
goals were cast aside once political and financial commitments had been made.
Traditionally, the US implicit technology policy also supports the funding of
basic research in universities and national labs to create fundamental breakthroughs
to spawn new kinds of products and new industries (Branscomb, 1992: 2-4). Thus,
many scholars criticize the targeting o f certain technologies, they think that
investment decisions will inevitably be based on political rather than economic or
market criteria when the government is involved (Branscomb, 1992: 4). They do not
think that the government should support R & D for strategic high-tech sectors when
domestic firms lose market share to foreign firms, they argue that, any governmental
remedy would be far worse than the problem. They indicate that, in a global economy
where capital, technology, and people are mobile, innovation itself is becoming
global. "Any effort by government to pick winners or otherwise unilaterally control
technological outcomes, within its own borders is certainly doomed." (Branscomb,
1992: 2) Therefore, they indicate that, in this globalization age, the technology
policy can be "a competitiveness program, or a growth agenda," and government can
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play a key role in this knowledge economy, government should boost research
spending and offer hefty financial support to the next generation of scientists and
engineers (Farrell & Mandel, 1992: 70).
However, there are other arguments, that indicate government can play an
active role in economic growth and development through encouraging creation of
new technologies and commercializing technological innovations. They advocate that
government support for R&D on 'critical technologies' is absolutely essential. They
argue that these technologies are crucial to future economic well-being, and both
Japan’ s Ministry of International Trade and Industry and the European Communities
have their 'critical technologies lists’ (Branscomb, 1992:2-4). But, it is suggested that
when government provides its support, the criteria for promising projects need to be
far more precise than those implicit in the typical 'critical technologies list’ , and the
government should support strategic technologies to sustain industries deemed
critical to the national interest only in very special situations. The government and
industry will have to address not only technological factors but also issues of capital
investment, market structure, industry structure, and trade policy (Branscomb, 1992:
6-7).
There is another reason supporting targeting some industry more than others
if it can encourage growth. As Jerry R. Junkins has indicated, the growth in jobs and
the standard of living tend to be governed by industries that have relatively high rates
of research, development and capital investment; others also argue that technological
breakthroughs are what really spur growth; and, "[wjithout major advances, even
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doubling net investment in plant and equipment raises the growth rate of real income
by less than half a percentage point a year." (Farrell & Mandel, 1992: 72) Thus,
interventionists advocate the public support of high-risk but potentially path-breaking
technologies, and funding of research and ideas, since the rate of return on R&D
spending could run as high as 50% a year (ibid.)- However, they suggest a smart way
of funding to avoid waste and failure, They think the government should diversify its
spending across a variety of technologies, like putting together a growth stock
portfolio, and give funding to sci-tech outfits, such as the National Science
Foundation, and the National Institutes of Health, so the policy would rely on the
well-established decentralized decision-making system of the scientific community,
one of peer review, and the funding can flow into top research universities through
these agencies, and in some cases, government should require business to make
similar research investments to protect the process from being hijacked by political
interests (ibid.).
Porter also argues for growth policy, but he indicates that government should
focus on offering a proper environment, as he says that technological change
accounts for much of economic growth, and "innovation requires sustained
investment in research, physical capital, and human resources." (Porter, 1990: 20)
Thus, whether or not a nation can provide a proper environment for firms to improve
and innovate faster than foreign rivals is very important to the competitive advantage
of a nation (ibid.). He argues that some developing nations have made wrong choices
in targeting entry into ’ structurally unattractive industries’ , thereby making poor use
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of scarce resources. He indicates that industries important to a high standard of living
are often those that are structurally attractive with sustainable entry barriers in such
areas as technology, specialized skills, channel access, and brand reputation, they
often involve high labor productivity and will earn more attractive returns to capital
(ibid.: 36). Porter argues that government can play a positive or negative role in
influencing the creation of national competitive advantage, "but lacks the power to
create advantage itself." (ibid.: 128)
Policy Options
There are many cases encouraging governments to use measures to promote
industrialization, for example, a developing country wants to upgrade to become
developed, or when a country’ s economy is in recession, or the competitiveness of
industry is lagging, many will ask for government’ s interventions to restore and
improve productivity and economic growth. Government can widen the industrial
sector by increasing industry’ s share of total output and the industrial labor force’ s
share of total employment and deepen the sector by upgrading into higher value-
added sectors which have higher average labor productivity, and generally,
"widening industry is more important in the early stages of industrialization, and
deepening it in the later stages." (Aberbach et al.: 1994: 5-6)
The following will introduce some discussion about some popular policy
options for the state to nurture and stimulate industrialization.
Credit Policy
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Many governments use selective credit policies to create a net increase in
credit to preferred borrowers, and change the allocation of resources. The
effectiveness of this policy could be achieved by financial institutions’ increasing
lending to the preferred borrowers due to government’ s intervention or
encouragement. But this policy may cause other borrowers higher costs, thus the
overall benefits of this policy must be evaluated with the consideration of all
industries and the welfare of the whole population. As Wade indicates, selected
promotion has costs, since it moves resources from currently profitable industry (e.g.,
textiles) to industry which might have profits in the future. "Industry optimality does
not establish national optimality, and national optimality may be defined not only in
terms of present or future consumption but also in terms of the competitive strength
of national industries in relation to other countries." (Wade, 1990: 31-32)
Furthermore, many scholars advocated that, sometimes, governments should
increase credit access to small firms to correct market failures. They argued that as
capitalist economy proceeds, there is a trend toward giant corporations, as big is
better’ , and stimulates more involvement of government in corporate planning.
Marx claimed that the trend is moving in the direction toward monopolization
and centralization. He proposes three reasons: (1) the battle of competition is fought
by the cheapness of commodities, so if big companies first introduce technological
improvements to lower costs, they can dominate the market. (2) With rising
productivity and improvements in technology, the scale becomes bigger, and it
becomes more difficult for small or medium enterprises to function as well as large
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enterprises, and the minimum scale becomes larger. Thus, it’ s harder to become a
capitalist enterprise. (3) The credit system is such that bankers lend money to large,
well established business rather than smaller ones, so the tendency for centralization
increases. Galbraith states that the application of increasingly intricate and
sophisticated technology to the production of things, notably in the large-scale
corporations have reduced the reliability of market relations and thereby have made
corporate planning imperative (Elliott, 1978: 97). Moreover, Galbraith argues that
due to large corporations’ ability to manipulate prices to their own advantage,
inequalities in economic power generate inequalities in income between the large
corporations and small firms, in the absence of unimpeded mobility between the two
sectors, these differences in the level and security of income can and will persist
(ibid.: 109). So Galbraith indicates that "the mature corporation has come to
influence and control public policy . . . through symbiosis with the public
bureaucracies." (ibid.: 110)
Thus, the market mechanism fails to treat small firms fairly. Scholars argue
that big firms usually get loans on privileged terms, since either big firms sometimes
have control over credit markets or they have implicit guarantees of being rescued by
government more likely than small firms, because they are too big to permit them to
fail. When this occurs, government is justified to intervene to increase credit access
to small firms to correct market failures.
Research Parks
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There are many theories suggesting that research parks— regions focused on
industrial R&D activities— can stimulate economic development through high
concentrations of R&D activities, expansion of existing firms, and formation of new
business by forward and backward linkages. Thus, many governments in Asia,
Europe all actively participate in the creation and coordination of research parks to
generate the next Silicon Valley. However, a study shows that when government
intends to stimulate economic development by establishing regional research parks, it
should first provide long-term investment in improving public and higher education,
environment quality, and residential opportunities, and the regions with rich
resources that can attract educated scientists and engineers will be more likely to
succeed (Luger & Goldstein, 1991: 183-4).
Many neoclassical economists also propose some proper state interventions in
order to correct market failures in the issues of technology development, manpower
training and credit to small firms and exporters (Wade, 1990: 12-13).
Tax credits
When a company invests in getting and learning technological knowledge,
other firms may be able to acquire these new developments by hiring employees from
the company which has the breakthroughs; thus, companies may underinvest in
technology development if the total benefits of investment can not compensate for
the costs. In this case, government can use tax incentives to promote the private rates
of return on technology development; and government should formulate and enforce
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intellectual property rights such as patents and copyrights. Scholars indicate that, "for
most governments, taxation is perhaps the most readily available instrument of
industrial policy." (Okimoto, 1989: 86) Generally, tax credits provide immediate
means of special benefits for priority industries without visible drain of government
budgets; many governments use generous tax provisions to encourage high-tech-
related R&D investments, and establish tax laws to reduce the costs for the private
sector to invest in research, development, and new equipment (ibid.: 86-87). Scholars
indicate that the cost of the tax credits and provisions may be up to billions of
dollars, but over the long run, it will increase productivity and living standards and
generate plenty of tax revenues to more than pay for itself (Farrell & Mandel, 1992).
Price regulation, government coordination
Also, some technology development may need a larger scale of investment
than a single company can afford, so government is justified in coordinating public
and private technology development. Wade indicates that economies of scale may
generate "an imperfectly competitive industrial structure as those with lower costs
are able to drive others out of business," thus government ownership, or price
regulation, or measures to help firms travel down their declining cost curves might be
needed (Wade, 1990: 13). Some economists also argue for state intervention in the
case of ’ sunset’ industries, when the market demonstrates disruptive speed or patterns
of decline which causes huge unemployment and is socially inefficient. In the case of
’ sunrise’ or Infant’ industries, some argue that market prices may not reflect some
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positive interfirm side-effects, or the benefits of innovative goods and services
created by a firm, thus government should adopt measures to offset suboptimal
private investment.
Manpower training
Evans argues that knowledge generation from human resource accumulation
by government’ s cultivation could provide a base for high-technology development
(Evans, 1989: 37). Scholars advocate that in the development of high-tech industry,
the main challenge is how to create sufficient human resources rather than how to
acquire embodied technology such as new equipment; they indicate that people are
the most important medium in technology transfers; and educated and trained
individuals moving through different positions and companies usually create new
high-tech companies, new markets, and new technologies (ibid.: 37-8). Since human
resources are so important to economic development and technological development,
scholars indicate that if the benefits to society from educated people, such as a better
informed citizenry and a healthier population, are more than the benefits to the
educated person from higher incomes, then markets may fail, and private sectors may
underinvest in education, however, government can intervene and provide subsidies
to encourage investment in human capital (Wade, 1990). Furthermore, some
advocate that government could take a more active role in development of human
resource. They suggest that the US government should subsidize the education of
more engineers and scientists, since the "more young people who pursue careers in
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science and engineering, the better the odds that society will develop technologies
and products that fuel economic growth." (Farrell & Mandel, 1992: 74)
R&D. Infrastructure
Almost all scholars agree that government should engage in investments in
R&D to establish the basic infrastructure for the development of high-tech industry
and economic growth. In fact, many advanced countries did fund research and
development expenditure to promote the development of high technology and
stimulate productivity growth. For example, in 1984, Japanese government spending
as a proportion of total research and development expenditure was 23.6 percent,
46.1% in U.S., 49.8% in Britain, 43.5% in West Germany, and 57.8% in France
(Uekusa & Ide, 1986: 163).
Evans advocates that in the beginning stage of new, emerging industries,
government intervention is needed in funding development, because when the
commercial market was too small to justify large-scale private risk-taking,
government funds can fueled the process; later, "when a substantial commercial
market had developed, private R&D investment became central to the competitive
process." (Evans, 1989: 5) Scholars indicate that, in fact, each country has used
different ways to nurture high-tech industries in the early development stage, for
example, "[t]he U.S. government’ s role as R&D contractor and guaranteed first
customer has fostered the growth of one high-tech industry after another," while
Japan’ s government has organized a series of national research projects jointly
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developed with the cooperation of private industry aiming at precommercial
technologies, cost-effective resource allocation, technology diffusion, and
information industries (Okimoto, 1989: 66-8). Scholars advocate that government
should enhance productivity by building up infrastructure, especially the
development of high-speed communication networks which can support the
information-intensive industries of the 1990s, and government should offer telephone
companies and their competitors incentives to expand the data superhighway so that
many small companies can receive the benefits (Farrell & Mandel, 1992).
Proponents of government technology policy suggest that government should
'supply’ technologies by supporting R&D that "underpin a broad array of specific
technology applications in many different industries"; furthermore, government
should encourage ’ demand’ for technologies "by helping companies across the
industrial spectrum speed up the commercialization of good ideas to meet specific
business needs," this can be done by encouraging joint research among companies
and among industry, universities, and government labs; by investing in the
technological infrastructure; and by helping develop the tools and techniques that all
companies need to be more productive (Branscomb, 1992: 3-4). Scholars suggest that
government does not have to "take on the expensive task of commercializing all the
elements of a given technology but instead concentrates on improving the ability of
companies to adopt and adapt technologies that either already exist or that represent
an important new competitive opportunity" to encourage commercial technology
development (ibid.).
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Except for some demand-side policies such as precompetitive research, and
generic technologies, scholars also advocate Industrial extension’ to provide
technical assistance to, especially smaller, companies to learn the latest
manufacturing techniques, which is an analogy to US government’ s elaborate and
highly successful agricultural extension service that began early this century to
provide technical assistance to nation’ s farms (ibid.: 6).
Free Trade
Scholars suggest that government adopt trade policy which opens up foreign
markets while resisting protectionism at home. Porter argues that free trade puts the
pressure on domestic industries to innovate and create a productive economy, and,
whenever possible, the government should press and prod industry to move to a
better plane (Farrell & Mandel, 1992). Porter also advocates that " [international
trade allows a nation to raise its productivity by eliminating the need to produce all
goods and services within the nation itself," and a nation can thereby specialize in
more productive industries and raise the average productivity level in its economy;
when a nation deploys its resources in the most productive uses possible, the success
of those industries with a competitive advantage will push up the costs of labor,
inputs, and capital in the nation and make other industries uncompetitive (Porter,
1990: 7). Therefore, Porter argues that "[g]ovemment’ s proper role is to push and
challenge its industry to advance," since a nation’ s living standards depends on the
capacity of its firms to enhance productivity by raising product quality, adding
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desirable features, improving product technology, or boosting production efficiency
(ibid.: 6, 30). Porter argues that, in today’ s world, the theory of comparative
advantage cannot be used to explain international competitiveness in trade, since
governments can change production factors’ advantage through different intervention
such as export financing, devaluation, and subsidies (ibid.: 11-2). Moreover, it is
estimated that, international trade made up 30% of real growth in the US economy
since 1986; thus scholars argue that the US government should reject protectionism,
but should help companies gain access to foreign markets by providing more small
companies with cheap financing from the Export-Import Bank, and expanding its
trade missions; they indicate that US "spends only around 50 cents per capita on
export promotion, compared with $4 in France and $5 in Japan, according to the
National Association of Manufacturers." (Farrell & Mandel, 1992: 74)
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Chapter 3 AN OVERVIEW OF GOVERNMENT’ S ROLE IN
INDUSTRIALIZATION
This chapter will first describe different cases of government intervention in
order to empirically demonstrate the factors of effective government participation.
Then we shall describe the process of Taiwan’ s industrialization and the development
of its high-tech industry. We shall present how the government transformed Taiwan
into an industrial island with high economic growth and development.
3.1 Worldwide Cases of Government Intervention
There are many instances of government intervention in the world; some have
failed and some have been successful. In this section, we shall present some cases
and try to find the factors affecting the effects of government intervention in these
limited number of cases.
3.1.1 The Effective Cases
There are many examples of government participation in the economy’ s
growth and development; some could demonstrate the positive effects of the
government’ s support. Some scholars also advocate an active role of government in
industrialization.
US
According to David A. Aschauer, a lower rate of public investment could be
blamed for the 50% falloff in the productivity growth-from an average of 2.8% a
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year from 1953 to 1969 down to 1.4% from 1970 to 1988; Michael Porter also
indicates that the government should press and prod industry to move to a higher
plane whenever possible (Farrell & Mandel, 1992).
There are many examples of government’ s intervention in economic
development, for example, in the 19th century, the US federal government backed
the development of a transcontinental railroad by ceding huge tracts of land to the
railroad industry. The government also sponsored a network o f universities,
extension services, and research to help US farmers. This cooperative extension
service was created in 1914; at that time, the U.S. trailed Europe in farming
techniques, but through almost 50 years’ increasing support, these investments
resulted in big gains in agricultural productivity (ibid.). And, in the 20th century, US
government funds nurtured many infant industries, such as airlines and electronics;
even the Reagan Administration pursued an ad hoc industry policy, providing huge
tax breaks for the real estate industry and funding high-tech industries like
biotechnology (ibid.). Moreover, the US Commerce Dept.’ s setup of the Malcolm
Baldrige National Quality Award in 1988 also contributed to the successful spread of
the quaiity-management revolution.
Scholars indicate that, in this globalization age, there are many ways by
which government can promote industrial development, help companies and society
as a whole to prepare for a global economy where the rapid absorption and
application of innovative ideas is the linchpin of competitive success (Branscomb,
1992: 7). For example, US military R&D and procurement contributed a lot to the
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development of the electronics, computer, and aerospace industries in their early
stage (ibid.: 3). In fact, even the current commercial Internet technology is based on
infrastructure established by the US Department of Defense; another example of
government’ s support for a crucial generic technology is that the US Congress
authorized funding in November, 1991, to upgrade Internet, the collection of more
than 2,000 computer networks linking universities and research labs around the US
and to the rest of the world, to create a National Research and Education Network
(NREN) that will expand Internet to serve schools, government and industry to
greatly increase the capacity for collaboration and to help create a national market for
improved information services, which in tum can enable companies to accelerate the
commercialization of new technology (ibid.: 5).
There are more examples of government’ s participation to promote
industrialization and efficiency. Since 1988, the U.S. Commerce Department’ s
National Institute for Standards and Technology has established six regional
Manufacturing Technology Centers to work with small and midsize manufacturers
to improve their productivity (ibid.: 6). Branscomb indicates that the best model for
government’ s role is the Defense Advanced Research Projects Agency (DARPA).
DARPA has made strategic investments in cutting-edge technologies that eventually
lead to commercial benefits. It has a small, highly professional, unbureaucratic staff
with a mission to explore high-risk technologies, also preventing it from political
pressures (ibid.).
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Another example of the US government’ s support in industry is the federal
government’ s sharing in the costs of Sematech— a consortium of large US
semiconductor manufacturers to ensure the manufacturers keep pace with
accelerating technical demands (ibid.). Furthermore, some US industry leaders also
form organizations to express their opinions and participate in shaping and
implementing technology policy, for example, Computer Systems Policy Project
(CSPP). CSPP is an affiliate of 12 US computer system companies, which has
meetings with government officials to encourage a more informed understanding of
the competitive dynamics in their industry and to identify areas for public-private
partnership (ibid.: 7). CSPP represents a kind of business-led, demand-oriented
approach to US technology policy, CSPP has called for the modernization of science
and engineering education, and for infrastructure investment in the nation’ s computer
network, and for the focus of research being tied with solving key business and social
problems (ibid.).
According to the US government’ s Office of Technology Assessment (OTA),
23 state governments are spending a total of $50 million a year supporting 27
technology extension centers to help small business by speeding diffusion of
technical knowledge and new manufacturing techniques, while Japan spent $500
million to back 185 technology extension centers (Farrell & Mandel, 1992: 73).
Canada
Evans provided other successful instances of government’ s involvement;
these cases showed that the combination of initial government’ s protection and
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support with subsequent strong focus on exports could have an impressive
performance (Evans, 1989: 34-35). He indicates that Canada’ s Northern Telecom was
protected by a ’ greenhouse’ rule to be the preferred supplier of Bell Canada.
Therefore, Northern Telecom had an ensured market and revenues income to support
it to produce products with comparable quality and price to other international firms.
Then, during the 1970s, with the basis of the protected domestic market, Northern
Telecom invested enormously in R&D to develop its own state-of-the-art products.
However, because of the economies of scale in telecommunications, Northern
Telecom had to expand its market to earn more revenues to pay for its investment.
"Fortunately for Northern Telecom, the results of its R&D efforts matured at about
the time of the breakup of AT&T," which meant that the Baby Bells suddenly
emerged as a new, technologically compatible export market for Northern Telecom
(Evans, 1989: 35). But, Evans advocates that the Northern Telecom case should be
seen as inspiration rather than a model for imitation, since its success also resulted
from two additional advantages: "the structural advantage of the technological
equivalence between its own market and the U.S. market" and the advantage from
the match of the timing of the opening of the US market with its matured research
efforts (ibid.).
East Asia
Evans indicates that the East Asian countries not only followed the Northern
Telecom’ s strategy, but also offered extra-greenhouse kinds of government
intervention to promote the development of high-technology industry to capture the
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social benefits of technology innovation and improvement (ibid.: 35-7). For example,
the Japanese government has served as a source of venture capital in channeling
capital into high-technology industry; and the Korean government also funded the
development of the computer industry with sufficient capital through a variety of
programs. Taiwan’ s government took efforts in technology-promotion more than
financial promotion, following its basic principles by facilitating private firms'
acquisition and commercialization of new technology as seen in the example of
Taiwan’ s Advanced Technology Corporation (ibid.).
Ireland
Some governments have engaged in the promotion of education and training
focused on science and technology to foster high-tech professionals, rather than just
college graduates. For example, Ireland’ s government emphasized much of its higher
education system on the information technology, and produced high GDP growth
during the decade of 1990-2000, because of direct investments from foreign high-
tech firms.
3.1.2 The Anti-intervention Cases
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Although some scholars point out several cases to demonstrate the efforts and
benefits of government protection and promotion, others argue that many cases have
raised doubts about the efficiency of government intervention.
Japan
Trezise indicated that Japan’ s aircraft industry has been "the object of special
promotional legislation and close bureaucratic guidance and nurturing since 1954."
(Trezise, 1984: 60) But, it remained a small industry, relying mostly on a single
customer, the Japanese Defense Agency. And from the late 1960s to 1975, Japanese
automobiles’ exports "had been increasing, but almost entirely at the expense of
European suppliers"; only after the oil crisis of 1973-74, the exports to US surged
and began to take market share away from Detroit (ibid.: 61). Thus, he indicated that
government was only one of the many contributing factors of Japan’ s success in some
industries like automobiles, and good quality control, good marketing strategies, and
good timing, and competitive pricing all had their part in this success (ibid.).
Germany
Schmidt also advocated that "industrial policy does not lead to adaptation, it
merely . . . makes the inescapable transition even more difficult." (Schmidt, 1984:
63) Schmidt indicates that West German government’ s support "has been given to
labor intensive branches as if they were industries of the future"; and "the
government’ s attempts to achieve structural changes were counterproductive." (ibid.:
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64, 67) He argues that these declining industries, such as coal mining, steel and
shipbuilding were inefficient and overmanned. Thus government’ s efforts in
providing subsidies, import tariffs and a minimum price system only caused the labor
and social insurance costs in mining to be highest of all West German industry,
persisted in overmanning in the shipbuilding industry and overcapacity and
unprofitable investment in steel industry (ibid.: 66-67). Furthermore, he states, the
government tried to establish a national computer industry in the early 1970s, "but
the program was a flop"; and the two new industries financed on a large scale by
government - the aircraft industry and nuclear energy - have not been major
successes (ibid.: 65).
Britain
Burton points out some unhappy history of industrial policy in Britain. He
indicates that Britain’ s experience with industrial policy has not proved to lead to a
better economic performance than those without industrial policies (Burton, 1984:
81). He argues that industrial policies which try to provide adjustment assistance to
sunset industries, financial assistance to sunrise industries and technologies, and the
establishment of tripartite (business, union, and government) councils to improve
cooperation turned out to cause expensive but unsuccessful bailouts, and an erosion
of business freedom (ibid.: 71-2). He indicates that Britain announced sectoral policy
for high-technology industry in 1965 to support high-risk R&D projects in
anticipation to generate diffuse benefits for the whole economy (ibid.: 75). However,
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he argues that political decision makers failed to think over economic and business
criteria when they evaluated high-tech developments. For example, the Anglo-French
Concorde supersonic jetliner project was intended to allow British and French
aircraft industries to become one generation ahead of US counterparts. But the
project is not commercially attractive as the cost per seat mile of the Concorde is
about three times that of the Boeing 747 (ibid.: 76). Furthermore, the British
government also promoted selected mergers with taxpayer finance to change the
industrial structure to achieve greater efficiency, but one of its largest merger efforts-
-British Ley land-failed in spite of continuous injections of about $3.5 billion of
taxpayers’ money (ibid.: 74-8). Thus the intended winners could be big losers and
cause huge taxpayers’ subsidies when the government injects taxpayer money into
selected firms and industries.
3.1.3 Concluding Remarks
From the above cases, we could form a simple inference, that is, when
government put more efforts in the infrastructure-oriented promotion such as
technical assistance, technology transfer, technology-based education, R&D and
communication infrastructure support, the effects of government participation are
more likely to be positive than when government provided easy credit, subsidies or
protection. However, the above cases are limited, and cannot be generalized due to
the complexity of the situations of government intervention. We shall study and
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analyze Taiwan’ s case in the next section and Chapter 4 and 5 in a more focused way
to analyze the effects of government intervention in industrialization.
3.2 Taiwan’s Industrialization
Taiwan’ s industrial development began with import substitution in the 1950s.
It focused on the production of consumer goods and agricultural products while
importing raw materials, machinery, and equipment. In the 1960s, it continued the
strategy of import substitution industry (ISI), and began export-led industrial
development. With a cheap and abundant labor force, Taiwan’ s light industry began
to export and stimulate high economic growth. Since the 1970s, labor-intensive
industry has made a great trade surplus for Taiwan. With the abundance of capital
now, Taiwan has began to upgrade to capital- and technology-intensive industry for
export. In every stage of economic and industrial development, Taiwan’ s government
has actively participated and led development. Since the 1980s, Taiwan has
selectively promoted high value-added, high-tech strategic industries to enhance
Taiwan’ s international competitiveness. Government has implemented many
measures, such as human capital formation and infrastructure development to support
technological upgrading and industrial development (OECD, 1994: 38-9). Basically,
Taiwan has followed the principle of evolutionary upgrading in its industrial
development by developing import-substituting industries of consumer goods first,
such as textiles, simple electrical appliances, then durable consumer goods and heavy
industrial products. The adoption of an import substitution strategy in Taiwan’ s initial
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stage o f economic development helped Taiwan a lot; it allows the gradual and easy
establishment of domestic manufacturing firms with government protection and
easy-to-reach local markets, it stabilizes the prices of goods made by local firms with
increasing supply. It also increases domestic job opportunities, and it could help
developing countries to "economize on foreign exchange spending." (Li, 1988: 136)
Moreover, the import-substituting industries of non-durable consumer goods are
labour-intensive, and do not need high technology, "have a short gestation period,
and yield quick returns on capital." (ibid.)
After establishing the light industries successfully, Taiwan has engaged in
export-oriented development. With cheaper wages than advanced countries, it is
easier to expand the export of labour-intensive goods. Taiwan’ s government has set
up several measures and incentives, like tax relief, extensions of low-interest loans,
and export-processing zones to promote growth in order to achieve more capital
investment, production, employment, growth, and foreign exchange earnings to
finance imports, and to enhance Taiwan’ s international competitiveness (Liang &
Liang, 1986: 106; Woronoff, 1986: 78-9; Li, 1988: 138).
By following conservative and balanced principles, Taiwan intended to
accomplish several goals, economic growth, economic stability, full employment,
and equitable distribution of income (Li, 1988: 127). Basically, Taiwan has achieved
its goals, it has enjoyed a generally increasing trade surplus, with a small income gap
and a moderate unemployment rate in 1980s.
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3.2.1 The Participation of Taiwan’ s Government
Many scholars have advocated that technology has played a critical role in
economic growth and development, while research and development are crucial to
technological advance and productivity growth (Li, 1988: 216). Thus, many
developing countries try to promote technological development in order to become
developed countries. Taiwan’ s government has actively encouraged industrialization
and high-tech development through many measures and strategies. Based on
Taiwan’ s limited resources in human and physical capital, and raw materials after
World War Q, Taiwan’ s government had to consider both available means and goals,
and adopt careful planning with limited options (ibid.). Basically, these measures are
successful as demonstrated by Taiwan’ s impressive performance of industrial
development.
The following will describe in detail about how Taiwan’ s government
participated in the industrialization and development of high-tech industry with some
guiding principles, general and strategic measures.
The Principles
Here, we shall explain how Taiwan become a technology island from a small
foundation in high-technology industry and short of capital. We shall describe six
important principles which were emphasized by Taiwan’ s scholars and government
officials in its experiences in economic development and industrial promotion. These
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features contributed to Taiwan’ s economic growth and industrialization, and provide
some insights and lessons for other developing countries (Li, 1988: 217-222).
(1) An evolutionary approach to technological advancement:
Taiwan achieved industrialization by evolutionary progress, first through
rehabilitation of existing infrastructure, then import substitution industries, and later
export-led industries; from light industries of consumer goods, to more durable
goods and industrial intermediates to heavy industry products and high value-added
products (Li, 1988: 218). Liang also indicates that Taiwan’ s economy went with its
comparative advantage (Liang & Liang, 1986: 107-8). As Taiwan’ s labor-intensive
industry made profits, it also gained experience, the learning process let industry
gradually upgrade its technology and change its comparative advantage to enter into
more skill-intensive industry with more competitiveness. Moreover, technology
acquisitions proceeded step by step, first relied on turnkey contracts or experience of
Chinese mainlanders in the 1950s, then from licensing arrangements in the 1960s,
and by joint ventures with foreign investors or Taiwan’ s own improvement in the
1970s (Li, 1988: 218).
(2) A balance between industry and agriculture:
This attitude has resulted in a stable social structure which can absorb the
insecurity and volatility in a more industrialized and urbanized society. As Li
indicates, during the worldwide recession of 1974 and 1975, 200,000 laid-off
workers in the industry sector were "quietly absorbed by agriculture, without causing
any serious social problem." (Li, 1988: 217-8) Furthermore, the government also
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intended to develop agriculture by virtue of industry, the government has encouraged
cooperation between the research scientists and fanners to identify problems and
handle them in order to increase agricultural productivity (Woronoff, 1986: 83; Li,
1988).
(3) International cooperation and attractive investment climate:
Basically, Taiwan’ s government welcomes and tries to attract foreign capital
and know-how to stimulate economic growth. From the US aid program between
1950 and 1965, Taiwan not only received material aid but also developed directional
planning, programming methodology and objective budgeting (Li, 1988).
Government also promoted domestic and foreign investment by adopting non
expropriation guarantees, permitting foreign investors to transfer their assets abroad
without statutory limitation on the share of non-Chinese ownership, and no
restriction on remittance of earnings, tax exemptions and deferrals, and help from an
Industrial Development and Investment Center under the Ministry of Economic
Affairs (Woronoff, 1986: 78; Li, 1988: 219). These measures brought an inflow of
about US$3,850 million from 1962-83 (Woronoff, 1986: 78). Li indicates that these
measures might seem to violate basic national interests, but in practice, these
measures stimulate Taiwan’ s local industry by mutual benefits, as investors could
take advantage of Taiwan’ s skilled manpower and social stability, and Taiwan’ s
industry could achieve more sophistication and higher quality standards from
technologies introduced; through ’ machine-shop innovation’ , Taiwan’ s subsidiaries
can design and manufacture products and sell back to the parent company (Li, 1988:
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219-220). Li argues that due to the principle of liberal investment laws and practices,
Taiwan has gained much more than it has lost (ibid.: 220).
(4) Educational investments:
Taiwan has committed considerable investment to education in order to
establish a critical mass of technical manpower, and its educational system has
become one of the best in Asia (Woronoff, 1986: 88). Although Taiwan suffered the
problem of brain drain as did many developing countries, since the 1980s, more
professional and technical persons have returned to Taiwan, and Taiwan has
achieved a concentration of low-cost scientists and engineers ready to enter into
high-tech industries (Li, 1988: 220-1).
(5) Overseas Feedback:
In order to effectively stimulate and evaluate the development of science and
technology, Taiwan has established links with overseas scientists and engineers.
Taiwan has adopted both in- and out-country reviews to all major project proposals,
and institutionalized overseas consultation on technological strategy (Li, 1988:
221 ).Furthermore, Taiwan’ s government, several institutions such as the Academia
Sinica, have sponsored seminars, international workshops to discuss issues about
technology development, and national reconstruction, and to make recommendations
to government authorities and industry (ibid.).
(6) Fiscal Conservatism:
Taiwan has managed to maintain a balanced government budget and usually
had a surplus during the 1960s and 1970s, even though the government "devoted as
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much as 12% o f GNP and 65% of government expenditures to defense right into the
1960s and only somewhat less subsequently." (Woronoff, 1986: 74-5) Li also
indicates that, in "both good and lean years, the government has maintained a strong
policy of living within its means with a balanced budget. . . . in spite of the fact that
defence expenditure has taken over 40% of our national budget." (Li, 1988: 221-2)
Financial officials have always been careful in borrowing and revenue estimates; Li
argues that, although tight money policy has caused businessmen's harsh criticism,
Taiwan government did achieve stability, a high credit rating with international
bankers, and put inflation under control (ibid.). This attitude against extensive
external financing could come from "the sad lessons learned many decades before
when its predecessors became over-indebted to foreign powers. . . . [thus] borrowing
was quite limited and the debt-service ratio remained under a remarkably low level of
5%." (Woronoff, 1986: 77)
Many scholars have attributed the cause of 1997’ s Asian financial crisis as too
many foreign debts for the inevitable devaluation of currencies. For example, on
November 10, 1999, according to the data of the Bank of Korea, the average debt-to-
equity ratio of South Korean manufacturing firms fell to 247.2 percent by the end of
June 1999 from 303.0 percent six months before and 387.0 percent a year before, and
this end-June debt-to-equity ratio was the lowest since 1968 when the level stood at
207.5 percent. In fact, one of the reasons that Taiwan could maintain its economic
stability without serious financial crisis is its low debts; and this can attribute to
Taiwan's initial fiscal conservatism.
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With these six principles in mind, Taiwan’ s government intended to achieve
economic stability, balanced national budgets and rational business planning, and
applied management and technology to make profits (Li, 1988: 232).
The Measures for General Industrial Development
Human resources
In order to increase human capital, Taiwan’ s government always takes
measures to cultivate its technical, scientific professionals. It has extended its free
education from six to nine years in 1969, and in 1988, its university and college
population is comparable to those of Japan on a per capita basis (Li, 1988: 220). This
commitment to education contributes to economic development and is in accord with
the Chinese cultural tradition. In addition to the commitment to the general
infrastructure of education, the government also gave special efforts to education
programs in science and technology fields. According to studies in manpower needs
and resources, Taiwan’ s government must "prepare more than one million people for
work in scientific and technological positions, including researchers, specialists and
managers with advanced degrees, engineers, technicians, analysts, craftsmen, and
skilled and semi-skilled workers" during the period of the 1980s in providing
adequate supply for the development of high-technology industries (ibid.: 234).
Therefore, Taiwan’ s government has promoted technological research
cooperation through collaboration among universities and business to "optimise
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scarce skilled personnel and . . . reduce . . . the intellectual costs." (Liang & Liang,
1985: 115)
In order to provide sufficient human capital for industrial development,
Taiwan’ s government also established a Programme for Strengthening the Education,
Training, and Recruitment of High-Level Science and Technology Personnel in 1983
in promoting graduate school education (Li, 1988: 241). Furthermore, the
government has relaxed the limitations on the number of staff at graduate schools
and increased the admission number to graduate programs in disciplines related to
national defence and strategic industries to fulfill the demands of human resources
(ibid.). In addition to the expansion of graduate programs in technology-related
fields, the government also expanded, diversified, and modernized vocational
schools and training centers to offer periodic retraining in technology-related
industries (ibid.: 235).
In promoting academic research, the government focused its efforts on
sponsoring medium- and large-scale problem-oriented research projects in fields
related to technological development, life science, basic sciences and social sciences.
Due to confined human and financial resources, the Taiwan government could not
afford to offer research grants based on personal interests as in the USA (ibid.: 242-
3). The government also invited outstanding scholars to propose plans for further
studies based on world trends, Taiwan’ s human and financial resources and actual
needs; while the government provided information services like establishing a
science and technology data bank for industries and academics (ibid.).
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Infrastructure
The government began its Ten Major Development Projects from 1973 to
establish infrastructure in transportation such as harbors, airports and freeways to
eliminate transport bottlenecks, set up key industrial ventures in steel and
petrochemicals to promote industry to a higher level, and provide employment and
contracting opportunities for retiring military personnel (Haggard, 1990: 142;
Woronoff, 1986: 69; Li, 1988: 268). The government also established many
industrial zones and export processing zones to facilitate the development o f high-
tech and high value-added industries, the promotion of multi-national manufacturing
and international commodities distribution through convenient transportation
services, tax benefits, cheap land rentals and complete peripheral facilities. Since
1960, Taiwan’ s government has already completed ninety-five industrial zones, and
another nineteen are under construction; these special zones have already provided
land for 9,817 firms to establish factories. (MOEA, 1998).
Deciding Directions
In the efforts to promote industrial development, Taiwan’ s government did
not just intervene extensively. Rather, it emphasized to identify the world trends, the
direction of changes in industrial structure, and Taiwan’ s national strength in
deciding ’ directions’ for its long-term development. The government intended to
provide this information to firms so that they could make the most productive
resource movements and know which way to adjust and improve their technological
base (Liang & Liang, 1985: 110; Li, 1988: 238). In order to accomplish this goal, the
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government adopted several strategies. It set up an Economic Reform Committee to
assess the economy, point out constraints and opportunities, and devise proposals for
needed modernisation and restructuring; it also followed the recommendations of
Science & Technology Advisors and the practices o f advanced nations to survey
R&D expenditures and manpower resources annually and assess the survey data to
achieve an objective comparison of the level of science and technology of Taiwan
and other nations (ibid.).
Government Regulations and Organizations
Taiwan’ s government has announced several measures to promote innovation
and research for industrial upgrading since 1983 (Li, 1988: 249). For example,
Taiwan’ s Ministry of Finance (MOF) promulgated Regulations Governing the
Operation of Venture-Capital Companies and the Programme for Promoting
Venture-Capital Investments to promote fund raising for venture-capital companies.
It also helped to set up venture-capital companies jointly with private business. The
Ministry of Economic Affairs (MOEA) also proposed a Programme for Granting Tax
Credits for R&D Expenditures by Productive Enterprises to offer tax benefits for
development in science and technology (ibid.).
During the 1970s, the government established several specialized nonprofit
organizations to engage in R&D of high technology and transfer the research results
to the private sector (Haggard, 1990: 142). For example, in the 1970, Industrial
Development Bureau (IDB) was established to promote industrial upgrading, design
plans, policies and strategies for industrial development and tax-related issues,
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manage and develop industrial zones, prevent pollution and regulate industry safety
issues. Moreover, the government supported the Industrial Technology Research
Institute (ITRD to "develop advanced high-tech for assisting numerous small and
medium-size industries." (Li, 1988: 192) The government also established the
Electronics Research and Service Organization (ERSO) to undertake basic research,
transfer its new product development to private firms, and help to create new firms
by spinning off part of its development efforts (Evans, 1989: 36).
Increasing Funding and Grants
Furthermore, annually increasing budgets from government agencies have
been assigned to projects of high priority, promotion of science and technology
education, and basic academic and industrial research. For example, during 1980-85,
the appropriations of the Ministry of Education (MOE) increased more than forty-
eight times, those of Taiwan’ s National Science Council (NSC) increased more than
threefold, those of MOEA also threefold, and Academia Sinica increased its budgets
six times. These demonstrate the Taiwan government’ s emphasis on education and
development of science and technology (Li, 1988: 239-240).
Moreover, the government offered grants to distinguished research, and sent
qualified Ph.D. candidate and lecturers to advanced countries for further research and
studies; recruited science and technology personnel abroad and offered special
salaries rather than the regular government salaries when their expertise was needed
in Taiwan (ibid.: 241-2).
Technology Transfer
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Taiwan's government has promoted technical progress and a rapid rate of
economic growth through technology transfer in export-led industrialisation (Liang
& Liang, 1985: 111). The government has approved technical cooperation
increasingly to promote technology transfer; it also provided research and
development funds and start-up capital and supported collaboration among university
research centers and business to share the risks in technology transfers (ibid.: 114-5).
The government also expanded its international cooperation to include European
countries and Japan in addition to maintaining close ties with the U.S. in science and
technology development, since technology transfer through international joint
ventures is an important part of Taiwan's transition from "mass production of
labour-intensive consumer goods to the manufacturer of sophisticated capital
equipment, special materials, and scientific grade instruments and components." (Li,
1988: 235, 240)
The Measures for Targeted Industries
In addition to the commitments to the establishment of basic infrastructures,
Taiwan has focused its joint R&D efforts from academics, research institutes, and
industry to select strategic areas of science and technology (Li, 1988: 243-4). In
1980, Taiwan’ s government announced a Ten Year Plan, and in 1982, a Four Year
Plan. Both indicated that Taiwan would switch the focus of industrial development
from energy and capital-intensive sectors, such as heavy and chemical industries, to
technology-intensive industries due to Taiwan’ s natural shortage of energy resources
(Haggard, 1990: 142; Liang & Liang, 1985: 112). Furthermore, due to Taiwan’ s
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private business sector's tendency toward family business, with limited capital and
small size, some economists have indicated that the government may take a bigger
role in development of some sectors in the early stage of Taiwan's industrialization,
such as to own and operate a significant proportion of some new heavy basic
industries, "because o f large capital needs, shortages in the private sector of available
entrepreneurial and management talent experienced in such industry and the business
risks involved in some o f the priority projects." (Haggard, 1990: 141) Therefore, in
Taiwan, capital-intensive industries like steel, upstream petrochemicals,
shipbuilding, and heavy machinery projects are under government's direct
involvement through state-owned enterprises (ibid.).
In order to stimulate economic growth and promote the development of high
value added industries, the government has decided to focus more efforts on some
strategic industries. In 1980, Taiwan identified energy, materials, information, and
production automation as strategically vital to Taiwan's international
competitiveness, economic development and industrialization (Li, 1988: 244). It
added biotechnology, electro-optics, hepatitis control, and food technology in 1982.
These strategic industries, such as information and electronics, and machinery
manufacturing are "skill-intensive at a relatively low capital intensity, and energy-
saving," and can support the automation of other industries, increase productivity and
achieve higher rates of export expansion through the upgrading of manpower skills
and manufacturing capacity (Liang & Liang, 1985: 112-113).
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Although Taiwan’ s government selected some industries to promote with
higher priority, the targeting was implemented through a combination of market-
based adjustments with selected promotion, relying mostly on tax benefits rather than
the use of the financial system (Haggard, 1990: 138, 140). The government has
provided incentives to these strategic industries with "low-interest loans, the right to
retain earnings of up to 200 per cent of paid-in capital, and the right to delay the start
of the five-year income-tax holiday by up to four years," and promote the
establishment of venture-capital firms, and supplement the share of unlisted ventures
in the over-the-counter securities market to offer risk capital for new high-technology
ventures (Liang & Liang, 1985: 113). Furthermore, the government has coordinated
academics and industries to jointly work in these Helds, and sponsored seminars for
ideas and insights from both local and overseas scholars. The
government also promulgated several regulations to promote the development of
strategic industries; it announced Measures for the Extension of Financing Facilities
and Assistance to Strategic Industries to offer financial benefits to business involved
in the development of ’ strategic’ industrial products. It also provided matching funds
to enterprises whose project proposals are accepted by the government according to
the Measures to Encourage New Product Development by Private Enterprises (Li,
1988: 249-250).
However, after entering the 1990s, Taiwan’ s business has experienced some
decline in its competitiveness due to increasing costs from soaring wages,
environmental protection, copyright requirements, limited resources and industrial-
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use land. Thus, the government continued its efforts in helping manufacturing
industry break through bottlenecks, upgrading industrial technology and training of
the experts needed in developing high-quality products to foster advancements in
high-tech and high value-added industries (MOEA, 1997).
To ensure Taiwan’ s continuous advances and successes in the rapidly
changing environment, in 1991, the government implemented "Strategies and
Measures in Developing the Ten Emerging Industries," "Development of Key
Components and Products," and other plans to focus its economic development on
these targeted industries and products (ibid.). The government selected these ten
industries as targets, based on six principles: high market potential, strong cross
industry linkages, high added value, high technological level, low pollution, and low
energy dependence. The government’ s development strategy will be modified to
comply with the changing needs of the global economy (ibid.). Moreover, a study by
Japan’ s Nomura Research Center states that Taiwan’ s future exports and competitive
advantage will be in some advanced industries such as information and
telecommunications. Therefore, the government decided to attract foreign and local
capital, strengthen trade, and upgrade technology in these advanced industries to
enhance Taiwan’ s economic and industrial performance in the coming new global
environment (ibid.).
The government also identified eight key technologies. It intended to
stimulate development of these eight technologies in order to foster the ten emerging
industries, improve the productivity of traditional industries and the quality of the
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service sector through aggressively investing in "training technology and
management professionals, enhancing technological research institutes, encouraging
private R&D, and bolstering the infrastructure for industrial development." (ibid.)
The Taiwan government also established plans to develop key components
through technological transfer by joint ventures or overseas investment; the
government selected these key components based on several criteria, including
capital sources, industry preparedness, feasibility of investment, urgency of market
demand, and ability to accumulate technologies (ibid.). The process for the selection
and decision of targets demonstrated that when the Taiwan government intervened in
the development of targeted high-tech products, it considered many factors such as
the level of domestic industrial development, market demands rather than just
interventions in the high-tech industries without considering the costs and Taiwan's
ability. These complied with Taiwan’ s development principles of conservative
investment and gradual innovation.
3.2.2 The Performance of Taiwan’ s Industry
In this section, we will present some statistical data to demonstrate Taiwan’ s
economic development and improvement in the performance of its industry.
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Table 3.1 Taiwan’ s economic summary, selected years
personal income(US $) Manufacturing GDP(US$ million)
1960 143 328
1965 203 627
1970 360 1,654
1975 890 4,790
1980 2,155 14,919
1985 2,992 23,310
1990 7,413 53,349
1995 11,276 73,199
1997 12,019 78,846
Source: IDB (Industrial Development Bureau), 1998.
From Table 3.1, we see that personal income and manufacturing GDP has
increased stably and continuously. Taiwan has gradually improved its economy and
industry within the framework of a safe and conservative government involvement.
Table 3.2 The Changes of GDP in Taiwan, selected years
1971 1981 1991 1996 1997
industry 38.9% 45.5% 42.5% 35.7% 34.9%
Agriculture 13.1% 7.3% 3.7% 3.3% 2.7%
Service 48% 47.2% 53.8% 61% 62.4%
GDP 6.6 48.2 175.4 273 284.7
(billion, US $)
Source: MOEA, 1998: 15
From Table 3.2, we see that the service sector has constituted more than 60%
of the three leading economic sectors, while industry’ s and agriculture’ s shares
dropped, these ratios approached those in advanced countries. This indicates that
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although manufacturing played an important part in Taiwan’ s economy, the
development in finance, insurance, commercial and legal services have grown
considerably (MOEA, 1997).
One body of empirical evidence supporting government’ s involvement in
industrial development is that after Taiwan’ s government established the Hsinchu
Science-Based Industrial Park in December 1980, and provided several attractive
benefits to stimulate the high-technology industries, by the end of 1985, about 50
plants were in operation, and the Park’ s imports and exports in 1985 totaled US$400
million, more than twenty-three times the increase of 1981’ s US$17 million (Li,
1988: 250).
Table 3.3 The Changes of Industry Structure in Taiwan’ s manufacturing sector
1981 1986 1991 1997 2002(estimated)
basic industries 36.9% 35.6% 35.1% 36.7% 35%
tech-intensive 20.2% 24% 31.2% 38.8% 40%
traditional industries 42.9% 40.4% 33.7% 24.5% 25%
Source: MOEA, 1998: 17
Table 3.4 The Exports of Tech-intensive industries in the manufacturing sector in
Taiwan
1986 1997
Export from Tech-intensive 33.2% 54.6%
Source: MOEA, 1998: 6
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These data in both tables 3.3 and 3.4 show that the industrial development of
technology-intensive industries advanced and expanded steadily, and kept pace with
global trends as exports to the global market increased rapidly.
Table 3.5 Industry summary. selected years
1952 1997
private sector production 43.4% 92.1%
public sector production 56.6% 7.9%
employment in industry 24.8% 38.2%
Source: ibid.: 13-14
Table 3.5 shows that the private sector has expanded greatly from 43.4% to
92.1% between the mid and late 20th century, the public sector production has
decreased from 92.1% to less than 8%, and the employment in the industry sector
gradually increased from 24.8% to 38.2%. These showed that with Taiwan’ s limited
government intervention in industry, and promotion measures in infrastructure, the
private sector and the whole economy has grown successfully.
Table 3.6 Trade Balance (US$ Billion) selected years
1992 1993 1994 1995 1996
Taiwan
S. Korea
12.718 11.508
-5.144 -1.564
11.847
-6.335
13.235 17.568
-10.061 -20.624
Source: Yoo, 1998: 133
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Table 3.6 shows that, due perhaps to Taiwan’ s fiscal conservatism in both
government and private industry, Taiwan focused its efforts on industrial sectors
where Taiwan enjoyed a comparative advantage, and took a prudent, evolutionary
upgrading approach. These principles and government promotion measures have
helped industry to gain profitability, productivity, and competitive advantage.
However, South Korea’ s focus on capital-intensive industries, and biased support to
huge conglomerates rather than the whole industry has partly contributed to its heavy
debts and trade deficits.
Another encouraging body of empirical evidence to support the government’ s
promotion measures and efforts is that, according to MOEA, since the
implementation of 199l ’ s "Development of Key Components and Products," about
76 new products have been developed (MOEA, 1997). According to Taiwan’ s
Industrial Development Bureau (IDB), in August 1998, Taiwan had eleven products
ranked number one in world, for example, Taiwan’ s production units of motherboard
reached 38.8% of the world market, monitor reached 30.9%, IC foundry’ s production
value reached 44.9%, graphic card 22.6%, scanner units 67%, and modem 51.1%;
thirteen products ranked as number two in the world, as measured by production
units or value, for example, notebook units 30%, IC design production value 16.1%,
IC packaging 24%, network card 41.5%; and six products ranked number three in the
world by production units or value.
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3.2.3 Concluding remarks
The above discussion demonstrated that Taiwan has implemented both
functional and sectoral industrial policies to stimulate economic development and
industrialization. From the empirical evidence, we discovered that Taiwan has
achieved stable economic growth and gradual technological advance in industry.
Basically, this experience indicates that Taiwan’ s government participation and
intervention are generally effective and positive. Although the success in Taiwan’ s
industrial development is largely due to the private sector’ s efforts, yet, part of the
success comes from the government’ s initiation and promotion. For example, the
establishment of Hsinchu Industrial Park did foster a lot o f entrepreneurs to take
advantage of government’ s attractive options, such as tax benefits, cheap land rentals
and complete peripheral facilities, and to set up many later very successful
companies.
Generally, Taiwan’ s government played a role of initiator. It gathered experts’
advice, and set up project proposals, jointly developed by government agencies,
private industries, and academics. Although not every project could be successful,
yet, even with one success, such as Taiwan’ s semiconductor industry, could result in
spill-over effects and foster confidence in both public and private sectors for further
investments and development.
Another lesson from Taiwan’ s experience for developing countries is that for
a country without many natural resources or capital, it is better to engage in the
development of skill-intensive industries by investing in human resources, training
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and education, than to focus on capital-intensive industries by borrowing capital from
foreign countries.
3 J Summary
From the above examination of many cases of government participation in
industrialization, we discover that government intervention could be either positive
or negative for industrial development. From Ireland’ s and Taiwan’ s experience,
aggressive cultivation of technical professionals has helped the emergence of high-
tech industries and high economic growth. However, government protection over
sunset industries delayed or distorted the efficient allocation of resources. Thus,
when government wants to promote industrialization, it should be cautious in using
different policy options to achieve the best results.
We shall discuss a successful case, Taiwan’ s semiconductor sector, in the
next chapter to demonstrate and analyze the initiator’ s role of Taiwan’ s government
and study the effects o f government intervention.
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Chapter 4 THE ROLE OF THE STATE IN THE
DEVELOPMENT OF TAIWAN’ S
SEMICONDUCTOR INDUSTR
In this chapter we shall examine the role of Taiwan’ s state in the initial stage
of the development of the semiconductor industry. We shall study whether the state
played a positive role or not, and analyze why and how it played its role. In this
chapter, we shall focus on Taiwan’ s semiconductor sector, and mainly on the
government’ s influence on this sector with qualitative analysis using empirical
evidence. We shall study how the government made the decision to promote a new
industry, and how these decisions affect the development of Taiwan’ s semiconductor
industry.
4.1 The Characteristics of the Semiconductor Industry
In this section, we shall describe the characteristics of the semiconductor
industry, discuss its entry barriers, and examine debates about different industrial
structures and advantages. These characteristics influenced the decision-making of
Taiwan’ s government in proposing and engaging in different research projects.
Generally, the semiconductor industry includes business in manufacturing Dynamic
Random-Access Memory (DRAM), Integrated Circuit (IC) design, manufacturing,
testing and packaging, and equipment manufacturers.
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Characteristics
This industry has several characteristics:
1. It needs huge capital investment in R&D spending, especially for DRAM
production. For example, the R&D spending for the development of the 4
megabyte(MB) DRAM chip were $3.2 billion for the leading Japanese
semiconductor firms. It has been estimated that the expenses of R&D for a new chip
should cost no more than 10 percent of total sale revenues in order to make profits
(Cowhey & Aronson, 1993: 129-130).
2. The product life cycles of semiconductors’ products are shorter than some other
industrial products, such as automobiles, and the rate of technological innovation is
much faster, its key technologies are more proprietary, and semiconductor plants and
equipment also have extremely short life cycles (ibid.: 125, 130). Therefore, DRAM
manufacturers must "spend relentlessly to keep their plants at the state-of-the-art
level" to produce the most advanced chips (ibid.: 130). Because the life cycles are
short, the high technology-intensive IC products require huge spending for
continuous R&D, and the market conditions change very fast and are volatile, so the
risks in the semiconductor industry are high (IDB, 1998: 398).
3. Economies of scale are important for relatively standardized chips such as
DRAMs; thus all firms intend to quickly produce massive capacity, and make deep
price cuts to win market share. For example, 1990 demand for 4 MB chips was
estimated as only 23 million units, but Japanese firms may have had the capacity to
produce 70 million units (Cowhey & Aronson, 1993: 130).
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4. There is a tendency to build more functions onto a smaller set of chips, as a result,
there will be fewer types of chips on a circuit board (ibid.: 131). And chips can be
used in a wide range of functions and applications, ranging from consumer
electronics to communication infrastructure (IDB, 1998: 398).
3. There is little brand name loyalty for semiconductor products, end users of
semiconductors emphasize price and performance, unlike auto buyers who take cars
as a symbol of status (Cowhey & Aronson, 1993: 125). Thus, price competition in
semiconductor products is fierce.
6. Competition among global players has increased, but "[ijncreasing concentration,
not free trade, was the norm for semiconductors. As the capital intensity of the
semiconductor industry increased, the global concentration of production grew."
(ibid.: 128) Thus, the US government has signed international agreement to "help
U.S. firms retrench, redraw the ground rules for semiconductor competition," and
antidumping suits have emerged among international DRAM firms, charging
predatory pricing to gain market shares (ibid.).
7. Semiconductor manufacturers use a much smaller network of suppliers than
leading auto makers (ibid.: 125).
Entry Barriers
From the above description o f the characteristics of the semiconductor
industry, we know that there exists some entry barriers for new firms, such as capital
spending requirement for R&D and purchasing advanced equipment, technical
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manpower requirements, and the requirement for speedy technological innovation.
Entry barriers also include the need for sufficient domestic demand for IC designs in
order to promote the establishment and development of Application-Specific
Integrated Circuit (ASIC) design business. For example, Taiwan’ s large numbers of
small- and medium-scale firms need a lot of ASICs for their products such as
computer peripherals and add-on cards, growing demand supports the continuous
expansion of Taiwan’ s ASIC design sector (OECD, 1992: 215).
Furthermore, the existence or not of silicon foundries also might be a barrier
for the development of the ASIC design sector, as evidence in Taiwan has
demonstrated. Taiwan’ s ASIC design sector has grown rapidly after 1986’ s
establishment of the Taiwan Semiconductor Manufacturing Co. (TSMC)— a silicon
foundry— because the independent design houses can have reliable and cost-efficient
sources to fabricate their chip designs, which could encourage their development and
increase profitability (OECD, 1992: 214-5). From Taiwan’ s experience, it has been
argued that the investment requirements of foundries for wafer fabrication might
need to be included in the entry requirements for the ASIC development for new
entrants (ibid.).
Different industry structure
There are different opinions about competitive advantage in industry structure
in the semiconductor sector. Some believe in the concept of big is better’ in the
semiconductor sector; they think that the requirement of huge capital and scale
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economies means that big business has competitive advantages in the semiconductor
industry. Others argue that because of the needs for fast technology innovation, size
may not guarantee success.
Generally, South Korea’ s and Japan’ s semiconductor industries are
concentrated in a few big firms, while the US and Taiwan have different industry
structures. Taiwan and the US have a few large, vertically integrated firms and many
small firms; while Japan has a more concentrated structure, with "85 percent of
production accounted for by six large producers, each of which is part of a separate
industrial group." (Branson & Klevorick, 1986: 243)
Since the 1980s, Japanese DRAMs’ manufacturing firms has gained
dominance over US firms and threatened the profits and the development of US
DRAMs manufacturing firms. Because, traditionally, the operating margins produced
by commodity memory devices such as DRAMs permitted manufacturing firms to
reinvest and attract new capital for the R&D and production of next generation
products and provide experience and know-how to produce more advanced ICs.
Thus, Japanese dominance of DRAMs by continuous heavy capital investment in
manufacturing threatened US firms’ margins, capacity to innovate and ability to get
critical production know-how in the semiconductor industry in the 1980s (Borrus &
Tyson & Zysman, 1986: 102-3).
There are different opinions about this phenomenon. Some scholars advocate
that Japan’ s DRAM firms can win over US firms not only because they dump chips
in the US but also because they have enjoyed some economic advantages. They
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indicate that Japan’ s big Arm groups consist of internal risk-sharing bankers,
networks of interrelated companies acting as users and suppliers that provide a
superior way to share technologies and spread the risk of developing low-margin, and
capital-intensive processes of manufacturing technologies. However, others argue
that markets will work efficiently to propel withdrawal from commodity
manufacturing such as DRAMs and led US industry go through a natural restructure.
Thus, large, complicated industries will produce many potential comparative
advantages for different firms; big Japanese firms like Toshiba and small, innovative
firms both can win because of their different expertise and advantages, and the
sources of diversity of advantages may be "created by firms or reflected special
properties of their home national markets." (Cowhey & Aronson, 1993: 136-7)
4.2 DRAMs* Importance and Problems
The Debate on the Importance of DRAM
Since the success of Japanese DRAM manufacturing firms in the 1980s, there
emerged many debates regarding whether DRAMs only are critical to the future
development of the semiconductor industry and whether Japanese big firms and
industrial organizations are better. Some believe that DRAMs are important to
success in developing higher-level semiconductor technologies and "DRAMs are the
only portion of the market that provide sufficient economies of scale and scope to
finance manufacturing-process innovations necessary to keep the general
semiconductor industry viable." (Cowhey & Aronson, 1993: 131-2) In fact, many
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countries and firms accepted this kinds of concept, so firms in countries such as
Japan, Korea and Taiwan all made huge investments in DRAMs’ development and
manufacturing.
However, there is a different argument. Some advocate that software rather
than DRAM is crucial in the information age; also, Korean and Taiwan’ s new
entrants will erode the market share dominated by the Japanese DRAM firms. Thus,
DRAMs would not earn financial advantages for Japanese firms as before;
furthermore, critics noted that US firms focused their efforts on higher-growth new
specialties, and performed well at the upper end, while Japanese firms tended to turn
chips into commodities and mass produced through intensive capital requirements
tocut down prices. Since the state-of-the-art production does not require heavy
capital investment as DRAMs, US firms do not need to focus on DRAMs’
development to maintain leadership in the industry (ibid.: 132-4). They also indicate
that Siemens, in 1992, decided to decrease its future participation in DRAMs, since it
argued that "DRAMs were no longer so critical to mastering the industry." (ibid.)
The Problems and Exits of the DRAM Business
Even DRAM has its importance, its manufacturing has a long history of
trouble, it involved in antidumping suit, overcapacity, and predatory pricing.
Therefore, many players have either exited or formed alliance in the consolidation
process.
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The Boom and Bust of the DRAM business
According to the semiconductor industry’ s history, the bust and boom of
DRAM business has alternated for a long time. In the early 1980s, the US is the
dominant force of the DRAM and semiconductor market. Since 1985’ s bust, Japan
replaced US to become the dominant player of DRAM business. Then in 1990 and
1991, a second bust hit Japan’ s semiconductor firms heavily, South Korea’ s DRAM
business emerged and become a major player in 1994 and 1995. However, since
1995’ s peak, DRAMs’ price declined, on the average, 95% within two and a half
years, which is faster than the speed with which any DRAM firms reduced their
production costs, thus all DRAM manufacturers were in a state of loss in 1998
(Chen, 1998: 65).
The global overcapacity in the DRAM market has caused continuing price
cuts and hit hard all memory chip makers. Since the end of 1995, DRAMs’ price
collapsed due to oversupply and inventory increases. Because the sale prices of
DRAMs become lower than production costs, almost all DRAM firms decided to
reduce production, stop production, even close manufacturing facility, lay off
employees, and cut salaries (ibid.: 67). The reduction of manufacturing of DRAMs,
coupled with the expected increase of demands in the arrival of more advanced PC
and consumer electronics products, may finally balance the supply and demand in
1999, which was the expected estimate from some analysts. Due to three consecutive
years’ bust in DRAMs’ business, which has never occurred in more than thirty years’
development of the semiconductor industry, most DRAM firms’ financial situation
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was seriously aggravated, Taiwan’ s DRAM firms become conservative in expansion
plans, the old manufacturing facility become out of date in production of more
advanced memory chips, and new manufacturing facility was too expensive to invest
and build. Some firms upgraded their manufacturing skills, but big investment to
replace out of date equipment was the inevitable means to produce advanced
DRAMs and compete with other manufacturers. The continuous upgrading of
DRAM manufacturing technology and downward prices pushed all DRAM firms
investing in next-generation new technology and manufacturing facility to produce
more advanced DRAM and reduce production costs. This further made the old
facility obsolete faster, and made the most competitive firms survive and more
mergers and consolidations occur (ibid.).
The Exits from the DRAM Business
Due to Fierce competition in the DRAM business, many firms exited from or
reduced their focus on this business. We shall describe some cases to demonstrate
that Taiwan’ s conservative approach in guiding semiconductor industry was
appropriate.
Intel’ s Exit
Intel developed and manufactured the first chip with memory function in the
late 1960s, among many competitors. (Grove, 1996). In the 1970s, Intel had
dominant market share in the memory chip industry while competing fiercely with
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Unisem, Advanced Memory Systems, Mostek, but these small US memory chip
firms all disappeared later due to competition. Intel also began to develop the
microprocessor in the early 1970s, but Intel thought that the microprocessor's market
growth was slower than DRAM's, and the demand was also less than DRAM, thus
Intel has put less R&D effort to the development of microprocessor. In order to
dominate the world market, Intel’ s strategy was to increase the number of transistors’
on a chip as many as possible, so that it can bring the highest gains to the computer,
and this would be the most cost-effective approach.
Basically, this approach in memory chips was successful. However, in the
1980s, faced with strong competition from Japan, Intel finally decided to withdraw
from the DRAM business after suffering big losses. Japan's firms produced higher-
quality memory chips with strategically 10% cheaper prices than US firms such as
Intel and AMD to grab the market share, they decided to set their prices always 10%
lower than Intel in order to enter and dominate the US market (Grove, 1996). In fact,
Japanese semiconductor firms have already engaged almost ten years’ efforts before
they could emerge and acquire dominant market share from US firms in memory
chip business.
Intel has engaged in heavy R&D investment to develop more advanced and
more value-added memory chips in order to survive the price war. Until 1984, Intel
suffered big losses due to decreasing demand for its memory chips. Since memory
chips became standardized products, there is no way to win the price war by
providing special value-added functions, Intel finally decided to give up memory
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chips business and focus on microprocessor business. The transition of main
products is not easy, however, because Intel can face the reality, withdraw from the
losing business, and focus on new opportunities, to build a new identity in a totally
different business. Finally, Intel became the largest semiconductor company in
1992,due to its great performance in microprocessors (Grove, 1996). Grove indicates
that if Intel had not changed its business strategy, it would have become a nobody in
the memory chip business, and got stuck in a very bad financial situation; and if they
hesitated more during the decision-making process, they might have lost the
opportunities in the crisis (ibid.).
The Reduction of the DRAM Business from Texas Instruments, IBM, and Acer
As Intel’ s Grove indicated, only withdrawal from losing business can find
hope and success in new business; Texas Instruments, IBM, and Taiwan’ s Acer, later
all changed their focus on DRAM business to other businesses after price cuts in
DRAMs make profits difficult to make.
In 1998, Texas Instruments announced that it will sell its money-losing
memory chip business to Micron. Micron and IBM will become the two remaining
DRAM chip makers in the US after this deal. Texas Instruments will focus on digital
signal processors(DSPs) and exit its DRAM manufacturing. Texas Instruments has
already walked away from its 33% stake in a memory chip joint venture with
Taiwan’ s Acer several months ago before it sold its DRAM business to Micron.
Texas Instruments’ memory chip business loss in the 1st quarter, 1998, doubled in
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comparison to the prior year; and Micron reported a loss of $106 million in June 18
1998 versus a profit of $97 million in the earlier-year period.
In 1999, Taiwan’ s Acer also sold 30% of its share of its DRAM business to
TSMC, and Acer will reduce its involvement in the DRAM business to shift the
focus to the emerging internet business in Greater China area.
On July 6, 1999, IBM announced it will minimize its stake in the low-margin
DRAM business, and focus more on specialty chips, thus it will sell its share of the
jointly operated memory chipmaking business to Toshiba. This is part of IBM’ s
strategy to exit from DRAMs and focus on other potentially profitable business.
The above cases demonstrate that firms are exiting from money-losing
capital-intensive, standardized memory chip business and moving to profitable skill
intensive specialty chips business. This was because DRAMs manufacturing needs
continuous upgrading by purchasing expensive advanced equipment, this needs huge
capital in order to maintain state-of-the-art innovation and performance. In fact, in
the DRAM business, although the price declines, the bit growth remains high, since
the production trend will shift from 4 Megabyte (MB) production to 16 MB, thus 4
MB price declines, and while global production shifts to 64 MB, the 16 MB price
declines again; each shift needs new equipment and capital investment for DRAM
producers to stay in the battlefield of new DRAM production. In such capital-
intensive business like DRAM, it needs capital to buy new equipment to reduce costs
and produce the most advanced chips, if products cannot make profits at first,
continuous upgrading in technology and equipment needs more inflow of capital, the
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borrowing debts can become enormous, the capital investment to maintain leading
position could be big in face of new entrants, the scale economy of DRAM business
makes DRAM manufacturers be big to reduce costs and price to win. Thus, the
original and new players all suffer in the overcapacity vicious cycle.
South Korea’ s DRAM firms also suffered big losses due to DRAM’ s
declining prices. This partially contributed to the financial crisis in South Korea in
1998, the big debt problems in the financial structure of Korea's enterprises caused
their near-bankruptcy, recession and financial crisis.
This demonstrated that profits are important for any entrepreneurs’ ventures,
since expansion and technology upgrading all need capital, without enough profits,
enterprises need continued borrowing to pay for all costs and interest.
Antidumping Lawsuits
DRAMs business troubles are more than the price decline and financial loss.
There are also lawsuits involving dumping charges. In order to sell more to gain
market share and reduce costs, many DRAM firms cut prices as much as they can.
Sometimes, the price falls below the production costs and results in dumping
charges. For example, the largest US maker of memory chips, Micron Technology
Inc., has charged South Korea’ s and Taiwan’ s DRAM firms of selling DRAM chips
and modules under the production costs, and causing material injury to Micron,
in 1999. And, Taiwan’ s DRAM firms also charged Micron of dumping its DRAMs on
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Taiwan, and causing material damages to Taiwan's DRAM firms just days after US
proposed anti-dumping penalties against Taiwan’s DRAM makers.
4.3 The Government’ s Participation in the Semiconductor Industry
4.3.1 Overview of Government’ s Participation and Policy
In many countries investigators believe that high-tech industry development
is important to industrialization; and semiconductors are critical in building
electronics technology, therefore, the semiconductor industry has been recognized as
strategically important in many countries (Cowhey and Aronson, 1993: 125). Thus,
many countries have different degrees of involvement in the development of the
semiconductor sector and use different tools and actions to promote its development.
For example, in Japan, MITI supported many domestic consortia to promote basic
technology and applied manufacturing skills, government provided low-cost loans
and invested in VLSI projects, and restricted foreign firms' access to the domestic
market (ibid.: 126). Scholars have argued that Japan's closed market has a substantial
advantage, it "permits the possibility of gearing up to reach world-scale production at
home and then very aggressively pursuing foreign markets." (Borrus & Tyson &
Zysman, 1986: 100-1) With govemment-support research programs and growing
demand in closed domestic markets, they indicate that, the Japanese captured
between 60 and 90 percent of the world market for DRAMs and SRAMs; however,
Japanese firms are good at competition on cost and quality of commodity products,
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while entrepreneurial US firms focus competition on diffusion and advance of new
technologies (ibid.: 102).
In fact, the US semiconductor industry was also promoted by its government
with different tools from Japan's. In the period from 1948 to 1962, US semiconductor
industry was supported by heavy government procurement of integrated circuit for
military and space agencies, also by strong basic research in schools and propelled by
entrepreneurial spirits of small firms (Cowhey and Aronson, 1993: 126; Borrus &
Tyson & Zysman, 1986: 94-5). After the US DRAM industry collapsed in the 1980s
due to the fast innovation and deep price cuts by Japanese semiconductor firms, US
firms still were preeminent in microprocessors and in application-specific integrated
circuits (ASICs) that are custom designed to perform specific functions (Cowhey and
Aronson, 1993: 128).
Taiwan’ s government officials also think of the semiconductor industry as a
critical component of the information industry, and the establishment of the
semiconductor industry is a strategic step in upgrading Taiwan’ s industrial structure
to become a high-tech island and become independent of foreign technology (Gold,
1986). We shall describe how Taiwan’ s government was involved in and promoted
the semiconductor industry in the next section.
4.3.2 The Participation of Taiwan’ s Government
Taiwan’ s semiconductor industry began with government’ s strong leadership.
Originally, Taiwan did not have many competitive advantages in human capital,
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market share, and research and development facilities in the semiconductor sector.
The success of the development of this sector demonstrates that government
targeting can be effective. However, this does not mean that all government targeting
will be successful. For example, Taiwan’ s government involves a lot of strategic
industries’ development, such as aerospace, but the performance of the satellite
program is not impressive, and has been criticized a lot. There are also many
examples in Japan and South Korea that targeting industry cannot invariably
guarantee international dominance, as Porter argued, but others argue that Japanese
industry emerged as a world-class competitor is a planned result of government’ s
policy (Porter, 1990; Borrus & Tyson & Zysman, 1986: 91).
Therefore, we shall investigate the role of government in the initial stage of
the development of Taiwan’ s semiconductor industry, and determine the relationship
between the government and the present performance of private business in the
semiconductor industry. Thus, this chapter is not to argue that Taiwan’ s government
successfully targeted the semiconductor industry, but to try to find out why this task
has been successful among many failed cases of government intervention in the
world.
The initial development of Taiwan’ s semiconductor industry was under the
state’ s careful planning and active participation. The government organized a team of
high-level government officials and technology experts, established an industrial
park, and recruited and trained high-tech professionals to nurture and support the
development of this sector.
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The Leadership
Taiwan’ s government policy toward the semiconductor industry was
discussed and decided by a team including top government officials, foreign advisers
and high-tech experts. The goal of this team was to study and propose how the
government could upgrade Taiwan’ s industry. The promotion program was initiated
by this team of sci-tech personnel and foreign advisers, and was led by a top
government official - Y. S. Sun - a former premier. In August 1974, Sun contacted
and discussed with an overseas Chinese Dr. Pan, then, Pan came to Taiwan and
discussed with several high-ranked government officials; he recommended that the
electronic industry should focus on semiconductor technology and that the
technology be acquired from abroad; and that an organizational capability for
implementation within the Taiwan’ s state be set up; and a U.S. partner was to be
located for technology transfer and training (Meaney, 1994: 175). Dr. Pan then
invited engineers from Bell Labs, IBM, and various universities to form the
Technical Advisory Committee (TAC) in the US to assist the selection of a particular
/
IC technology to focus on and to recommend a list of U.S. companies for a
technology-transfer agreement; TAC also provided information on industry trends
and past results of different approaches to product development, and submitted
proposals about the next thrust for the IC program in Taiwan (ibid.: 176).
In 1979, Y.S. Sun became premier. He proposed eight technical areas
including IC in the future direction of Taiwan’ s development in science and
technology. He also set up the Science and Technology Advisory Group (STAG).
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This has two purposes: one, it can collect opinions from a group of advisers
independent of the people engaged in the IC project within ERSO; second, it
established a "formal organizational support for high technologies in general and
semiconductors in particular." (ibid.: 179) Thus, Sun reduced his personal influence
on the development of high-tech industry, such as semiconductor industry, and
replaced it with an official institution; and his plan for the direction of Taiwan's
technological development was also approved in Taiwan’ s government’ s major
science and technology meetings (ibid.).
In the 1984-85 period, STAG formed two task forces (technical review
boards-TRBs): "one for electronics and ICs, headed by Bob Evans, and one for
telecommunications, headed by Ken Mackey," to increase its organizational capacity
to handle increasing firms in the semiconductor industry (ibid.: 183). The TRBs
consisted of both domestic and overseas Chinese, basically, overseas Chinese were
selected from different organizations according to different studies. The TRBs issued
final recommendations to the Taiwan NSC and then ITRI after the overseas team
visited Taiwan and held briefings and meetings.
STAG had a certain amount of influence due to its power in screening the
high-tech budget; it also persuaded different agencies in Taiwan’ s government to
pursue VLSI projects and TSMC joint ventures. The STAG also invited many
experts in the US semiconductor industry, such as Pat Haggerty, former board
chairman of Texas instruments, to advise Taiwan. In fact, what Taiwan’ s government
focused on was that these advisers can provide a "vision of how to develop a
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country" rather than their industrial experience and expertise (ibid.: 180). This
showed that when Taiwan’ s government intervened in the development of a
strategically important industry, it emphasized acquiring and learning the correct
direction and trend for a country to develop and which industry sector to develop and
prosper, and spill over its gains to the whole economy.
The Goal
After discussion with teams of experts, the Taiwan government decided that
its main goal in the semiconductor industry was to transfer the technology developed
in government labs to the private sector and create commercial applications. It also
wanted to increase production capacity and improve quality control o f the technology
acquired from abroad, so that Taiwan can have self-development capability and
infrastructure (ibid.: 177).
Basically, the Taiwan government’ s main direction for the semiconductor
industry was toward small, skill-intensive rather than capital-intensive business, it
intended to develop a design methodology and train designers who would become
small entrepreneurs; and stay away from projects with heavy capital requirements,
such as DRAM technology; and concentrate on low-end manufacturing (Meaney,
1994: 179). This direction intended to create technology-intensive enterprises with
design-oriented focus rather than capital-intensive big firms.
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The Establishment o f Institutions to Promote and Implement plans fo r the
semiconductor industry
In order to promote and guide the semiconductor industry, Taiwan’ s
government set up several institutions to engage in the implementation o f high-level
plans, such as acquiring foreign technology, and setting up private firms.
In 1973-74, Taiwan’ s government established the Industrial Technology
Research Institute (ITRI) with the electronics R&D spun from the Ministry of
Communications. ITRI was placed under the Ministry of Economic Affairs, and
under the direct protection of Y.S. Sun (ibid.). Taiwan’ s government supported the
Industrial Technology Research Institute (ITRI) to "develop advanced high-tech for
assisting numerous small and medium-size industries." (Li, 1988: 192) Within ITRI,
ERSO (Electronics Research Service Organization) was established to develop IC
projects, to undertake basic research, to transfer its new product development to
private firms, and to help the creation of new firms by spinning off part of its
development efforts (Evans, 1989: 36; Meaney, 1994: 179).
Originally, ITRI and ERSO were totally funded by the state, the budget of
ITRI was examined within the MOEA and approved by the Executive Yuan and the
Legislative Yuan. But the private sector later also participated with funding through
payment for project developments, by 1988, ERSO only received 20-25% funding
from the state, and ITRI received about 55% from the state (Meaney, 1994: 179).
Generally, the long-term projects in ITRI were initiated from within the state until
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the late 1980s, while the private sector was generally interested in the development
of short-term projects (ibid.). After the establishment of these research institutes,
Taiwan’ s government has tried many direct methods to link the domestic research
institutes, universities, local firms, and foreign firms to support the development of
high-technology industries (Haggard and Cheng, 1987: 127).
In late 1975, RCA was chosen from eight companies to provide technicians
and technical training, design and production capabilities, and information on
product applications, and to transfer all technological advances and design and
processing improvements. In return, ITRI would purchase a certain amount of wafers
from RCA (Meaney, 1994: 176). Then the Taiwan government sent forty young
engineers recruited by Dr. Pan and Hu Ting-hua from the US and Taiwan to RCA to
learn process technology, testing and design (ibid.: 176-7). In 1976, ERSO began to
build the IC pilot production facility within ERSO. Meaney indicates that the IC
project received criticism and skepticism within the government, but the support
from Y.S. Sun, Pan Wen-yuan, and TAC in the US allowed the project to proceed
with a then-ambitious budget of $12 million for 1975-79 (ibid.). At the same time,
another IC research project was also being developed. It was led by Taiwan’ s
National Science Council (NSC) in 1974-75 with a large scale project on
microelectronics. Taiwan’ s NSC worked closely with several universities mainly,
Chiao Tung, also Cheng Kung, Tsing Hua and NTU. The NSC granted funding for
research in IC process technology, and requested professors to organize students for
team projects. Since 1979, about one hundred students with MS degrees per year
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received training. ERSO also collaborated with universities, inviting professors to
work there to gain industrial experience.
In 1979, Taiwan's government also decided to build the Hsinchu Science-
Based Industrial Park to further stimulate technological development by providing an
infrastructure for high value-added private enterprises and state-of-the-art R&D
capabilities (Meaney, 1994: 177). The Park located close to ITRI, and other
universities and research institutes which could offer experienced personnel and
R&D support to the high-technology companies set up in the Park (Li, 1988: 233). In
order to achieve the goal of stimulating the setup of high-tech firms, Taiwan’ s
government announced that one entry criterion to the park is that a firm has to
"engage in some development and engineering work in the park” to enjoy the benefits
offered by the government (Haggard and Cheng, 1987: 127).
Taiwan’ s government provided many benefits to attract high-tech scientists
and engineers domestically and from abroad, by offering excellent pay and
conditions, and supported high-tech start-up with a computerized inventory control
system, modem communication facilities, real-time computer access to databanks in
Taiwan and the USA, streamlined procedures for entry and exit of personnel, rental
of land and buildings to reduce capital expenditures, tax holidays, duty-free import of
key equipment, raw materials, semifinished goods, exemption from commodity taxes
on export, low-interest loans (Li, 1988: 234).
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The Change of Direction - Why Enter into DRAMs Business
Taiwan’ s initial direction in the development of the semiconductor industry is
toward small, skill-intensive rather than capital-intensive business, such as DRAMs
manufacturing. This design orientation within ERSO influenced Taiwan’ s
semiconductor development for a long time, however, it has encountered some
criticism and changed to a more aggressive strategy later (Meaney, 1994: 179).
But, since 1980, when STAG provided recommendation and action plans to
help Taiwan to achieve rapid development of science and technology, it challenged
ERSO’ s orientation and suggested that ERSO should stop pilot production of wafers,
and move into DRAMs’ manufacturing (ibid.: 180). STAG also held different
opinions from ITRI/ERSO regarding the development direction of the semiconductor
industry. It advocated entry into "the most costly and risky memory chip business
needed to make Taiwan a world-class competitor independent of foreign chip
manufacturers" rather than focus on design-oriented small entrepreneurs (ibid.: 184).
This viewpoint was similar to South Korea’ s engagement of the development of
DRAMs. South Korea’ s government has adopted "a high-risk, leapfrog strategy . . .
this strategy . . . puts Korea in a head-to-head confrontation with the two industry
leaders, Japan and the United States; and second, the strategy is costly in terms of
capital requirements." (World Bank, 1987: 125)
But, Taiwan’ s industrial development basically followed the financially
conservative, step-by-step principle. Therefore, Taiwan’ s government’ s pursuit of
DRAM development was pushed by STAG and private industry rather than initiated
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from its own interests, as Shih Chin-tay indicated that "in the 1979-83 phase STAG
was constantly challenging ERSO’ s focus on design, on small entrepreneurs and
local-end manufacturing, and on avoiding heavy capital requirements, arguing for a
move into DRAMs as the cutting edge of technology." (Meaney, 1994: 185)
The argument for DRAM’ s development is based on the fact that Taiwan has
no DRAM technology; the supply of DRAM is unpredictable; the trend in computer
and VHD-TV will need more DRAMs, and "DRAMs are a critical component for the
growth of an IC industry," as argued by STAG; however, ERSO tended to have "a
more modest approach, looking for niches in which Taiwan would have a
comparative advantage." (ibid.) In 1988, TSMC’ s then president Jim Dykes
supported the original concept behind TSMC’ s operation as a foundry for ASICs
only, excluding memory chips; Taiwan’ s government agency, MOEA’ s IDB initially
maintained its non-interventionist attitude toward TSMC’ s direction even under the
pressures from Acer, a private computer maker. But, in 1989, Taiwan finally changed
its plan for TSMC to produce DRAMs as well as ASICs. This change was because
both foreign and domestic situations have varied. Outside Taiwan, the global DRAM
market appeared less risky; due to (1) the antidumping agreement between Japan and
US, and (2) many foreign DRAM companies went bankrupt during the chip glut in
1985. Inside Taiwan, the pressure from domestic enterprises, especially UMC and
Acer, and from STAG and the electronics TDB and the successes in IC industry from
TSMC and many chip design house all provided some confidence for government
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agencies and a sufficient industrial base for entry into the DRAM business (ibid.:
186).
Before Taiwan's government decided to enter into DRAM manufacturing,
A cer-a major computer maker in Taiwan-had decided to sign an agreement with
Texas Instruments to acquire a DRAM capacity in 1989, because Acer has asked the
government to develop DRAM technologies, feeling that domestic demands for
DRAM are big enough for TSMC to manufacture DRAM, but TSMC repeatedly
refused (ibid.). According to MOEA’ s source, the alliance of Acer with Texas
Instruments is a major force in changing the conservative approach of ERSO,
because it has been pushed by high pressure from private industry, with the need to
ensure sufficient supplies of memory chips as well as a perception of profits to be
made, although, many have doubts (ibid.: 187).
After continuous debates about investment in DRAMs’ manufacturing among
leaders from public officials, foreign advisors, and private industry, Taiwan finally
felt confident enough to engage in DRAMs’ development. The government proposed
a strategic plan in 1989, the ERSO will begin the submicron project over five years
and spend NTS5.5 billion, with a consortium of six IC companies— UMC, TSMC,
Huapang (Winbond), Vitelic, Hualon, and AMPi— to split the expense; but in fact,
government supported 100% of equipment expenses. This submicron idea differed
from previous projects in that it came from discussion with private sector rather than
from a top level leader’ s vision or decision (ibid.: 185). This shows that after the
success of previous projects of state’ s leading, the private sector has increased in
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number and capability to gradually replace the state in leading the development and
upgrading of the industry.
4.4 The Development of Taiwan’ s Semiconductor Industry
The Establishment of Private Firms by Government
Taiwan's government has engaged in the establishment of major
semiconductor firms to foster more start-ups from the private sector. The two leading
semiconductor firms UMC and TSMC were formed by the state, and had an
impressive growth and performance since their establishment. In the next section, we
shall describe how the state was involved in the development of Taiwan’ s
semiconductor industry by planting two seeds, UMC and TSMC. In order to
encourage the development of the semiconductor industry, Taiwan’ s state has
developed an impressive, technically sophisticated bureaucratic apparatus for dealing
with foreign investors, and took an active role in directing capital toward pioneer
industries; and, the state apparatus has become increasingly active in an
entrepreneurial way (Evans, 1987: 217). With the leadership of Taiwan’ s state, and
the entrepreneurial way of setup of backbone ventures, Taiwan’ s "wholly owned
ventures in electronics and other industries followed the earlier alliance of state and
transnationals in joint ventures." (ibid.) We shall describe in detail how the state set
up leading firms and brought about confidence in the private sector in the
semiconductor industry in the following section.
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The Establishment of United Microelectronics Corp. (UMC)
In 1978, ERSO’ s Hu Ting-hua and Shih Chin-tay proposed a joint state-
private semiconductor venture to the MOEA to transfer technology from ERSO to
private industry. However, Taiwan’ s private enterprises which were asked by the
government were unwilling to invest their capital because they viewed "ICs as a
highly risky business," the government had to intervene and finally got a small
amount of contributions from private firms; in addition to private investment, the
government made further investment to form an ITRTs subsidiary, composed of
banks, private investors and 40% from ITRI to make sure the IC venture have enough
capital to develop (Meaney, 1994: 178). The process of forming this private IC
company fully demonstrated that Taiwan’ s government focused on developmental
goals, but the private sector wanted to "maximize profits, limit risks, and achieve
stable growth," and make decisions on consideration of changing costs, capital
availability, export incentives and other factors which are manipulated by the
government (Johnson, 1987: 141-2). Therefore, after the private IC firms established
by the state’ s efforts made gains, the private sector began to aggressively invest in the
high-technology sector without any stimulas from the government.
The state’ s efforts created United Microelectronics Corp. (UMC), a joint
state-private sector venture (state 44%; private 45%). Taiwan’ s government did not
just provide funding and technologies; it also spun off ERSO’ s plant and equipment
and "transferred a large contingent of personnel from ERSO to UMC"; the president
of UMC, Bob Tsao, also came from ERSO, and the "new personnel for UMC were
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recruited locally and trained for about a year in ERSO’ s facility." (Evans, 1989: 36,
Meaney, 1994: 178)
The government’ s goal of establishing private enterprises is basically
successful as UMC’ s wafer production and sales overtook those of ERSO, UMC also
produced consumer chips to be used in toys, telephones, and computers (Meaney,
1994: 180). As UMC gradually made big profits, it began to function independently
with signing licensing agreements with US firms and establish R&D facility, it also
began to produce more advanced chips by continuous upgrading of its capacity.
When it went public in 1985, the government only owned 23% of its shares.
The Establishment of Taiwan Semiconductor Manufacturing Co. (TSMC)
In 1982, leaders within ITRI/ERSO decided to focus the semiconductor
program on VLSI technology to provide a base for expanding Taiwan’ s R&D
capacity (ibid.). The VLSI project stimulated many discussions and objections within
the state and between the state and private enterprise (UMC at that time) (ibid.: 180-
1). Some argued that Japan’ s MITI already developed a VLSI program between 1976
and 1980, Taiwan was two years behind, and did not have needed facilities like
lithography as did Japan. Furthermore, some questioned that "Canada and France
have tried and failed, how can we succeed?" (ibid.) Also, the finance issues came
again, as some criticized that the cost of VLSI development is too expensive and
occupies too big a proportion of available government budgets and resources
compared with other projects like biotechnology. Moreover, UMC, a private firm,
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argued that it should do the VLSI project rather than the government (ibid.).
However, leaders in ITRI/ERSO and STAG argued that UMC alone did not have
enough capabilities to compete globally, the project needed government’ s
involvement, probably until 2000 (ibid.). The project had been presented to other
state agencies before it had finally been approved by a special review in Taiwan’ s
Executive Yuan (cabinet) in 1984. Then ERSO provided research funding in
universities to encourage professors and students to engage in VLSI design projects.
In the first year of the VLSI project, the private sector is unwilling to invest as
usual, the other parts of the state also failed to provide big capital investments; thus a
$250 million joint venture proposed by the MOEA was rejected in 1984 (Chu, 1987:
226) After the abandonment of the MOEA-proposed joint venture in 1984, ERSO
has worked with small Silicon Valley firms to continuously develop the VLSI
program. But the highly advanced DRAM technology developed in ERSO’ s lab by a
US startup, Vitelic, was sold to Korea by Vitelic because Taiwan’ s government and
private industry did not provide sufficient facilities for the manufacturing of the
advanced memory chip (Chu, 1987: 238).
Again, the feeling that South Korea would exceed Taiwan in the
semiconductor industry brought about some changes in the attitude of government
toward the development of VLSI technology. With support from Bob Evans, a
former executive at IBM, a new joint venture was established to accomplish the goal
of continuously developing VLSI technology and transferring it to the private sector
(Meaney, 1994: 182).
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This new joint venture established by Taiwan’ s government formed Taiwan
Semiconductor Manufacturing Co. (TSMC), with 49% ownership from government,
27% from Phillips, and 24% from domestic private investors, including 5% of
Formosa Plastic, 4% Sino-American Petroleum, and several small investors (ibid.:
182-3). According to Meaney, even though these local private companies were
already successful, and "had dealings with the government already; a certain amount
of arm-twisting apparently was involved" to get them to invest in this project (ibid.:
183). The management team included Chang Tsung-mo recruited by K. T. Li in 1985
to head ITRI. Chang also recruited Jim Dykes to head up TSMC. Originally, TSMC
only manufactured ASICs excluding memory chips, but it changed later.
TSMC was successful and become Taiwan’ s number one semiconductor firm,
and the world’ s largest pure foundry firm. Basically, TSMC was established as a
foundry to manufacture the silicon wafers for clients, TSMC does not design or sell
chips; thus, it "would not compete with the large companies, only with their
manufacturing divisions." (ibid.) TSMC’ s establishment was based on a new concept
in finding a niche, an opportunity in a market among independent chip designers and
the large US semiconductor firms (ibid.). From the experience of TSMC, we can
identify several factors contributing to its success. First, it had no head to head
competition to large companies; second, it had less risks since it did not have to
spend on sales and marketing, and worry about sales results; third, it had less capital
requirements in R&D expenditure, and less competitors than DRAM would have;
thus, it had lower entry barriers. From TSMC’ s case, we think that when government
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or business leaders make business decisions or new ventures, it is important to find a
successful business model, a new market, a underserved market, or a niche.
However, it also needs a vision, or luck or both.
There are other examples that demonstrate that business and government
leaders could find promising sectors to be able to make profits for their investment,
rather than based on ideological consideration. For example, South Korea’ s
conglomerates invested about US $1 billion in semiconductor plants in the early
1980s, even if some warned that they’ d be doomed if they "got into the business at
this point," and a Samsung executive responded that "we have no choice; we have to
learn." (Gomes-Casseres and Lee, 1988: 4) This showed that some Korean
executives put the learning of the most advanced knowledge in the semiconductor
industry above the profit-making.
One good example about how business leaders focus on finding a niche or a
new market and succeed is how Japan’ s copier companies entered America’ s market.
They did not compete with dominant firms like Xerox head to head in the beginning;
they focused instead on small copiers which were underserved in US (Porter, 1990:
36-7). Japanese firms used a new strategy in sales and pricing, and altered
manufacturing methods by using mass production instead of batches to reduce costs.
The targeting of an underserved product segment avoided fighting directly with
leading firms, reduced entry barriers, and increased the chances to make profits to
compensate for current costs in R&D, production and marketing, and future
expansion and upgrading. This also demonstrates that private and public investment
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should look for and focus on the product segment which is not already mature or full
of dominant players, thus this product segment could provide potential opportunities
for gains.
The impact of the establishment of TSMC on Taiwan’ s development of the
semiconductor industry is more than the gains in its revenues and profits. Within one
year of the establishment of TSMC, about forty chip design houses were established
in the Hsinchu Science-Based Industrial Park; this fully demonstrated the success of
the government’ s IC project. TSMC also began to serve the needs of local small
entrepreneurs who used to go to Japanese or Koreans for manufacturing, and
requested the rights to the design (Meaney, 1994: 183).
After the establishment of TSMC and the success of UMC, local interests in
the semiconductor sector have increased, several private semiconductor firms have
been set up, such as Winbond, founded by Yang Ting-yuan, leaving ERSO with a
large number of personnel (ibid.). In fact, many pioneer engineers trained in ERSO’ s
initial program founded their own companies. This indicated that the government
skill training program is basically successful in providing knowledge, experience,
and connection to the development of infant industries. Moreover, the recruitment of
experienced industrial experts to be advisors or heads of joint ventures to allow
professional expertise to be fulfilled in the management of new firms rather than
offering high-rank government officials or big firms’ leaders to become heads as
rewards also contributed to the successful development of the new firms like TSMC
and (JMC.
ill
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Although the concept in the establishment of TSMC is new and promising,
the implementation is important too, due to a good management team and
outstanding technical skills, profitable business operation emerged; this will further
increase the confidence and interest in this industry. Taiwan’ s experience in the
development of the semiconductor industry demonstrated spillover effects: the
successful performance of one enterprise brought about a lot of start-ups, encouraged
the confidence of the private sector to invest and make money in the semiconductor
industry, and also encouraged interest in the development of the whole high-tech
sector.
Change in the Role of Government Agencies
After the successful setup of UMC and TSMC, the private sector grew
rapidly, and began to interact with government agencies with their own viewpoints
and complaints. For example, UMC felt that ERSO had lost its leadership in its goal
of supplying the private sector with R&D services during 1979-83, because ERSO
maintained wafer manufacturing and sales activities rather than focusing on
developing advanced products or acquiring well-developed research. Finally, ERSO
decided to phase out its pilot production in 1988, and planned to produce some chips
and transfer the advanced products to private industry to optimize and meet
commercial needs.
In 1989, MOEA changed the procedures of rTRI’ s R&D tasks, and required
that ITRI "present projects to industry as soon as they have been approved by the
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government and ask interested companies to send applications for the technology to
the government." (Meaney, 1994: 187)
These changes suggested that after the private sector became stronger and
bigger, the public agencies had to respect the feedback of the private sector and
transformed its role to reach mutual benefits, closer cooperation, and proper division
of function.
Performance after Government’ s Initial Participation
According to Taiwan’ s MOEA’ s IDB, the semiconductor industry began to
sprout in the 1980s, and have remarkable development and performance in 1990s,
after government’ s initial fostering in 1960s and 1970s under strategic development
policy. Taiwan’ s development in the semiconductor industry was more balanced than
Korea’ s, as most of the wafer fabrication plants are for DRAMs in Korea, thus Korea
imported microprocessors, peripherals, and ASICs, etc. for consumer electronics and
computer manufacturers’ requirements and exported DRAMs and SRAMs, with both
a high export ratio (91.5% in 1988) and a high import dependency (92.1% in 1988);
while the product mix of Taiwan’ s semiconductor industry was more diversified,
including linear ICs, telecom chips, ASICs and memory chips (OECD, 1992: 211-6).
According to Taiwan’ s Industrial Development Bureau, in 1998, Taiwan had
81 firms engaging in IC design business, 20 firms in wafer manufacturing, 23 in
semiconductor packaging, and 16 in semiconductor testing. This has grown hugely
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from only 6 IC manufacturers in 1989 (IDB, 1998: 398-9). According to industry
analysts, in 1999, Taiwan makes about 12 percent o f the world’ s chips and half of all
motherboards; and about two-thirds of the world’ s integrated chips are assembled in
Taiwan, while three out of every four companies relying on outside manufacturers
utilized Taiwanese chip makers, according to industry estimates. According to IDB’ s
analysis in 1998, Taiwan enjoyed competitive advantages in the foundry business,
because Taiwan’ s average quality of engineers, and cost structure are higher than
other countries engaging in foundry, thus the profits earned in foundry are far more
than in DRAM business and other products (IDB, 1998: 399).
Since Taiwan’ s government established TSMC jointly with Philip
Electronics, TSMC has become the world’ s largest company providing pure IC
foundry services. Furthermore, after Taiwan entered into the silicon foundry business
in the mid-1980s, some 50 or more ASIC design firms were established in Taiwan
and grow rapidly (OECD, 1992: 214). The products of the semiconductor industry
supplied Taiwan’ s domestic demands for production of computer-related products.
Since 1989, domestic demands for ICs grew by double digits, since Taiwan’ s
production in computer-related industry has become the third largest; and products
such as monitors, motherboards, scanners, mouses, and keyboards have the largest
production volume in the world (IDB, 1998: 397).
From Table 4.3.1, we see Taiwan’ s semiconductor sector has demonstrated
stable growth across different fields such as design, manufacturing, testing,
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packaging and foundry; the production value all increased in 1997 and 1998, even
with Asia’ s financial crisis of 1997.
Table 4.3.1 The Performance of Taiwan’ s semiconductor industry
NT billion 1996 1997 97/96 1998(e) 98/97
total
production
value 188.2 247.9 31.7% 367.8 48.4%
IC design 21.8 36.3 66.5% 46.8 28.9%
IC
manufacturing
125.6 153.2 22% 233.3 52.3%
foundry 56 84.2 50.4% 128.6 52.7%
IC
packaging
35.8 47.8 33.5% 64 33.9%
IC testing 5 10.6 112% 23.7 124%
domestic
sale (%) 39.5 47 42.7
Source: (IDB, 1998)
From Table 4.3.2 and 4.3.3 we see that TSMC and UMC have managed to
increase not just total operating revenue, but also net profit; thus, even without any
easy credit access or low-interest loans, they could have sufficient capital to invest in
expansion and innovation without the heavy burden of paying interest. The stable
growth of revenue and profit also indicated that they are less volatile than DRAMs
which depend on many external factors such as PC demands, and price war.
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From these two Tables, we see that, basically, TSMC and UMC are
successful and could provide solid foundation for Taiwan’ s semiconductor industry.
Table 4.3.2 TSMC performance
(NTS m) operating revenue net profit
1991 4.480 525
1992 6,511 1,153
1993 12,334 4,245
1994 19,336 8,474
1995 28,766 15,081
1996 39,400 19,401
1997 43,936 17,960
1998 (e) 55,000 22,742
Source: TSMC.
Table 4.3.3 UMC performance
(NTS m) operating revenue net profit
1991 5,701 601
1992 6,468 1,228
1993 10,007 2,458
1994 15,243 6,493
1995 24,247 13,441
1996 22,606 7,647
1997 25,089 9,740
1998 (e) 18,347 5,817
Source: UMC.
Furthermore, according to semiconductor industry analysts, the potential of
the foundry business is optimistic. For example, VLSI Research, a research firm in
San Jose, Calif., indicated that while foundries still account for a relatively small
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percentage o f overall semiconductor manufacturing, accounting for about 8% of the
industry in 1998, it stated that their influence on the industry is increasing rapidly,
and could expand up to 13% of production in just a year or two.
In order to meet future demands, Taiwan’ s foundry firms has continuously
upgraded their production technology to leading-edge levels after years of lagging
behind; that has turned foundries from manufacturers of low-tech, low-priced chips
to sources of cutting-edge technology. Therefore, some established chip makers have
turned to foundries for manufacturing support. However, analysts were not so
optimistic about the DRAM business, they indicated that the mainstay 64 megabit
memory chip now, June, 1999, goes for $5.50, down from $9.50 in March.
Therefore, most of the world’s memory-chip makers are still suffering from
declining prices.
The Performance of DRAM’ s Industry
In this section, we shall describe the development and performance of
Taiwan's and other DRAMs manufacturers amid global competition. From this
discussion, we shall try to assess Taiwan's government decision-making process in
entering the DRAMs business and evaluate the losses and gains of Taiwan's entering
into the DRAM business.
First, we shall describe the performance of Taiwan's DRAM business. Acer
aggressively entered the DRAM business in 1989 by creating a joint venture with
Texas Instruments, but the alliance with Texas Instruments proved to be at least not
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as successful as was previously expected. First, Texas Instruments sold its shares in
the alliance to Acer and exited from this joint venture. Then, in 1999, Taiwan’ s Acer
also sold 30% of its share of its DRAM business to TSMC, and TSMC will
transform this DRAM maker to a professional made-to-order foundry. Acer’ s DRAM
business has lost almost NTS 10 billion for the last two years, and so did World
Vanguard International— another DRAM maker invested in by TSMC. Some analysts
worried that TSMC has invested in both these big-loss firms and may thereby face
more pressures on its total revenue and profits.
In fact, Acer’ s DRAM subsidiary was not the only DRAM firm which lost
money in 1998. Taiwan has seven big DRAM firms, with about NTS 160 billions
invested in equipment, the equipment depreciation in 1998 cost about NTS26
billions, all Taiwan DRAM firms suffered big losses, in the first half of 1998. The
total loss for six DRAM firms was about NTS 12 billions, (see Table 4.4.1) and the
total loss for global DRAM firms was estimated as over NTS280 billions; the larger
the manufacturing capacity, the larger the loss (Chen, 1998:69).
Table 4.4.1 Taiwan DRAM firms’ losses in the first half of 1998
firm loss (NT Sbillion)
Acer’ s DRAM subsidiary 3.2
Vanguard International 2.13
Nan-Ja 2.1
Mou-Te 1.4
Li-Jing 2.2
Mou-Si 0.65
Source: Chen, 1998: 70
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However, Taiwan’ s firms thought that Japan’ s and Korea’ s firms would suffer
the most from the 1997 Asian crisis, Taiwan’ s DRAM firms’ loss would be less than
theirs, and would have better capital access from banks and investors. Thus, Taiwan’ s
DRAM firms could be positioned better in future competition and the next boom in
the world DRAM market (Chen, 1998: 69-70).
From Table 4.4.1, we know that most of Taiwan’ s DRAM firms not only
made much less profits than foundry firms - TSMC and UMC - but lost heavily. This
demonstrated that Taiwan’ s officials’ concern was right, and their conservative
attitude resulted in the establishment of TSMC rather than a DRAM firm. Taiwan’ s
ERSO’ s policy and approach, which looks for niches in which Taiwan would have a
comparative advantage in the early stage of the development of Taiwan’ s
semiconductor industry, helped to create the environment for diversified and
balanced growth, allowing the coexistence of small, skill-intensive and big, capital-
intensive firms. As data collected by Taiwan’ s Industrial Development Bureau, in
1998, shows, Taiwan’ s semiconductor industry has grown rapidly, and has consisted
of small design house, and big DRAM manufacturing firms and foundries. It has 81
firms engaging in IC design business, 20 firms in wafer manufacturing, 23 in
packaging, and 16 in testing; this has grown hugely from only 6 IC manufacturers in
1989 (IDB, 1998: 398-9).
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However, the targeting and promotion of the software industry by the
Taiwanese government was not as successful as the semiconductor industry. This
indicated that targeting did not guarantee success.
4.5 Conclusion
From the above discussion, we draw several conclusions.
(1) Initial Promotion
Taiwan’ s development experience has demonstrated that government
planning and promotion can be effective, but the intervention was successful because
the intervention has considered market discipline, financial terms, and competitive
advantages. The Taiwan government’ s attitude toward planning is conservative and
step-by-step, rather than aggressive and bold. This brings about stable, gradual
technological upgrading and profit and revenue growth in the targeted industry and
encourages domestic businessmen’ s confidence and entrepreneurs’ enthusiasm in
forming start-ups for further development of the semiconductor industry.
Taiwan’ s experience in the semiconductor industry conforms with Evans’
argument that the important thing is not if the government should intervene in high-
tech industry but how the government intervenes to encourage and promote industrial
development. If government and industry cooperate and develop with the correct
direction, proper government intervention can help the targeted industry as shown in
the development of Taiwan’ s semiconductor industry. However, the most important
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thing is that government intervention is most justified in the early stages in the new
industry, when the risks are too large for the private sector to take. As shown in
Taiwan, when private industry became more confident and successful, the public
agencies have been asked to change to meet private sector’ s needs, or to reduce its
involvement.
(2) Technology-intensive vs. Capital-intensive
From Taiwan’ s experience in the development of DRAM manufacturing, we
found that the risk-averse attitude, and the principle which preferred technology
intensive industries rather than capital-intensive ones, played an important role. With
many firms like Texas Instruments and IBM, exited from capital-intensive DRAM
business and shifted to skill-intensive specialty chip business, we think Taiwan’ s
developmental principles are correct.
For developing countries which have less capital, programs in human
resources to cultivate high-tech manpower in scientists, engineers, and entrepreneurs
in order to develop technology-intensive industries are more appropriate than
borrowing big capital from abroad to engage in capital-intensive industries, as
demonstrated by Taiwan’ s experience.
(3) Direction, Niche, New Market
From the above discussion of DRAM business, we know that if Taiwan
invested in the capital-intensive DRAM production in the early 1980s, it might have
competed directly with Japan, the US and South Korea before it established a strong
base in the semiconductor industry. The fierce competition would then cause price
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declines and profit decreases. As we saw, in the US, Micron’ s profits decreased
sharply when Korea enter DRAM production; and mass manufacturing caused
overcapacities, even Japanese big semiconductor firms also suffered declining price
and decreasing profits. Because DRAM has become a commodity-like product after
the entrance of many players, Texas Instruments, IBM, Acer and earlier Intel, all
withdrawn or reduced their DRAM business after evaluating the costs of continuous
investing in expensive equipment and price cuts, and altered their direction to
technical and design-intensive chip production or internet-related business. Thus we
see, direction of development is very important. When stuck in the wrong direction, a
business wastes time, capital, and talented people, as Intel's case indicated; however,
after Intel changed its development direction and business strategy, it became even
more successful than before.
As Porter indicated, when DRAM becomes commodity-like products, it
becomes an unattractive industry (Porter, 1990: 36). With or without government’ s
support, it is difficult to make huge profits for DRAM firms and the whole economy.
In fact, since Taiwan’ s firms began their investment and production of DRAM,
investment did not bring in huge profits for firms as expected, but the unstoppable
renewal of more advanced equipment and technology has caused huge losses for
firms. Thus, when government or business chose the wrong direction, or products, no
matter how effective its implementation of the promotional policies, the result can be
unsatisfying. This is shown by Intel’ s struggle to maintain its DRAM business and
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finally its exit due to unacceptable losses; and shown by Taiwan’ s DRAM firms’ loss
even with heavy investment and workforces’efforts.
From the success of TSMC, we found that the most important thing for
government participation is to find the correct direction and niche in which industry
can develop its competitive advantage and be able to make profits. When TSMC was
established in the 1980s, foundry was not a state-of-the-art highly advanced sector,
but with TSMC’ s continuous efforts to upgrade, many firms, such as Motorola,
decided to let foundry manufacture its chips because of foundries’ impressive
performance. And, DRAM used to be an important and profitable product, but with
too many firms, and overcapacity, it is no longer an attractive or profitable product.
Thus, when government or business chooses a target to invest, it must have clear
vision about the future. TSMC’ s case further confirm that Taiwan’ s ITRI and ERSO’ s
approach that Ends a niche wherein Taiwan would have a comparative advantage
rather than jump into risky and fiercely competitive DRAM business was the right
vision.
(4) Decision-making Process
From Taiwan’ s decision-making process in the development of the
semiconductor industry, we found that there existed tremendous reservation,
objection, and debate, which demonstrated that Taiwan’ s industrial development was
under careful planning, conservative financial consideration, and open mindedness to
different suggestions. The government’ s intervention might be less aggressive or
effective than South Korea’ s development, as Chu indicated (Chu, 1987). But this
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step-by-step commitment and development, and careful reviews of the probability of
success and reward could be an important factor in Taiwan’ s stable economic growth
and industrial development as shown by the gradual and successful development in
the semiconductor industry. The success of the development of Taiwan’ s
semiconductor industry also demonstrates that Taiwan’ s government agency,
including technocrats, finance personnel, and business advisors not only focused on
developmental goals, but also had business-oriented consideration and made profits
while avoiding too much risk, with the proposal of such low-risk, profitable ventures
as TSMC. Furthermore, when Taiwan’ s government promoted its industrial
development, it respected both domestic and foreign experts rather than favored big
domestic firms as South Korea did. Basically, Taiwan’ s government focused on the
goal of development of the whole industry, without consideration of political support
and donation from big firms, or subject to the idea 'too big to fail’ .
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Chapter 5 THE DEVELOPMENT OF TAIWAN’ S
AUTOMOBILE INDUSTRY
In this chapter we will analyze the development o f Taiwan’ s automobile
industry and examine the relationship between the performance of the industry and
the government’ s policy, and the background behind the formation of the sectoral
policy. We will describe the development of Taiwan’ s automobile industry, its
performance in different time frames, and under different government protection and
promotion policies, and analyze the implications of these different policies.
I will show that these policies, which have a balanced consideration of local
markets’ and automakers’ constraints and the state’ s goals, should prove to be
appropriate for Taiwan’ s economic development. But these policies sometimes have
been criticized as ineffective, too conservative, and risk-averse. This study will
indicate that these policies might be ineffective to promote the automobile industry
but beneficial for Taiwan’ s overall economic development; and a policy which targets
a specific industry needs to consider the competitive advantages enjoyed by the
nation, such as technological skills and innovation, human capital capacity, labor and
capital abundance.
First, this study will describe the characteristics of the automobile industry
and its entry barriers, which will limit the effects of government’ s promotion efforts
and influence the decision-making by government officials. Then, this study will
present some cases to demonstrate how these characteristics affect the development
of the automakers in different nations.
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I will then discuss the development of Taiwan’ s private domestic automakers,
and the effects of government policy upon this sector. The time frame of the analysis
will be from the 1950s to 1997. The performance under different policies at different
time frames will also be analyzed . The analysis will show that Taiwan’ s government
did not give easy credit access or complete protection to the domestic automakers.
However, Taiwan’ s limited protection and promotion measures toward the auto
sector allowed the economy as a whole to progress with a market-oriented path and
encouraged the successful development of other sectors which might meet Taiwan’ s
competitive advantages.
5.1 The Characteristics of the Automobile Industry
In this section, I shall describe some characteristics of the automobile
industry. These properties, including scale economies, brand loyalty, and
technological innovation, form major entry barriers to new entrants, and have
resulted in vigorous competition between existing big and strong carmakers to
continuously upgrade themselves and form alliances in order to survive and become
even bigger and stronger.
1. Protection
Scholars have said that the political economy of the automobile industry
"never fit the classic model of free trade" and reflected its size (Cowhey & Aronson,
1993: 91-2). Because automobile makers rely on large economies of scale, most of
them are big employers and buyers of huge quantities of others’ products. Therefore,
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the US auto sector "is always politically sensitive because it affects the economic
well-being of grass-root constituents and the voting public knows it." (ibid.: 92-3) In
1990, when the automobile deficit of the US with Japan increased to 31 billion and
was about three-quarters of the total US trade deficit with Japan, auto trade issues
became very important and affected regional economies and labor unions (ibid.).
Scholars have also pointed out that many countries, especially in Europe and Asia,
viewed the automobile sector as very critical to national development, therefore they
"insisted on championing the industries even when they possessed no revealed
comparative advantage." (ibid.: 96-7)
Scholars have indicated that after 1945, all key countries tried to protect their
own auto makers. This resulted in highly regionalized markets, with domestic firms
in Japan, France, and Italy, etc., dominating their own countries. This also allowed
Japan and other countries to postpone liberalization "until they became important
markets." (ibid.: 93) For example, after the establishment of the European Economic
Community in 1958, European governments "spent heavily to promote and protect
their national automobile champions." (ibid.: 95) Furthermore, in the 1970s and
1980s, due to the high unemployment and auto firms’ huge losses caused by Japanese
auto success, the US negotiated a formal voluntary export restraint agreement(VRA)
with Japan by 1981 to slow down Japanese expansion, and allow losers to lose more
slowly and have a chance to restructure their operations (ibid.: 98, 120).
The action by the US to adopt auto protection was a big change to the auto
industry, since it had long been believed that the US auto industry did not need
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protection "because of its own international orientation and long-term strategy of
global sourcing." (Cline, 1986: 228)
2. Scale
For any industry, scale plays an important role in production cost. In many
cases, the more you produce, the less it costs per unit. This is especially true for the
automobile industry. All major mechanical components manufacturing, and all major
phases of production, including final assembly, design and development of new
models, marketing and distribution, benefit a lot from large economies of scale. And
it is necessary for automakers to combine these economies and "apply all of these
scale economies across a multimodel range spanning all the major market segments."
(Chu, 1994: 133)
Generally, for an automobile plant to be efficiently operated, it should be able
to produce between 200,000 and 250,000 cars per year, and between 300,000 and
500,000 units of engines and transmissions annually (Kwoka, 1993: 64). Thus, the
auto industry is a highly capital-intensive industry, and needs a big market of
hundreds of thousands of demands, and auto makers usually need to produce huge
volumes to cut average costs to survive in this market.
Some scholars advocate that economies of scale are very important in the car
manufacturing industry; therefore, it is very difficult for the auto industry toto
survive without government protection (Li, 1988: 204).
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3. Consumer Tastes
Another characteristic of the auto industry is the shifts in consumers’ tastes.
Due to the fluctuations of oil prices, consumers may favor smaller, fuel-efficient cars
when oil prices go up. Thus, auto makers might have to adjust their product
development (Branson & Klevorick, 1986: 249). Moreover, carmakers have to make
surveys to understand consumer taste and demands to produce products attractive to
consumers. In fact, many indicate that Japanese automobile firms could emerge and
became successful in the global market because they could provide a wider range of
models, and they offered about double the number of models of US auto firms to
meet different consumer demands and tastes (Cowhey & Aronson, 1993: 98-9).
4. Mergers and Alliances
Because of the scale economies and other technological necessities, the
automobile industry has experienced numerous alliances and mergers, which resulted
in a global oligopoly. In 1960, there were around twenty firms in the auto world,
accounting for about 90 percent of total world sales, "[t]hese firms were the survivors
of a process of concentration in their respective home-country markets over the
course of the preceding decades"; the trend toward concentration continued in the
1960s and 1970s; and by 1972, the eight largest commanded about 85% of the total
world sales (Chu, 1994: 133).
Some recent concentration examples are the merger of Benz and Chrysler,
Ford and the truck-division of Volvo, and the alliance of Nissan and Renault. Thus,
in the automobile world, a firm must take advantage of scale economies to reduce
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average costs, or to merge or form alliances to increase its competitiveness to survive
and succeed. As globalization became a dominant trend, the automobile industry also
has changed to form international corporate alliances to "share the risks of
developing, building, and bringing expensive new products to market." (Cowhey &
Aronson, 1993: 104) Scholars are also concerned that these alliances may retard new
independent entry.
5. Technology Innovation
Besides scale economies, another dominant factor in affecting the
performance of automakers is the innovations of technology in improving the
reliability and quality of cars. During the 1970s, Japanese carmakers introduced a
new wave of process technology, such as zero defect quality control and just-in-time
inventory systems; and shifted "the focus of productivity improvement from the costs
of the factors of production to how efficiently they are combined into an integrated
sequence of production operations." (Chu, 1994: 134)
These new competitive advantages enjoyed by Japanese carmakers have won
big market shares and profits for them, and pushed other firms to learn from Japanese
firms by forming joint ventures, or cut costs by decreasing redundant facilities and
workforces, and outsource the production of components and subassemblies. In
addition to the new process technology, the manufacturing of some major mechanical
components is technical-intensive, and highly automated with the use of robots and
other tools on a large scale, and requires heavy initial R&D investments (ibid.: 135).
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Furthermore, Japanese automakers kept the costs down, and had "the shortest
innovation cycles in the industry to target specialized niches", their superior
management practices could develop a model from the idea stage to the customer in
about three years, while their competitors--US and European auto firms— need five
years (Cowhey & Aronson, 1993: 98-99). However, many of the new innovations of
Japanese process technology are difficult to learn or copy, even if US automakers
make big investments to improve the manufacturing, because the organizational
efficiency, worker productivity and production innovation of Japanese auto firms
result from not just R&D investment but also from Japan’ s unique socioeconomic
structure, and cross-ownership links between auto firms and their suppliers, the
corporate union system, and the domestic competitive environment. (Chu, 1994: 135)
Due to the slow pace by US automakers to catch up with Japanese carmakers, all
three US auto firms have alliances with Japanese automakers to produce small cars
and major components, (ibid.: 136)
6. Brand Loyalty
Besides the technological innovations and performance of different types of
cars, the brand name is also an important factor affecting the business of automakers.
Consumers generally recognize the brand name of a car as a symbol for personal
status, of wealth, and has a loyalty toward certain brands of cars (Cowhey &
Aronson, 1993: 125).
New entrant automakers have to spend heavily in marketing and
advertisement to establish recognition and respect for a new brand even if its new
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cars have comparable prices and performance as existing brands. This increases the
difficulty for new entrants.
Because of these characteristics and requirements, most current world
automakers are the winners from Europe, US and Japan in the extremely competitive
world market. The combination effects of scale economies, brand loyalty, and
technological improvements has resulted in huge entry barriers for new firms to enter
the automobile industry, and also has pushed the existing firms to continuously
enhance their competitiveness by merger, alliance, and increasing capital investment
to satisfy customers' demands for new, advanced, multiple-usage cars such as sport
utility vehicles.
Due to the capital-intensive and technology-intensive requirements of the
auto industry, many scholars have argued that a nation should established light
consumer goods industries first. Then, with gradual achievement of knowledge of
industrial production and management techniques, considerable accumulation of
capital, and increasing demand for durable goods with considerable purchasing
power generated through the increase of national income, a nation can begin to
develop capital-and technology-intensive industries when "domestic demand grows
to the point which justifies the establishment of such industries on an appropriate
economic scale" to avoid unnecessary retention of scarce capital and high production
costs from low economies of scale (Li, 1988: 137).
From the above discussion of the characteristics of the auto industry, we
know that it is a capital-intensive industry with vigorous competition from among
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world leading players. This situation was similar to DRAM manufacturing but with
even stronger capital requirements and competition. Thus Taiwan’ s government was
not very eager to promote Taiwan’ s own auto industry. In fact, many countries which
tried to promote the auto industry also encountered difficulties, and either sold the
unprofitable business or cooperated with existing dominant auto players as described
in the following section.
Cases of Automobile Industry Development
Here we briefly present some cases of the development of automakers in
South Korea, Canada and Indonesia to demonstrate how difficult it is to make profits
for new auto entrants, and to establish a nation’ s own auto industry.
South Korea
South Korea has aggressively engaged in the development of the automobile
industry, but some of its carmakers have suffered big losses and are under bidding to
sell. For example, Kia, in 1998, recorded a 6.6 trillion won loss. When Hyundai took
over Kia in March, 1998, creditors of Kia wrote off about 7.4 trillion won of the
approximately 8.9 trillion won in debts it had accumulated. After the sale of Kia in
1998, South Korea is going to sell three more carmakers which are loaded with debt.
The Samsung Group will sell Samsung Motor, and the group promised to absorb the
carmaker’ s debts by cleaning up about four trillion won worth of debt from Samsung
Motors. Furthermore, South Korea’ s No. 2 automaker, Daewoo Motor, which had a
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huge IS trillion won debt, has also invited potential bidders to submit proposals for
its sale. And, Daewoo creditors decided to sell sport-utility vehicle maker Ssangyong
Motor which has three trillion won in debts.
Canada
Analysts indicated that almost all cars or trucks designed and made in Canada
have disappeared, and one Canadian startup carmaker has become GM Canada. But
Canada’ s auto industry is thriving; the industry contributed $6.5 billion to total
economic output in 1998; and more than 175,000 Canadians earn weekly paychecks
by assembling cars and making auto parts.
Indonesia
Indonesia’ s largest carmaker, Astra, had over a billion dollars in debt as
1998.1n 1999, Astra, has adopted restructuring plan and shifted auto production and
parts to regional markets and capacity to new products, such as casting to plastics and
toys and was able to post half-year net profit of 496 billion rupiah in 1999 compared
with losing 2.85 trillion rupiah in the same period of 1998.
The above three countries’ cases demonstrate that, it is very difficult to
establish a successful auto business either by early entry, as shown by Canadian
efforts since 1900, or by government promotion as in Korea. Most automakers either
disappeared or lost money and under restructuring or sale.
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5.2 Taiwan Government’ s Participation in the Auto Industry
This section describes the Taiwan government’ s intervention efforts in the
auto sector from the 1960s to the 1980s. We shall also describe the factors which
affected decision-making, and the results of the government’ s decisions. From this
section, we shall see that Taiwan’ s government did not intervene and promote the
auto industry as it did for the semiconductor industry. We shall demonstrate that
when Taiwan’ s government officials made decisions on how to invest limited and
valuable capital and human resources, they considered the potential of gaining
profits. Therefore, we shall show that, in Taiwan’ s experience of economic
development, its government played an important role in guiding domestic industry
into a profitable semiconductor sector, and limiting intervention efforts and capital
investment in the automobile sector.
Factors Affecting Government Promotion
We shall discuss the decision-making considerations concerning the auto
industry from aspects of culture, and the concerns of profitability in establishing and
promoting the automobile industry. From the previous section’ s discussion, we know
that scale is very important in the development of the automobile industry. Taiwan's
ex-minister of Economic Affairs, Chao, has estimated that unless annual production
of one million cars could be achieved, no automakers could have enough
competitiveness in the world market (Chun, 1998). However, Taiwan’ s private
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business preferred small, family businesses to large corporations. A common
example of Taiwan’ s business development is some of the staff leave and establish
their own startup business; because the culture was to be the head of a small firm
rather than a worker in a big firm. This situation was seen also in the development of
the semiconductor industry. Some foreign advisors have suggested that Taiwan’ s
government should help domestic firms to "achieve higher productivity and
economies of scale through mergers, acquisitions." (Haggard, 1990: 141) However,
although Taiwan’ s government has encouraged the merger of small auto firms to
form big ones to achieve economies of scale, private automakers still maintained
their independence, rejecting the merger idea (Chu, 1994). Some scholars argued that
small family business success was "partially due to deep-rooted traditions" and
insufficient "unemployment insurance, retirement benefits and old age pensions"
during Taiwan’ s process toward modernization, while private savings and family
solidarity were helpful (Woronoff, 1986: 88-89).
In addition to the private sector’ s tendency toward small business, Taiwan’ s
government officials also have different opinions about whether the Taiwan
government should put more efforts to support the automobile industry’ s
development. Some officials believed that the automobile industry can begin to
export and make profits if government aggressively supports it, while others argued
that, with a smaller population in Taiwan than in Korea, and 1974’ s oil price hikes,
the demands for cars in Taiwan cannot be enough for efficient manufacturing under
the principle of economies of scale. Thus, they proposed to focus on the development
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of parts and components industry instead. Due to the conflicting positions, Taiwan’ s
government still imposed protection such as tariffs, import restrictions, commercial
vehicles licensing, but with no massive credit inflow to support the automobile
industry, nor did it select the fittest for special promotion (Chu, 1994: 149).
Because of the private sector’ s preference toward small family business and
government’ s concerns about the profitability o f Taiwan’ s own automobile industry,
basically, Taiwan did not target or promote the auto industry aggressively.
In fact, the driving forces behind the decisions of the government and private
sector reflected culture, characteristics of the people, and history. Taiwan’ s emerging
small startup business was similar to US flourishing startups rather than Japan’ s big
conglomerate business model. Thus, South Korea promoted capital-intensive
business like DRAM manufacturing and the auto industry, because Korea wanted to
compete with Japan and become the next Asian giant like Japan. However, Taiwan
did not intend to compete head to head with Japan; in fact, most Taiwanese admired
Japanese performance in industry, and Taiwan’ s government and private business
was concerned more with profitability and realistic constraints than on ideological
and hegemonic considerations. Therefore, Taiwan did not promote the automobile
industry aggressively as demonstrated by the description below of Taiwan’ s
government intervention in the auto sector. The following description also
demonstrates that Taiwan’ s government treated the auto industry differently from
high-tech industries such as the semiconductor industry, adopting a passive
protection policy rather than active promotion.
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Taiwan's Government Policy in the Automobile Industry
The Taiwan automobile industry has requested and received government
support and protection during the beginning stage of the establishment of the
automobile industry. In the 1960s, the government used import controls, tariffs, local
content requirements, and entry requirements to support and control the infant
industry.
The Leadership
Basically, Taiwan's government set up the Industrial Development Bureau
(1DB) under the Ministry of Economic Affairs (MOEA) to support industrial
development in the private sector. However, scholars indicate that Taiwan’ s
institutional arrangements for designing and implementing industrial policies were
flexible and sometimes shared by several agencies. For example, the IDB, the
International Trade Bureau (ITB), and the Ministry of Finance (MOF) determined the
tariff policy for automobile industry together; and the allocation of R&D grants
according to firms or products was administered by the Office of Science and
Technology Advisors (OSTA) under the direct control of MOEA. Thus the IDB does
not have a lot of power to make decisions and use effective policy instruments(Chu,
1994). In fact, no one agency has been established for exclusive guidance on
industrial development in Taiwan, the economic issues were discussed coordinately
by the powerful and conservative Central Bank of China (CBC) and MOF and
MOEA (ibid.).
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From the above description, we can see that Taiwan’ s auto industry
development did not receive strategic promotion as did the semiconductor industry; it
was under general bureaucratic management without high-ranking officials’ special
attention. In fact, in the early 1970s, Taiwan’ s automobile industry had "no state
agency or enterprise taking part in related R&D or production activities," and most
ambitious ministers decided not to invest their energy, resources, and political
entrepreneurship in the automobile sector (Chu, 1994: 144). Furthermore, scholars
have argued that, under "the close scrutiny of the conservative CBC and MOF
officials, all domestic banks are risk-averse when it comes to lending and are
obsessed with collateral." (ibid.: 143)
Contrasted with the automobile sector, scholars have indicated that some
sectors, such as the semiconductor sector, have received "a comprehensive and
coherent plan . . . the personal commitment of a minister-level policy entrepreneur"
to lead private businessmen, to mobilize support and resources, to win the trust of
financial officials, and to defuse interagency conflict; these government promotions
have been generally successful (ibid.: 144).
The Goal
Taiwan’ s government has supported the establishment of domestic auto firms,
protected the auto industry as an infant industry, and promoted it gradually, in order
to achieve the goal of manufacturing complete cars instead of just assembling.
However, most domestic auto firms depended on foreign auto firms for important
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technologies and parts until recently. Since 1970, while South Korean government
has installed big programs in aggressively developing automobile industry to export
whole cars like Japan, the Taiwanese government did not engage in the Korean-style
development of automobile industry, rather it focused on the development of ten
major infrastructure projects and other industries, such as petrochemicals, chemicals,
plastics, steel, and electronics (Woronoff, 1986: 84; Chu, 1994).
Government Policy
Basically, Taiwan's government took a conservative attitude toward the
development of the auto industry. It adopted passive protection policies rather than
active promotion strategies, as used in the development of semiconductor industry.
Taiwan’ s government officials thought that Taiwan did not have enough competitive
advantages to win in the vigorous global competition of the auto industry. This kind
of attitude was also seen in the development of DRAM projects. In fact, Taiwan
generally avoided the development of capital-intensive industry. The government’ s
inefficiency in promoting capital-intensive industry such as the auto industry
reflected the conflicting opinions from different groups of academic scholars,
government officials, and private business leaders. Therefore, Taiwan’ s government
generally adopted inconsistent and weak protection and requirements in regulating its
auto industry.
Protection of Domestic Auto Manufacturers
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In 1961, government established rules in prohibiting further investment in
simple assembled cars, and announced tariffs and import restrictions to protect
domestic auto manufacturers. The Ministry of Economic Affairs passed a 60% duty
on finished passenger cars, 40% on commercial vehicles, and IS % on parts and
components (Chu, 1994). Moreover, the government prohibited the imports of
vehicles for which comparable models were produced domestically unless with
special approval (Chu, 1994: 145). And the government was determined to reassess
the performance of these promotional measures in four year.
In 1964, the government prohibited the imports of commercial vehicles, in
the next year, government increased the tariffs on parts and components to 65 %
from 15 %, tariffs on finished cars to 65 % from 60 % in order to help this infant
industry, mainly the only indigenous automaker--Yue-Loong (Wade, 1990).
Requirements for Domestic Car Makers
Taiwan’ s government tried to use local content requirements to induce private
automakers’ incentives to enhance their manufacturing capability. In 1965, the
government imposed a 60 % local content requirement to encourage domestic firms
to upgrade. The government also decided to review these procedures in four years.
Under these newly enforced measures, Yue-Loong produced more new parts and
components under licensing agreements with Nissan. The 60% local content
requirement has resulted in broad criticism. Some think this was an unrealistic
requirement, economic bureaucracy did not enforced it strictly at that time, since the
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MOEA showed much leniency toward Yue-Loong. Some argued that this
requirement just restricted new entry and intended to prolong Yue-Loong’ s coveted
monopoly status in the domestic auto market (Chu, 1994: 146).
Entry Requirements
In 1969, Taiwan’ s government established a minimum investment of $25
million to reflect new circumstances and needs, and used this power of investment
review to regulate the development of the auto industry by restricting the number of
automakers in the domestic market to the current five. But, the MOEA did not
enforce this policy seriously. After the entrance of Yue-Tian in 1977, the MOEA
decided to revise the policy in order to prevent any new entrants from only focusing
on sales in domestic market. It issued a requirement that any new investment in
automobile production must export at least 50% of the output. In the following year,
the government added new requirements that a new entrant must achieve 70% local
content requirements and choose one of six designated major mechanical
components for localization (Chu, 1994: 150). All these revised policies are focused
on new applicants, but the existing automakers were exempt from these requirements
since the IDB recognized that none of these second-tier automakers can achieve these
new requirements, and they are allowed to credit their export of parts and
components to compensate for the new local content requirement up to a certain
percentage ceiling (ibid.: 150-1).
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Although the government tried to protect and regulate the auto industry to
improve its performance, scholars argue that the government was never committed to
a consistent policy and a firm position toward the automobile industry, and the
"automobile industry policy has been tailored to meet the more immediate policy
concerns of other state agencies." (Chu, 1994: 150-1)
They indicated that, sometimes, the ITB, the Ministry of Finance, and the
Council of Economic Development and Planning have different opinions from the
IDB about the import restriction, this resulted in inconsistent policies of import
restrictions (ibid.). For example, between 1969 and 1980, the government revised its
policy on import restrictions o f small passenger cars six times due to different
reasons, such as, to introduce necessary market discipline, or to countervail their
collusive pricing strategy; to adjust bilateral trade relations with the United States,
Western Europe, and Japan; and to help balance the current account (ibid.).
Government Promotion - Big Auto Plants
After years of weak and inconsistent protection and regulation, the
government finally provided some active promotion plans, which were triggered by
South Korea’ s development in the auto industry. In 1978, when Taiwan’ s government
acknowledged that South Korea has made big progress in its automobile industry,
Taiwan’ s government felt that Taiwan has fallen behind Korea. Therefore, in 1979,
for the first time, Taiwan’ s government announced the establishment of a special task
force directly under the minister of MOEA to propose sectoral policies to improve
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the development of automobile industry and designated the automobile industry as
strategic (Arnold, 1989: 188-89).
Taiwan’ s government decided to provide direct intervention from minister-
level officials in the auto industry and put more economic pressure on existing
automakers (Chu, 1994: 154-6). The MOEA planned to establish a competitive,
large-scale automobile plant by manufacturing two hundred thousand or more
compact cars every year to achieve economies of scale and be able to export.
Concerning the compact car plant, although some felt that "it might have been safer
to expand (or merge) the existing operations, Chao [the minister of the MOEA]
thought it was more effective to launch major new ones." (Woronoff, 1986: 85)
Thus, Taiwan’ s government planned to form a joint venture between a foreign and a
domestic automobile leader, consisting of at most 45 percent o f foreign equity. The
new plant intended to produce about 300,000 units annually, and export 50 percent of
the finished cars, when completed in 1990, and the overall investment would cost
more than US $1,000 millions (ibid.: 86).
The government decided to assign China Steel to be the domestic enterprise
of the joint venture, and the chairman of China Steel became the director of the "Big
Auto Plant preparatory committee." (Wade, 1990: 102) The government decided that
the joint venture would introduce technology in manufacturing parts and components
and assembling cars, and government would supervise this joint venture to make it
work. The government persuaded several local companies to participate, and chose
Toyota as the foreign partner in 1982. However, the government did not invite or
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consult with six domestic private automakers about the project since it lost patience
with them (Chu, 1994: 155-6).
In 1981, the chairman of China Steel become MOEA’ s minister, thus, the big
auto project received strong support from MOEA’ s minister and the premier, Sun
Yuan-chuan. However, the joint venture with Toyota did not proceed as planned. In
1981, China Steel made a tentative agreement with Toyota. Government officials
determined to maintain the 50 percent export requirement for eight years, increase
the domestic content target to 90 percent in five years, and produce 300,000 units
annually, require Toyota to transfer relevant technology substantially, and complete
these requirements according to strict schedules. If Toyota failed to finish these tasks
by schedule, it will not be allowed to take any profits in this joint venture. Toyota felt
these requirements were too tough to achieve, and, in 1983, it submitted its own
investment plan and requested flexible schedules and an exit clause in maintaining its
benefits. These different expectations brought about extended negotiation between
Toyota and Taiwan economic officials. Because consensus could not be reached, the
joint venture was finally canceled in late 1984, and with minister changes, a more
modest and pragmatic new approach was adopted later (Woronoff, 1986: 86).
Except for the disputes with Toyota, the Taiwan government officials had
split opinions about the project. Financial officials were reserved about the Big Auto
Plant, and less supportive about the joint venture than the planning technocrats(Chu,
1994: 157). After Taiwan’ s government changed its cabinet in 1984, the new cabinet
decided to adopt the original policy which focused mainly on the development of
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parts and components rather than the design and manufacturing of cars, and left the
original assemblers unchanged (Wade, 1990: 102).
However, this event has been called the "Big Auto Plant fiasco", and
criticized as a failed state intervention with the evils of protection (ibid.). From the
above description of Taiwan’ s government policy toward the automobile industry,
many argued that Taiwan’ s government protection was less than South Korea’ s, but
there are still many criticisms about the government’ s protection (Chu, 1994).
However, according to many other countries’ industrial development experiences,
some scholars have indicated that, for the survival of infant or inefficient industry,
limited protection is sometimes unavoidable, indeed, essential. For example, "in the
mid-1970s the automobile, steel, shipping, electronics, agricultural and clothing
industries in the US were all making strong demands for increased protection,... and
were having some success." (McKie, 1979: 84)
Another empirical case of government protection is Japan. As scholars
indicated, "in postwar Japan infant industry protection across the board was a rule
rather than an exception." (World Bank, 1983: 31) In fact, the U.S. auto industry
imposed import controls on Japanese cars in the 1980s to protect the survival of its
domestic automakers; furthermore, the US government provided support and
protection to Chrysler to avoid its bankruptcy (White, 1986: 197-207). And then, the
US automakers began to enhance their competence through competition and alliances
with Japanese automakers (Cowhey and Aronson, 1993: 104-117).
New Policy
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After this failed promotion plan, the new cabinet issued a new Automobile
Industry Development Plan in 1984 and changed policies. It planned to decrease
tariffs and domestic content requirements for the first time in twenty-five years. The
new cabinet decided to adopt flexible measures in promoting the automobile
industry, it canceled the previous requirements of at most 45 percent foreign equity,
and allowed total foreign ownership in export-only car and components production.
It decided to examine export ratios and technology transfer requirements case by
case, and encouraged mergers between the original assemblers instead of forced
consolidation, as in South Korea.
The new program intended to push the domestic automakers to either adopt
mass production strategies by merging small producers or focus on upgrading the
manufacturing of parts and components to become the primary OEM supplier to
transnational corporations (Chu, 1994: 160). In this new program, there is no pursuit
of the glorious goal of designing and making cars by domestic carmakers, since the
economic and technical barriers are too hard. The MOEA’ s officials finally realized
the capability and constraints of Taiwan’ s manufacturing facilities, and the
difficulties of exporting full Taiwan-made finished cars. They acknowledged that
under the new program, with reduced tariffs and domestic content requirements,
domestic automakers needed to reorganize by merging or forming joint ventures to
survive and succeed. Thus, they approved new investment plans by Japanese
automakers in owning part of Taiwan’ s automakers, such as Nissan’ s 25% stock
ownership of Yue-Loong.
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Due to decreased protection, the domestic carmakers had to improve their
operation efficiency and technology generally; the domestic firms chose to
accomplish this by forming alliances with big foreign players, like Ford, Nissan,
Mitsubishi, and Toyota, rather than by merging as encouraged by the government.
This was contrary to the expectation of MOEA officials, that under the new program,
there will be only two or three automakers left in Taiwan after restructure. Some
argued that this was because the government officials did not provide enough
pressure for merger to become attractive, since they also encouraged joint ventures
with big TNCs to become Japanese automakers’ offshore production partners. These
foreign firms also aimed to use joint ventures with Taiwan’ s firms to supply parts and
components, produce small cars, and potentially export to China in the 1990s.
However, in the late 1980s, due to Taiwan’ s big trade surplus to the US, the US has
urged Taiwan to open domestic markets and appreciate its currency. These changes
in the international environment forced MOEA to abort the auto export requirement
for new investment in 1986, and Japanese automakers scaled down their offshore
production plan to export to the US, but focused on sales in Taiwan (Chu, 1994:
161). Due to more and more criticism about tariff protection policies, the IDB
decided to hasten the tariff reduction schedule and decrease tariffs from 65% to
42.5% between 1985 and 1988 (ibid.). Taiwan’ s government officials accommodated
outside pressure and changed the plans again. In 1985, it gave up the goal of
exporting and fully domestically manufacturing cars, and it increased the speed of
reduction of tariffs, which allowed foreign cars become available to Taiwan’ s
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domestic market with a cheaper price due to the side-effect of Taiwan’ s currency’ s
appreciation. With this faster reduction in tariffs, and the appreciated currency,
imported passenger cars increased from 12.7% in 1986, to 17.1% in 1987, to 29.3%
in 1988, and topped 42% in the first half of 1989 (ibid.: 162). Some also attributed
the increased import car sales to the fact that "most import dealers can circumvent
the tariff protection wall because of lax enforcement by the Custom Office." (ibid.)
Reasons for Different Policy Implementations
From the above description, we found that Taiwan’ s government
implemented a different approach in the auto industry from the semiconductor
industry. Taiwan’ s government adopted inconsistent policies and fewer promotion
measures in the auto sector than in the semiconductor sector. There are several
reasons: First, in Taiwan, the auto industry was not thought of as critical to
technological upgrading and was seen as less important than the information
industry. Second, the auto industry has developed over 100 years, while the
information industry is an emerging new industry; it is important and easy for
Taiwan to catch on. Evans has indicated that there are moments of transition when it
may be possible for a Third World country to break into an existing industry
(Meaney,1994: 172).
Thus, Taiwan’ s government never treated or supported the auto industry as it
did the semiconductor industry, because government leaders think that the
semiconductor sector is strategically important to the information industry, and they
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can find many other promising sectors and products to achieve competitive
advantage, while the auto industry is a mature one; even with heavy investment and
support from government, it is less likely to be successful and compete with
dominant world players. Furthermore, Taiwan's government was also concerned with
the capital-intensive requirements of the auto industry. Scholars indicated that
Taiwan's adoption of a conservative policy toward industrial development could be
partly attributed to Taiwan’ s high political vulnerability because of its rivalry with
mainland China since 1949 (Haggard, 1990: 139). Because Taiwan had to spend big
money in national defense, Taiwan’ s government did not want to put too much
capital into developing capital-intensive industries which have high entry barriers or
risky returns of investments.
Taiwan’ s officials also thought that the auto industry was not appropriate for
Taiwan to invest too much capital and effort. For example, K. T. Li-one of Taiwan’ s
major designers of economic development-advocated that, because of national pride
or security, some Asian countries " rushed into the development of large-scale,
capital-intensive industries such as giant steel mills, shipyards, and car
manufacturing plants", and the premature development of these heavy industries will
lead to a serious waste of investment capital (Li, 1988: 131, 136).
Thus, many scholars have argued that Taiwan’ s state policy in both auto and
semiconductor industries is less effective than South Korea’ s, since Taiwan did not
want to invest a lot in capital-intensive projects (Meaney, 1994: 171). But when
Taiwan saw South Korea export their domestic-made cars, some ideological
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considerations such, as national pride, pushed the government to aggressively
develop the auto industry. Practical financial considerations and difficulties to ensure
foreign help made the government’ s big auto plant project fail. In fact, many of South
Korea’ s large automakers suffered big financial loss and mounting debts, which
partly resulted in 1997’ s South Korea’ s currency depreciation and financial crisis.
From section 5.1, we saw that South Korea’ s government had to sell some carmakers
which were loaded with debts in restructuring its economy. After observing Taiwan’ s
economic development path and other developing countries such as South Korea, we
found that Taiwan’ s government leaders’ concerns and arguments made sense. The
ineffective efforts in some capital-intensive projects such as the auto sector or
DRAM manufacturing turned out to help Taiwan to develop in sectors, such as
foundry, which have their own niches and can earn profits without accumulating
foreign debts to hurt economic development. Because, Taiwan did not invest heavily
in these capital-intensive projects, it did not suffer heavily as Korea did; and
Taiwan’ s investment in projects like foundry proved to be successful as discussed in
Chapter 4.
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5 3 . The Development of Taiwan’ s Private Auto Industry
In this section, we will describe Taiwan’ s private automakers’ development
and performance before and after the reduction of the government’ s protection
measures.
5.3.1 Before the reduction of protection
Taiwan’ s first private automobile company Yue-Loong was established in
1953 with a domestic market scale of about 200 licenses per year, it was aimed to
make cars on its own (Chun, 1998: 78). It began its operation by first assembling
semi-knocked-down kits, since assembling parts encountered lower entry barrier than
a whole car (Wade, 1990: 92). Although, Yue-Loong was said to have close
connections with highest political authority, the connection with government officials
was not strong enough to obstruct new applicants to enter the profitable domestic
auto assembly industry, and it also failed to persuade the MOEA to narrowly
interpret local content requirements in terms of in-house production to protect its
investment in achieving content requirements (Chu, 1994: 146).
From 1967 to 1969, four new firms jointly ventured with Japanese firms
entered Taiwan’ s domestic auto market. All were small-scale compared with other
big carmakers in the US, Europe and Japan, with around twenty thousand vehicles a
year at the end of the 1960s (Wade, 1990: 93). In fact, in the early 1970s, Taiwan’ s
auto industry had been dominated by "the Japanese TNCs in technical licensing, and
a tripartite ownership structure that comprised Mainlander (Yue-Loong), Taiwanese
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(San-Fu and Sam-Yang), and foreign (Lio-Ho)." (Chu, 1994: 144) In 1977, a new
automaker, Yue-Tian, in cooperation with Peugeot of France, entered the passenger
car market. The six domestic automobile manufacturers competed with each other in
the small domestic market, and produced annually about 18,000 compacts, sedans,
and light trucks. Some scholars blamed the government’ s laxed policy on limiting the
players in the auto industry for the increasing participants in the domestic markets
(Chu, 1994: 150 - 151). This increasing competition from unexpected newcomers did
not increase Taiwan’ s automakers’ ability to upgrade to higher value-added
production with increasing manufacturing of domestic auto parts and components,
rather, the domestic market became occupied by Japanese or other foreign carmakers
competing with each other. Ford Lio-Ho, 70% owned by Ford, competed with Yue-
Loong, which had an alliance with Nissan, in the small passenger car market; and
San-Fu, Sam-yang, and China Motors, each cooperating with some Japanese
automakers, competed in the commercial vehicle market (ibid.: 148-153).
The Interaction between Government and Private Carmakers
Scholars indicated that Taiwan’ s government policy toward import
restrictions was inconsistent and fluctuated. This has resulted in complaints and
friction between domestic automakers and government officials (Wade, 1990: 101;
Chu, 1994: 151). For example, in 1959, Yue-Loong began to produce chassis for
large passenger cars and trucks with the protection of the tariff and import license
quota measures. But, government officials later changed their minds and decided that
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large passenger cars and trucks are too essential to the economy to be protected, thus,
they abruptly canceled the import restrictions, and Yue-Loong dismantled its
stillborn large chassis production (ibid.).
Due to inconsistencies in the Taiwanese governmental policy toward
protection, the environment for Taiwan’ s automakers is more competitive than
Korea’ s; for example, in Korea, the import restriction on finished vehicles has lasted
about 25 years; while Taiwan’ s government has changed its import restriction
schemes six times between 1969 and 1980 (Chu, 1994: 151-152).
Therefore, in Taiwan, the foreign vehicles have market shares which
fluctuated between 11.7% and 42%, depending on the import policy, during 1960s
and 1970s (ibid.). Furthermore, "without a secure long-term prospect under an
orderly market," Taiwan private carmakers adopted risk-averse attitudes toward their
investment and development (ibid.: 151-3). They did not want to make large capital
investment to expand their manufacturing capacity and thereby increase their
production efficiency and upgrade their ability to produce major components despite
the fact that the demand for cars and the sales of domestic cars increased during the
1970s because of the increasing per capita income in Taiwan (ibid.: 153). Thus,
Taiwan’ s domestic carmakers produced cars according to their expectations of short
term domestic sales. For example, in 1980, the domestic carmakers produced about
188,000 vehicles compared to domestic sales of about 150,000, with an average
capacity utilization rate of 68.8% from 1976 to 1980 compared with Korea’ s average
capacity utilization rate of 40.1% from 1975 to 1980 due to their optimistic
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expectation of car demand (ibid.)- Because of Taiwan’ s automakers’ cautious attitude
in expanding production capacity and making up-front lump sum investment,
domestic automakers adopted a product differentiation strategy in order to increase
their market share which only "intensified domestic producers' technical dependence
on their foreign partners and further delayed the possibility of full local production."
(Chu, 1994: 153)
Because of the 1979-1984 government’ s big auto plan, Taiwan’ s domestic
private automakers felt pressure from government, and they decided to make
progress to avoid further criticism. In 1981, Yue-Loong established a design center to
develop the first domestically designed model and proposed export strategy (Wade,
1990: 102). Yue-Loong invested NT $ 2 billions in this design center, more than half
of Yue-Loong’ s capital value at that time. However, because the core technology, the
engine, was still controlled by foreign automakers, Yue-Loong’ s dream of making
cars by Taiwan failed at last (Chun, 1998:99). The Ford joint venture also decided to
include the Taiwan subsidiary in its global supply network (Wade, 1990: 102). It
proposed to upgrade and expand its domestic production operation, and to export
"150,000 units by 1993 on the condition that the production would be exempt from
the 70 percent domestic content requirement." (Chu, 1994: 157-8)
Thus, scholars argued that without the government’ s aggressive and
potentially threatening actions, under a protectionist and profit-oriented, risk-averse
environment, private automakers had no incentives to take bold and long-term
oriented moves. Moreover, as discussed later, even when bold moves and strategies
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were undertaken by Yue-Loong, they failed to produce exports and profits. From this
experience, we see state intervention could promote and stimulate the private firms to
better behave themselves by facilitating their operation. As Chu indicated, "given the
limited direct leverage that Taiwanese state officials had over private producers," this
big auto plan, though canceled, did push all domestic automakers to take substantial
efforts to improve efficiency and quality control, which were unexpected an side-
effect of the big auto plan (ibid.).
All these developments demonstrated that, protection alone is bad medicine
to cure an inefficient industry; it needs more pressure from competition of foreign or
stronger domestic firms to push the unaggressive domestic firms to make progress.
Thus, the Taiwan's government officials later attempt to take a new comprehensive
package with reduced tariffs to urge the upgrading of the automobile industry.
5.3.2 After the Reduction of Protection
After Taiwan’ s government adopted a new policy with reduced tariffs,
Taiwan’ s auto producers had to adapt to the new environment, and transform
themselves, to survive. Basically, they continued the auto parts production business,
and restructured themselves to become more efficient.
Focus on Parts
Due to different government policies and private producers’ preferences,
Taiwan’ s automobile sector pursued a different industry strategy from South Korea.
Taiwan’ s producers focus on products where they have market niches, and can spend
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less capital investments and still earn profitable returns that are fast and certain.
Therefore, under less protection than South Korean automakers, and preferring small
capital investment, Taiwan’ s automakers focused on auto parts and components
production and could make profits instead of losing money in selling and exporting
finished cars. Taiwan’ s auto producers did not export finished cars, but, they became
net exporters of auto parts and components. In 1988, Taiwan’ s auto parts producers
expanded their market shares in minor mechanical parts and components, achieving
US$1.2 billion a year, which is equivalent to export 220,000 completed small cars,
while South Korea was a net importer of auto parts and components, even though it
manufactured over one million finished cars and exported two-thirds of them,
primarily to Canada and the US (Chu, 1994: 125-6). This strategy of auto producers’
production of parts continued and made profits for Taiwan’ s automakers. For
example, in the first three quarters of 1999, Taiwan’ s nine automakers exported auto
parts to Japan totaling over US$267 millions, increased 87.6% from the same period
of 1998; furthermore, exports to East Asia also increased after the East Asian
economy recovered from the 1997’ s crisis. For example, Yue-Loong’ s auto parts
exports to East Asia totaled US$91.5 millions in the first three quarters of 1999. Yue-
Loong became Taiwan’ s second largest auto parts exporter to East Asia.
The Transformation and Change of Strategy
When Taiwan’ s government reduced tariffs, local companies might suffer
losses in market share in the short term. But this loss pushed domestic carmakers to
restructure and adopt new strategies to became more efficient and competitive. This
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phenomenon can be confirmed by data provided by Taiwan’ s Industrial Development
Bureau in Table 5.3.1.
Table 5.3.1 Taiwan’ s carmakers’ market shares vs. tariff changes
Year tariffs of small
passenger car
domestic market shares
of small passenger car
1987 55% 78%
1988 42.5% 62%
1989 42.5% 57%
1990 40% 63%
1991 40% 76%
1992 30% 70%
1993 30% 67%
1994 30% 66%
1995 30% 66%
1996 30% 72.09%
1997 30% 74%
Source: IDB, 1998: 128
From the above Table, we see that when Taiwan’ s government reduced tariffs
from 55% to 42.5% in 1988, in the beginning period of the reduction, the domestic
carmakers’ market shares decreased from 78% to 62% to 57%. But, after a couple of
years’ restructure and adaptation, local carmakers increased their market shares from
57% to 63% to 76%. The same pattern of changes happened when tariffs were
reduced from 40% to 30%, the local carmakers’ market shares first decreased from
76% to 66%, then after a period of time, local carmakers’ market shares increased
again from 66% to 74%. This showed that with gradual reduction of government
protection, domestic carmakers had to adapt to the new environment by
reorganization and new strategies to survive and succeed. Firms which fail to
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restructure to meet the challenge within a couple of years will lag behind other
competitors and face more pressure since more cuts of tariffs probably will come. In
the following section, we will present a case study of Taiwan’ s first private carmaker,
Yue-Loong, to demonstrate how reduced protection measures such as tariffs affected
Taiwan’ s automakers and how Yue-Loong transformed itself and succeeded in the
more competitive environment.
Yue-Loong’ s Problems
With an excellent welfare package, Yue-Loong operated like a state-owned
enterprise. Its huge employment benefit packages cost enormously, and its
organization, production and management have been criticized as inefficient. For
example, using 1992’ s average operating income per employee as a comparison
among Taiwan’ s carmakers, Yue-Loong was NT $ 6.45 millions, China Motors was
12 millions, Ford Lio Ho was 15 millions (including import cars), Sam-Yang was 7.5
millions (including motorcycle). All were higher than Yue-Loong; moreover, the
average hours to assemble a car was about 24-30 hours in Yue-Loong, while it was
about 8 hours for Japanese firms in 1993 (Chun, 1998; 64-5,70).
Since Taiwan’ s government opened its market for imported cars, due to
declining import tariffs and 40% appreciation of the Taiwan currency, the prices of
import cars became much cheaper; import cars attracted more domestic consumers’
attention, and put more pressure on domestic carmakers (Chun, 1998: 143). Under
increasing competition from both foreign and domestic carmakers like Ford Lio-Ho
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and Sam Yang, Taiwan’ s first private automakers, Yue-Loong began to suffer big
losses. Its new car model-designed and made wholly by Taiwan’ s engineers failed to
produce substantial revenues and profits to make up the design and production costs.
The new model took 5 years, cost NT $ 2 billions, designed by more than 300
engineers became just a symbol of idealism or mission for national pride rather than
practical goal to earn profits (Chun, 1998: 79). Although it has dominated the
Taiwan-made car market for 35 years, it became second in 1988, when it lost to Ford
Lio-Ho (ibid.: 77-8). And, it begun to suffer losses from 1993 to 1995, its net
earnings rate fell from -1.52% to -2.89%, and its market share in Taiwan dropped
from 60% in its peak year to 20% (Chun, 1998).
Successful Transformation
However, Yue-Loong transformed itself into an efficient company. It began
to lay off employees in 1995, dislocated headquarters to merge with the
manufacturing factory, and established more cooperation with Nissan. It began to
make profits in 1996, with a growth rate of 26%, gaining NT $ 1.4 billions from a
loss of NT $ 0.8 billion in 1995 (Chun, 1998: 5). This successful performance partly
resulted from the new model Cefiro, after its demands exceeded the original
expectation due to its good quality and pricing. Yue-Loong’ s successful turnaround
could also be attributed to several other factors; it has organized a new management
team around the new leader, the son of the founder, and changed the old promotion
process to a capability-oriented culture rather than an age-oriented traditions. It has
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moved Taipei's headquarters, all factories, and design center to locate in one place to
shorten communication time, and increase mutual understanding among different
units. It also reduced redundant units and laid off surplus labor to decrease costs, and
restructured the organization to improve efficiency. Good quality contributed to the
successful sales of Yue-Loong’ s new model— Cefiro. Yue-Loong’ s new leader and
high-ranked management team devoted much effort to improve the quality of the
new model in order to change the traditional image of Yue-Loong as poor quality. In
order to satisfy Taiwan’ s consumers’demands and tastes, Yue-Loong has engaged in
detailed market surveys. It then modified the original model introduced from Japan’ s
Nissan to better suit Taiwan’ s consumers’ preferences. Beyond the improved quality
and adaptation to consumers’ tastes, Cefiro’ s sales success can also be attributed to
another factor, lower prices. Yue-Loong’ s marketing strategy was that it sold the
higher quality and larger cars with lower level prices, this low pricing strategy still
made profits for Yue-Loong because of Japan’ s Yen depreciation and Nissan’ s auto
parts discounts.
The introduction of Cefiro marked a big change in strategy for Yue-Loong. It
was transformed from a manufacturing-oriented automaker to a market-oriented one.
It decided to transform the Nissan model to suit Taiwan’ s tastes rather than to design
and manufacture its own model (Chun, 1998: 17). The new strategy considered the
practical constraints rather than the ideological mission to design and produce cars
totally on its own. Although the new model, Cefiro, has made big revenues and
earnings for Yue-Loong, the new strategy has relied on Nissan to provide car models
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for Yue-Loong to modify and sell to Taiwan’ s market. One company official worried
that Yue-Loong’ s brand name will disappear, and the dependence on Nissan was too
much (ibid.: 18). After the restructure and introduction of new modified Nissan’ s
models such as Cefiro, Yue-Loong has rebuilt itself into an efficient and profitable
business. Its revenues rose from NT $ 26 billions in 1993 to 46 billions in 97,
employees numbers fell from 3,900 to 2,700, earnings per share expanded to4.7 from
negative figures after it made profits of about 5 billions in 1997 (Chun, 1998: 31-35).
From this comeback experience, its new leader indicated in an interview that Yue-
Loong has learned that it had to observe changes in the market, and understand its
own resources, do what it can do while adapting to outside changes (ibid.: 26).
This case fully demonstrated the situation Taiwan's automakers faced, with a
small domestic market and more than six small automakers, Taiwan’ s automakers
could not achieve economies of scale in manufacturing, since they all rejected the
idea of merger. And they do not have enough capital to do the research and
development to reduce costs and improve quality to compete with giant established
international firms such as Toyota or GM. After losing a great deal of money by
trying to make and sell its own cars, Yue-Loong accepted the failure and adopted
new strategies to conform to Taiwan’ s and its own competitive advantages. After the
restructure, Yue-Loong has achieved its new competitive advantage through accurate
market surveys to meet consumers’ demands and respond to their interests, and faster
parts manufacturing (Chun, 1998: 36).
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This demonstrates that a company should pursue the path which can make the
largest profits in both long- and short-term. For example, Dell Computer
Corporation, an assembler of personal computers(PCs) using a build-to-order
principle, buys the components and builds a PC according to the customers’ specific
demands in the fastest and most efficient way to make big profits. From this case,
we find that a company does not need to design and make all components to prove its
capacity and competitiveness if that can not make profits. If the learning costs are too
big, a government should consider if it is worth targeting that industry with large
capital investment, since there might have other sectors in which a country has a
niche and comparative advantages and will have a better bet to become successful
and profitable.
5.4 Conclusion
From this chapter, we have made some remarks about Taiwan’ s automobile
industry development:
1. We agreed that Taiwan’ s government was ineffective in promoting the automobile
sector, as previous studies had argued. We point out that this ineffectiveness is
somewhat intentional and has contributed to Taiwan’ s balanced industrial
development, with less foreign debt than South Korea. Basically, Taiwan’ s
government did not engage in aggressive promotion measures in the automobile
industry as in the semiconductor industry. This is because government policy makers
favored technology-intensive industry rather than capital-intensive industry, and the
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government did not think that Taiwan had competitive advantages in the auto
industry, so it was not willing to invest large capital to promote the auto industry. In
Chapter 3, we saw that government asked some foreign advisors to study Taiwan’ s
competitive advantages as a reference for future possible targeting and development.
Since Taiwan’ s government did not perceive the automobile industry as strategically
important as South Korea’ s government did, the government did not intend to target
the automobile industry. The government used limited resources and capital to assist
mostly light industry, technology-intensive industry. These industrial sectors could
allow small and medium business to develop; thus Taiwan’ s private business sector
has many small and medium start-ups which used limited capital and engaged in
sectors where they were perceived to have niche. These developments helped
Taiwan’ s economic growth and earned trade surpluses, without the burden of
borrowing huge amounts of capital and paying large amounts of interest which could
eat up revenue income and make profits even harder to attain. From other countries’
failed automobile development cases, Taiwan appreciated the government’ s
intentional ineffectiveness.
2. The empirical case of Taiwan’ s automobile industry development indicated that a
strategy based only on protection does not work. When Taiwan’ s government reduced
protection by cutting tariffs, the automobile industry suffered in the short term, but
they gradually enhanced their competitiveness and gained more market share later as
shown in Table 5.3.1.
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Chapter 6 CONCLUSIONS
This dissertation is motivated by the discussion of the causes of 1997’ s East
Asian financial crisis. During the crisis, Taiwan suffered less damage than some
other East Asian countries, such as South Korea. As Taiwan displayed stable and
smooth economic growth and development for many years, it also achieved
extraordinary performance in its high-tech industries, such as semiconductor and
electronics industries. This study intended to engage a reexamination of the role of
Taiwan’ s government in its industrial development and provide different insights to
the successful performance o f Taiwan’ s economic growth and industrial
development.
Many scholars have argued that South Korea’ s government has more effective
intervention and promotion in its industrial development than Taiwan (Chu, 1994).
But according to the present data, we see that Taiwan’ s semiconductor sector
performed excellently, as its IC industry’ s chip production amounts to the third
largest in the world in 2000, and most importantly, Taiwan’ s did not suffer a serious
financial crisis, as did South Korea.
This study has investigated more deeply into Taiwan’ s industrial development
and provided additional explanations for the success of Taiwan’ s industrial
development. This study has accomplished this by focusing on two sectors— the
semiconductor and automobile industry-analyzing each sector’ s characteristics, and
government’ s promotion policies toward each sector. This study has pointed out that
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Taiwan’ s government’ s consideration of the different constraints and opportunities in
each industrial sector contributed to the different government intervention policies
and promotion measures in the semiconductor and automobile sectors.
This study has argued that, Taiwan’ s semiconductor sector, even though the
government’ s promotion upon it was less aggressive and effective than South
Korea’ s, as scholars argue, it performed well and emerged as third largest
semiconductor industry in the world, just behind the USA and Japan. Taiwan’ s
government has grasped a correct direction in promoting a product which Taiwan
could have a niche, such as foundry rather than pursuing the hottest state-of-the-art
technology of the time, such as DRAM. Therefore, this study has indicated that,
when faced with a sector which has no competitive advantages and niches compared
to global leaders such as the automobile sector, the government’ s ineffective
promotion and limited intervention are, in fact, reducing damages to market’ s
efficient allocation of resources and improving economic growth and industrial
development.
This study has established the validity of its arguments by presenting
empirical evidence. Specifically, we presented the characteristics of the
semiconductor industry, and different arguments about DRAM development. This
study described several cases of DRAM development from Intel, Texas Instruments
and Acer. Each has decided to exit the business due to huge capital requirements and
unstable profits because of unpredictable supply and demand conditions, which
caused prices to go up or down.
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From the description of Taiwan’ s government intervention, we indicated that
the government spent less capital but received stable and growing profits from the
engagement of foundry development. Thus, with smaller capital requirements than
DRAM and less competition in the global market, Taiwan’ s foundry business
fulfilled both domestic and foreign orders and made growing profits and helped
Taiwan’ s domestic semiconductor industry’ s development in IC design, packaging,
and testing, etc. We have listed the revenues and profits for Taiwan’ s two largest
foundry firms, and cited arguments from industry experts about the potential of
foundry development to indicate the advantages and benefits of investing in foundry.
While South Korea spent heavy capital in DRAM manufacturing and often suffered
losses from DRAM’ s price cuts due to oversupplies, Taiwan’ s government selected a
not-state-of-the-art foundry business as the focus of its semiconductor development
and received growing profits with less capital investment and encouraged the
domestic diversified semiconductor industry development. While South Korea’ s big
DRAM firms lost heavily during 97 and 98, most of Taiwan’ s DRAM firms also
lost, but due to the diversified development of Taiwan’ s semiconductor industry, the
profits made by non-DRAM semiconductor firms provided a stable buffers for
Taiwan’ s economic development, and this was one factor of the heavy foreign debts
of South Korea while Taiwan has less debts.
From Taiwan’ s semiconductor industry's development, we see that
government’ s intervention was effective in promoting a specific sector’ s
development, and even achieved a leading status, but this did not guarantee that
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government intervention is always effective. As we argued the key factor in Taiwan’ s
semiconductor industry’ s success was the government’ s selection of foundry as the
focus rather than DRAM. Taiwan’ s semiconductor industry’ s development confirmed
development theory that human capital, tax credits and public research funding are
helpful to the development of high-tech industry.
In our study of Taiwan’ s semiconductor industry success, we found that the
key factor is to find a niche, a sector where Taiwan has competitive advantages in
order to develop into a profitable, growing and successful business. It is not
necessary that the targeted sector must be the most important or embody state-of-the-
art technology in the relevant industry. For example, when Taiwan’ s government
intended to develop the IC foundry business, it was not recognized as the most
important sector. However, as time went by, it became more and more important.
Furthermore, this study indicated that choice by Taiwan’ s government of the targeted
project was based upon lower capital requirements and it was easier to survive and
succeed. This demonstrated that when a targeted project needs huge capital
investments and encounters tremendous difficulties, then this project’ s targeting may
cause large distortions of market discipline and allocation of resources, and it might
not be successful; however, this will need further research.
This study has established that sometimes, the economy and industry need
promotion from government. In our study of the development of Taiwan’ s
automobile industry, we found that the ineffective intervention from Taiwan’ s
government was in fact effective in successfully guiding and promoting Taiwan’ s
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economy by efficiently allocating resources to improve economic development.
Since no public funds are poured into the automobile sector, which is under vigorous
global competition, heavy capital requirements and Taiwan’ s small local market
demands, all these indicated that the probability of the success of independent
carmakers is small. Thus, ineffective government intervention and promotion is a
smart government move in providing a balanced moderate promotion for local
carmakers without spending too much government funding. It also provided a time
buffer for local carmakers to find their own niches to survive by cooperation with
foreign carmakers, merge with each other, and improve their operational efficiency.
We have presented many cases of other nations’ carmakers’ development, and
they indicated that it is very difficult to achieve profitable returns for these carmakers
even with government’ s protection and promotion. We also described the
characteristics of the automobile industry to point out the key factors to achieve
success and the degree of difficulty for a new player to enter and become profitable.
Therefore, this study has indicated that, when faced with a sector which has
no competitive advantages and niches compared to global leaders such as the
automobile sector, the government’ s ineffective promotion and limited intervention
are, in fact, reducing damages to market’ s efficient allocation of resources and
improving economic growth and industrial development.
Basically, this study has made several contributions by providing additional
information for the exploration of the industrialization path of East Asian NICs as it
indicated that government promotion efforts could improve the targeted industry
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sector when it is matching its own competitive advantages and domestic demands;
while the intervention should be limited in scope and time in the sector which has no
local niche and is against domestic business culture.
Moreover, this study has provided additional contributions to the debate
between neoclassical, market-oriented and state interventionist theories. This study
filled in a hole within the debate between these two schools of thoughts, as it
indicated that government intervention, sometimes, is needed in guiding the economy
into more value-added, technology-intensive industries; thus government targeting
and promotion is not always bad. However, the intervention must be very cautious
and limited; for example, as Taiwan’ s semiconductor industry became more
developed, private industry became more independent and did not want the
government to intervene anymore. Thus, state intervention and targeting had better
follow market discipline, as in Taiwan’ s example. There is almost no targeting or
promotion in the automobile sector since Taiwan has no competitive advantages in
this sector, any targeting will just distort the efficient allocation of resources.
Furthermore, scholars indicate that "East Asian countries have been effective in
blending the roles of market and state." (World Bank, 1993: 18) This study has
pointed out Taiwan’ s unique way in blending market and state, as Taiwan’ s
government played a role as private entrepreneur in forming a startup, such as
TSMC, to find a niche in the semiconductor industry and take advantage of it with
private business discipline - maximizing profits and limiting risks.
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Further research
In this global age, every nation has to find its own strategies in order to
promote its industrialization and make gains in vigorous global competition. This
study has provided more insights to the developing countries in their struggle to
become more industrialized. However, there are many research problems which
needed to be studied, such as how to assess if a sector has a niche, and suits a
country’ s economic development, and what is the best way for a government to guide
or assist its nation’ s economic growth and industrial development.
The successful development of the Taiwanese semiconductor industry also
raised a question of whether state targeting could really cultivate a dominant world
leader such as TSMC in the foundry business. Generally, scholars have argued that
government’ s targeting does not work, that it could not or seldom cultivates a world
leader in the targeted sector (Porter, 1990).
Whether TSMC’ s success is a lucky exception, or government targeting could
work in other cases by shrewd and careful selection of targets and a comprehensive
package of capital investment and supportive policies in human resource, tax credits,
needs more researches in other industrial sectors and nations to find answers.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
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Asset Metadata

Creator Wang, Syu-ping (author)

Core Title Analysis of the role of government in Taiwan's industrialization and economic development

School Graduate School

Degree Doctor of Philosophy

Degree Program Political Economy and Public Policy

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, General,OAI-PMH Harvest,political science, general

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Cheng, Harrison (committee chair), [illegible] (committee member), Elliott, John C. (committee member), Rosen, Stanley (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c16-173789

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Legacy Identifier 3054821.pdf

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Rights Wang, Syu-ping

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

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