ENCOURAGING KNOWLEDGE-INTENSIVE INDUSTRIES:WHAT AUSTRALIA CAN DRAW FROM THEINDUSTRIAL UPGRADING EXPERIENCES

OF TAIWAN AND SINGAPORE

John A. MathewsMacquarie Graduate School of Management

Report commissioned by theAustralian Business Foundation

August 1999

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CONTENTS

Page

Foreword 3

Executive Summary 5

Abbreviations 9

1. Introduction:What is there to learn from Asia in 1999? 11

2. Industrial upgrading in Taiwan 15

3. Case study: Taiwan's innovation alliances 35

4. Industrial upgrading in Singapore 57

5. Case study:Singapore's cluster development strategies 76

6. Common institutional elements:Industrial upgrading and institutional learning 83

7. Concluding remarks:A way forward for Australian firms and institutions 94

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FOREWORD

Professor John A. Mathews of the Macquarie Graduate School of Management wascommissioned by the Australian Business Foundation to research and prepare a paper thatwould offer some practical examples of industrial upgrading of relevance for Australia.

The paper submitted describes and analyzes the industrial and technological upgradingpractices of firms and public institutions in Singapore and Taiwan. These two nations areof particular interest because they have weathered the recent Asian financial crisis well.Their institutional strategies are robust and have important lessons for other countries,including Australia.

The Australian Business Foundation is Australia's newest, independent, private sectoreconomic and industry policy think-tank. It is sponsored as a separate research arm byAustralian Business, the pre-eminent business services organisation.

The mission of the Australian Business Foundation is to strengthen Australian enterprisethrough research and policy innovation. It does this by conducting ground-breakingresearch, which it uses to foster informed and well-argued debates and imaginative policysolutions and initiatives. The end goal is to advance the store of knowledge about howbest to generate future growth, prosperity and jobs for the widest reach of the Australiancommunity.

In commissioning this research paper on the experiences of industrial upgradingundertaken in Taiwan and Singapore, the Australian Business Foundation sought to bringtogether a level of detailed knowledge concerning the industrial policies and programs ofthese two countries that had never been published in Australia before.

The brief also included a requirement for an analysis which tested the cultural relevanceof the actions taken by Taiwan and Singapore for the Australian situation and anassessment of their implications for both Australian business management practices andfor public policy settings.

The Australian Business Foundation's aim in commissioning this research paper fromProfessor Mathews was to foster greater understanding as to how best to boost Australianfirms' innovation capabilities and to capture value from building and sustaining highgrowth, knowledge-intensive industries.

The author is eminently qualified to write on the topic commissioned. Professor Mathewsteaches graduate programs in International Management, the Management ofInternational Industries in the 21st Century, Global Strategic Management, InternationalHuman Resources Management, Strategic Behaviour and Organizational Behaviour inSydney, Singapore and Hong Kong on behalf of the Macquarie Graduate School ofManagement. He has taught visiting programs at the Australia-Asia Management Centreat the Australian National University, Canberra and in the Korean European MBAprogram, Seoul.

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His research interests focus on the dynamics of international business, with particularreference to the rise of new high technology industries in emerging areas such as EastAsia. In his research, Professor Mathews has focused on the institutional capacities offirms and governments in East Asia; the sources of the Asian financial crisis; theinternationalization processes of firms, particularly of latecomer firms from the Asianregion; and the theoretical explanation for latecomer firms' success in terms ofmanagement and organizational theory (such as the resource-based view of the firm). Hehas published papers on these topics in leading scholarly journals including CaliforniaManagement Review (in 1997 and 1999), Academy of Management Executive,Organizational Dynamics, Cambridge Journal of Economics, Journal of World Businessand Human Systems Management.

Professor Mathews has a major research study being published worldwide by CambridgeUniversity Press in 1999, co-authored with Professor Dong-Sung Cho of Seoul NationalUniversity on the rise of new, high-technology industries in East Asia, taking thesemiconductor industry as major case. The book, entitled Tiger Technology: TheCreation of a Semiconductor Industry in East Asia, is to be published in October 1999.

Narelle KennedyChief ExecutiveAustralian Business Foundation

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EXECUTIVE SUMMARY

Australian firms, like their counterparts elsewhere, are concerned with the building ofinnovation capabilities in knowledge-intensive industrial sectors. Successive reports togovernment as well as to industry associations stress the gap between the potential thatcould be realized by Australian high technology exporters and the actual performanceregistered -- albeit impressive in several cases.

Traditional concerns with business inputs (such as taxation, costs of labor, and costs ofessential services) fail to get to grips with the real issues. A better focus is the improvingof business outputs through enhancing the capabilities of the firms themselves and theinstitutional environment in which they operate.

In the Asia-Pacific region, some outstanding successes have been registered in advancedtechnological fields such as semiconductors, computers and communications. The case ofTaiwan, which has risen to become the world's third largest producer of IT hardware andfourth largest producer of semiconductors, is striking. Singapore too has grown from apoverty stricken former colony to a technology powerhouse, based on judicious attractionof multinational investment and relentless attention to industrial upgrading. Both thesecases in Australia's region are all the more striking in that these countries have comethrough the recent Asian financial crisis more or less intact, suffering a downturn onlydue to their regional exposure. This means that their technologically sophisticated firmshave come through the toughest test of all -- a major economic recession in the region --and been found resilient and robust.

The lesson to be drawn from this is not that these firms were 'special' in some way, butthat they drew strength from their institutional environment, which had been createdpainstakingly, and renovated and upgraded, continuously over the preceding decade. Thisstudy draws on the experience of firms in Taiwan and Singapore, within these institutionsand policy frameworks, with a view to formulating some general conclusions as to whatkinds of industrial institutional frameworks best suit highly innovative firms.

The study finds that the key to the successful restructuring and upgrading engagedin by firms in Singapore and Taiwan, lies in the institutional environment whichshapes their decisions. Both countries have fashioned a set of institutions whichdrive firms in these economies towards an outward, export orientation and towardsendless technological upgrading -- rather than allowing firms to take the easy optionof competing on the basis of cost minimization. The institutions found in thesecountries shape firms' decisions along the following lines.

Technology leverage

Firms in Taiwan and Singapore regard the world as a 'technology marketplace.' They areconstantly scanning the technological horizon for new developments, with a view toinserting themselves as players. They are less concerned with developing new knowledgethemselves, as with keeping up with the knowledge that is generated by others, andincorporating this knowledge in their product and service strategies. Public sector R&Dinstitutes are established whose main mission is not 'blue sky' scientific research but

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technological scanning and technology transfer, through systematic management oftechnology diffusion to firms. Institutional frameworks are shaped to encourage andfacilitate this rapid technology diffusion. Prime examples are the R&D consortia that areformed in Taiwan for brief periods (one or two years) to ensure that small and medium-sized firms remain abreast of major technological developments and fashion their productofferings in accordance with these developments. It is the public and private institutionsof technology leverage that are most characteristic of Taiwan and Singapore's industrialupgrading approaches.

Financial leverage

Some development bank or investment vehicle charged with the mission of identifyingworthwhile strategic investments, such as those which further the goals of catching up,and organising the financing required has also been present in all the cases we haveexamined. Thus, in Taiwan there was the China Development Corporation. In Singapore,there has been the Singapore Development Bank (spun off from the EDB in the 1960s)and such novel institutions as the Cluster Development Fund. These operate eitherthrough the mobilisation of domestic savings or through mobilising international banksyndicates and the issuance of debt instruments such as depositary receipts.

Nurturing environment for the formation of knowledge-intensive firms

The creation and sustenance of knowledge-intensive firms is not left to the vagaries of'market forces' in Taiwan and Singapore. Like CSIRO in Australia with its strategy ofpromoting spin-off ventures, public sector bodies in Taiwan and Singapore have verysuccessfully formed and nurtured new technology-intensive firms. In some instances newindustries were created through this process -- such as the semiconductor industry inTaiwan, which was started by spin-offs from the public sector laboratories of theIndustrial Technology Research Institute (ITRI). Infrastructure like science-basedindustry parks are established which offer firms that locate there tangible benefits interms of tax concessions, assistance with recruitment of skilled labor and incubators forsmall, high-tech startup firms.

Industry cluster strategies

In Taiwan and Singapore, firms and even industries are not promoted on their own, butin relation to each other. It is connections and linkages that are prized above all -- upwardand downward linkages in the value chain, and horizontal linkages between firmsproviding complementary products and services. Industry clusters become self-perpetuating and self-renewing once a sufficiently rich set of interconnections have beenestablished. Taiwan actively promotes its IT and semiconductor clusters, and Singaporehas focused its industrial promotion activities on key clusters like electronics andsemiconductors, chemicals and precision machinery. Multinational investment in theseclusters is especially encouraged, and local firms encouraged to form to take advantage ofthe supply linkages thus generated. If an economy can be judged by the richness of itsinter-connections, then the Taiwanese and Singaporean industrial economies have alreadybroken through an important network threshold.

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Investment attracting vehicles

Industry clusters are created and seeded through the attraction of foreign investment aswell as the encouragement of local firms. Bodies such as Singapore's EconomicDevelopment Board, termed collectively economic development agencies, provideinstitutional continuity as well as investment knowhow in attracting investments bymultinational corporations. Investments are targeted towards activities which provideopportunities for capturing benefits from spillovers and linkages within designatedclusters. The investments are sometimes sweetened with partial equity investment frompublic sector funds (such as Singapore's Cluster Development Fund) but more usuallythey are secured through close institutional attention being paid to every need of theinvestor, ensuring that investment is trouble-free.

Industrial upgrading incentives and discipline

Industrial policies and incentives are couched not in terms of 'picking winners' or dealingwith individual firms (on the pattern of bounties and other targeted forms of assistance).Rather it is couched in a process of strategically selecting certain sectors and shaping theinstitutional environment to encourage investment in that sector and to encouragecontinuous upgrading by firms to keep abreast of the moving world technologicalfrontier. Incentives are provided in terms of tax benefits, tax credits, and upgradingallowances, while discipline is enforced by holding firms to stated performance targets.The bodies dispensing these benefits (such as the Industrial Development Bureau inTaiwan) are subjected to rigorous audit by other arms of government, such as theMinistry of Finance.

Industry self-organization

Industries are encouraged to form their own industry associations as intermediariesbetween government and private firms. These frequently play quasi-regulatory roles, andact as organizing vehicles for R&D consortia and other industrial upgrading structures.Government deals with industry largely through these self-organizing associations ratherthan through individual firms making submissions.

Skills upgrading and technical training

In Taiwan and Singapore it is understood that it is the inputs to the production processthat determine the quality of the outputs. Local skills and knowhow are constantlyreplenished and upgraded through targeted programs. Institutional innovations have beenimplemented in Taiwan and Singapore to ensure that there is a supply of skilled staff forthe high technology, knowledge-intensive industries which are increasingly the source ofwealth-generation in these economies.

Market shaping and creation

Markets for knowledge-intensive products frequently have to be conjured into existence,rather than left to the operation of 'market forces.' In Taiwan, the early firms in thesemiconductor sector were created deliberately by public sector agencies, in advance ofany demand from the private sector. A good case of market shaping is currently provided

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by the development and nurturing of an electric-powered vehicle market in Taiwan bygovernment agencies, both as an industry promotion exercise and as an environmentalprotection policy. Taiwan promises to become one of the world's leaders in 'clean' powersupplies for two-wheeled and four-wheeled vehicles in the next century.

Export promotion

The collective enhancement of export performance through institutions such as Taiwan'sChina External Trade Development Council and Singapore's Trade Development Boardhave been a significant source of institutional support for firms seeking to break intoexport markets. Austrade has played a comparable role in Australia.

Lead agency

The key to the overall success of the institutional frameworks in Taiwan and Singapore isthat they operate not just as individual elements but in a coordinated fashion, with astrategic lead being provided by a lead agency -- in Taiwan's case, the Council forEconomic Planning and Development and in Singapore's case, the EconomicDevelopment Board. It is in this systemic coordination that the principal institutionalcapacity of these East Asian technologically upgrading economies resides.

In short, it is firms which generate the wealth in Singapore and Taiwan and they doso through making their own strategic decisions. But they operate within aninstitutional environment which biases them towards investing in strategicallyimportant industries, and in technological upgrading, that has the effect of enlargingtheir strategic options.

Firms are then free to choose to pursue this or that technological feature as their owndistinctive strategy -- provided they are operating at close to the technological frontier. Itis technologically unsophisticated, cost-minimizing, backward-oriented businessstrategies that are discouraged by this institutional framework.

Taiwan and Singapore are chosen for this study because of the strength of theirinstitutions, and because they have successfully engaged in industrial upgrading,weathering even the recent financial turmoil in Asia. The study is focused on bringing outthe innovation-building practices evident in these countries, seen from the perspective oftheir relevance for Australia. There are no cultural impediments to Australia learninginstitutional lessons from these successes in our Asia-Pacific neighbors.

As a country, Australia pioneered many of the institutional innovations which have sincebeen adopted and adapted in countries like Singapore and Taiwan -- institutions such asclose public-private collaboration in promoting industry R&D and productivityimprovement in Australia's rural industries. It is in recognizing that these institutionalstrengths have not been transferred across to manufacturing in Australia that creates theneed for an informed and wide-ranging comparative institutional perspective.

This study is designed to contribute to the development of such a comparative perspectiveon the tasks of institution building in Australia in the early years of the 21st century.

ABBREVIATIONS

Taiwan

CCL Computing and Communications Laboratory (a part of ITRI) CDC China Development Corporation

CEPD Council for Economic Planning and DevelopmentCETRA China External Trade Development CouncilCIST Chung-shan Institute of Science and TechnologyERSO Electronics Research Service Organization (a part of ITRI)IDB Industrial Development Bureau (a part of the MoEA)III Institute for Information IndustryITRI Industrial Technology Research InstituteMoC Ministry of CommunicationsMoEA Ministry of Economic AffairsNSC National Science CouncilOESL Opto-Electronics Systems LaboratorySTAG Science and Technology Advisory GroupTEAMA Taiwan Electrical Appliances Manufacturers Association (pre-1995)TEEMA Taiwan Electrical and Electronic Manufacturers Association (post-1995)TSIA Taiwan Semiconductor Industry AssociationTVMA Taiwan Vehicle Manufacturers' Association

Singapore

CDF Cluster Development Fund (operated by EDB)CSM Chartered Semiconductor ManufacturingDBS Development Bank of SingaporeEDB Economic Development Board (formed 1961)IDS Innovation Development SchemeILC International Logistics CentreIME Institute for MicroElectronics (formed 1991)LIUP Local Industry Upgrading ProgramMTI Ministry of Trade and Industry (formed 1979)NCB National Computer BoardNSTB National Science and Technology BoardNTP National Technology Plan (1991)NUS National University of SingaporePLE Promising Local Enterprises programSISIR Singapore Institute for Standards and Industrial ResearchSTG Singapore Technology GroupTECH Semi. DRAM Consortium: Texas Instruments, EDB, Canon, Hewlett-PackardTDB Trade Development Board

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Technology and general

ASICs Application-Specific Integrated CircuitsCD-ROM Compact Disc - Read Only Memory (for PC)CNC Computer Numerical Control (for machine tools)DFI Direct Foreign InvestmentDVDs Digital Video DiscsDRAM Dynamic Random Access Memory (integrated circuit)FPDs Flat Panel DisplaysHDD Hard Disc Drive (for PC)HDTV High Definition TelevisionHTI High Technology Industrial upgradingIC Integrated Circuit ("chip")IT Information TechnologyLCDs Liquid Crystal Displays (an instance of FPD, used in laptop PCs)MNCs Multi-National CorporationsNSEL National System of Economic LearningPC Personal ComputerTTF LCDs Thin Film Transistor LCDsVLSI Very Large Scale Integration (of integrated circuits)WBT Windows-based terminal

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1. INTRODUCTION: WHAT IS THERE TO LEARNFROM ASIA IN 1999?

The building of innovation capabilities by firms is widely understood to be the key tosuccess in wealth generation. Whereas business in Australia has often focused its analysison the costs of business inputs, through reducing taxation levels or costs of inputs such aselectric power and transport, the reality is that business success is generated through aclear focus on the quality and innovative potential of outputs.

It is the firms which are able to generate the core competences needed to supportcontinuous innovation and upgrading of products and technology that are found to havethe most sustainable competitive advantages.

Central to the vision that sees companies as generating the future wealth of Australia,based on their own innovation capabilities and abilities to cooperate in networks, clustersand alliances, is a set of models of what constitutes best practice in this emerging area.

While Australian firms clearly have much to learn from US models of innovation such asthe Silicon Valley cluster around Stanford University and Boston’s 'Route 128' aroundMIT, or the 'Cambridge phenomenon' of high-tech firms launched by associates ofTrinity College and other progressive Cambridge institutions, these are generally maturesystems of innovation that make emulation very difficult. Other models of technologicalupgrading linked to foreign investment as well as local R&D are needed to complementthese well-known US and UK cases. Such models lie to hand in Australia’s Asia-Pacificneighbors.

Despite the gravity of the Asian financial crisis of 1997 and its continuing aftermath,some countries in the region have come through the crisis relatively better than others.The cases of Taiwan and Singapore spring to mind. These countries have engineered aremarkable improvement in the level of their technological capabilities over the course ofthe past three decades. Most recently, through their institutional and regulatoryframeworks, they have managed to avoid the worst effects of the 1997 financial crisis.They are dipping towards lower growth in 1999, but this is because of their trade andinvestment links to the wider region, rather than to any intrinsic problems of their owneconomies.

Industrial upgrading in Taiwan and Singapore

Since the Plaza Accord of 1987, when international currencies were realigned and the yenappreciated against the US dollar followed by the Taiwan NT$ and the Singapore $,Singapore and Taiwan have lost their earlier cost competitive advantages. They havebeen forced to rely instead on technological and industrial upgrading capacities.

In the case of Taiwan, the industrial upgrading efforts since 1987 have been prodigious,turning Taiwan into a genuine 'high technology' island whose semiconductor and IT

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industries now rank with the world’s best. In the case of Singapore, its continuedopenness to selected foreign investment has seen its industries systematically upgraded interms of responsibilities (eg expanding from single product facilities to regionalproduction headquarters to regional customer support headquarters and R&D centres) andin terms of technological capabilities. The public sector has steadily enhanced its owninvestments in state of the art research facilities that are linked closely to domesticcompanies’ upgrading efforts and the upgrading of multinationals’ activities.1

The twin examples of Taiwan and Singapore have many ingredients of great interest forAustralian firms as they seek to become global, sophisticated players. The strategies ofthe firms themselves are of interest, in their ability to link themselves to technologicaltrajectories generated in Silicon Valley or elsewhere in the industrial heartlands. Of evengreater interest is the complex network of alliances spun between the public and privatesectors in these countries, designed not to 'pick winners' in some crude sense, but tosustain the dynamic of technological innovation in industry at large.

Global technology scanning

Taiwan’s Industrial Technology Research Institute (ITRI) for example, is comparable insize to Australia’s CSIRO. It sees its mission as being a global technology scanner andfilter, keeping itself abreast of technological developments around the world and forgingcapabilities in these technologies within its own laboratories. Its aim is to spin themacross to Taiwan’s private sector as rapidly as possible through short-lived R&Dalliances with small and medium-sized Taiwan manufacturing firms. In this way, ITRIcan sign technology licensing deals with the world’s leading multinationals, and ensurethat Taiwan’s nimble manufacturing firms gain access to these licenses and produce stateof the art products for export -- in some cases, even before the originating multinationalscan do so.2

Likewise in Singapore, the strategy of selective upgrading of foreign investment, and theactive encouragement of backward linkages into the Singaporean economy (eg throughlocal supply of components and services to multinationals), linked to major collaborativeR&D programs fostered by key public sector research institutes gathered together under

1 This study is based on numerous visits to both Taiwan and Singapore over the period 1994 to1999. The scholarly support of several institutions needs to be acknowledged, including Chung-HuaInstitution for Economic Research, Taipei (under successive Directors Dr Joseph Lee and Professor Chao-Cheng Mai); the Academia Sinica and in particular the Sun Yat Sen Institute for Social Science andPhilosophy (ISSP), Taipei; and the Centre for Management of Technology at the National University ofSingapore (under its Director, Professor Poh-Kam Wong). Most of the institutions discussed in this paperhave been extremely generous in providing materials and staff for extensive discussions. In particular, ITRIin Taiwan, under its President, Dr Chin-Tay Shih, has been extraordinarily helpful on several occasions,while the Economic Development Board in Singapore has hosted several visits, the most recent in October1998 being sponsored by Mr Lai Yeow Hin, Deputy Director for the Electronics Division. Aspects of thisresearch have been conducted under an Australian Research Council grant (on high technologyindustrialisation in East Asia). Research assistance has been provided at times by Ms Teresa Poon and byMs Elizabeth Thurbon.2 For example, in the case of the Personal Computer based on the PowerPC microprocessor, asdiscussed below.

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the umbrella of the National Science and Technology Board (NSTB), represents apowerful model of a 'national system of innovation' that is of great relevance to Australia.

Industrial clustering

Singapore in the 1990s has reconceptualised its industrial economy as a series of clusters-- focused around the three major industrial areas of electronics/semiconductors,chemicals/petrochemicals and engineering. Its industrial strategies have been conceivedand implemented in terms of promoting and strengthening these clusters. Programs havebeen developed to enhance the skills base needed by firms in these clusters. Specializedinfrastructure has been provided -- such as the 'wafer fabrication parks' created inWoodlands, Tampines and Pasir Ris for semiconductor firms, and the new Jurongartificial island for the petrochemical sector. Other programs enhance and promote thelinkages between firms (upstream and downstream) that generate the dynamics andvitality of industrial clusters, increasing the density of interactions between firms.

It is now widely agreed that industrial clusters, like those being promoted assiduously andsuccessfully by Singapore, will constitute the dominant competitive paradigm in the 21st

century. Michael Porter, for example, writing in the Harvard Business Review inNovember/December 1998, describes the economic map of the world today as beingdominated by clusters -- critical masses, in one place, of unusual competitive success inparticular fields.3

In both Taiwan and Singapore we see two master exponents of this emerging paradigm.Taiwan's Hsinchu Science-based Industry Park, for example, has until recently beenhome to the entire semiconductor cluster in Taiwan, which itself was fourth largest in theworld, and benefited enormously from its proximity to the two universities of Tsinghuaand Chiaotung as well as the laboratories of ITRI. Likewise the Singapore Science Park,and its more recent extension, has generated a dynamic cluster of multinational firmslinked to local suppliers and new entrepreneurial firms, deriving support again from thenearby Nanyang Technical University as well as the industry promotion institutions ofSingapore such as the Economic Development Board.

Institutional lessons for others -- including Australia

This study was commissioned by the Australian Business Foundation to examine andanalyze the strategies and institutional frameworks of technological upgrading andinnovation fostered in Taiwan and Singapore, viewed from the perspective of theirrelevance for Australia.

The project focused on the methods these countries have used to ensure that firms makecontinuous efforts to upgrade their technological and industrial capabilities, as they longago left behind any residual cost competitive advantages.

3 See Michael Porter, 'Clusters and the new economics of competition,' Harvard Business Review,Nov/Dec 1998, pp. 77-90.

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Their experience contrasts markedly with that of Hong Kong, where industrial andtechnological upgrading has slackened off over the past decade, due largely to the abilityof companies to seek low-cost manufacturing in southern China, and to the refusal of thepublic sector in Hong Kong to act as collective risk-taker in technological upgradingprograms.

It is this differential experience of these East Asian countries over the course of the pastdecade that is of great relevance to Australian firms, which likewise are subject to thetemptation to seek to compete on the basis of lower costs rather than on capabilities ininnovation and customization.

Australia has pursued many effective industry promotion strategies and has developedworld class institutions such as CSIRO and, in the 1990s, numerous CollaborativeResearch Centres. Nevertheless, there remains the sense that the country lacks the clearfocus on long-term manufacturing excellence and upgrading that characterizes policy andfirms' strategy in Taiwan and Singapore. There remains also the sense that Australialooks to North America and Europe (and specifically the UK) for its industrial models,rather than to countries closer to us in the Asia-Pacific region.

It is to provide a further comparative dimension to the development of policy in Australiathat this study has been written. The aim is not to promote Singapore and Taiwan asappropriate models, but as sources of institutional lessons which can be adapted, andapplied, with success in Australia.

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2. INDUSTRIAL UPGRADING IN TAIWAN

Behind the Taiwanese industrial 'miracle' there lies an unrelenting pressure on firms tocontinuously upgrade their technological and market access capabilities. The alternativecourse, of allowing firms to retreat to least cost strategies, such as through out-sourcingall their production to China, has been seen, rightly, by the Taiwanese authorities as adownward slippery slope. To keep firms operating a continuous 'fast follower' strategy,operating at the technological frontier (with all the headaches of constant adjustment thatthis imposes), is one of the genuine unsung achievements of the Taiwan economicsystem. It is worthwhile to inquire into the combination of incentives and disciplines,provided through a set of policies and institutions, which could achieve such anextraordinary outcome.

Taiwan's industrial performance …

And extraordinary it is. This tiny island of 21 million people, has produced for year afteryear world record industrial growth figures, manufacturing export figures, and tradesurplus figures -- all based on manufacturing prowess. During four decades of high speedgrowth, from the late 1950s to the late 1990s, Taiwan's annual growth rate averaged 8.6percent -- a remarkable performance. This has meant that its per capita GDP has soaredfrom a paltry US$196 in 1952 to US$12,439 in 1995 -- and it has continued to growthereafter, even in the midst of Asia's financial crisis. Its GNP in 1995 actually amountedto US$264 billion -- compared with Australia's GNP in the same year of around US$300billion. 4 This meant that from 1952, when Taiwan's modernization really began, to 1995its economy has multiplied 156-fold. Per capita GNP has multiplied over the same period62-fold.

The growth rates have also achieved some remarkable peaks and troughs. Double-digitgrowth, first shown to be feasible by Japan, was achieved by Taiwan in 1964, when it hit12.2 percent. This was truly the industrial takeoff for the island. Even in the 1980s, whenit was maturing as an industrial nation, it achieved growth of 12.7 percent in 1987.Taiwan, because of its oil dependence, suffered a precipitous drop in growth in 1973, andagain in 1979, associated with the OPEC oil price increases -- but in each case, itsrecovery was rapid. This must be attributed to the flexibility of its myriad manufacturingenterprises, which are the key to Taiwan's rapid adjustment capabilities.

… based on manufacturing prowess

Manufacturing remains the bedrock of Taiwan's economy and its industrial activity,accounting for over 90 percent of industrial production in 1995.5 Taiwan's total exports

4 Taking the Australian GDP in 1995 to be around A$450 billion (on a production basis), anddeflating by an exchange rate of around 0.70 to the US$.5 The corresponding figure for Australia, according to the Australian Bureau of Statistics report'Australia Now: A Statistical Profile' is that manufacturing contributed 13.6 percent of industrial productionin 1996/97, or a total of A$61.1 billion out of Australia's GDP of A$449 billion.

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reached a value of US$112 billion in 1995, with just on 98 percent of this accounted forby industrial products! 6 This confirms that Taiwan's miracle has been 'man made' and notbased on supposed 'comparative advantages' in certain kinds of resources.

By the 1990s Taiwan was notching up world leadership positions in several veryimportant industries. Its outstanding achievements have been in the informationtechnology (IT) industry, where it has grown to become the world's third largestproducer, behind only Japan and the USA, and ahead of such industrial giants asGermany and Korea. Taiwan's output of IT products in 1997 reached US$16.4 billion,plus $7.7 billion representing production undertaken in China making it the country'smost important foreign exchange earner. Its 900-plus computer, peripherals andcomponents firms together employ around 100,000 people in highly skilled, demandingmanufacturing jobs. The final assembly part of the operation, which accounts for only avery small part of the total value-added, tends to be undertaken close to the final market,ie in Europe, North America or Japan, rather than in Taiwan. Thus these manufacturingjobs are genuine, high-skill manufacturing jobs, which provide a foundation forprosperity.

IT industry central …

Taiwan IT manufacturers continue to break world records in their penetration of worldmarkets. In computer monitors, for example, they held over 50 percent of the worldmarket in 1996 (and the situation has not changed since, despite the crisis). In keyboards,they held over 60 percent of the world market. In the motherboards which form the heartof PCs, they held over 70 percent. In handy scanners, they held an astonishing 95 percentof the world market -- through the efforts of firms such as Umax and Logitech.

Taiwan's IT industry is even an export surplus performer with respect to Japan.According to the Japanese authorities, Taiwan has now supplanted Singapore as Japan'ssecond largest supplier of IT products, behind only the USA. 7 While Taiwan became amajor player in PCs and scanners in the 1980s, it has continued to penetrate one IT sectorafter another in the 1990s. First it was laptop PCs, where Taiwan rose to become thirdlargest producer in the world of these extremely sophisticated and (until recently) highvalue-adding products.

Then it was CD-ROMs, which Taiwan started to penetrate in the mid-1990s, and hasrapidly become a major force, capturing 60 percent of the world market by 1998 [Weshall look at the CD-ROM industry in detail in a moment, as an example of Taiwan'sindustrial upgrading capacities.]

6 By contrast, Australia's manufactured exports in 1996/97 were estimated by the ABS to be A$30billion (15% of goods produced overall), or around US$20 billion -- less than one fifth of Taiwan'smanufactured exports.7 This should not be taken to mask the fact that, overall , Taiwan is in severe trade deficit with Japan,mostly for high tech components that feed into its range of manufactured output.

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And in the late 1990s, Taiwan has become a major force in flat panel displays,particularly in thin film transistor liquid crystal displays (TFT LCDs) now the dominantcomponent in laptop PCs and many other display applications -- becoming the third forcein this case after Japan and Korea (and well ahead of European and US suppliers).

But this is not all. In the integrated circuits (ICs) which feed into this wealth of ITproducts, Taiwan has also become a world force, holding fourth world position after theUSA, Japan and Korea -- and again, ahead of European giants like Germany. Taiwanbroke into the market for integrated circuits in the 1980s, when several new firms likeUMC, TSMC, Winbond and Macronix were founded. These firms produced either highlyspecialized logic and analog ICs, or acted as third party producers ('silicon foundries') forIC firms that lacked fabricating capacity of their own. This latter business has in factgrown, in size and sophistication, ever since TSMC was founded in 1986 as the world'sfirst wholly dedicated IC foundry. It has been a spectacular success, becoming Taiwan'sfirst $1 billion-plus semiconductor firm, and expanding to operate several waferfabrication facilities in Taiwan and now around the world as well (eg in Camas,Washington, and in 1999 in Singapore).

In the 1990s Taiwan's IC industry has moved relentlessly up the capability ladder,breaking into the extremely demanding memory chips (DRAM and SRAM) business, forexample. It has also broken into the data switching business, on the basis of new, fast ICsdeveloped in Taiwan by firms such as D-Link and Accton. This is high technologyperformance that is substantial in its breadth of coverage and its depth of technologicalcapabilities. Anyone who tried to pass off Taiwan today as a lowly 'second string'industrial island would be very wide of the mark.

The paradox in all this is that Taiwan's high technology firms are still barely knownoutside the country. They are not big brand promoters -- with the exception of the oneTaiwan IT company that has pursued a worldwide brand presence, namely Acer.For the most part, Taiwan's achievements in high technology are the fruit of anonymousenterprises, which work not so much to bring branded products to retail markets, as toseek out business as suppliers to other manufacturers usually as original equipmentmanufacturing (OEM) suppliers, but increasingly as more sophisticated ODM (OwnDesign and Manufacture) contractors.

Industrial upgrading in Taiwan

Taiwan's achievements in high technology in the 1990s are the fruit of repeatedupheavals in its industrial structure over the course of the past four decades. Theseupheavals have seen the overall composition of the country's industrial output changedrastically.

The 1950s -- creating a manufacturing base

In the 1950s, the main industrial upheaval was the creation of manufacturing as analternative to agricultural activity, which until then had been the main export earner in

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Taiwan. While the KMT government took steps to control the 'commanding heights' ofthe economy with state-owned enterprises in strategic sectors such as electric power, oiland communications, it allowed thousands of small firms to operate in market niches, andin particular in export markets. At first, these SMEs produced agricultural goods andprocessed goods. But under the influence of the then-conventional doctrine of importsubstitution, more and more firms were encouraged by government incentives to moveinto production of light industrial goods which would reduce imports (and their drain onforeign exchange earnings).

1960s: the shift to export orientation

The 1960s saw a flourishing of export activity in light industrial goods, and a shift awayfrom import substitution as strategy towards export promotion. Again it was myriadSMEs that led the way, contracting with large industrial firms in the US and Europe aswell as Japan to supply goods on an OEM basis. The Taiwan government regulated andpromoted the activity of SMEs in the 1960s through the Small and Medium-sizedEnterprise Guidance Regulations, first issued in 1967. Very much as in the case of Italy,these regulations defined SMEs and made such firms eligible for various tax concessions.The Regulations have been revised regularly ever since.8

A number of export processing zones were established in Taiwan in the 1960s, topromote export activity and inward investment by MNCs. The first (in the world) wasestablished at Kaohsiung, the southern port. The concept of export processing zone wassimple but revolutionary. Like the 'free ports' established in the 19th century by Britain, egPenang and Singapore, in which all duties were suspended, the EPZs lifted all duties onincoming and outgoing manufactured goods, with the aim of promoting such export-oriented manufacturing activity. In this they were wildly successful. Exports increasedduring the 1960s at an annual rate of 27.4 percent, powered by an average rate of growthof industrial output of 16.4 percent. The EPZs were quickly emulated by Taiwan'scompetitors, such as Korea. In achieving a secondary aim of promoting linkages into thedomestic economy (eg through supply contracts with MNCs) they were less successful inTaiwan -- but have been very successful in this respect elsewhere, such as in Singapore.

1970s: industrial upgrading

Based on the solid gains of the 1960s, the 1970s saw wrenching industrial restructuring inTaiwan, as the government shifted to the promotion of capital- and technology-intensiveindustries -- all in the pursuit of industrial upgrading. Without such a shift Taiwan wouldhave been caught in the 'Hong Kong trap' of remaining tied to light industrial output. Newbasic industries such as steel and petrochemicals were promoted, partly through state-owned enterprises like China Steel and China Petroleum establishing the upstreamproduction activities that would then feed into downstream industrial production. In thelate 1970s the drive towards raising the country's infrastructure was accelerated with the

8 In 1995 they were revised again, so as to define small and medium-sized enterprises as onesemploying fewer than 200 workers, having a capital less than NT$60 million (around US$2.2 million), andan annual revenue less than NT$80 million (around US$3 million).

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Ten National Construction Projects -- including steel, shipbuilding and petrochemicalscomplexes as well as development of communications, electric power and transportimprovements. This was the heavy industrial foundation for Taiwan's nimblemanufacturing SMEs. Through the 1970s, despite two major downturns associated withoil shocks, Taiwan averaged 14.1 percent annual growth in industrial output.

1980s: high technology industries

The 1980s saw further wrenching adjustments with the seeding and development of hightechnology industries. The outstanding example of this was the semiconductor industry:integrated circuits (ICs) became the new symbol of Taiwan's evolution towards advancedstatus. New companies were being spun off from Taiwan's public sector research utilities(chiefly ITRI) while a major source of support was the creation of the Hsinchu Science-based Industry park opened in 1980, as a conscious public-sector emulation of SiliconValley in California. Businesses locating on the Hsinchu park were eligible forconsiderable tax concessions linked to their introduction of new technologies, and wereexpected to sustain a higher level of R&D expenditure than for firms generally in Taiwan.These measures had their effect. By 1990, high tech products, including electronics, ITand electrical machinery, accounted for no less than 40 percent of total exports.Meanwhile the government was winding back much of the earlier protection that hadbeen offered to infant industries, to expose industries to the full force of worldcompetition, in a controlled and measured process of deregulation and liberalization.

… and more upgrading

As if all this were not enough, Taiwan was faced with another forced round ofrestructuring after the 1986 Plaza Accord considerably revalued the East Asian currencies(including the New Taiwan dollar) with respect to the US dollar and European currencies.Industries which were battling to survive at the old foreign exchange level, as domesticcosts rose, were forced once again to upgrade, or go under. This process has continuedinto the 1990s, with Taiwanese industry being overhauled, creating new high technologysubsectors (such as memory chips and communications chips in semiconductors, or CD-ROMs and flat panel displays in IT products) and upgrading the technologicalcapabilities of existing sectors such as in machine tools and electronics.

This brings the story up to 1997 and 1998, when Taiwan, along with the rest of Asia, wasplunged into its worst financial crisis in 50 years. The interesting feature of this story asregards Taiwan, is that it was well protected against the ravages of such a crisis, havingbeen very cautious in liberalizing its financial system -- so much so, that by early 1999,one could say that Taiwan had escaped the crisis virtually unscathed, apart from theeffects transmitted by a downturn in its Asian markets (an effect felt by all countries inthe region, including Australia).

Overall, Taiwan's industrial restructuring and upgrading efforts can be captured in thefollowing statistic. Technology-intensive industries accounted for just over 20 percent ofindustrial output in 1981. Ten years later they had expanded to account for just over 30

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percent of industrial output. By the year 2002 it is estimated by the Ministry of EconomicAffairs that they will account for 40 percent of industrial output. This is industrialtransformation on a grand scale. And it reveals just how serious Taiwan is in recreatingitself as a 'high technology manufacturing' island in the 21st century. 9

So much for the story in outline. But the Taiwan case comes to life when we sharpen thefocus to look at specific industries. There are many to choose from, but let us examine ina little more detail the IT industry, the semiconductor industry, and the automotiveindustries, to see what institutional pattern has underpinned Taiwan's successful industrialrestructuring and upgrading in these three sectors.

Key industries and upgrading cases within them

Taiwan has assiduously sought to target and acquire technological capabilities inindustries with strategic significance -- in the sense that they have multiplier effects thatripple throughout the economy. Japan pursued a similar strategy a decade before Taiwan-- and thereby forced Taiwan to be even more selective in the industries and technologiesit chose. Consider the following industries as representative of the strategy:semiconductors; information technology; and automotive. Other industries such aspetrochemicals, plastics, new materials, and biomedical would reveal similar findings.10

Semiconductors

Taiwan's involvement in the semiconductor sector goes back to the 1960s, whenpackaging and then test operations were started in the country by multinationals, sparkingemulation by local companies. High value-adding wafer fabrication was initiated by theTaiwanese themselves, as an act of public policy, through the public sector IndustrialTechnology Research Institute (ITRI). Its electronics laboratory, the Electronics ResearchService Organization (ERSO), entered into a technology transfer arrangement in 1976with the US firm RCA, which for a royalty fee made available its then-obsolete 7-micronIC product and process technology and trained a cadre of Taiwanese engineers.

9 As an aside, consider how this makes nonsense of neoclassical economic growth models which,'for convenience' assume constancy in proportions of industrial output. The most salient fact of Taiwan'srecent development experience is that its proportions of industrial output have not remained constant, butindeed have been changed through wrenching restructuring -- guided, coordinated and driven by stateagencies.10 On Taiwan's industrial strategies and evolution, see for example, Yu Tzong-shian, The Story ofTaiwan: Economy (Taipei, Government Information Office, 1999); Yang Ya-Hwei (ed) IndustrialDevelopment and Policies in Taiwan (Taipei, Chung-Hua Institution for Economic Research, 1998); andthe chapter by Otto Lin, 'Science and technology policy and its influence on economic development inTaiwan,' in Henry S. Rowen (ed) Behind East Asian Growth: The Political and Social Foundations ofProsperity (London and New York, Routledge, 1998). On individual Taiwan industries, see TaiwanIndustrial Outlook 1998, published jointly by the Ministry of Economic Affairs and the IndustrialTechnology Information Service (IT IS) of Taiwan's Industrial Technology Research Institute (ITRI),Hsinchu.

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ERSO/ITRI spun off Taiwan's first mainstream semiconductor company in 1980, theUnited Microelectronics Corporation (UMC), which located on the newly establishedHsinchu Science-based industrial park, located close by ITRI/ERSO. From these modestbeginnings a mighty industry has flourished in Taiwan. By the late 1990s its ICfabrication industry and related activities notched up sales of nearly $10 billion, oraround 7 percent of the world total. The Taiwan IC industry is expected to continue togrow fast, as major memory chip investments were coming on stream in the late 1990s.

What is the evidence that the Taiwan semiconductor industry has continued to upgrade,rather than 'coast' on the basis of its initially leveraged technologies. One kind ofevidence can be sought in the way more sophisticated sectors such as memory chips(DRAMs) have been entered, where the initiative for technology transfer has been takenby the private sector firms themselves. A second line of evidence concerns Taiwan's entryinto new IC sectors such as communications and multimedia chips, which did not existwhen Taiwan made its initial technology leverage efforts.

Taiwanese DRAMs

Taiwanese firms mastered DRAM technology only in the 1990s. Earlier efforts to enterthe industry, by firms such as Quasel, Mosel and Vitelic, all failed. (Quasel disappearedas a company; Mosel and Vitelic merged in the 1990s and have since become strongDRAM producers.) The supporting infrastructure and skills -- in a word, the absorptivecapacity of the Taiwan semiconductor industry -- was not at that time able to support thedemands of advanced DRAM fabrication. But the absorptive capacity was beingenhanced by the activities of semiconductor firms in various non-memory devices, whichrapidly deepened their experience. Judicious targeting by the Taiwan public agencies(such as the Industrial Development Bureau and ITRI) ensured that as many of the stepsas possible in the semiconductor value-chain were being covered (such as IC design,mask production, and supply of specialist materials and equipment).

The decisive contribution to raising the industry’s absorptive capacity to produceDRAMs was made by ERSO with its Submicron project, in which a major pilotfabrication plant was built and subsequently passed across to the private sector (thusaccounting for the launch of the new firm, Vanguard International SemiconductorCorporation). In the 1990s, one Taiwan firm after another announced the intention ofbecoming a DRAM producer, based on technology transfer agreements with US orJapanese firms. Thus the initiative for moving to the next stage of semiconductorcapabilities was taken by both the private and public sectors, with the initiative graduallymoving to the private sector as the industry matures.11

11 Further details are contained in the forthcoming study by John A. Mathews and Dong-Sung Cho,Tiger Technology: The Creation of a Semiconductor Industry in East Asia (Cambridge, CambridgeUniversity Press, 1999).

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Taiwan communications chips

Likewise in the communications chips sector, Taiwanese firms have utilized variousforms of technology leverage to become players in this most sophisticated of chips,where the challenge is to meet international standards for data transmission protocols. Inthe 1980s, before the industry’s absorptive capacity had reached the appropriate level,some small firms tried to enter this industry as ‘knock off’ practitioners, taking US orJapanese products and copying them to sell for a lower price. Strict enforcement ofproperty rights put a stop to this. A new wave of Taiwanese ventures in this sectoremerged in the 1990s, driven by technology leverage taking place through both the publicand private sectors.

In the private sector, firms like Silicon Integrated Systems entered the fast Ethernet dataswitching IC business by licensing technology from one of the leading US firms,National Semiconductor. In the public sector, ITRI’s ERSO and CCL have developedEthernet switches and the ICs to drive them, and then formed R&D alliances with smallfirms to pass across the technology for rapid commercialization. Firms such as DLink andAccton have prospered through this process. (We discuss below how the CCL-ledconsortium allowed firms such as Accton and D-Link to get their start in Ethernetswitches.)

The point to emphasize here is that there is a coherence to these continuing leverageprocesses. They evolve as competences are accumulated. The earlier competences inbasic semiconductor fabrication and marketing, which themselves were leveraged mainlyvia the public sector, serve as a platform for later, more specialized and sophisticateddevices, which are leveraged through both the public and private sector. Private firmscome to take more and more of the initiative in such leveraging, while the public sectorlaboratories serve as the repository of technical capabilities, which can be upgraded anddiffused across to the private sector through R&D alliances.

Information Technology products

The Taiwan IT industry continued to expand and upgrade in the second half of the 1990s.In 1997 its output reached US$16.4 billion, for production in Taiwan, plus $7.7 billionfor production of IT products by Taiwan firms in China -- making an output of $24,1billion, which continued to place Taiwan in third place behind Japan and the US. Whilemost of the IT firms are small by world standards, the biggest are now very large. Acer isthe big success story, accounting for worldwide sales of IT products of $6.7 billion in1997.

Components and motherboards

Taiwan is by far the world's largest supplier of IT components for personal computersand other IT products like scanners. Its supplies of motherboards, for example, accountedfor 76 percent of the world market in 1996 (MIC/III data). The individual firms however

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are barely known, even though some of them are now growing to be very large. FirstInternational Computer (FIC) founded as a two-person operation in 1980, now racks upannual sales revenues of around $1.5 billion. Yet over 80 percent of these sales are toOEM customers, and are sold under the brand of other leading firms such as Compaq orIBM.

Compact discs: CD-ROMs

CD-ROMs are another of the most significant value-adding components to feed into PCs,both desk based and laptops. Taiwan had to import virtually all its CD-ROMs from Japanup until the mid-1990s, by which time determined efforts had been mounted to create anindigenous Taiwanese industry. The difficulties involved here were considerable,revolving around the extremely rapid technological turnover in this sector, and theextremely demanding optoelectronic and precision machinery capabilities required.

To provide a basic level of capability the public R&D laboratories at ITRI sponsoredsome key technological transfer projects, funded partly by various programs of theMinistry of Economic Affairs, and partly by contributions from interested firms. From1993 to 1996 ITRI ran several concurrent technology development projects, some in-house and some in the form of development consortia with private firms (nine of whomcollaborated regularly with ITRI from 1993 to 1996.

Taiwan's first CD-ROMs were produced in 1994, when they accounted for only 1 percentof world output, but they have grown spectacularly on the solid foundations laid by theMoEA and ITRI, accounting for 9% of world output in 1995, doubling to 18 % in 1996,and 26 % in 1997. On the basis of value produced, it was claimed that by 1998 Taiwan'smarket share had risen dramatically to over 60 percent, as leading firms in Japan and theUS withdrew from the increasingly price-competitive market. This means that Taiwanmoved from being a non-participant in CD-ROMs to the world's leading producer in fiveyears -- surely a record in an industry that is well used to such remarkable reversals.

Flat panel displays

While Taiwan was increasing its penetration of the laptop PCs sector, it was unable topenetrate into the key component segment of flat panel displays, which were dominatedby Japanese firms including Sharp, Fujitsu, Toshiba and Matsushita. This meant thatmuch of the value-added in notebook PCs was lost to Japan and represented a drain onTaiwan's balance of trade. Efforts by ITRI/ERSO to launch a Liquid Crystal Display(LCD) industry in Taiwan in the early 1990s were frustrated, partly due to lack ofsufficient absorptive capacity, and partly due to resistance from semiconductorincumbents.12 But in the second half of the 1990s one Taiwan firm after anothercommitted to LCD production, as it became clear that Thin-Film Transistor (TTF) LCDswere becoming the technological standard for notebook PCs, and as Japanese firms

12 One of ITRI's principal adversaries in its bid to secure government funding for the launch of amajor LCD consortium in the early 1990s, was none other than UMC -- the company that ITRI created in1980 to seed the semiconductor industry.

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sought to outsource and ‘second source’ much of their LCD work to Taiwanese firms. Bythe late 1990s, through these several efforts, Taiwan was moving to establish itself as theworld’s third largest supplier of TTF LCDs, after Japan and Korea – all of whom wereconsiderably in advance of US and European firms in terms of mass production.

Photonics Industry and Technology Development Association of Taiwan (note thesignificance of the name of this industry association -- it is not just concerned withprotection of trade rights) has been formed to promote this newest subsector of theTaiwan IT industry. Production of flat panel displays of all kinds has exploded in thelatter half of the 1990s, reaching NT$155 billion in 1998 (around US$5 billion) and anestimated NT$200 billion in 1999 (around US$6.7 billion). Leverage has been effectedby Taiwan firms from Japanese and US sources, as follows:

• UMC (Unipac Optoelectronics) Matsushita• Tatung (Chung-Hwa Picture Tubes)_ Mitsubishi• Acer Display Technology IBM• Winbond Toshiba

Many of these alliances reflect earlier alliances struck on other technological upgrades,such as Winbond and Toshiba collaborating on DRAM technology.

Next generation: digital versatile discs

Digital video discs (or digital versatile discs: DVDs) represent the next technology set tosupercede CD-ROMs, and Taiwan is already positioning itself for this eventuality. Thestandards which will govern its introduction to the marketplace are being set by leadingUS firms, such as IBM and Intel, leading Japanese firms such as NEC, Matsushita andSharp and the Korean firms, Samsung and LG. These firms form a DVD Forum SteeringCommittee to set standards for video, audio and computer data storage and transmissionusing DVDs. In March 1998, Taiwan became a player in this process, through ITRI beingelected to the Steering Committee. ITRI followed this up by signing an agreement withMatsushita of Japan to establish a DVD Verification Laboratory in Taiwan. Thus ITRIcontinues to steer the entire Taiwan industry towards its next technological goal.

Automotive industry

The automotive industry in Taiwan has been characterized by a large number ofparticipants (11 companies in 1994 producing 400,000 cars, ie on average only 40,000each) each of which is quite small and incapable of making the investment needed todevelop self-sufficiency in critical components like engines and powertrains. Theindustry was based mainly on local companies with Japanese partners, such as ChinaMotor Co(CMC)., Yulon Motor Co.(YMC) and San Yang Motor (SYM).13 Somesuccess was achieved in developing local branded products, eg the VARICA van andsmall delivery truck line produced by CMC, which used a Japanese 1-litre engine. But 13 CMC has a 35 percent equity tie-up with Mitsubishi Motor; YMC a 25 percent tie-up with Nissan;and SYM likewise a 25 percent tie-up with Honda.

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efforts to develop the core engine and powertrain components by these firms had beenfrustrated - and some attempts, as in the case of the Yulon group’s 'Feling' branded car,with its own engine, had failed in the marketplace.14

Thus by the 1990s the automotive companies were anxious to find a way to develop theirown capabilities in the core components of engine and powertrain. The drivinginfluences were, firstly their own desire to become fully fledged automotive companies;the prospects of the opening China market, from which they would likely be excluded ifthey did not have their own components; and the looming prospects of tariff protectionbeing wound back under GATT and then WTO rules.

Engines

An attempt to forge an alliance to produce a common 2-stroke engine by Taiwan'sautomotive companies in the 1980s had failed. Continuing dependence on their Japanesepartners meant that they were more inclined to cooperate to produce a 4-stroke engine inthe 1990s. The three companies were prepared to find common ground through theirtrade association, the Taiwan Automotive Industry Association (the TVMA), which madean approach to the government and ITRI in 1990/91. This was the beginning of a longprocess, involving the companies, ITRI's Mechanical Engineering Laboratories,technology partners in Europe and the USA (such as Lotus in the UK) and marketingoutlets -- but not the Japanese principals -- which culminated in the launch of a commonengine and a joint company to produce it, the Taiwan Engine Company, mainly for theemerging China market.

The story of this R&D alliance is told in greater detail below. Here it suffices to note thatTaiwan has eventually broken through as an independent engine and powertrain producerin the automotive industry, after several decades of being a 'second-source' supplier forJapanese automotive firms. This illustrates the limits to the Taiwan approach totechnology leverage, as well as the possibility for extending those limits throughassiduous application of institutional learning techniques.

Electric motor cycle

The motorcycle industry has grown rapidly in Taiwan, along with rapidly increasingusage of motorcycles in cities as a means of personal transport. This has become a majorsource of air pollution - if not the dominant source, at least in the cities themselves. Thusthere is great pressure to develop alternative urban transport systems, such as metrosystems - and electric vehicles. The Taiwan EPA is maintaining this pressure by issuingstringent emission controls on motorcycle exhausts (stepwise reductions in allowablelevels of carbon monoxide and nitrogen oxides in 1988, 1991,and 1998), and requiringthat 2 percent of sales of motorcycles by the year 2000 be electric vehicles.

This in itself constitutes the platform for a new industry with both domestic and exportprospects - protected by the emission controls which constitute very effective non-tariff 14 The Feling car had a fuel injection engine upgraded by YMC from a Nissan carburetor engine.

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trade barriers. Thus the Energy Committee of the MoEA targeted an electric motorcycleas a strategic product, and funded the formation of a consortium of companies to producesuch a vehicle.

Taiwan's leading motor cycle producer, Kang Yang Motor Co. announced its intention oflaunching its new all-electric powered motor cycle at the end of 1998. This resulted froma successful collaborative alliance fostered by ITRI, with the full financial support of theMoEA which is interested in generating a new industry as well as encouraging non-polluting engined vehicles.

The Kang Yang product is being supported at its launch with an environmental subsidy ofbetween NT$16,000 and 22,000 per vehicle, allowing it to sell initially at the modestprice of NT$40,000. In this way MoEA is deliberately shaping the market for thisemergent product, on grounds of social desirability.

Kang Yang teamed up with 10 local automotive components and motor cycle companiesto establish an R&D Center in Taipei that will support the emerging industry. Initialcapital of NT$200 million has been subscribed by all participants. Behind thisachievement lies a carefully orchestrated R&D alliance, which again is described in detailbelow.

Taiwan's deployment of industrial upgrading incentives

Taiwan has left little to chance in its industrial upgrading approaches. Targetedapproaches for particular industries were used throughout the 1960s, 1970s and 1980s,offering firms in the selected sectors various kinds of incentives and tax concessions inreturn for upgrading technology, improving the quality of output, expanding exports, andso on. By the end of the 1980s these targeted approaches were being seen as havingdecreasing impact, and in any case they were easily identified as being 'unfair' in terms ofGATT rules.

In 1991 a new Statute for Upgrading Industries was introduced, making companieseligible for tax benefits if they made investments in such industrial upgrading measuresas performing R&D, training of personnel, introduction of automation, establishment ofbrandname products, pollution control, recycling and energy conservation.

The 1990s has seen further programs introduced, aimed at promoting Taiwan as an Asia-Pacific regional manufacturing centre, through raising (and rewarding) higher levels ofinvestment in R&D, further integrating investment operations and actively promotingcertain fundamental investments, and promoting industrial cooperation through thesigning of 'industrial cooperation agreements' with major multinationals looking to dobusiness in Taiwan. Within this overall framework, the Ministry of Economic Affairs,and in particular its Industrial Development Bureau, has formulated a series of 5- and 10-year plans for improving quality levels in manufacturing, promoting industrialautomation and for the technological upgrading of local companies in traditionalindustries.

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The major innovative program of the 1990s was the identification by the IDB of Taiwan'sTop Ten Emerging Industries, which were singled out for special promotion in the 1991Six Year National Development Plan. These industries are: communications, information,consumer electronics, semiconductors, precision machinery and automation, aerospace,advanced materials, specialty chemicals and pharmaceuticals, specialty medical devices,and pollution control.

Long discussion led to the selection of these industries, conducted both internally withinthe IDB and its sister agencies, and externally through such vehicles as the Science andTechnology Advisory Group (STAG). This latter group dates back to the landmark 1979Science and Technology conference convened by K.T. Li, and brings together leadingtechnologists and scholars from around the world for two days of intensive discussionevery two years.

The Top Ten industries were identified as being those which would drive Taiwan's hightechnology development into the 21st century. In 1995 the IDB announced a revisedlisting, estimating that these Ten Industries generated output of US$47 billion in thatyear, and would be expected to produce output of just under $75 billion in the year 2000(as shown in Table 2-1).

Table 2-1 Development objectives of the Top Ten Emerging Industries

Industry 1995 production US$ billion

2000 production (e) US$ billion

Annual growth Percent

Communications 2.4 3.3 8.3Informationproducts

17.2 30 14.9

Consumerelectronics

2.0 2.3 3.6

Precisionmachinery/automation

8.1 12.0 10.3

Semiconductors 9.0 14.0 11.7Aerospace 1.1 2.0 16.1Advanced materials 1.7 2.5 10.1Specialty chemicals/pharmaceuticals

5.2 7.5 9.6

Specialty medical 0.1 0.15 10.7Pollution control 0.2 0.4 18.9Totals 47 74.1 12.1

Source: Industrial Development Bureau, 1997 'The development and upgrading of manufacturing industriesin Taiwan,' Industry and Innovation, 4 (2): 277-301.__________________________________________________________

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Institutional elements in these upgrading experiences

Taiwan has developed a complex and innovative set of institutional vehicles which drivethe industrial upgrading process. These are generally mixed public sector/private sectorentities. Four are worth singling out in this context:

• technological support (ITRI);• infrastructure (Hsinchu park);• R&D alliances; and• industry associations.

Technological support: ITRI

The powerhouse behind Taiwan’s entry into information products, semiconductors andother advanced technologies generally is the Industrial Technology Research Institute(ITRI). It is the most visible and dynamic institution in Taiwan’s national system ofinnovation. As a national research institute, ITRI is chartered with the mission ofundertaking applied research to accelerate the industrial development of Taiwan. Thus itis charged with working as closely as possible with Taiwan’s private sector. It conductspre-competitive research on projects sponsored by the Ministry of Economic Affairs witha view to transferring the outcomes to the private-sector non-exclusively. It also conductsshort- and medium-term research that is sponsored by private firms. It is engaged withindustry associations in the formation of various R&D collaborative consortia, designedto bring Taiwanese firms abreast of world technological best practice.

The business of ITRI is not research so much as technology transfer. It is arguably themost capable institution of its kind in the world in scanning the global technologicalhorizon for developments of interest to Taiwanese industry, and then executing the stepsrequired to import the technology (eg under license, or through joint development),absorb and adapt it, involve Taiwanese firms in projects that utilize the new technology,and finally transferring across products, equipment and know-how to Taiwanese firmswho will take over its further commercial development. This is not so much a ‘nationalsystem of innovation’ as a ‘national system of economic learning’ of prodigious effect.Programs undertaken by ITRI were designed both to facilitate the creation of newindustries, as in the case of semiconductors (but also fine chemicals, pharmaceuticals,optoelectronics, aerospace), and to upgrade existing industries.

In the latter case, a good example is ITRI’s efforts to upgrade the technologies used inbicycle fabrication (such as carbon fibre). Taiwan had built a good position in bicycleproduction, but it was declining in the 1980s as domestic costs rose. ITRI madedetermined efforts to acquire carbon fibre technologies and pass them across to thedeclining industry, which has revived in astonishing fashion on the strength of the newmaterials.

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The semiconductor industry has certainly been ITRI’s greatest ‘industry creation’ successstory. Through ERSO, ITRI was centrally concerned in the promotion of the privatesector development of the semiconductor industry, through its initial pilot waferfabrication facility, and then through subsequent spin-off ventures: UnitedMicroelectronics Corporation (UMC: 1979), Taiwan Semiconductor ManufacturingCorporation (TSMC: 1986), Taiwan Mask Corporation (TMC: 1988) and VanguardInternational Semiconductor Corporation (VISC: 1994). ITRI has been activelypromoting other technologies and industries which in many cases build on the priorsuccess with semiconductors - such as in flat panel displays.

Infrastructure provision: Hsinchu Science-based Industry Park

Underpinning all these Taiwanese high technology firms lies the phenomenon of theHsinchu Science-based industry park. All the semiconductor companies have theirfabrication and design facilities there, clustered around the foundry facilities of TSMCand the research and design facilities of ITRI/ERSO and the leading national technicaluniversities of Chiaotung and Tsinghua. So too do many of the leading IT firms such asAcer Inc and Acer peripherals as well as specialists like Logitech.

The Hsinchu park was entirely an initiative of the Taiwanese government, and modelledquite explicitly on the success of the Stanford Research Park in California’s SiliconValley. To many observers, such as the US Semiconductor Industry Association (SIA),Hsinchu has taken the best features of Silicon Valley and adapted them to the Taiwanesesituation. Taiwan's National Science Council established the Park in December 1980, toattract investment in high technology industries of the future. Ease of access, cleanenvironment, good housing and educational facilities, as well as land made available bythe government, and generous investment and taxation allowances, were the inducementsoffered. The park has been an outstanding success, and continues to offer an extremelysupportive environment for all the firms located there.

Hsinchu Park offers firms an attractive working environment and living conditions (muchbetter than the crowded conditions of cities like Taipei and Kaohsiung) as well asproximity to technical expertise. Because it is government-owned, it also offers firmswhich settle there a range of special benefits, such as: low-interest government loans;R&D matching funds; tax benefits; special exemptions from tariffs, commodity andbusiness taxes; government purchase of technology abroad for transfer to participatingcompanies; government equity investment of up to 49 percent of enterprise capitalization;and access to government laboratories and test facilities located in the Park.

A second science park: Tainan

Hsinchu was by the mid-1990s chock-a-block. The park’s existing 360 hectares havebeen entirely used up. A third-stage has extended its reach by another 200 hectares – butthis too was fully booked even before any soil was turned. This led the National ScienceCouncil to create a second science-based industry park at Tainan in southern Taiwan. 15

15 This is based on a 660 hectare property formerly owned by the Taiwan Sugar Corporation.

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First stage construction began at the beginning of 1996, and completed by 1998. The parkaccommodates firms in four major industrial sectors: microelectronics and ICs, precisionmachinery, biotechnology and agriculture. The latter two are based on the abundantagricultural resources of southern Taiwan, to which value can be added by hightechnology firms.

Investment in the infrastructure of the second park is likely to be of the order of NT$80billion (US$2.9 billion), channelled from the Hsinchu park’s own operating fund, andfrom loans raised using existing assets, rather than through fresh governmentappropriations. This is a case where infrastructure expansion is achieved independently ofgovernment appropriations, and where regional development policy is reinforcingindustry development policy – a goal which many countries have found difficult toachieve.

CIST intelligent science parks

Most recently, the Taiwan military academy, Chung-shan Institute of Science andTechnology (CIST) has founded two very successful 'intelligent' science-based industryparks in Taoyuan, near Taipei. These are the Ching-shan and Lung-yuan parks,established in 1996. They now house more than 100 small firms developing 'dual use'commercial and military technologies, as spin-offs from projects undertaken at CIST. Athird such park was opened in March 1999 at Taichung, in central Taiwan. The success ofthe CIST initiatives owes much to the institutional learning accumulated through theNational Science Council's parks established at Hsinchu and Tainan.

R&D alliances

The way in which ITRI's laboratories forge alliances with the private sector, and inparticular with small and medium-sized enterprises, so that they can commercializetechnologies acquired through ITRI's scanning role, is one of the most interesting featuresof Taiwan's industrial upgrading system. The alliances have evolved from their inceptionin the 1980s, to become highly sophisticated devices for the rapid dissemination of newtechnological capabilities through Taiwanese industry. Original fieldwork by the authorin investigating 20 of these R&D alliances, incorporating five case studies, is reported inthe next section.

Industry associations

Industry associations are one of the striking features of the East Asian model of economicand industrial adjustment. They are particularly well developed in Taiwan, where theyplay a highly significant role as intermediaries between state agencies and the firms -- or,to paraphrase Okimoto, 'between the MoEA/IDB and the market.'16 While the role of

16 See Okimoto's treatise on industrial coordination and technological upgrading in Japan: D.Okimoto (1989) Between MITI and the Market: Japanese Industrial Policy for High Technology. Stanford:Stanford University Press.

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industry associations has been extensively discussed in the case of Japan, their role inTaiwan's industrial upgrading experiences is perhaps less well known.

The key condition needed for routine negotiation to take place between governmentagencies and business is for the variety of interests represented by firms, with theirdifferent strategies and capacities, to be amalgamated into a single expression of interest,in an industry association.

This the primary function of industry groups, in Taiwan as anywhere else. The differenceis that the industry groups in Taiwan have struggled to claim the representation rights thatthey have to enjoy, and once recognized, come to play an important role in co-evolvingindustry strategy with the relevant state agencies. All the important industries mentionedso far -- IT, semiconductors, automotive -- have generated their own industry associationswhich act as the essential interface between firms and government agencies, and therebyhelp to drive the process of industrial upgrading.

Co-evolution of government-business relations as technological capabilityexpands

How are the relations between government agencies and industries in Taiwan to becharacterized? As opposed to the perception of ‘cronyism’ as characterizing government-business relations in East Asia, the reality of the relationship observed in the creation andupgrading of high technology industries in Taiwan is one of ‘governedinterdependence.’17 By this phrase is meant a productive and complementaryrelationship, in which each side provides a necessary complement to the other:government agencies need the private sector for implementation of policies, while theprivate sector needs public agencies for coordination of catchup activities, particularly infinancial allocation and risk sharing and technological upgrading.

The point is that the relations between public and private sector are not fixed, but evolvealong with the industry which is being created. It is a case of co-evolution of the firmsand public agencies (linked bilaterally and in clusters), each of which adapts to changesin the others, thus stimulating a mutually dependent process of change and development.Taiwan’s semiconductor industry provides a test case of this co-evolution of government-business relations. 18 Government strategies for the creation of the industry have beenopen and explicit, with the government agencies such as ITRI and the IndustrialDevelopment Bureau (IDB) being equally insistent that firms must learn to survive andprosper in a world of fierce competition. It is striking that government assistance to theindustry -- the nurturing of enterprises while in a fledgling state -- never moved beyondthis to encompass trade protection or rescue of enterprises which hit operationaldifficulties.

17 For discussion of the concept of 'governed interdependence' by the scholar who introduced theterm, see Linda Weiss, The Myth of the Powerless State (Ithaca, NY, Cornell University Press, 1998).18 On the creation of Taiwan’s semiconductor industry, see John A. Mathews, 1997 'Silicon Valleyof the East: How Taiwan created a semiconductor industry,' California Management Review, 39 (4): 26-54.

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Indeed the history of the creation of the industry in Taiwan is littered with bankruptcies --such as that of Quasel in the mid-1980s -- where government refused to intervene torescue the company in distress. In Taiwan it is understood that this would completelydefeat the goal of public policy which is to ensure that firms become independent ofnurturing assistance as soon as practicable, and are able to hold their own in internationalcompetition. But the forms of nurturing and public coordination evolve as the industrybecomes established.

The early years in the semiconductor sector saw ERSO and its pilot plant play a leadingrole in acquiring technological capability and then in propagating that capability as fast aspossible to the private sector, through spin-off ventures and through staff leaving to takeup employment in semiconductor firms. With the close of the Submicron project in theearly 1990s, ERSO no longer played a major role in providing leading-edge pilot plants.This is something that the major companies could provide for themselves. Neither wasfinancial assistance needed in the launch of new companies and ventures. Most of thenew DRAM initiatives, for example, have been privately funded, or in some casesassisted by public investment vehicles that came to act like venture capital funds.

While Taiwan's public investments in technological upgrading may be small byinternational comparisons, nevertheless its institutions have developed an interesting wayof accounting for, and justifying, their investment in the 'common good' of upgrading.

Taiwan's model of recovery of public investments

Taiwan developed a highly innovatory approach to evaluating the worth of publicinvestments in industry creation and upgrading. Such investments are not seen as havingto be immediately ‘cost-effective’ in paying for themselves. Rather the government looksto the long term, for a return in taxes paid by companies that are successfully launched.The idea of this ‘Taiwan model’ of recovery of public investment, is depicted inFigure 2-1.

The model rests on the twin propositions that:

(a) Private R&D expenditure will eventually exceed public R&D expenditure; and

(b) Company tax revenues will eventually exceed public funds paid out as R&D support.

These are realistic propositions, and account for the public support granted ITRI'sprograms of R&D leadership to date. The actual revenue and expenditure figures for thesemiconductor industry are shown in Figure 2-2.

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Figure 2-1 Taiwan model of recoupment of public investments

Company revenues

Company tax revenue

Private R&D

Public R&D

Time

$

Source: Mathews and Cho (1999)____________________________________________________

Figure 2-2 Return on public R&D expenditure in Taiwan semiconductor industry

0

100

200

300

400

500

600

700

800

1975 1980 1985 1990 1995

Private R&D

Public R&D

Company revenues

Private R&D commences

R&D '00 NT million

____________________________________________________

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Over the 18-year period, 1977-1995, a cumulative total of NT$12.7 billion was spent inR&D funds by government through ERSO/ITRI to develop and sustain thesemiconductor industry, while the cumulative revenues of the companies which receivedtechnology transfer assistance has amounted over the same period to NT$225 billion.This is a near 20-fold return to the country as a whole.

To see how Taiwan's institutions bring together the various players -- firms, publicagencies and industry associations -- for purposes of industrial upgrading, we turn to lookin detail at the distinctive institutional innovation in Taiwan -- its R&D alliances.

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3. CASE STUDY: TAIWAN'S INNOVATION ALLIANCES

As the costs and risks of research and development mount, so firms in the industrialheartlands of the USA, Europe and Japan have sought new organizational forms to reduceand share these risks. Inter-firm R&D collaborative alliances have flourished, and withthem new institutional foundations and facilitative mechanisms have been discovered.The common feature shared by all such partnerships is that they influence the dynamicsof innovation in such a way that the future competitive position of at least one of thepartners, and potentially of all the partners, is improved.

The microelectronics, semiconductor and computer sectors have been in the forefront ofthese developments, driven by the Schumpeterian competitive dynamics of rapid productturnover and diminishing process technology life cycles that characterize these sectors.Governments have played key roles in the successful R&D consortia in all the advancedcountries -- as in the case of Sematech in the USA, in the VLSI and many other jointR&D programs in Japan, and in ESPRIT, EUREKA and other collaborative programs inEurope.19 These developments, whether they be called R&D alliances, or strategictechnology partnerships, or simply collaborative innovation networks, are the subject of agrowing scholarly literature.20

From the perspective of the practising manager, what is of interest in such inter-organizational alliances is not so much their efficacy (which can be taken as established),but the conditions in which their efficacy can be captured by the participant firm and thecompetitive advantages created or sustained. It is at this micro level of analysis that thedynamics of R&D collaboration may best be explicated, with full reference to thestrategies of the participants and their mutual adaptations as the process of collaborationunfolds.21

19 On R&D collaboration in the USA, see for example: M.L. Katz and A.J. Ordover, 'R&Dcooperation,' in M.N. Baily and C. Winston (eds), Brookings Papers on Economic Activity (Washington,DC: Brookings Institution, 1990): 137-203; or A.N. Link and L.L. Bauer, Cooperative Research in U.S.Manufacturing: Assessing Policy Initiatives and Corporate Strategies (Lexington, MA: Lexington Books,1989). On R&D collaboration in Japan, see for the case of the computer industry, Martin Fransman, TheMarket and Beyond: Information Technology in Japan (Cambridge, UK: Cambridge University Press,1990/1993); and for R&D collaborative structures more generally, Mariko Sakakibara, 'Cooperativeresearch and development: Theory and evidence on Japanese practice,' (PhD dissertation, HarvardUniversity, 1994). On the case of R&D collaboration in Europe, see for example EIRMA (EuropeanIndustrial Research Management Association), Cooperative R&D in Industry, Working Group Reports No.38 (Paris: EIRMA, 1989).20 For a general discussion, with many examples, see Mark Dodgson, Technological Collaborationin Industry: Strategy, Policy and Internationalization in Innovation (London and New York: Routledge,1993); and for examples of studies of innovation networks in both East Asia and the West, see the specialissue of Journal of Industry Studies on 'Innovation Networks: East meets West' (Vol. 3, No. 2, Dec 1995).21 See for example the detailed analysis of the unfolding dynamics of R&D collaboration in a singleEuropean instance, namely the case of inter-firm collaboration to create an automotive adhesives industryin Germany in the late 1980s, involving chemical firms, automotive firms, steel firms, and public sectorresearch institutes, as provided by J. Hausler, H.-W. Hohn and S. Luetz, 'Contingencies of innovativenetworks: A case study of successful interfirm R&D collaboration,' Research Policy, 23 (1994): 47-66.

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Of great interest in this regard is the series of collaborative R&D ventures that haveemerged in Taiwan, within a quite distinctive institutional framework. Unlike the case ofmany of the collaborations between established firms in the US, Europe or Japan, wheremutual risk reduction is frequently the driving influence, in the case of Taiwan it istechnological learning, upgrading and catch-up industry creation that is the object of thecollaborative exercises.

Origins of the R&D alliances

The Taiwan R&D alliances were formed hesitantly in the 1980s, but have flourished inthe 1990s as institutional forms have been found which encourage firms to cooperate inraising their technological levels to the point where they can become world-classcompetitors in advanced technology industries. Most of these alliances are in theinformation technology sectors, covering personal computers, work stations,multiprocessors and multimedia, as well as a range of consumer products andtelecommunications and data switching systems and products -- but they have alsoemerged in non-related sectors such as automotive engines, motor cycles, electricvehicles, and now in the services and financial sector as well.

Over a dozen such alliances could be counted as operating in Taiwan in the mid-1990s,bringing together firms, and public sector research institutes, with the addedorganizational input of trade associations, and catalytic financial assistance fromgovernment. Thus in Taiwan, as in Japan, one may hazard the observation that R&Dcollaboration is increasing in intensity as the knowledge-intensity of products andprocesses increases.

Taiwan’s high technology industrial success rests on a capacity to leverage resources andpursue a strategy of rapid catch-up. Its firms tap into advanced markets through variousforms of contract manufacturing, and are able to leverage new levels of technologicalcapability from these arrangements. This is an advanced form of 'technological learning',in which the most significant players have not been giant firms (as in Japan or Korea), butsmall and medium-sized enterprises whose entrepreneurial flexibility and adaptabilityhave been the key to their success.

Underpinning this success is the efforts of public sector research and developmentinstitutes, such as Taiwan’s Industrial Technology Research Institute (ITRI) which sinceits founding in 1973 has acted as a prime vehicle for the leveraging of advancedtechnologies from abroad, and for their rapid diffusion or dissemination to Taiwan’sfirms.22 This cooperation between public and private sectors, to overcome the scaledisadvantages of Taiwan’s small firms, is a characteristic feature of the country’stechnological upgrading strategies and the creation of new high technology sectors suchas semiconductors.

22 On Taiwan’s technology transfer strategies, see Otto Lin, 'Development and transfer of technologyin Taiwan ROC,' in O. Lin, C.T. Shih and J.C. Yang (eds) Development and Transfer of IndustrialTechnology (Amsterdam: Elsevier, 1994).

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Behind many of these successes lie some remarkable institutional structures favoringcollaborative product development, which is Taiwan’s own adaptation of the R&Dalliance. 23 Taiwan’s dominance of mobile PCs for example, rests on a public-privatesector led consortium that rushed a product to world markets in 1991. Taiwan’s strongperformance in communications products such as data switches, which now dominate inPC networks, similarly rests on a consortium which worked with Taiwan’s public sectorindustry research organization, ITRI, to produce a switch to match the Ethernet standard,in 1992/93.

New alliances continue to be formed in the 1990's

These successes are being followed up by many more such R&D alliances in digitalcommunications and multimedia areas. Taiwan is emerging in the second half of the1990s as a potentially strong player in the automotive industry, particularly in theexpanding China market, driven by its development of a 1.2 liter 4-valve engine. Again,this is the product of a public-private collaborative research endeavor involving threecompanies, which have now jointly created a new Taiwan Engine Company to producethe product. The commercial development of an electric-powered motor cycle, first madeavailable in 1998, is likewise the product of a carefully orchestrated R&D alliance. Thus,the R&D consortium is an inter-organizational form which Taiwan has perfected as avehicle for catch-up industry creation and technological upgrading. The microdynamicsof the operation of these consortia, is therefore a matter of some substantial interest.

Of course, the R&D collaborative ventures account for only a small proportion ofTaiwan’s high tech successes, many of which are due to companies’ own R&D or toprivate collaborative ventures between firms, for example between a Taiwanese firm andadvanced firms in Europe, Japan or the USA. But where Taiwan is doing very well, as inLaptop PCs, there is frequently a public-private R&D alliance to be found at thebeginning of the sector’s development. Taiwan is learning from, and in some waysimproving on, the R&D consortia that can be found in Japan, the USA and Europe.

Organizational foundations of the R&D alliances

The basic model of the Taiwanese alliances is the construction of a process in whichR&D costs can be shared, and risks reduced, through bringing many small firms into acollaborative alliance with each other and with ITRI (ie with one of its operatinglaboratories). It is ITRI which provides the anchor for the alliance and the principaltechnology leverage vehicle. Thus, the Taiwan R&D alliances differ from theircounterparts in the USA, Japan and Europe, in that their goal is rapid adoption of newtechnological standards, products or processes developed elsewhere and their rapiddiffusion to as many firms as possible.

23 On Taiwan’s R&D alliances generally, see Linda Weiss and John Mathews, 'Innovation alliancesin Taiwan: A coordinated approach to developing and diffusing technology,' Journal of Industry Studies,1/2 (1994): 91-101.

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But their organizational form owes much to the R&D collaborative vehicles developed inthe leading industrial centres, particularly in the way that Japan has structured relativelyshort-lived R&D alliances with clear technological goals (as in the 1976-79 VLSIproject). 24

As in the leading cases in Europe, the USA and Japan, government plays an importantrole as facilitator and provider of catalytic funding -- but in Taiwan a significant portionof costs is borne by participant firms. The central hypothesis of the paper is that theTaiwan alliances, while being formed for very different purposes, share many of thefundamental features of the R&D alliances established in the advanced industrialcountries.

Over 20 R&D alliances can be identified as having been formed in Taiwan over thecourse of the past 15 years, as illustrated in Table 3-1. Five are asterisked; these we shalllook at in some detail in the following discussion. One striking feature worthy ofimmediate notice is their relatively small budgets. In all, the twenty consortia haveaccounted for a budget of no more than NT$4 billion, over 15 years, with governmentinput of no more than NT$2.3 billion -- or around US$100 million, equivalent to just oneyear’s government subsidy of the 10-year Sematech program in the USA.25

Thus, these figures reveal just what a 'David and Goliath' struggle it has been for Taiwanto take on US firms in high technology industries -- and they underscore the significanceof the Taiwan achievements, which clearly owe as much to organizational finesse andlearning as to dollar subsidies.

24 There is by now a large literature on the VLSI project and its organization. For a representative account,see D. Okimoto, T. Sugano and F. Weinstein (eds), Competitive Edge: The Semiconductor Industry in theUS and Japan (Stanford: Stanford University Press, 1984).25 On Sematech’s budget and its appropriation, see Sematech, A World of Opportunity: 1996 AnnualReport (Austin, TX: Sematech, 1997).

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Table 3-1 R&D alliances in Taiwan: 20 cases 1983-1997

Alliance Year(s) Companies Max. BudgetNT$ m

Electronics and information technology1. PC 100 (IBM PC XT-compatible) 1983-1984 5(9) 402. PC 400 (IBM PC AT-compatible) 1984-1985 3 243. Workstation (Sun SPARC-compatible) 1989-1991 2(3) 1504* Notebook PC 1990-1991 46 1005. Graphics terminal 1991-1993 34(9) 256. Palmtop PC 1991-1992 16 507. Pentium server 1991-1993 2 508* Taiwan NewPC (PowerPC) 1993-1997 40 250

Consumer electronics and communications1 * Ethernet switch 1993-1996 5(8) 752. Digital loop carrier 1992-1994 3(4) 603. LCD consortium 1995-1997 4 2304. HDTV 1994-1996 11 2505 Interactive TV 1995-1997 21 2006. V5 Network access standard 1996- 12 1507. High speed loop access system 1996- 14 120

Mechanical engineering/materials1* 1.2 L engine 1992-1997 4(3) 1,4002. *Electric scooter 1991-1996 10 5003. 250cc motorcycle engine 1996- 2 600

Software/services1. Java-based Internet products 1996- 24 2502 Electronic commerce 1996- 61 300

* Case study(..) Second-stage participation

Source: ITRI; industry interviews_____________________________________________________

Evolution of R&D alliances in Taiwan

Like Taiwan’s industrial upgrading efforts more generally, the R&D alliances are thefruit of experimentation and some early failures. Some of the early R&D collaborativeefforts, inspired no doubt by Japanese cases such as the VLSI program of 1976-1979,were hardly successful. In the beginning of the 1980s, the newly established Institute forthe Information Industry (III), for example, initiated a project called SoftwareEngineering Environment Development (SEED), which brought together 32 member

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firms and the agency with some ambitious goals to establish technical standards forChinese-character processing and software - but in the end there was little to show forthese efforts. Likewise an early effort by ITRI to involve automotive firms in thedevelopment of a 2-stroke engine, to provide a technological foundation for a mootedTaiwanese automotive industry, was also an almost complete failure.26

But the characteristic feature of Taiwan and its institutions is pragmatism and the abilityto learn from mistakes. These two failed R&D alliances were not the last word on thesubject. Characteristically, for the Taiwanese these failures led simply to a search for amore effective institutional framework that could combine collaboration withcompetition. Rather than giving up on alliances on the grounds that they 'did not work',they instead searched for a better way to make them work.

In the 1980s and 1990s there have been many more such initiatives, most of which can betraced to the various research laboratories of ITRI - ERSO, CCL, OESL and MIRL. 27

Some of these have been more successful than others - but all seem to have learnedorganizational lessons from the early cases where government contributed all the fundsand research tasks were formulated in generic and overly ambitious terms for thecompanies to take advantage of them. The more recent R&D alliances have been morefocused, more tightly organized and managed, and have involved participant firms muchmore directly in co-developing a core technology or new technological standard whichcan be incorporated by the companies, through adoption and adaptation, in their ownproducts.

The current period of R&D alliances traces its origins to a series of 'multi-client projects'initiated by ITRI (in particular its computer laboratory, ERSO) in the early to mid-1980sto develop IBM-compatible PCs. Taiwan missed out completely in mainframe and mini-computers. But in the early 1980s computer engineers in ERSO were highly aware of thepossibilities in the new PC sector, based on the emergence of firms in microprocessor-based product areas such as calculators, game machines and the early microcomputers.IBM introduced its PC in August 1981 with a non-proprietary open architecture. IBM’sproduct was a great success, and opened the possibility for component standardizationand legal cloning through 'IBM-compatible' machines -- a concept first realized byCompaq, which demonstrated an IBM PC XT-compatible machine at the 1982 USComdex. This created an opportunity which Taiwan was quick to seize.

In 1983 there was no concept of the 'R&D alliance' within ITRI. The norm was for ITRIto develop new technologies and then advertise their availability to existing firms or todevelop the technology and then spin it off into a new firm (as done with the firstsemiconductor firm, UMC, in 1980) or to perform contract work for individualcompanies, sometimes merging into co-development work.

26 See Jiann-Chyuan Wang, 'Cooperative research in a newly industrialized country: Taiwan,' ResearchPolicy, 23: 697-711, for a brief description of these two projects and their shortcomings.27 These are, respectively, the Electronics Research Laboratory (ERSO); the Computing andCommunications Laboratory (CCL: spun off from ERSO in 1990); the Optoelectronic Systems Laboratory(OESL); and the Mechanical Industry Research Laboratory (MIRL).

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Within ERSO there was interest in developing the IBM-compatible machine as indeedthere was in some of Taiwan’s emerging IT companies such as Acer. Thus a developmentagreement was signed between Acer (then Multitech) and ITRI/ERSO - but at theinsistence of the Ministry of Economic Affairs, which saw the potential for many Taiwanfirms to become involved in this emerging industry, the project was extended to become a'multi-client project'. This was the organizational prototype of the R&D alliance. Thisinitial effort had partial success in developing a generic product standardized aroundcertain core components - but it was too late for the market, and was plagued at the timeby intellectual property rights disputes.

The next chance came with IBM’s announcement of a powerful new PC system inAugust 1984, the PC AT, again with open architecture and by now standardizedcomponents, such as DOS operating system and Intel 286 microprocessor. This was atechnological leap that was eminently suited for emulation by ERSO’s neworganizational form of the multi-client project. No sooner was IBM’s new machineannounced than ERSO moved to establish a new multi-client project to emulate it. Aconsortium was established in October 1984 to build the new IBM machine. Threecompanies were enrolled as participants.28 Formal contracts were signed in December1984. A prototype machine was transferred to the companies by July 1985, less than ayear after IBM’s announcement.29 This project was considered a great success, both interms of the technology development and transfer and in terms of the business generated.The stage was now set for ITRI, and its newly established Computing andCommunications Laboratory (CCL), to take the next step in upgrading Taiwan’stechnological capabilities beyond the simplest PCs. We can date the R&D alliancesproper from this stage.

Case studies of Taiwan’s R&D alliances in the 1990s

1) Notebook PC (1990-1991)

Background and rationaleThe PC market was fragmenting in the late 1980s, and Notebook PCs (mobile PCs)represented an important development, pioneered by Toshiba, in which Taiwan firmscould reasonably hope to make an impact -- but where no firm at this point possessed theneeded capabilities.30 The prospects for Taiwan companies in this new field seemedremote, given the multiple proprietary standards which were emerging, and the highdensity of the product design and assembly process calling for different and moreadvanced skills than those involved in producing desktop PCs.

28 The firms involved were Systek; Tatung; and Copan. This was the project through which Tatung, then aleading electronics firm in Taiwan, made its entry into the PC business.29 This time, ERSO sent engineers to Washington to discuss with IBM and US Customs representativeshow copyright infringement challenges could be avoided; they were instructed in the ‘cleanroom concept’(in which software engineers work in a room without any IBM code accessible) which was adopted.30 Initial interest in this area was shown by Tatung, which developed a prototype notebook PC in 1989, inconjunction with ERSO, and exhibited it at the CeBIT trade fair in Hanover.

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CCL’s senior officials saw this as an opportunity to develop a further multi-client projectfor the Notebook PC to give the industry greater technological and commercialmomentum. The idea was to settle on certain key components as standard and help tobuild a mass production industry on this basis. This did indeed turn out to be an effectivestrategy, helping the Taiwan Notebook PC industry into its leading world position today.

Consortium processA completely new organizational approach was tried for this Notebook PC project,marking the point where the multi-client projects were being recognized as genuine R&Dalliances or consortia. In this case, CCL developed draft specifications for a 'commonmachine architecture' and announced the new project to interested firms. CCL negotiatedwith the trade association, the Taiwan Electrical Appliance Manufacturers’ Association(TEAMA), to become involved as coordinator.31

This may have seemed a small step at the time, but in organizational terms it representeda considerable enlargement of the scope of the alliance - and an institutionalentrenchment of its legitimacy within the industry. As things turned out, no fewer than 46companies elected to join the consortium - some clearly more for informational purposesthan for any serious intention of manufacturing. 32 In July 1990 a formal consortium wasestablished, the Taiwan Handheld PC Consortium (THPC), with capital of NT$50 million(just less than US$2 million) subscribed by member firms.

The overall strategy was for CCL and the consortium to develop a 'common machinearchitecture' for its prototype, which would translate into a series of standardizedcomponents which could be produced by Taiwanese manufacturers through massproduction. This was the key innovation of laptop PC consortium, which had the effect oftranslating what would have been a 'niche' product for Taiwanese manufacturers into amass-produced product where Taiwanese manufacturing efficiencies could be broughtinto play.

Once the serious engineering work began, the prototype was produced rapidly (buildingon the earlier work with Tatung) within four months and exhibited to great acclaim at theComdex computer show in the USA in 1990. The prototype consisted of a number ofstandardization decisions regarding the key components, such as: motherboard (andchipset); screen (LCD); keyboard; battery; connectors; and adapters.

Many of these had to be imported from Japan. Their adoption by the consortium meantthat the Japanese suppliers would see their business expand and would respond quickly toorders from Taiwanese firms. Those components which could be sourced locally weretargeted as important industrial upgrading initiatives. For example, Acer Peripheralssucceeded in developing its own Laptop PC keyboard (separately from the consortium),which was an important breakthrough -- for Acer and for other Taiwanese firms which

31 Now the Taiwan Electrical and Electronic Manufacturers’ Association, TEEMA.32 The initial entrance fee was set at only NT$1.2 million. A slightly higher fee of NT$1.8 million was setfor later entrants.

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could source from Acer. Other components suppliers, such as Proton (for power supply)did very well out of their participation in the consortium.

OutcomeThe prototype was transferred rapidly into mass production. Market sales took offrapidly, both in Taiwan and abroad; more than 500,000 units were produced and shippedin 1991. Thus, a notebook PC industry in Taiwan was launched thanks to the consortium.CCL followed up the earlier product development work with extensive training programsoffered to engineers employed by consortium member firms.

However, the initial success quickly generated problems. Several consortium membersfound themselves selling virtually identical products (given that the prototype had beenso close to a commercial product) and price competition rapidly became the main meansfor producers to differentiate their products. This led to excessive competitive pressures,and some of the less experienced PC firms which had entered the industry via the allianceexited, or went bankrupt. This was hardly a desirable outcome. Further attempts to extendthe alliance, to produce a second generation Notebook PC, foundered on the emergingdifferences between the manufacturers, and the formal consortium was disbanded in1991.

2) NewPC consortium (1993-1997)

Background and rationaleThe Taiwan PC industry has been very successful, but has limited itself up to the 1990s to'Wintel' architectures, with the exception of an attempt to enter the workstation segmentof the market on the basis of Sun SPARC-compatible machines, in the late 1980s. Thereare of course alternatives to the Windows-based architectures developed by Microsoftand Intel. One such is the PowerPC microprocessor developed by IBM and Motorola andused by Apple. It made sense for the Taiwan IT industry to develop capability in thePowerPC architecture, at several levels, in case it took off and established itself as agenuine alternative to Intel and Microsoft products, and in order to use the PowerPCplatform as a way of accessing Apple product platforms, which had until recently beenlegally inaccessible for Taiwan PC firms.

For their part, IBM and Motorola recognized the significance of extending their globalreach through encouraging Taiwan IT firms to develop a range of PowerPC-basedproducts. IBM and Motorola were therefore approached by CCL in 1992, with a view tolicensing the PowerPC to a group of Taiwan PC firms. By dealing with ITRI/CCL in aonce-off licensing agreement, the US firms could avoid having to deal with a lot ofindividual, small Taiwanese companies. Negotiations over the character of thetechnology transfer process were prolonged, with a final agreement not being signed untillate 1993. To show their commitment, the US firms jointly established a PowerPCTechnical Centre in Taiwan (the first outside the USA) in the period 1994 to 1996, toprovide technical assistance to Taiwan firms seeking to adopt the PowerPC platform. 33

33 Apparently Digital Equipment Corp (DEC) also approached ITRI/CCL with a view to licensing itsAlpha processor, a rival to the PowerPC. However DEC was reportedly not willing to offer the same level

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The consortium processThis is one of the more complex ITRI R&D alliances, formed to promote a standardsystem platform based on the PowerPC microprocessor. Technology transfer from IBMand Motorola was effected through CCL, on behalf of Taiwanese firms generally, in theform of a comprehensive licensing agreement. This agreement set the terms of thedevelopment process. It provided for development of products based on the PowerPCprocessor, but not of the processor itself. Thus the consortium was designed to producesuch PowerPC-based products as rapidly as possible. On the original model of the LaptopPC consortium, the NewPC consortium was allowed to span several steps in the system-product value chain, including production of chipsets (platform), add-on cards,components and software as well as final PC system producers. This was a furtherorganizational innovation, making the NewPC consortium considerably more complexthan its predecessors at ITRI.34

The NewPC consortium was a large affair, involving 40 Taiwan IT companies as well asITRI/CCL, the trade association TEEMA and the US partners IBM and Motorola. The 40Taiwan IT companies were grouped in four classes, depending on their position in thevalue chain, focusing on either platform details (ie chipset), add-on cards, components orsoftware.35 Its structure is illustrated in Figure 3-1.

Figure 3-1 The structure of the NewPC consortium

CCH

ERSO

IDB

IBM

Motorola

core: R&D

small firms

large firms

foreign firms

industry association eg TEEMA

consortium

Source: Author of technology support as IBM and Motorola, and so their processor was not chosen for the NewPCconsortium. (DEC has since been acquired by Compaq.)34 In this it is comparable to the Electric Scooter consortium developed at the same time in MIRL.35 The firms involved in the four working groups were:

Platform working group (ie chipset):Umax; FIC; Tatung; Mitac; Datatech (DTK); UMC; plus new members - Asustek Computer Incand Universal Scientific Industrial Co.(USI);

Add-on card working group:Umax; FIC; Mitac; UMC; Asustek; Elitegroup; Macronix; Accton; Leadtek; Philips Taiwan;MicroMax; National Semiconductor Taiwan

Component working group:UMC; Winbond; Macronix; Sunpull; Chupond Precision; MicroMax; Philips Taiwan; NS Taiwan

Software working group:Umax; Tatung; UMC; Elitegroup; Datatech; Accton; Taiwan Autodesign; Welltronix; Leadtek;Sunsoft; Philips Taiwan; National Semiconductor Taiwan

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Most of the leading IT firms in Taiwan were involved except Acer, which elected toignore the PowerPC, and in any case consider itself capable of developing its own newproducts (with some exceptions, such as its participation in the Server alliance with Intel).Some leading companies did not join -- presumably for fear of offending Intel.36 Basedon the earlier experience with the Laptop PC consortium, membership in each of theworking groups was limited to a maximum of nine firms, to avoid excessive competition.Thus the alliances learn from each other, from one generation to the next.

An important distinguishing feature of the NewPC consortium is that it has followed anagreed roadmap for technological development.37 This is linked directly to thecontribution of the two multinational partners; they have raised the technologicalsophistication of the whole consortium process. In 1995 IBM, Motorola and Appleannounced the Common Hardware Reference Platform (CHRP) for the PowerPC, whichhenceforth provided the baseline for PowerPC-based products, ie chipsets andmotherboards. This was subsequently licensed to CCL and has since been embodied in aprototype PC system that was exhibited by the NewPC consortium at the TaipeiComputer Exhibition in June 1996. Thus the Taiwan consortium has moved along atrajectory provided by the multinational partners.

OrganizationImportant lessons were learnt from the Laptop PC experience. In the NewPC consortium,membership of the Platform working group (the most important of the consortium) wasrestricted to a maximum of seven companies, all of whom were required to haveconsiderable prior expertise and technological capabilities as well as their own marketingchannels. Thus the quality and quantity of the membership was regulated by theconsortium organizers -- an important innovation.

OutcomeIn terms of business generated, the PowerPC itself has not yet made a significant dent inthe dominance of the 'Wintel' standard promoted by Intel and Microsoft. Thus theproducts of the alliance are still at the 'potential' stage of business evolution -- apart fromthe Apple cloning, which was growing fast until Apple itself, under the influence of SteveJobs, reversed its stance and refused to continue licensing its Powerbook architecture.This was a major setback for the Taiwan firms pursuing Apple clone strategies,particularly Umax. On the other hand, some products utilizing PowerPC microprocessorshave emerged from the alliance. These include the PowerPC Internet access box and theWindows-based terminal (WBT), both of which are expanding rapidly in their ownproduct niches.

36 Other participants kept a low profile for similar reasons; for example, First International Computerparticipated via its subsidiary, Formosa Industrial Computing, while Umax sent its subsidiary, ProlabTechnology, to the software working group.37 Initial products were based on the PowerPC 601 processor; subsequent PCs and servers were based onPowerPC 603 and 604 versions, while workstations and servers were based on versions 620 and 604enhanced processors.

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The Internet access box is designed for use with a TV set at home or with a computermonitor in the office. These are simple devices consisting of the processor, a modem anda connection port to a phone socket as well as a lead to the display device. Japanese firmsare producing such devices using Taiwanese firms as OEM suppliers, incorporating thePowerPC. Since they do not offer computing power, they are free to use simpleroperating systems than the 'Wintel' standards which dominate PCs. This is their principalattraction -- simplicity of access and operation.

Another kind of product utilizing the PowerPC is the Windows-based Terminals (WBTs).These are again simpler devices than full PCs and normally dedicated to some routineprocessing function -- like displays in supermarkets or fast food outlets. The WBT marketis rapidly expanding, after the eclipse of earlier 'dumb' terminals by machines withprocessing power. 38

Thus the consortium must be rated a qualified success -- despite the failure of thePowerPC to displace the 'Wintel' dominance of the worldwide PC market. It was in thefirst place an insurance policy for the Taiwanese in case the PowerPC did effect anincursion into the PC market.

It has had several highly significant indirect effects. It has equipped major firms with thetechnological capabilities to develop products based on a major microprocessor and giventhem deep insights into the workings of the operating systems based on this processor. Ithas generated profitable product lines for the companies, both through their ownPowerPC-based products and through the opening up of Apple Powerbook clones. It hasassisted Taiwanese companies to move into product segments like Internet access boxesand Windows-based terminals which would otherwise have been inaccessible. And it hasfurther raised the international profile of the Taiwan PC industry so that it is seen to be aplayer in the technological development of the sector.39

3) Ethernet switch (1992-1996)

Background:The 1980s saw the emergence of computer networks, and with them emergentpossibilities for digital data transmission systems either modeled on existing analogueelectrical switching systems used for telephone traffic or based on new data architectures.

Computer networks have been based on a number of transmission and interconnectionprotocols, amongst which Ethernet (developed originally at Xerox PARC) is thedominant open standard. Early networks were based on hub or ring architectures, inwhich all computers could communicate with all others. 38 ITRI/ERSO had been involved in producing an earlier generation terminal based on the Unixoperating system -- the X-Terminal -- in the late 1980s and early 1990s. The Windows-based terminal(WBT) has come to replace the X-terminal -- but this early experience was invaluable for the Taiwanproducers.39 For further details on the NewPC consortium, see John Mathews and Teresa Shuk-ching Poon,'Technological upgrading through alliance formation: The case of Taiwan’s New PC consortium,' Industryof Free China, 74/6 (1995): 43-58.

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Taiwan firms were quick to become involved in these technologies, with the assistance ofERSO; for example Accton (an unofficial ERSO spin-off of 1988) was an earlyparticipant with its ‘Etherhub’ products. In the 1990s computer networks became socomplex that switching systems needed to be introduced, together with drasticallyincreased capacity (‘bandwidth’) for data flow. Switching systems enable two computersto communicate, separately from all others in the network. This represented a ‘quantumleap’ in data network technology which it was essential for Taiwan firms to master. SoCCL took the initiative in acquiring the technology, and forming a consortium for itsdissemination.

Consortium processThe technological core of the emerging Ethernet switch technology was threefold:

a) the open Ethernet standards themselves (as published by IEEE in the USA);b) the chipset embodying these standards;c) the hardware providing the physical switching link between computers.

In 1992 CCL initiated a project to build up its technological capability in this area. Nosource of technology transfer was needed, as Ethernet technology had previously beenmastered (eg through the earlier Ethernet hub-based systems). In 1993 CCL let theindustry know of this project (via alerting the trade association, TEAMA) and initiallyfive companies enrolled in a product development consortium: Dlink, Accton, Cnet,RPTI and Long Shine. Of these, DLink and Accton already had prior technologicalcapabilities, which they wished to extend and upgrade through this project. Three furthercompanies joined the project at a later date.40

The first versions of the Ethernet switch were embodied in a customizable chipset, laterreduced to a single Application Specific IC that could be manufactured locally byTaiwanese IC firms. Condensing the chipset to a single ASIC chip was the criticaltechnology challenge - spurred by US companies such as VLSI Technology that led theway with this kind of innovation. CCL used its own funds to develop the ASICs, on the‘fast follower’ strategy, and provided them for a fee to the Taiwan industry. Theconsortium participants took over this technology, and developed their own adapted orimproved versions of the ASIC technology for themselves.

OutcomeThis was one of ITRI’s most successful R&D alliances. The data switching businessbased on Ethernet standards is growing fast world-wide and Taiwan has produced at leasttwo leading specialist suppliers in Accton and DLink. Both companies have benefitedconsiderably from their involvement in the CCL alliance(s). Accton in the mid-1990sembodied its own ASIC chips in Ethernet switch products, such as its ‘backboneswitches’ and ‘segment switches’.41

40 The firm Long Shine later dropped out, due to financial difficulties not linked to the project.41 Products include the ES3008-TX, a smart, fast Ethernet switch with multiple ports utilizing 10 Base-Tinterface protocols ; and similar variations.

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These are profitable, high value-adding products that represent a welcome upgrade fromTaiwan’s accustomed role as supplier of the least value-adding components in hightechnology systems. The MoEA-funded phase of this project ended in 1996; since thenCCL has continued to maintain and develop its own expertise, further improving itsASICs, and developing expertise in rival technologies to that of Ethernet, such as ATMstandards.42 This led to continuing close relations between CCL and the companies - oneof the less visible outcomes of successful R&D alliances.

4) 1.2 liter, 4-cylinder, 8-valve engine (1992-1997)

Background and rationaleThe IT sector is by no means the only advanced technology sector to have benefited fromR&D alliances in Taiwan. The automotive industry has also made most effective use ofsuch arrangements in its efforts to break into a highly competitive field. The automotiveindustry in Taiwan is characterized by a large number of participants (11 companies in1994 producing 400,000 cars, ie on average only 40,000 each). Each of these companiesis quite small and incapable of making the investment needed to develop self-sufficiencyin critical components like engines and powertrains. Three automotive firms soughtassistance to develop a common 4-stroke engine, as described above.

Consortium processThe project was initiated at the instigation of the industry association, the TTVMA,whose members (and particularly the China Motor Corporation) would provide thecustomers for a collaboratively developed engine. Thus this was a relatively simple --albeit large and important -- consortium, where the participants were clearly identifiedand the market for the product was guaranteed in advance. The years 1991 and 1992 sawITRI/MIRL undertake a feasibility study, in which a group of engineers from thecompanies and ITRI undertook overseas study missions, and identified three leadingengine companies as sources of technology: Lotus (UK then independent now asubsidiary of General Motors); Porsche (Germany) and Ricardo (UK). Teams ofengineers from ITRI and the companies made extensive assessments of these companiesand drew up details of the technology transfer aimed for -- including targets for quality,cost, product simplicity and vehicle matching, as well as processes such as production oftechnical manuals and training of engineers.43 In the end, Lotus made the most attractiveoffer, and was accepted. A formal Technical Assistance Agreement (TAA) was signedbetween ITRI/MIRL and Lotus in January 1992.

At the beginning of 1994 the prototype engine was handed to the four companyparticipants. Rather than each company then seeking to develop and commercialize theengine on its own, a proposal to form a joint (common) engine company was mooted.

42 Asynchronous Transfer Mode (ATM) standards represent a rival for Ethernet switching standards forintra-network operation. For example, CCL has a current project designed to develop an ATM Internetswitch.43 In ITRI this is called a Request for Proposal document; it provides the topics on which an agreement isto be sought with a potential client or consultant.

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This was a momentous proposal, that promised to put the Taiwan automotive industry onthe solid technical foundations that had been sought but not attained over the previoustwo decades. The companies studied this proposal for 18 months (while undertaking theirown market and technology feasibility studies) and eventually agreed to form the jointengine company in July 1995. An office was established to plan and implement aproduction facility for the engine.

OutcomeThe consortium successfully launched a common engine company, the China EngineCompany (CEC) in 1995, and it became operational in 1996.44 The venture is capitalizedto a level of US$60 million (which again illustrates the tiny scale of the Taiwaneseindustry initiatives compared with their counterparts in Europe, the US and Japan). Thecompany’s initial plans were to produce a 1.2 liter, four cylinder, 8-valve gasoline engine,commencing in 1997, to reach a capacity of 73,000 engines per year by the year 2000. Infact the first engines of commercial standard were produced in February 1997.

This has been by Taiwan standards a large project, with a total budget of around NT$1.4billion (US$50 million). Over the course of the project, there have been equalcontributions from government and industry -- with the MoEA providing over 80 percentof the budget initially, and the companies increasing their share (and commitment) as theproject progressed. The companies had to put up NT$50 million (ie around US$2 million)each to participate in the project. This was a relatively small sum for the profitableautomotive companies, with a potentially very large return for them if the projectsucceeds and opens up the China market as a result.

5) Electric scooter (1991-1996)

The background to the emergence of an electric motor cycle in Taiwan has beendescribed earlier. Once again, it is a consortium organized by ITRI, and instigated by theMoEA, which lies behind the new market development. Participants in this consortiumincluded three sets of parties: the government agencies -- ITRI/MIRL (MoEA); theindustry association -- Taiwan Transportation Vehicle Manufacturers Association(TTVMA); and the ten companies, grouped as:

* Motorcycle companies (6):Kymco; San Yang; Taiwan Yamaha (three largest, accounting for 90percent of sales in Taiwan); plus Taiwan Suzuki; Giant Yeh; Kang Yang.

* Components companies (4):electric motor and controls - Shih Lin; Taigenebatteries - GS; Walsin Technology.

44 The consortium members, CMC, YMC and SYM each took 20 percent equity, with financial institutionstaking 35 percent (Chiaotung Bank 15 percent, and the China Development Fund 20 percent), and an autoparts manufacturer, Sengton Transportation Implements Co taking the remaining 5 percent. Yu Tien, whilea member of the consortium faced financial difficulties and is not an equity holder in the China EngineCompany (Hua-Chin Machinery Co.)

50

This consortium was initiated in 1990 by the Energy Committee of the MoEA, with aninitial feasibility study. A formal consortium was formed in 1992, named ZES 2000, andITRI/MIRL produced a prototype vehicle, the EC1, in 1996.45 Engineering options werechosen from the perspective of local supply and market accessibility, eg lead acidbatteries because of their availability. The consortium involved an advancedorganizational design, in that it spanned several phases of the value chain in producing anelectric scooter - namely batteries, electric motor and final vehicle assembly.46

The project has been driven by market considerations all along, and is unusual in that ithas involved customer surveys conducted to ascertain the likely acceptance of an electricvehicle produced. The project took a local 50cc scooter as benchmark and adapted it toimprove its electrical and mechanical efficiency, increase its battery density and capacity,reduce the scooter weight and drag characteristics and improve the scooter’s reliabilityand safety.

Design of a product for ease of mass manufacture was a constant factor. A six month testprogram was initiated in July 1995. Over 30 ITRI employees were asked to drive theZES 2000 scooter and log their responses on controlled questionnaire forms each week.The test vehicle was rated well for smoothness of ride, low noise and zero exhaustemission. Most found the long hours required for charging the battery overnight asacceptable, while some objected to the low acceleration capabilities of the vehicle.

ITRI/MIRL continued with further development work, for example to extend thecharging cycle time (giving scooter riders a longer ride between battery rechargingsessions) with a higher density battery such as the EV battery. This resulted in significantchanges to the propulsion system. Thus ITRI/MIRL improved the prototype whichminimizes the product engineering costs to be borne by the scooter companies if andwhen they make a decision to produce a commercial version of the scooter themselves.

Market prospectsThis is a case where government regulations are creating a new market (ie by EPAregulations) and where government regulations could shape the market in future. Thecritical techno-economic issue is battery charging. One option being considered by thegovernment is an infrastructure where batteries are owned and operated (ie charged,stored and recharged) by a utility, eg TaiPower, and leased to cyclists. In this system,cyclists could deposit their used batteries at depots located in or near petrol servicestations and pick up a freshly charged battery. Such an infrastructure system wouldgreatly enhance the attractiveness of the electric vehicle (eliminating the need forovernight battery charging at home and extending the driving range of scooters virtuallywithout limit - similar to the case for gasoline-driven vehicles now). The export prospectsfor such electric scooters would be expected to improve rapidly in the 21st century, asemission controls in polluted cities are implemented and as countries like China and Indiaswitch from manual bicycle transport to motorcycle transport.

45 The vehicle is named after the MoEA Energy Committee, which drove the project.46 In this it resembles the NewPC consortium within ERSO, which also pioneered the joint involvement ofcompanies spanning several links in the value chain.

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A prototype product was produced and tested in 1996/97 by the EPA to assess itscleanliness. This prototype has been passed to the consortium members who are assessingtheir technical and marketing options. This is the organized and orchestrated process thatlies behind the announcement at the end of 1998 that Kang Yang is to produce a series ofelectric scooters.

Benefits conferred by the Taiwanese R&D alliances

Let us now draw on these case studies to develop a more general understanding of theworkings of these R&D alliances in Taiwan. 47 The pattern of the alliances is that a groupof firms join with ITRI to establish capability in a new technology or new set of standardsfor an existing technology. The alliances have evolved from a fairly simple organizationalstructure, where ITRI identifies the technological issues and develops the specificationsand prototype and hands this over to interested firms. This has progressed now to onewhere there is a lengthy process of co-development between ITRI and partner firms,spanning several stages in the value chain. The role of the firms has evolved from theirbeing fairly passive recipients to co-developers (and co-funders) to the point where firmsthemselves are taking the initiative, as in the SET consortium.

All the models involve ITRI securing access to a new technology on behalf of Taiwanesefirms -- usually a technology source located overseas in the US, Japan or Europe. This iscommon to the operation of all the R&D alliance organizational forms. ITRI thereby actsas the 'vehicle' or gateway for Taiwanese firms to access a technology that wouldotherwise be beyond them -- and at the same time, offers a single point of contact for alarge advanced firm (such as IBM or Intel or Motorola) which can license its technologyto Taiwanese firms without having to deal with many small firms simultaneously. Thebenefits which the alliances confer on companies are both direct and indirect.

Direct benefits:

• Acceleration of process of product development or technology acquisitionThe cases reveal how rapidly many of the R&D alliances achieved their technicalgoals. It is a reasonable hypothesis that firms on their own could not have reached thesame technical levels on their own.

• Gaining access to new sources of technology, eg from foreign advanced companiesMany of the alliances involve a foreign advanced company as source of technology, egIBM and Motorola (PowerPC); Intel (XMP multiprocessor architecture); Lotus (1.2Lengine design); Sun Micro (SPARC Workstation). In each case the consortium, viaITRI, has a better chance of securing a technology transfer agreement than companiesacting on their own.

47 For the study on which this section is based, see John A. Mathews, 'Technological upgradingthrough collaboration: The case of Taiwan's R&D alliances' mimeo, April 1997.

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• Reducing and sharing R&D costsBuilding a single prototype on behalf of several firms clearly saves them the costs ofacquiring knowledge separately and building separate prototypes. In terms of publicbenefit, the existence of the R&D consortium clearly saves costs of duplication,without incurring penalties of long-term reduction of competition.

• Information gathering and sharingThe alliance provides a natural forum in which relevant technological and marketintelligence may be gathered and shared -- again saving on costs of informationcollection and processing. The emphasis on gathering of technological intelligence andits rapid dissemination to interested parties within the consortium solves one of thevexing problems of non-collaborative R&D, viz. how to ensure that informationreaches the relevant firms.

• Development and standardization of componentsOne of the hidden barriers to entry into a new field for small companies is that theycannot standardize on components and thereby strike a good deal with potentialsuppliers. The alliance can solve this problem by making the component selections (iestandardizing on certain components and not on others) and then negotiating supplyagreements with vendors on behalf of the firms as a group. As noted above, thisenabled the Laptop PC consortium, for example, to transform what would have been a'niche product' into a standardized product suitable for mass production. This is asubtle but effective way of accelerating diffusion of an innovation and of generatingnational competitive advantages where at the outset there appear to be none.

• Strengthening of bargaining power with suppliersThe alliances provide a means through which ITRI can bring member firms into closerrelations with suppliers and negotiate better deals with them through offering biggerorders on behalf of the consortium as a whole. This is a straightforward application ofeconomies of scale being captured by the consortium - but in purchasing rather thanproduction.

• Systematization of the product development processITRI project officers are trained to impose a product development methodology on theconsortium process, starting with clear specifications, milestones and performancereviews. For many firms, this would be their first introduction to such a systematicapproach to new product development. This is one of the most significant intangiblebenefits conferred by participation in the alliances.

• Creation and sustaining of market interestIn many of the alliances, the key to success lies not so much in efficient production asin efficient marketing. The alliances offer several advantages in this regard. Forexample, the prototype can be exhibited by ITRI at representative trade fairs topromote interest in the new product, and thereby generate commercial interest - as inthe case of the Laptop PC or the New PC based on the PowerPC microprocessor.

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Indeed, orders can be taken by ITRI and farmed out to the relevant firms within thealliance. Thus the potential market for the product is broadened. Likewise, ITRI canpromote the technological capabilities embodied in the new product, in media reports,on behalf of the consortium as a whole. These are activities which would normally bebeyond the capacities of any individual member, but can be accomplished by theconsortium acting as a totality. These activities take the R&D consortium to the pointwhere it could evolve into a marketing consortium.

Indirect benefits

• Demonstration effect -- showing Taiwan firms that it is feasible to utilize aparticular kind of technology or produce a particular product

The technological upgrading effect of the alliances rests on their ability to demonstratethe feasibility of doing something new. This is where a public sector repository oftechnological capabilities plays a vital role, in that the 'demonstration vehicle' needs tobe a neutral party.

• Replenishment effect - R&D alliance acting as vehicle for bringing new companiesinto an industry (reducing the barriers to entry)

The alliances provide an institutional alternative to free market mechanisms for thediffusion of innovations -- and it would appear, a much more efficient mechanism. 48 Ineffect, the alliances provide a unique institutional vehicle for bringing new firms intoan industry with minimal pain and disruption and commitment. Another way of sayingthis is to point to the possibilities for diversification provided by the alliances forexisting firms: they can learn about a new technology or field in a relatively painlessway before committing to enter that field. The alliances thereby play an indirect roleas replenishers of the energy within an industry, and thus as enforcers of competition,by exposing incumbent firms to the competitive effects of new entrants.49 This is yetanother of the paradoxes of the alliances -- through collaboration they heightencompetition and also reduce excessive competition between the member firms.

• Innovation effect -- the alliances act to stimulate R&D in member firmsFar from firms learning to economize on R&D expenditure through joining R&Dconsortia (a common assumption in the economics literature), the experience inTaiwan indicates that firms rapidly acquire a taste for R&D and an appreciation of itscompetitive benefits through participating in alliances. They thereby tend to increasethe scale of their own R&D activities, even as they participate in the alliances. This iswhat may be termed the 'innovation effect' of the alliances. It is enhanced as firmsconduct more and more of the development work within their own facilities -- whichis a trend encouraged in Taiwan by ITRI.

48 Note however that the scholarly economic literature has not yet been able to model or indeed accountfor this subtle range of effects of R&D collaboration. For a review of the (still limited) state of the art,which is concerned almost entirely with issues to do with costs and their sharing, see Morton Kamien, EitanMuller and Israel Zang, 'Research joint ventures and R&D cartels,' American Economic Review, 82/5 (Dec1992): 1293-1306.49 This is the source of the sometimes strident objections made by existing firms to the formation of newITRI consortia.

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The Taiwan alliances are not formed for the long-term, as in Europe or the USA. Rather,they are highly pragmatic and are dissolved as soon as their immediate goal isaccomplished. Indeed they do not even have a specific institutional form; in most casesthey are structured simply as non-profit incorporated entities, or even more simply asITRI 'projects' which are subject only to parliamentary budgetary oversight.50 Anti-trustconsiderations are not considered relevant.51

Yet the collaborative features of the Taiwan alliances do not preclude competition. Onthe contrary, they are recognized as being simply a 'temporary' suspension of competitivehostilities in a certain product area for a certain period of time and do not preclude themaintenance of competition between member firms in other areas, even while the allianceis in operation. For example, the members of the Interactive TV consortium are activelycompeting in a range of consumer and IT products while collaborating in thedevelopment of specific iTV capabilities.

Thus the success factors of the Taiwan R&D consortia come full circle. They start withclear and precise aims and finish with an appreciation of their short and delimitedduration. The one factor depends on the other. It is the clear aims which enable theparticipant firms to suspend competitive hostilities within a clearly demarcated area,without concern that this would undermine competitive pressures more generally; and itis the cap on the duration and scope of the collaborative consortium that enables suchclear aims to be formulated, providing the participants with strong incentives to realizethe joint aims for their own competitive advantage and for the benefit of the country as awhole. These features of the Taiwan R&D alliances are summarized, and displayed incyclic form, emphasizing their mutual dependence, in Figure 3-2.

50 Note that this oversight role can be played in a highly critical fashion. Thus ERSO’s proposals for amajor Liquid Crystal Display (LCD) project in the early 1990s, which it was anticipated would result in thespin-off of a new world-class LCD producer to match Japanese and Korean capabilities, was snuffed outdue to the objections of industry incumbents which at that time did not have LCD businesses of their own,but entertained plans to enter the industry. (A scaled-down LCD project was launched subsequently in themid-1990s.)51 Indeed the question elicited some astonishment, when raised with ITRI officers. Of course, antitrustprotection figures in the legal protection offered R&D consortia in each of the advanced countries: USA,Japan and Europe. Legal issues emerge in Taiwan, however, when foreign firms participate in an allianceand then raise objections to technology being shared with other Taiwanese firms; this is the outcome of oneof the alliances concerned with telecommunications products. For a comparison between the legalframeworks governing R&D collaboration between the USA, Europe and Japan, see S. Martin, 'Publicpolicies towards cooperation in research and development: The European Union, Japan and the UnitedStates,' in W. Comanor, A. Goto and A. Waverman (eds) Competition in a Global Economy (London:Routledge, 1996).

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Figure 3-2 Success factors in R&D alliances: The Taiwan case

10. The alliances offer collaboration as a temporary suspension of competition, and enhance competitive processes through opening fields up to new entrants

1. Clear, precise and attainable goals for each alliance

2. Products produced are generic and pre-competitive in scope

3. Strong technological leadership provided from a neutral party

4. Alliances span several steps in the value-chain

5. Government oversight to lend credibility and legitimacy 6. Alliances are self-

governing, calling for commitment and involvement by participants

7. The alliances offer tangible and intangible membership benefits

8. Alliances target products suited to a 'fast follower' business strategy

9. Alliance members adopt the joint products according to their own business strategies, building on their prior capabilities

_______________________________________________________

These features of the Taiwan R&D alliances can be argued to have very general validity.They have clearly had considerable success in Taiwan itself, when utilized for thespecific purposes identified, namely as an exercise in 'fast followership' to catch-up withinnovations generated elsewhere. But this is a strategy that has wide applicability, both inthe newly industrialized countries that are seeking to become players in advancedtechnologies, and also for firms in the advanced industrial countries as well.

The conditions which have generated the R&D alliances in Taiwan, namely rising levelsof knowledge-intensity and an increasing pace of product and process innovation, areprecisely the conditions faced by firms throughout the world. Thus, the organizationalsolution formulated in Taiwan is likely to have wider and more general applicability.

But of course, not all the Taiwan R&D alliances have been successful. Some have beenfailures in terms of their own goals and targets. Some have been unsuccessful, notbecause of lack of effort or coordination on the part of the member firms, but because theworld did not behave as expected, or a market did not develop as expected (as in the caseof the HDTV consortia and the graphics terminal consortium).

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In other cases, consortia have been unsuccessful because of lack of supportinginfrastructure: for example in the case of efforts to launch laser fax machines and harddisc drives. Here the problem was not so much the alliance itself as the lack of a richnetwork of precision engineering and machinery firms needed to sustain such industries.

Yet even where R&D alliances in Taiwan have been less than successful, they havecontributed their experience and this has been absorbed and applied in the design andimplementation of future alliances. Thus, the Laptop PC consortium was recognized asclearly having too many participants with too little experience - but this was corrected insubsequent consortia. Likewise the trade association was not involved in earlier consortia-- but its involvement has been found to be so beneficial, in terms of expanding the scopeof the potential participation by firms and in securing the legitimacy of the alliances, thatits involvement is seen as important in later alliances.

Thus, the alliances represent a form of advanced 'economic learning' in two senses.Firstly, in the sense that there is an underlying improvement from one generation ofalliance to the next. And secondly, in the sense that the knowledge generated is held by anumber of firms and agencies in the 'space' that exists between firms and agencies, ie ininter-organizational space. 52 It is in the capability to organize this space, through variousforms of consortia, alliances, trade associations and keiretsu, that East Asian economiesappear to have stolen a march on their Western competitors.

The Taiwan alliances work because of the benefits -- both tangible and intangible --outweighing any disadvantages, such as knowledge 'leakage' to competitors. Thealliances do not reduce competitive forces overall, but actually achieve an appropriateblend of collaboration with competition that experience indicates is needed by any viableeconomy. Thus the Taiwan model -- embodied in the ten success factors identified --provide the starting point for more realistic modeling of the economic effects of suchalliances, grounded in an improved understanding of the real dynamics of collaborativeventures in high technology competition.

52 On the concept of 'economic learning' as a process of inter-organizational learning within aninstitutional framework, see John Mathews, 'Organizational foundations of economic learning,' HumanSystems Management, 15/2 (1996): 113-124.

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4. INDUSTRIAL UPGRADING IN SINGAPORE

Singapore's strategy and manufacturing performance

Singapore presents the traveller today with the image of a bustling, confident and wealthycity – a ‘tropical city of excellence’ as it calls itself. One statistic tells the story: in 1960,Singapore was a struggling Third World economy, with a per capita income of $1,300; by1995 it was classified by the OECD as a ‘dynamic Asian economy’, with a per capitaincome of nearly US$25,000.53

In 1996 the OECD upgraded the classification to count Singapore as a ‘developedcountry. In the late-1990s, Singapore has a thriving manufacturing industry, based mainlyon electronics, of which semiconductors forms a core activity, as well as chemicals andpetrochemicals and engineering. The contrast is compelling for anyone who knewSingapore in the 1960s, when it was struggling with such issues as communal violence,achieving independence from Britain, and negotiating entry to the Malaysian federation(followed by quick exit in 1965).

Singapore has become a powerhouse of manufacturing, which it sees, correctly, as thefoundation of its future prosperity. Over the 30-year period, 1965 to 1995, manufacturingoutput expanded at an annual rate of 21 percent, with output reaching S$80.1 billion in1995. There was a marked dip in output in 1985-87, which caused widespread concern inSingapore and accounted for considerable changes in strategies and policies – as we shalldiscuss below. (Figure 4-1, first panel).54

Much of this manufactured output was exported, so that direct exports grew by 19 percenta year, to reach S$50 billion by 1995 (Figure 4-1, second panel).55

The electronics, petroleum products and fabricated metal products industries have beenthe mainstay of Singapore’s manufacturing, accounting for at least half of output in the1970s and 1980s. By 1995 the electronics industry cluster was dominant, accounting forover half of manufacturing output(Figure 4-1, third panel).

53 The equivalent in Singapore dollars was S$34,459, at the average exchange rate of S$1.41 =US$1.00 in 1995.54 Output of the manufacturing sector as a whole, in Singapore’s currency, was S$113 billion, whichis equivalent to US$80 billion at the 1995 average exchange rate of S$1.41 = US$1.0. Value-added wasS$35.4 billion.55 Value-added in manufacturing was $25.1 billion; as a proportion of total manufacturing output of$80.1 billion, it was 31.2 percent – a remarkably high proportion, reflecting the substance of Singapore’smanufacturing activities. Value-added is output net of material inputs, and represents the true economicworth of activities.

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Figure 4-1 Manufacturing in Singapore, 1965-1995

(1) Output(2) Direct exports(3) Output of selected industries: electronics, petroleum, fabricated metal products

Chart 1 Output

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Chart 2 Direct exports

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Chart 3 Output of selected industries

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Source: Singapore 1965-1995. Review of 30 Years of Development. Singapore: SNP Corporation.

The health of manufacturing in Singapore is reflected in the investment committed eachyear. Even during the world cyclical downturn in semiconductors and electronics in1996/97 and the Asian financial downturn of 1997/98, investment in Singapore has heldup remarkably, registering S$8.5 billion in manufacturing in 1997.56 This was up 4.3percent on the previous year's total. Most of this investment is from multinationalcorporations, from Japan Europe and the USA, putting in place world-class facilities formanufacturing, R&D and logistics.

Singapore has no intention of allowing itself to be ‘hollowed out’ to become nothing buta services hub and counts on continued growth in manufacturing into the 21st century.The aim of its current 'Industry 21' programs, spearheaded by the Economic DevelopmentBoard, is to maintain manufacturing as a vital and dynamic part of the Singaporeeconomy, contributing no less than 25 percent of GDP in the medium-term and 20percent in the long-term .

Singapore’s manufacturing industries are made up almost entirely of the activities ofmultinational corporations, supplemented by some powerful state-owned corporationssuch as Keppel and Singapore Technologies and by an increasing number ofentrepreneurial indigenous Singapore high technology firms like Creative Technology.

The multinationals kicked the whole process off. They came in the 1960s for cheap laborand stable working conditions. They stayed on and steadily upgraded the scope anddepth of their activities. Wave after wave of multinationals have arrived from the USA,from Japan and latterly from Korea and Taiwan as well. Singapore turned the practice ofleveraging skills and technological knowledge from these companies into a high art.

56 For comparison, Australian manufacturing firms registered investment of the same amount in thatyear -- in an economy five times larger than Singapore's.

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Before looking at this process in detail, it is worth reviewing the technological andmarket depth of Singapore's manufacturing industries.

Singapore's manufacturing industries

Electronics cluster

The electronics cluster of industries in Singapore now spans several key high technologyareas, including some of the world's most advanced semiconductor fabrication facilitiesand the world's highest concentration of manufacturing of hard disc drives. Theelectronics cluster in 1997 produced an output of S$63.4 billion, made up of sectors asfollows:

Data storage and imaging (eg HDDs) 42 percentComputer, communications and consumer electronics 30 percentSemiconductors 17 percentModules, devices, components (eg contract manufacturing) 11 percent.

The electronics sector itself has seen sustained growth – at an explosive rate of nearly 40percent a year in the 1970s, moderating to 19 percent average in the 1980s, and to 16percent in the period 1990-1995 (Fig 4-2).57

Employment in the electronics cluster has remained more or less stable at around 125,000workers. These are high-skilled, knowledge-intensive jobs, not just simple 'finalassembly' jobs because Singapore concentrates so intensely on producing the high value-added components like semiconductors and hard disc drives.

While 'output' is the commonly watched indicator, it suffers as an index of industrialhealth from not discriminating between industrial activities early in the value-chain andthose late in the chain. Malaysia, for example, appears to have a very high 'output' ofsemiconductors, but in fact it is only the last step of the value-chain that is achieved inMalaysia, namely packaging and assembly. The Economic Development Board inSingapore understands very well that what really counts is the value-added -- output lessinput -- and it has been monitoring this assiduously for the electronics sector. Indeedvalue-added in the Singapore electronics cluster has been steadily increasing since themid-1980s, rising to $15 billion in 1995, or fully one quarter of output. This is very highby international standards.

57 Output of electronics reached $41.3 billion in 1995 – and value-added in Singapore (output net ofmaterial inputs) reached $11.0 billion, contributed by a workforce of 128,700. In Singapore’s owncurrency, output of the electronics sector in 1995 was S$58.2 billion, while value-added was S$15.5 billion(Economic Development Board, private briefing).

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Figure 4-2 Electronics industry in Singapore, 1980 – 1995

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In hard disc drives, Singapore has had spectacular success in attracting the cream ofmultinationals like Seagate and Conner peripherals, to make itself the most concentratedsource of HDDs in the world. This in itself is no mean achievement and depends on thecapacity of Singapore's thriving precision engineering sector to provide the supportservices needed for HDD manufacture, such as in production of spindles, micro-motorsand bearings.

Semiconductors

Yet more impressive, if that is possible, is Singapore's achievement in semiconductors.Its core semiconductor industrial cluster now encompasses a number of IC waferfabrication facilities and test and assembly facilities, but alongside them have grownindigenous silicon foundries and test and assembly operations. While neighboringcountries like Australia missed out entirely on IC wafer fabrication as an industry,Singapore now boasts no less than 11 advanced wafer fabrication facilities producingchips, operated either by multinationals or by the indigenous Chartered Semiconductor, apart of the state-owned Singapore Technologies Group (Table 4-1).

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Table 4-1 Integrated Circuit fabrication facilities in Singapore, 1985-1999

Year Company Wafer size Products

1985 SGS 6 inch Logic ICs1989 Chartered Fab I 6 inch Foundry1993 TECH Semi I 8 inch* DRAMs1996 Chartered Fab II 8 inch** Foundry1997 TECH Semi II 8 inch DRAMs1997 Chartered Fab III 8 inch Foundry1998 SGS-Thomson 8 inch ASIC/Logic ICs1998 Chartered Silicon Partners 8 inch ASIC/foundry1998 Hitachi/Nippon Steel 8 inch DRAMs1998 Silicon Mfg Partners 8 inch ASIC/foundry1999 Philips/TSMC 8 inch ASIC/foundry

*Won Semiconductor International 'fab of year' award in 1993**Won Semiconductor International 'fab of year' award in 1996_________________________________________

Singapore understands how hard it is to secure international investment in waferfabrication facilities.58 By the end of 1995 it had secured four such facilities from threeoperators – Chartered Semiconductor, the TECH DRAM facility at Woodlands and theSTG-Thomson facility, with the new one rising beside it in 1996. There were alsocommitments from Hitachi-Nippon Steel for a wafer plant producing 8-inch wafers for64M DRAM fabrication. 59 With investments of up to $1 billion in each fab, countriesfight hard to secure these facilities. Singapore is therefore making substantial investmentsin the creation of two wafer fab ‘parks’ for the late 1990s and early 21st century.60

The EDB's wafer fabrication parks

The EDB supports semiconductor investment with specially constructed and servicedwafer fabrication ‘parks.’ One such park was established in 1995 at Woodlands, on thenorthern perimeter of Singapore, and looking across the water to Malaysia. This housesthe TECH DRAM facility and Chartered’s new IC fabrication facilities and provides eachcompany with room for expansion.

58 Wafer fabrication is sought for its technology driving potential, as much as for its economiccontribution: value-added per worker for wafer fabrication averages $500,000 – 600,000 pa, compared withthe average of $80,000 – 90,000 for IC testing and assembly.59 A proposed fab from Hitachi-LG Semicon was abandoned in 1996 due to the downturn in thememory chips market.60 See John A. Mathews 1999, 'Silicon Island of the East: Creating a semiconductor industry inSingapore,' California Management Review, 41 (1).

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A second park was announced in 1995 for Tampines, an area just five minutes from theChangi International Airport. Each park is designed to hold seven to ten facilities each –making an anticipated total of fourteen to twenty such facilities by the turn of the century.This would indeed make Singapore the ‘Silicon Island’ of SEAsia.61

The EDB also plays an active role in promoting investment in wafer fabrication, throughbecoming an equity partner itself.62 To support such investments, in 1994 Singaporeestablished a S$1 billion Cluster Development Fund, managed by the EDB, and nowexpanded to S$3 billion.63

Heavy and chemical industries

While Singapore has not sought to develop typical 'heavy' industries such as steel andautomotive, it has nevertheless aimed successfully at certain heavy 'niches' such asshipbuilding and repair, aerospace (particularly maintenance) and petrochemicals. Allthese are based on some form of value-adding to its operations as a major port.

Chemicals

Singapore aims to be a world-class hub for the petroleum and petrochemicals industry,with expected output of $75 billion by the year 2010. In petrochemicals, for example,Singapore's present capacity is 1 million tonnes per year. The EDB plans to expand thisto 3 million tonnes in the immediate future.

The centrepiece of this new industry is Jurong Island, an artificial construction thatamalgamates seven natural islands. Multinational petroleum companies have flocked tothe facilities created, as well as Singapore's indigenous operators. The deliberate clustereffect created by the EDB has meant reaping all kinds of synergies, such as upstreamfeedstock linking to downstream processing. A causeway has been constructed linkingJurong Island to mainland Singapore.

61 The Tampines development is in two parts, with Phase 1 being ready for tenant firms to startconstruction in mid-1996, and Phase 2 in 1998. Both parks are being supplied with dedicated powersubstations and reliable water supply, as well as another park reserved for semiconductor support andancillary activities (such as supply of specialty chemicals). The EDB is guarding against wafer fabovercapacity by seeking to attract a portfolio of IC fabrication activities. For example, TECH is producingDRAMs, while CSM is producing to contract (as a ‘silicon foundry’), while SGS-Thomson is producinglogic and non-DRAM memory chips.62 It has invested in both the TECH joint venture (taking a 24 percent stake in this venture) and in theexpansion of Chartered Semiconductor Manufacturing (CSM) granting S$100 million to CSM for itssecond fab. It has since also invested in the Hitachi/Nippon Steel 64M DRAM venture, announced in 1998.63 This Fund has three purposes: to facilitate investments in strategic projects in Singapore; these willenhance core capabilities of local industry clusters (as in the case of CSM’s foundry operations); toaccelerate the development of local enterprises; again, the EDB investment in CSM’s second foundryserves this purpose; and to undertake strategic investments with local and multinational companies whichwill strengthen Singapore’s links with the SE Asian region.

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Output of the chemicals cluster in 1997 was S$27 billion, made up as follows:

• Petroleum refining 54 percent• Petrochemical 16 percent• Specialty and industrial chemicals 12 percent• PBH 9 percent• Materials 9 percent.

In 1997, for example, Celanese Singapore, a member of the Hoechst Group, became theseventh Vinyl Acetate Monomer (VAM) production facility in the Celanese company. Itsnew start-up facility in Jurong was opened in July 1997. In the same year, ExxonChemicals announced that it would build a US$3 billion ethylene cracker refinery. WhileMerck & Co. announced that it planned to establish a US$300 million pharmaceuticalsbulk production facility to meet worldwide demand for its products.

Engineering cluster

The precision manufacturing cluster achieved output of S$16.2 billion in 1997. This wasmade up from:

• Precision engineering 65 percent• Marine engineering 21 percent• Aerospace engineering 11 percent• Process engineering 3 percent.

The cluster is dominated by large multinationals such as Philips, which operates a state-of-the-art Philips Machine factory to provide the worldwide group with precisionmachining and tools, destined for example for the semiconductor industry which is takingoff in Singapore and the region. In 1997, for example, the Japanese Yokogawacorporation invested S$30 million in a new engineering facility and S$24 million in anew software R&D division. While Nidec Corporation invested S$30 million in a newfacility for the engineering of spindle motors (needed in CD-ROM and HDD drives).

There is no question, then, that Singapore has emerged with a thriving manufacturingindustry. How was this created, and what was the role of government agencies andpolicies in shaping the development? This has all been carefully overseen andcoordinated by Singapore’s Economic Development Board (EDB), the city-state’s primeindustrialization agency. 64

64 On the history and mode of operation of the Economic Development Board, see L. Low et al(1993) Challenge and Response: Thirty Years of the EDB (Singapore, Times Publishing, 1993) and EdgarSchein, Strategic Pragmatism: The Culture of Singapore's Economic Development Board (Cambridge,MA, MIT Press, 1996).

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Origins of Singapore's manufacturing miracle

The roots of Singapore’s present success go back to the mid-1960s, when the foundationswere laid for a modern manufacturing sector. Already in 1960, just a year after itselection and before formal independence, the Singapore government under Goh Keng-Swee’s economic stewardship, invited a UN-led study team to examine and evaluate thecity-state’s economic prospects. This study, now known as the First Economic Plan forSingapore, prepared under the guidance of Dr Albert Winsemius, recommended theestablishment of an Economic Development Board to accelerate (or rather, initiate)industrialization. 65

The Economic Development Board (EDB) was duly founded in August 1961, with aninitial capital budget of S$100 million. It has been central to Singapore’s developmentand industrial upgrading ever since. Its early efforts were directed towards ‘importsubstitution’ -- in line with the thinking at the time. Thus the EDB looked to establishSingapore-based enterprises to compete with imports.

Over the course of the next three years, the EDB carved out of the swamps of Jurong thefirst industrial park for Singapore, where it was envisaged that its early industrialenterprises could be located.66 The collapse of federation with Malaysia in 1965, whenSingapore found itself out on its own and friendless, led to these preparations becomingeven more frenzied.

But it was not domestic firms that Singapore was now seeking to attract, but investmentsfrom multinationals, which were seen as the only feasible source of rapid employmentgrowth. The preparatory steps put in place were rigorous and comprehensive: theycovered such matters as provision of infrastructure; development finance; investmentincentives for foreign firms; active sourcing of investment; labor and human resources; aswell as acquisition of technical skills through university and technical training.

Infrastructure

The EDB was charged with the primary responsibility of attracting foreign manufacturinginvestment as top priority. Once the first industrial estates had been established, theJurong Town Corporation was spun off from the EDB to take charge of these lands andtheir management. The Corporation, along with the Singapore Housing Board, providedextensive worker housing for the employees in these new industrial estates. The PublicUtilities Board was created in 1963 to ensure reliable and cost-effective supply of utilities– power, water and gas – to the industrial estates. 65 The report -- 'A proposed industrialization programme for the state of Singapore', United NationsSurvey Mission -- was delivered to the Singapore government in June 1961. Dr Winsemius, an economicsprofessor from The Netherlands, has remained a good friend of Singapore, and has been invited back onseveral occasions to give his views on the island’s development.66 An idea of the scale of operation, and the uncertainty surrounding it, can be gleaned from theremark attributed to Goh Keng-Swee, Minister of Finance, that if the millions of dollars spent ondevelopment resulted in vast tracts of empty wasteland, then Jurong would be known to Singapore’sposterity as "Goh’s folly." See L. Low et al, op cit (1993): 58.

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Development finance

The Development Bank of Singapore was also established, spun off from the EDB in1968, and equipped with funds. Half the equity was owned by the government and halfby a consortium of commercial banks. Henceforth this finance institution was to providea key vehicle for assisting with the establishment of new ventures in Singapore,particularly ventures which met the government’s goal of raising the technological levelof the island’s economy.

Investment incentives

Tax breaks and other incentives for investing companies were formalized in the 1967Economic Expansion Incentives (Relief from Income Tax) Act. This reduced thecorporate tax rate from 40 percent to 4 percent on export-generated profits, for up to 15years, in approved manufacturing occupations. Thus the government was able to maintaintight control over the incentives, to ensure that they were working as anticipated and notas an encouragement for rentier activities. In effect, taxation revenues were beingforegone in favor of employment and technology transfer -- in the expectation that taxwould be recouped subsequently from those placed in employment and from the MNCsthemselves once they were established.

Active sourcing of investment

The EDB was refocused in 1968 as primary agent for attracting foreign investment. Inthis capacity it opened new offices, starting with one in New York, and sent abroadmissions to argue the case for Singapore as a desirable investment location. It followedup with offices sited in the world’s financial capitals. Nothing was left to chance inSingapore’s drive to industrialize.

Labor and human resource

On the labor and human resources front, the issue of union militancy was met head on –but not with the kind of repression meted out in Korea. The PAP government leaderstirelessly put the case that unions and their members stood to gain more from economicgrowth and prosperity than from strikes and rioting in the streets. The militants wereisolated, while gung-ho employers were curbed with the introduction of industrialarbitration. Fairness was emphasized as the goal of this system. It was complemented bytraining initiatives, which demonstrated that worker skills and hence prospects could beimproved other than through union militancy. Eventually, in 1968, with the support of thenational trades union congress (NTUC), the Employment Act was passed, establishing anindustrial relations system favorable for rapid industrial development.

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University and technical training

Singapore spared no effort in its upgrading of its own technical training activities. ATechnical Education department was created in the Ministry of Education in 1968,charged with the responsibility to drastically upgrade the throughput of technicians. TheEDB made technical training and 'manpower development' (now called 'human resourcedevelopment') one of its principal priorities, forming a Manpower and Training Unit forthe purpose.67 Another spin-off from the EDB’s training efforts was the SingaporeInstitute of Management, founded in 1964.68 Enrolments in technical and educationaltraining programs expanded dramatically.69

Immigration by professionals

Perhaps even more significantly, Singapore recognized that the real bottleneck to its rapiddevelopment would be, not skilled workers, but skilled engineers and managers. In orderto make up the immediate shortfall, it liberalized its immigration and work permitsystems for foreign professionals being employed by foreign firms. This proved to be anastute move on the part of Singapore, solving one of the hidden problems that bedevilMNC operations.

These then were the foundations upon which Singapore’s industrial development andtechnological upgrading was based. The results of these preparations were readilyapparent. Between 1966 and 1973, Singapore’s real GDP grew by 13 percent per annum– a record, even for East Asia. At the beginning of the process, in 1959, industryaccounted for 13 percent of a small GNP; by 1975 it accounted for 35 percent of a muchlarger GNP. The spectacular growth in the industrial sector not only solved Singapore’sunemployment problem, but actually created labor shortages. By the early 1970s it wasnecessary to import guest workers from Malaysia.

Singapore found quick success in attracting multinational semiconductor operations,based on the careful preparatory steps that had been taken. The semiconductor industry inSingapore started with chip assembly plants established by US-based multinationals suchas Texas Instruments and National Semiconductor. They were soon followed by other USfirms such as Hewlett-Packard, and by Europeans such as SGS (now SGS-Thomson). 67 This was in fact the main thrust of the recommendations made by Dr Winsemius in his secondvisit to Singapore in 1970: output of engineers, accountants and other professionals would have to bedrastically upgraded to keep up with potential demand. At the same time, Singapore relaxed its restrictionson immigration and work permits, particularly for foreign professionals. Thus Singapore was planning itsfuture high technology skill needs contemporary with similar exercises underway in Taiwan and Korea.68 Initial funding was provided by the Ford Foundation. The Singapore Institute of Management hassince grown to play a major role in upgrading the competences of managers in Singapore, offering coursesin conjunction with the world’s leading tertiary institutes.69 Between 1959, when the People's Action Party (PAP) government was elected, and 1975, totalstudent enrolment in Singapore increased from 306,000 to 522,000. The increase was largest in the fields ofsecondary and tertiary education. Enrolment in secondary schools increased from 49,000 to 176,000.Enrolment in tertiary institutions – the two universities and polytechnics – increased from 5,000 to 18,000.There was, moreover, a strong practical and technical bias towards these tertiary enrolments, in keepingwith the needs of an expanding and developing economy.

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The Japanese came in the 1970s, with firms like NEC establishing their own chippackaging and assembly plants. After the initial employment stimulus provided by theseinvestments had been absorbed, Singapore started to insist that future operations have asubstantial skill component; otherwise they should go elsewhere, for example toMalaysia. Singapore also insisted on companies raising technological levels withinexisting operations. Some MNCs saw this as being in their own interests and were happyto comply.

As the early approach of attracting investment indiscriminately in order to mop upunemployment and kick start a process of industrialization began to achieve its goals, soattention turned to a more strategic approach to take the city-state beyond labor-intensiveactivities.

The framework for seeding of semiconductor capabilities was established by the EDBitself, through a number of initiatives. In 1975 it embarked on a targeted promotionstrategy, and published Singapore’s first list of priority industries which wouldhenceforth receive favored treatment – including electronics and semiconductors (but notincluding heavy industries like chemicals or shipbuilding). Thus Singapore was pickingup on a strategy that had been pioneered by Japan and was being utilized to great effectby Korea and Taiwan at the time. The list of priority industries indicated wheregovernment support would be focused, with a view to securing the maximum leverage oftechnologies and skills.

Economic restructuring

By the end of the 1970s, economic restructuring out of labor-intensive industries inSingapore was proceeding in earnest.70 A new Ministry of Trade and Industry (MTI) wasformed to take charge of the process, formulating relief programs for the industries beingrun down while the EDB maintained its targeted programs to promote the industries ofthe future, particularly electronics and semiconductors.

In 1980 the Second Economic Plan was launched by the MTI, reflecting Singapore’s newemphasis on technology-intensive industries, and the achievement of higher levels ofproductivity and of quality. In response to this, in 1981 the EDB published a revised listof priority industries, emphasizing those which promised higher levels of investment inR&D. Again electronics and semiconductors were top of the list. The multinationalswhich had settled in Singapore, and the new ones arriving in the 1970s, were the sourcefor the implantation of skills and technologies in the Singapore economy.

The transfer of technologies and skills was not a one-way street. Singapore itself had toset the tone and direction of leverage. In this second phase, Singaporean agencies insistedthat MNCs provide adequate skills transfer, mostly through on-the-job training andsending technicians back to firms’ headquarters for training.

70 The same experience of restructuring had occurred in Japan two decades before, and in Korea andTaiwan, it was still underway.

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A policy of high wages was implemented in the early 1980s, partly to induce firms toinvest in greater levels of training and to force out firms that wished to pursue simple,low-cost assembly operations without skill or technology transfer. This was backed bythe initiative of the Skills Development Fund, which initially imposed a levy of 4 percentof payroll on firms; the funds accumulated were used to upgrade skills, particularly inthe small and medium-sized contract firms which had sprung up throughout Singapore tosupply parts and services to the multinational operations.

These requirements were underpinned by massive investments by Singapore itself inindustrial training, financed out of the Skills Development Fund. In addition to the effortsof the Ministry of Education, and of the EDB’s Manpower Services Division, there weremajor initiatives taken in establishing focused industrial training institutes in partnershipwith leading MNCs. Three such institutes were established by the EDB working closelywith Philips, with Tata and with Brown-Boveri. Because of the close association with theMNCs, these institutes could provide short training courses in subjects such as precisionengineering and electronics assembly, utilizing the latest industrial equipment.

The Skills Development Fund, backed by its payroll levy, ensured that these newinstitutes would actually be used for advanced training purposes. This proved to be a veryeffective way of ensuring that firms would see a coincidence of interest between theirown needs for skilled operators and the upgrading of Singapore’s general technologicallevel. Thus, even in the most basic provision of industrial skills training, Singapore wasable to leverage the required resources from the MNCs.

How has Singapore maintained its relentless focus on industrialupgrading?

The 1985/86 recession was a turning point for Singapore. It revealed weaknesses in theprevious high-wage policy, which had had the desired effect of forcing technological andbusiness upgrading, as well as improving worker welfare, but had made life very difficultfor the smaller firms in Singapore struggling to survive.

The recession underlined Singapore’s extreme dependence on multinationals andcatalyzed a new approach that would be oriented more strongly to the encouragement oflocal enterprises. The new strategy was outlined by the Ministry of Trade and Industry inits 1986 document The Singapore Economy: New Directions. The new phase wasmarked by an intense effort to propagate knowledge-intensive activity, with the EDBagain spearheading the new effort, utilizing a range of vehicles and avenues, including:

- Direct leveraging from multinationals: local industry upgrading;- Further MNC investment in a broader functional range of industrial activities; and- Propagation from Singapore’s state-owned enterprise sector. 71

71 By 1985 the EDB had become a victim of its own success, and it too was revitalized in 1986 withthe new charter, to be implemented under a new chairman, Philip Yeo.

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Direct leveraging: local industry upgrading

Rather than offer general incentives to small firms, the Singapore approach to localindustry upgrading was to utilize the multinationals, encouraging them to enter into closersupply relations with local firms. The government sought to facilitate such developmentsthrough a Local Industry Upgrading Program (LIUP), which provided benefits to smallfirms in selected local industries. Multinationals were encouraged to enter into long-termsupply contracts with such firms, upgrading their quality and reliability and technologicallevels in the process. Small firms supplying maintenance services, components andequipment to the semiconductor MNCs particularly benefited by this new approach.

Further MNC investment in a broader functional range of industrial activities

All these initiatives in direct leveraging activities have not distracted Singapore and theEDB from the basic strategy of attracting multinationals and pressuring them to broadenthe range of their activities. This remained the bedrock of Singapore’s developmentstrategy. The later they came, the more stringent the requirements imposed on themultinationals by the Singapore government. The Singapore authorities were acquiringmore maturity and confidence in dealing with MNCs as it became clear that Singaporehad something important to offer.

Take the case of Linear Technology as typical of the later arrivals. The company is theworld’s leading supplier of high-performance linear analog ICs, which are needed in hugenumbers to provide links between real-world operations and the digital operations ofcomputers. The company was founded in 1981 and first came to Singapore in 1989, whenit opened a small testing and finishing operation in leased premises in Kallang. Sincethen, Linear Technology has expanded these operations to become a significant providerof test and finish operations for the company’s global activities. It has added two furtherfunctions of IC design and warehousing and distribution to the Asia-Pacific and in 1994 itfurther upgraded the Singapore operation to make it Linear’s regional headquarters forthe Asia-Pacific. These activities complement the IC assembly plant built at the sametime in Penang, Malaysia.

For early arrivals such as SGS-Thomson and Hewlett-Packard, the process of broadeningthe scope of their Singapore operations continued unabated. There was a common interestbetween the firms and the Singapore authorities. The firms were looking for greaterefficiencies and responsibility to be exercised by their Asia-Pacific operations, while thegovernment agencies were looking for higher levels of functional responsibilities to betransferred in the interests of knowledge leverage.

SGS-Thomson, for example, continually expanded its activities since the building of theIC fabrication plant in 1985. The plant’s technological capabilities were broadened toencompass MOS ICs in 1988, and several R&D projects have since been located at theSingapore operation. By the mid-1990s the firm had designated Singapore as the lead

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centre for three such world-wide projects.72 In the 1990s SGS-Thomson established itsregional headquarters in Singapore, in recognition of the growing significance of Asia-Pacific in the company’s world operations.

In the case of Hewlett-Packard, the operation in Singapore was continually upgraded, andby the mid-1990s ranked as the most advanced manufacturing and engineering centre inthe city-state. It has a staff size of 8,000, with activities spanning such HP products aspalmtop computers, integrated circuits, opto-electronic components, inkjet printers,keyboards and computer peripherals and network software. Indeed by the mid-1990s, theSingapore operation held global responsibility for two of HP’s product lines, namelymobile printers and hand-help products (such as personal data assistants), meaning that itcarries responsibility for all stages of these products, from R&D, through manufacturing,to marketing and customer support.

Thus, Hewlett-Packard has been one of the multinationals which has given mostjustification to the soundness of the Singapore version of the developmental resourceleverage strategy. In pursuing its own interests in SouthEast Asia, it has alsoaccommodated the needs of Singapore for transfer of skills, technology and resources.

Propagation from Singapore’s state-owned enterprise sector.

Central to the Singapore strategy for the implantation of high technology capabilities, hasbeen its utilization of the large firms which have grown within the State-owned sector.This sector, established in the 1960s as a far-sighted Singapore initiative, has proven tobe the seedbed for many of Singapore’s present high technology indigenous firms, suchas Keppel Corporation and Singapore Technologies Group.

The Singapore Technologies Group (STG), which can be taken as typical of these firms,was founded early on in Singapore’s evolution as a defense equipment producer, but onewhich was forced from the beginning to operate along sound commercial lines. UnderGoh Keng Swee’s leadership, firms like STG were encouraged to diversify, taking oncommercial contracts where these would not interfere with their basic equipmentmanufacturing and supply functions and to act as technology leveragers in their ownright.

Thus Singapore rapidly acquired skills and technologies in the fields of ship repair andmaintenance, shipbuilding, weapons manufacture, aircraft maintenance – all within acarefully controlled and nurtured commercial environment. The Chartered SemiconductorManufacturing operation is the outstanding product of this development.

Industrial upgrading in the 1990s

It is only in the 1990s that the Singapore government has taken steps to prepare the city-state for 'advanced country' status and to accelerate the shift towards 'knowledge- 72 They covered a design project for digital signal processing (DSP) chips; streamlining the waferfabrication process; and new packaging operations.

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intensive' industries. This has involved for the first time sustained investment inSingapore’s own R&D facilities, set up in the public sector on the Taiwan model. Theframework for the new strategy, which would take Singapore around the 'next lap' of itsdevelopment trajectory, was issued by the Ministry of Trade and Industry in 1991.73 TheNext Lap strategy called for more adventurous industrialization policies needed to takeSingapore to a qualitatively higher-level of technological and commercial sophistication.

One approach was to consider how Singapore’s various industries could be conceived as'clusters', and to formulate government policy in future in terms of the identification ofgaps that needed to be filled if clusters were to operate effectively. Based on Porter’snotion of industry clusters, the EDB started to formulate plans for encouraging certainindustrial 'clusters' in Singapore rather than single industries.74

This cluster-oriented study was conceived as part of a wholesale renewal of Singapore'spolicies and programs to support its manufacturing and industrial development generally.Five of these programs were formulated to take Singapore into the 21st century. Theywere:

1) The Manufacturing 2000 program, which aims to keep manufacturing contributing atleast 25 percent of GDP and at least 20 percent of employment by the year 2000. In1995 manufacturing accounted for 25.3 percent of GDP and the employment share ofmanufacturing was 24 percent.

2) The International Business Hub 2000 program, which aims to encourage firms tomake Singapore the site for their regional headquarters.

3) The Promising Local Enterprises (PLE) program, which aims to foster thedevelopment of indigenous local firms, at least 100 of which are expected to grow tothe point where they produce $100 million in turnover within 10 years.

4) The Regionalisation 2000 program, which aims to establish high technologyindustrial parks in Riaus (Indonesia), Suzhou and Wuxi (China), Bangalore (India)and Vietnam.

5) The Co-Investment program which establishes a fund from which the EDB can makeequity investments in strategic projects. By the end of 1995 over $200 million hadbeen committed under the Cluster Development Fund in eight projects involving bothMNCs and ‘promising local enterprises’.

73 This was the 1990s Strategic Economic Plan, prepared by an economic planning committeeconvened in 1989. See Ministry of Trade and Industry, The Next Lap (Singapore: MTI, 1991).74 See Michael Porter, The Competitive Advantage of Nations (1990). Note however that Porter madea very negative judgment concerning Singapore’s prospects in his 1990 study; this is taken up again belowin the discussion of the viability of Singapore’s approach.

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Framework of public support in the 1990s

Thus it could be said that by the late 1990s Singapore was finally taking the necessarysteps to support a genuine innovative capability and to promote the self-sustaining effortsof its own companies. It was taking the necessary steps to establish high technologyfoundations that complemented but were independent of the activities of its multinationalclusters. If this was ‘too little, too late,’ as claimed by Michael Porter, then it wascertainly making up for lost time. Its initiatives covered the following issues.

Innovation support

The innovation thrust is designed to promote and support the development of new ideasand projects, through provision of major new resources to the NSTB to promoteinnovation activities in Singapore companies and by entrepreneurs.75

Overseas expansion

The regional promotion thrust is designed to replicate Singapore’s high technologyactivities and strategies abroad, in a series of ‘technology parks’ being jointly developedin India, China, Vietnam and Indonesia. The EDB for example co-invested with HitachiSemiconductor, which already operates an advanced plant in Singapore, to attract theJapanese firm to the China-Singapore Suzhou Industrial Park. It is anticipated thatSingapore’s high technology activities will take place in several continents by the 21stcentury.

Process capabilities enhancement

Central to the deepening of ‘absorptive capacities’ are continual investments in processcapability enhancement, which Singapore is now promoting through the public sector, asstimulus for similar developments in private firms. These programs are focused onSingapore’s critical high technology industries. Thus in 1996 the National Science &Technology Board launched its Semiconductor Process Capability Development (SPCD)program, a $200 million scheme to upgrade companies’ capabilities in wafer fabrication,lithography and display process technology. The first contract under the scheme wasawarded to Chartered, to develop 0.25 micron wafer capabilities at its Woodlandsfabrication facility, in conjunction with the Institute for Microelectronics and tertiaryinstitutions.

Deepening of skills base

The skills thrust is concerned with anticipating the labor and skills needs of hightechnology industries. In 1995 the EDB and NSTB initiated several specialist skillsdevelopment programs specifically in the area of IC wafer fabrication skills to ensure that

75 A $500 million Innovation Development Scheme (IDS) was launched at the end of 1995. Underthe scheme, companies can seek reimbursement of 50 percent of the costs involved in undertakinginnovation activities in products, processes, applications or services.

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new wafer fab projects being sought for Singapore would be able to draw on reliableskilled labor.76

That a promotion framework such as this is needed at all is a sign that Singaporeconsiders its high technology activities to be very vulnerable -- as indeed they are. Itcompetes vigorously for new investment by multinationals, but is now activelyencouraging the efforts of its local firms as well.

The practical engagement of these programs is striking. They are complemented by anarray of reforms to administrative infrastructure and relentless IT upgrading, which whencombined with Singapore’s clean and efficient administrative procedures, makes for aformidably competitive manufacturing centre. But no one is more aware of thevulnerabilities of Singapore than its own elite. It was able to pass through the 1997/1998Asian financial crisis virtually unscathed, but nevertheless anticipated major downturns in1998 simply because of its regional ties. These are the realities of Singapore’s existence.

Industry 21: A Knowledge-based Economy

The Economic Development Board's vision for Singapore in the 21st century is as aknowledge-based economy. Its Industry 21 (I21) plan is designed to keep Singaporecompetitive and abreast of the major trends around the world.

According to the EDB, 'Industry 21, launched in June 1998, is a set of six programsdevised to promote Singapore's economic growth into the next millennium. In the next 10years, knowledge driven industries under Industry 21 will contribute 40 percent ofSingapore's annual GDP, and create 20,000 to 25,000 jobs every year. Of these,manufacturing and exportable services will create 5,000 to 10,000 jobs a year. Two out ofevery three jobs will be for knowledge and skilled workers in the manufacturing sectorand three out of four in the exportable services sector.' 77

The six programs encompassing the Industry 21 package, some of which were previouslyannounced and have been bundled into this set, are:

• Cluster development -- designed to create and promote inter-sectoral linkages, andbacked by the S$3 billion Cluster Development Fund.

• International business -- to tap into global and regional hubs.

• Promising local enterprises -- to build up local entrepreneurship.

• Headquarters -- a continuing effort on Singapore's part to attract MNC headquartersto Singapore.

76 The NSTB launched a $30 million Semiconductor Manpower Development Initiative in 1996,designed to encourage young Singaporeans to pursue post-graduate technical studies in semiconductorengineering, at the National University of Singapore and the Nanyang Technological University.77 Economic Development Board, Annual Report 1998.

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• Innovation -- science and technology programs supported by the National Science &Technology Board to generate like industrial clusters in the future.

• Resource development -- to produce the skills base in the workforce needed forknowledge-intensive production.

Undoubtedly what has underpinned Singapore’s success is not a reliance on 'marketforces' but the continuous interventions of state agencies like the EDB, and latterly theNSTB, in shaping and fostering the industry’s development. Long before the World Bankrecognized the complementarity of market-led development and state intervention,Singapore’s agencies had been strenuously intervening to attract investment and'encourage' upgrading (through the carrot of incentives and the stick of threatenedbanishment from Singapore).78 This process has continued right into the 1990s, throughsuch initiatives as the $3 billion Economic Development Assistance Scheme (1995 to2000), out of which the EDB has created its Cluster Development Fund and the NSTBhas launched its Semiconductor Process Capability Development program, amongst otherinitiatives.79

Singapore thus leaves nothing to chance in its strategies of leverage and supports themwith the institutional capacities embodied in its first-class agencies like the EconomicDevelopment Board, the National Scienxe & Technology Board, Trade DevelopmentBoard and many others.

It follows that other countries seeking to replicate Singapore’s success would likewisehave to invest their energies and resources in developing comparable institutionalcapacities. This is a tall order. It will prove to be the means for separating the successfulfrom the unsuccessful in pursuing such leverage strategies in the future.

78 The World Bank finally came to terms with this complementarity in its 1993 report, The EastAsian Miracle (Washington, DC: The World Bank).79 The Cluster Development Fund is described above. The Semiconductor Process Capabilitydevelopment program is a S$200 million program launched to help upgrade companies’ capabilities inwafer fabrication, lithography and display technologies. The first contract under the scheme was awarded toChartered, to develop 0.25-micron wafer capabilities at its Woodlands facility, in conjunction with theInstitute for Microelectronics and tertiary institutions.

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5. CASE STUDY: SINGAPORE'S CLUSTERDEVELOPMENT STRATEGY

Singapore in the 1990s has been highly influenced by cluster development concepts, aspromoted for example by Harvard's Michael Porter. Its 'Manufacturing 2000' strategy,formulated in the early 1990s by the Economic Development Board, is an expression ofthe cluster development concepts in action. The M2000 study, and the programs whichhave emanated from it, has a clear strategic objective: to maintain manufacturing as asignificant activity in Singapore, accounting for 25 percent of Singapore's GDP in themedium-term (ie by the year 2000) and for 20 percent in the long-term.

The strategic aim of the strategy is to prevent the 'hollowing out' of Singapore'sindustries, which has been feared in the world's centres of advanced manufacturing, suchas the USA, Japan and Europe, but which has also been felt in East Asia, particularly inHong Kong.

Singapore's EDB has no intention of allowing Singapore to become the 'Manhattan' ofSouthEast Asia, responsible for finance and services but giving up on manufacturing. TheEDB understands very well that the best and most highly skilled jobs are located in highvalue-adding manufacturing jobs, and that these actually generate the best service jobssuch as engineering consultancy.

The M2000 study identified three key clusters around which Singapore would build itsfuture manufacturing prosperity. They are: electronics and semiconductors; chemicals;and engineering (all described earlier). The EDB's efforts to attract manufacturing andR&D investment and to build entrepreneurial small companies in Singapore have beentightly focused on these three clusters ever since. This is strategically a highlysophisticated approach, and compares most favorably with the 'scatter gun' approachfound in other countries (including, let it be said, Australia).

Rationale for cluster development

The case for focusing industrial development policies on clusters of activities, with eachstep in a value-adding chain feeding into other steps, is by now overwhelming. But it isstill only practised by the most sophisticated industry promotion agencies -- includingthose found in Taiwan and Singapore.

Recognition of the advantages of clusters goes back to the 19th century. The Britisheconomist, Alfred Marshall, for example, noted how several European 'industrial districts'had emerged with superior competitive advantages, such as Sheffield in England for steelcutlery and Solingen in Germany for fine steel products. He formulated the basictheoretical advantage for firms in such districts as being 'positive externalities', meaningthat each firm was able to derive advantages from the proximity of other firms

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conducting related activities (upstream or downstream) and from the knowledge that was'in the air' in such districts.80

The same advantages have been observed in the 20th century to accrue to multitudes ofsmall and medium-sized firms clustered in industrial districts in Italy -- such as in thetextile district of Prato, near Florence -- and in R&D intensive locations like California'sSilicon Valley or North Carolina's Research Triangle Park.

The terms used to describe the advantages derived by firms from clustering are'agglomeration economies' or 'positive externalities' or 'spillover effects' as well ascumulative effects summarized as 'locational economies.' Spillover effects are the 'free'benefits that are captured by one firm through the activities of another. The term iscommonly used to account for the benefits of foreign direct investment, which certainlylies at the core of the Singapore clusters.81 A considerable literature has now built up onthese matters -- despite the under-recognition by governments of the enormous practicalsignificance of clustering, both for advanced as well as developing economies.82

Focusing on the value chain

The fundamental concept that holds together a cluster of firms is that of the 'value chain'that links downstream to upstream industrial activities. Take the case of clothing andtextiles. In yarn production there are various stages of fibre preparation (eg wool scouringand cleaning) leading to production of finished yarn. In textile production there are stagesof dyeing, knitting or weaving, and textile finishing, that can be done separately byseparate firms (as in an industrial district like Prato in Italy) or can be done in anintegrated operation within the confines of a single 'vertically integrated' firm.83 Animportant link with both are the services supplied by specialist chemicals houses (fordyes); by specialist machinery and equipment suppliers (eg suppliers of looms and CNCcontrol systems); and by fabric designers and fashion marketing specialists. These all addvalue in a complex chain that starts with raw materials and ends with finished productsbeing supplied to the market.

80 Alfred Marshall, Principles of Economics (London, Macmillan, 1890; 1920).81 On spillover effects, see the work of the Swedish economist Magnus Blomstrom, now deputy headof the Stockholm School of Economics -- for example, M. Blomstrom and F. Sjoholm, 'Technology transferand spillovers: Does local participation with multinationals matter?' Working Paper #6816, NationalBureau of Economic Research, Washington, DC, 1998; or for a full survey of the economic literature onthis topic, M. Blomstrom and A. Kokko (1998), 'Multinational corporations and spillovers,' Journal ofEconomic Surveys, Vol. 12, pp. 247-277.82 For a useful review, see Jane Marceau, 'Clusters, chains and complexes: Three approaches toinnovation with a public policy perspective,' in Mark Dodgson and Roy Rothwell (eds) The Handbook ofIndustrial Innovation (Cheltenham, UK, Edward Elgar, 1994). Professor Marceau makes the point thatclusters, chains and complexes all give policy makers a different 'lens' or framework for viewing theinteractions that drive economies and innovation.83 On the industrial district of Prato, seen from a cluster perspective, see Linda Weiss and JohnMathews, Structure, strategy and public policy: Lessons from the Italian textile industry for Australia,UNSW Studies in Organisational Analysis and Innovation, No. 4 (Sydney, University of NSW, 1991).

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Cluster theory has been studied in numerous contexts, most famously by Porter and hisassociates at Harvard, but also by European groups such as GREMI (which developed the'filiere' concept to describe an industrial chain of activities spanning an entire economy)and numerous Italian theorists such as Brusco, with his fundamental contribution ofseeing the Italian industrial districts as 'technically decomposed but socially integrated.' 84

Public policy that is 'cluster-oriented' or 'value-chain' oriented seeks to determine whichare the value chains that dominate in any given economy and where 'gaps' can beidentified and potentially filled. It is in closing these 'gaps' (such as the supply ofspecialist chemicals in a textile district) that public policy can make all the difference,over and above what 'market forces' would achieve acting on their own. 85

Cluster advantages increase with the technical sophistication of production systems.While there might not be much advantage to having a steel mill next to a white goodsfactory, because their linkages are standardized, the situation is quite different for veryknowledge-intensive integrated circuit design, IC fabrication and customization by IT andelectronics firms, for example.

It is the possibility of enhancing productivity and time to market by bringing specialistsfrom such firms locationally together to work in cross-disciplinary and cross-firm teamsthat the real advantages of locating in 'Silicon Valley' type environments emerges.

Enhancing the value of clusters

Porter's 1998 contribution in Harvard Business Review identifies three major advantagesthat accrue to firms when they are part of clusters. These are that:

• clusters drive productivity improvements;• they drive the direction and pace of innovation; and• they stimulate the formation of new businesses.

In these ways, clusters are superior to their alternatives, which are either atomized firmsinteracting at arm's length in the marketplace or the vertically integrated firm, whichseeks to bring all activities within itself.

84 On Porter's work, see his study The Competitive Advantages of Nations (New York, The FreePress, 1990) and subsequent developments such as his 1998 HBR article, op cit. On the GREMI group, seefor example P. Aydalot and D. Keeble (eds) High Technology Industry and Innovative Environments(London, Routledge, 1988) and more recently, V. Sabourin and I. Pinsonneault, 1997, 'Strategic formationof competitive high technology clusters,' International Journal of Technology Management, 13 (2): 165-178. On the Marshalian 'industrial district' and Brusco's contribution, see F. Pyke, G. Becattini and W.Sengenberger (eds) Industrial Districts and Inter-Firm Cooperation in Italy (Geneva, International Institutefor Labour Studies, 1990) and in particular the paper by Brusco: 'The idea of the Industrial District: Itsgenesis', pp. 10-19.85 See the discussion on this point by the World Bank study, 'Industrial structures and thedevelopment of small and medium enterprise linkages' edited by Saha Dhevan Meyanathan (Washington,The World Bank, EDI Seminar Series, 1994).

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The first case suffers from the lack of stimulus that comes from clustering and long-termrelations, while the second suffers from atrophy and inertia associated with largeoverheads and size.

Porter makes the point that clusters promote both competition and cooperation.

"Rivals compete intensely to win and retain customers. Without vigorous competition, acluster will fail. Yet there is also cooperation, much of it vertical, involving companies inrelated industries and local institutions. Competition can coexist with cooperationbecause they occur on different dimensions and among different players."86

It is worth mentioning this explicitly, because it represents a fundamental change instance on the part of Porter, who in his earlier work tended to downplay cooperation inclusters, or treated it as something which weakened the competitive impulse. This changein his perspective is welcome, because it makes his work more applicable to the realdevelopments in clusters that have occurred in east Asia, and in particular in Singaporeand Taiwan.

The critical resources that are common to clusters, or regional agglomerations, or'industrial districts' are knowledge resources -- frequently found in a great university or inthe human resources processes of skills acquisition. The well-known cases involve theclustering of firms in Silicon Valley around Stanford University and the University ofCalifornia at Berkeley, while on the US East Coast the cluster of firms around Boston'sRoute 128 all drew from the knowledge resources available in MIT.

In the East Asian cases we are considering, the Hsinchu Science Park in Taiwan hasdrawn heavily on the intellectual resources of the nearby Tsinghua University andChiaotung University, as well as the laboratories of ITRI, while in Singapore themanufacturing clusters have drawn on industrial training centres established jointly by theEDB and multinationals, as well as new technical universities like Nanyang.

The Singapore industrial clusters

The focus by Singapore's industry promotion agencies, principally the EDB, on threeindustrial clusters -- electronics/semiconductors, chemicals and engineering -- is based onall the advantages identified above, combined with an intelligent appreciation of what canbe achieved by public policy intervention. The cluster focus identifies the key value-adding steps that already exist, and even more importantly, identifies the value chain'gaps' that could be remedied by attracting either local or international firms to 'plug' thegap.

86 Porter 1998, op cit, p. 80.

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Semiconductors cluster

In the case of semiconductors, Singapore has in the past actively sought investment in the'back end' of the fabrication chain, namely assembly and packaging, and in the 'front end'namely wafer fabrication or the laying down of circuits through complexphotolithographic techniques. In between there are numerous steps which Singapore'sEDB has actively encouraged, in order to make the semiconductor value-chain morecomplete -- such as photomask production and silicon wafer production. The state of thesemiconductor cluster in Singapore in 1998 is shown in Table 5-1.

Table 5-1 Firms making up the IC industry cluster in Singapore: 1998

IC DesignMNEs: AMD, Fujitsu, Harris, HP, Hitachi, Linear Tech, Lucent, Motorola, NEC,

Philips, SGS-Thomson (STMicroelectronics), Sharp, Siemens, SiliconSystems, Sony, Temic, Toshiba

Local firms: Azfin, Serial Systems, TriTech

IC fabricationMNEs: SGS-Thomson (STMicroelectronics), TI-HP-Canon (TECH

Semiconductor), HP, Hitachi/Nippon Steel, Philips/TSMCLocal firms: Chartered Semiconductor Manufacturing (CSM), Chartered Silicon

Partners (CSM-HP), Silicon Manufacturing Partners (CSM-Lucent)

IC test and assemblyMNEs: AMD, Adaptec, Lucent, Brooktree, Delco, Fujitsu, HP, Linear,

Matsushita, NS, NEC, Philips, Seiko-Epson, SGS-Thomson, Siemens,Silicon Systems, Unitrode

Local firms: KES-Rood Technologies (Sunright group), STATS (SingaporeTechnologies), UTAC

IC support and ancillary servicesMNEs: Photronics (IC masks), Wacker Siltronic (wafers) and othersLocal firms: Advanced Systems Automation (ASA), Ever Technologies,

Manufacturing Integration Technology (MIT), MBE Technology, NatsteelElectronics, International Semiconductor Products (ISP) and others

Source: Adapted from EDB

______________________________________________

The Economic Development Board counted nearly 50 companies as being involved inthis sector in the mid-1990s. These companies employed 20,000 staff, many of whom arehighly skilled. Output reached $9.0 billion (S$12.5 billion) in 1995 – most of which wasaccounted for by multinational assembly, testing and packaging operations, as well assome wafer fabrication and foundry activity. The value-added in Singapore reached $2.8billion (S$4.0 billion). All of this is value-added within multinationals or under contractto multinationals. There is as yet no branded semiconductor product produced by a

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Singapore indigenous firm. The range of chips produced is impressive, from DRAMs(TECH) through logic chips and ASICs to mainstream logic and memory products (SGS-Thomson).

The R&D and training infrastructure to support and reproduce these operations inSingapore is also being developed. The Institute of Microelectronics (IME) wasestablished as a centre of excellence in 1991, with funding largely from the NationalScience and Technology Board (NSTB). It is expected to work with firms in pre-competitive R&D in highly focused consortia.87

Supporting industries have been or are being established to provide specialized materialsand equipment for the semiconductor industry. 88 The major inputs that had hitherto beenlacking in Singapore were masks (reticles) and wafers – both of which were covered byannouncements in 1995. The announcement that the US firm Photronics would establisha mask-making plant in Singapore – the first in SEAsia – was a major boost to theisland’s semiconductor industry. 89 These supporting and ancillary activities add to thedepth of the semiconductor cluster in Singapore – thereby making it even more favoredas a location for high technology semiconductor and IT industry development. This is thepower of ‘increasing returns’ at work.

The chemicals cluster

In the case of chemicals, the cluster process has been actively promoted through theprovision of major infrastructure, in the form of the creation of the artificial island ofJurong, and the linking of one kind of chemical processing with another on this island, toachieve substantial economies of proximity.

Singapore, through the EDB, has poured enormous efforts into building the Jurongfacility, and in attracting multinationals to it, as part of a long-term vision of the city-state's prosperity. The petrochemical cluster bases its rationale firmly on Singapore'sstatus as the premier port of SouthEast Asia, and thus on its existing shipping links,which are fundamental to the economics of petrochemicals.

87 It has signed research partnerships with several of the major companies already operating inSingapore (such as AT&T, Siemens, SGS-Thomson, Toshiba and NEC, as well as Chartered of Singapore),thereby leveraging the skills of these companies across to Singapore technicians and engineers. In 1995 itformed eleven Singapore-based MNCs and local firms into an Electronic Packaging Research Consortium,to conduct further leading-edge collaborative research and development work, on the model of the productdevelopment consortia that are formed in Taiwan.88 These include: masks, lead frames; burn-in and testing services; bonding wires; automatedequipment; ceramic packages; epoxy resin manufacturing; gas and chemical supplies; wafer fab equipment;and cleanroom design and installation.89 Masks are the silicon templates used to trace the circuit designs onto chips; a separate mask isneeded for each layer of the circuit. A single blemish in the mask can ruin a whole production run ofwafers.

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The engineering cluster

In the case of precision engineering, there has been relentless effort by the EDB to buildup the technological capabilities of Singapore's engineering specialists, and theircapabilities in precision engineering. It is this cluster which supports further developmentin the electronics cluster. For example, both hard disk drive production and CD-ROMdrive production call for the services of precision engineering firms for spindles andminiature motors. It is Singapore's ability to provide such services locally which largelyaccounts for its success as a world concentration of HDD production -- rather than thisbusiness being monopolized by Taiwan, which still lacks the precision engineeringinfrastructure that has been so carefully cultivated in Singapore.

Public promotion of clusters in Singapore

All these developments are backed financially and technologically by public policyinitiatives in Singapore. Technologically they are backed by the creation of a series ofpublic sector R&D facilities in the 1990s, targeted clearly on the emerging clusters. Forexample, the semiconductor cluster has been targeted by the Institute of Microelectronics.This institute, which has its own cleanrooms, works collaboratively with firms based inSingapore, both multinationals and indigenous firms, to pursue technological upgradingprojects of common interest.

In financial terms, the EDB has created a Cluster Development Fund, initially capitalizedat S$1 billion and since expanded to $3 billion. It is the CDF that has enabled Singaporeto attract investments in front-end wafer fabrication activities that generate further clusterpin-offs (such as in TECH corporation for production of DRAMs, and in new venturessuch as Chartered Silicon Partners, an advanced Application-Specific IC facility beingbuilt as a joint venture between Singapore's Chartered Semiconductor manufacturing andLucent Technology of the US.

But more fundamental is the underlying work of the Economic Development Board itself,which has conceived the cluster strategy, is responsible for implementing it and exercisesconstant vigilance in attracting appropriate investments for Singapore in the strategicclusters and in providing an interface between the firms involved and the Singaporepublic authorities. More than any other institution, the EDB has been responsible for thesuccess of Singapore's efforts to create manufacturing industries and to ensure that theyare continually upgraded.

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6. COMMON ELEMENTS: INDUSTRIAL UPGRADINGAND INSTITUTIONAL LEARNING

While the differences between the approaches taken by Taiwan and Singapore to theirindustrial upgrading are clear and important, the underlying similarities in their strategiesand institutional frameworks are also striking. The fundamental differences involve thevariety of institutional vehicles chosen for their upgrading strategies.

In the case of Taiwan, it is the public sector research laboratories, led by those of ITRI,which have played the role of technology transmission agency on behalf of the economyas a whole. They have driven the process of technological diffusion through such novelinstitutional devices as the rapid creation and dissolution of R&D consortia that bring theITRI laboratories into direct contact with small and medium-sized enterprises andindustry associations.

In the case of Singapore the emphasis has been quite different, in that the target of thegovernment's interventions has been the attraction of multinationals. But this has beenwith a clear goal in view, namely the systematic and relentless leveraging oftechnological capabilities from the MNCs, to be channeled across to indigenousSingapore firms, through a progression of capabilities that moves along two dimensions -- technical and market oriented capabilities. The idea illustrated in Figure 6-1.

Figure 6-1 Map of technology diffusion: leverage from MNCs

Market expansion

Exports Integrated

production and marketing

Domestic production

Production and product development

Functional expansion

The commonalities reside in the way that both countries have fashioned a set ofinstitutions which drive firms in these economies towards an outward, export orientation,and towards endless technological upgrading -- rather than allowing firms to slip into lazyhabits as domestic suppliers only, looking to compete simply through low costs, or worse,through monopoly positions.

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The strategic decisions made by firms

Firms in Singapore and Taiwan make strategic decisions for themselves. They are notunder any compulsion to follow this or that strategy as laid down by public authorities.But where there are clearly desirable national directions for firms to follow, as in the caseof industrial upgrading (for example from manual machine tools to computer-aidednumerically controlled machine tools) then incentives are provided and disciplinesimposed when firms seek some form of government assistance.

Firms which are established in Taiwan and Singapore have a clear perspective as to howthey may insert themselves within global production chains. They pursue strategies, forexample, as contractors to other firms, not seeking to produce a product or a brand oftheir own. This means they are often invisible in the eyes of the wider public. But theygenerate wealth nonetheless, and are subjected moreover to the constant upgradingdiscipline of having the toughest international firms as their industrial customers.

The trends towards industrial contracting as a leading-edge business strategy areintensifying, rather than diminishing. New firms arise in Silicon Valley each monthpursuing some innovative form of industrial contract strategy. Innovative firms inAustralia are likewise pursuing such strategies -- such as Bluegum, Australia's largestelectronics contract manufacturer, which acquired the computer manufacturing facilityvacated in Wangaratta by IBM and added it to its thriving industrial contractingbusiness.90

… are shaped by the institutional frameworks within which firms operate

The institutional frameworks that have been found to work effectively in Taiwan andSingapore have been tried and tested through an evolutionary sequence of trial and error,learning and improvement. They did not spring ready made from some convenientformula. Indeed, as we saw in Chapter Three, early examples of Taiwan's R&D allianceswere failures. Characteristically, for the Taiwanese these early failures led to a search formore effective institutional frameworks in which firms could be enrolled so thatcollaboration could be combined with competition. There is an important lesson here. InAustralia debate tends to be polarized between advocates of one kind of solution oranother, without much room being left for learning, adaptation and evolution.

Likewise we noted that the institutional frameworks developed in Taiwan and Singaporeare not based on dominance by the private sector over the public, or public over private.Rather there has been a continuous co-evolution of responsibilities and behavior which iscaptured by Weiss in the phrase 'governed interdependence.'91 The strength of thecollaboration between the public and private sectors lies in their mutual obligations andcomplementary resources.

90 See the articles "A future for our factories" and "Contract manufacturing: an old idea is new again"by David Forman, in "Tales from Silicon Valley" published electronically by the Australian BusinessFoundation: www.abol.net.91 See Weiss 1998 op cit.

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Now, the World Bank’s ‘East Asian miracle’ report attributed East Asian success to goodmacroeconomic management and to ‘market friendly’ interventions.92 While theseelements were certainly present in the rise of high technology sectors, they do not take usvery far in understanding high technology industrialization and upgrading as seen inTaiwan and Singapore. Once the central role of learning is acknowledged, the issue of theinstitutional setting in which it takes place becomes unavoidable. In our examples of themanufacturing industries which have seen continuous upgrading and diversification inTaiwan and Singapore, the common institutional elements have been as follows:

Technology leverage

Some public sector R&D institute whose main mission is the scanning of the world’stechnological developments and rapidly building a capability in these new techniques, forthe purpose of diffusing them to the private sector as fast as possible, has been present inall the semiconductor cases. Examples are ITRI in Taiwan, with its specialist laboratoriessuch as ERSO and CCL; or the NSTB with its specialist laboratories such as the IME inSingapore.

Financial leverage

Some development bank or investment vehicle charged with the mission of identifyingworthwhile strategic investments, such as those which further the goals of catching up,and organizing the financing required, has also been present in all the cases we haveexamined. Thus in Taiwan there was the China Development Corporation. In Singaporethere has been the Singapore Development Bank (spun off from the EDB in the 1960s)and such novel institutions as the Cluster Development Fund. These operate eitherthrough the mobilization of domestic savings, or through mobilizing international banksyndicates and the issuance of debt instruments such as depositary receipts.

Industry cluster strategies

Firms and even industries are not promoted on their own in Taiwan and Singapore, but inrelation to each other. It is connections and linkages that are prized above all – upwardand downward linkages in the value chain and horizontal linkages between firmsproviding complementary products and services. Industry clusters become self-perpetuating and self-renewing once a sufficiently rich set of interconnections have beenestablished. Taiwan actively promotes its IT and semiconductor clusters and Singaporehas focused its industrial promotion activities on key clusters like electronics andsemiconductors, chemicals and precision machinery. Multinational investment in theseclusters is especially encouraged and local firms encouraged to form to take advantage ofthe supply linkages thus generated. If an economy can be judged by the richness of itsinter-connections, then the Taiwanese and Singaporean industrial economies have alreadybroken through an important network threshold.

92 See the World Bank, The East Asian Miracle (New York, Oxford University Press, 1993).

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Nurturing environment for the formation of knowledge-intensive firms

All the cases of semiconductor industry formation have involved provision of suitableinfrastructure, such as the Hsinchu Science-based Industry Park in 1980 and its successor,the Tainan park in the late 1990s. Or, the Singapore science parks in Jurong and the newsemiconductor fab park in Woodlands, as well as taxation and R&D incentives schemesdesigned to facilitate the formation of new firms. In the case of Taiwan’s ITRI, this hasextended in the 1990s to the creation of a multi-storey ‘incubator’ building on the ITRIcampus, designed to house the operations of new technology-intensive firms, startedmainly by ITRI staff.

Investment attracting vehicles

Bodies such as Singapore’s Economic Development Board (or Penang’s PenangDevelopment Corporation in Malaysia) -- termed collectively economic developmentagencies -- have been central to the process of attracting and monitoring investment inhigh technology activities by multinationals.

The East Asian agencies have been so successful in attracting multinational investmentthat they have been paid the compliment of emulation in other parts of the world, such asScotland, Wales and Ireland, where the economic development agencies have all playedmajor roles in attracting foreign investment to these areas formerly stricken withindustrial decline.

Industry self-organisation

Bodies such as the TEEMA and more recently, TSIA in Taiwan, have emerged to providea means for communication between government and firms, and to fashion a consensusover new directions for the industry to move in. It is such a capacity for an industry toself-organize, for more than merely defensive ends, that is an important factor in theability of the industry to be continuously upgraded and thereby to sustain itscompetitiveness. This has not been such a strong feature in Singapore, wheremultinationals have their own global agendas and do not need national industryassociations.

Industrial upgrading incentives and discipline

In none of the cases of manufacturing industry creation or upgrading that we haveexamined in Singapore or Taiwan have public agencies been content to create new firmsor seed technologies without at the same time setting in place processes for continualtechnological upgrading and enhancement. The world technological frontier moves aheadrelentlessly, and firms and agencies need to be focused on keeping up with thesedevelopments, through all the means of open technological communication available.

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Skills upgrading and technical training

Technological capabilities rest on an infrastructure of specialist industrial training whichagain is not created by markets, but calls for institutional innovations to ensure that firmscan employ skilled staff and engineers as they need them. Singapore for example createdspecialist training centres in alliance with selected multinational corporations. In the1990s it has underpinned its expansion of wafer fabrication activities with a specialisttechnical training program funded through the EDB.

Market shaping and creation

In all the cases of semiconductor industry formation in East Asia, markets for theproducts did not exist initially. They had to be conjured into place, to complement themarkets in advanced countries which acted as the export drivers for the nascentindustries. Thus institutions like III in Taiwan helped to create a public and private sectormarket for IT products, by driving the associated standards for IT use in governmentagencies for example. In Singapore a similar role was played by the National ComputerBoard.

Export promotion

The collective enhancement of export performance through institutions such as Taiwan'sCETRA (China External Trade Development Council) or the TDB (Trade DevelopmentBoard) in Singapore has also been a significant source of institutional support as firms inEast Asian countries seek to enter new markets.

Lead agency (Johnson’s ‘pilot agency’)

Since industry adaptation and adjustment depends for its success on coordination, theneed for some form of pilot or lead agency to set the overall strategic directions andcoordinate the activities of the various agencies and trade/industry associations, isapparent. The outstanding example in East Asia has been Japan's Ministry ofInternational Trade and Industry (MITI), analyzed in Chalmers Johnson's famous work,MITI and the Japanese Miracle.93 Prominent examples in our cases, playing comparableroles, are the CEPD in Taiwan and the EDB in Singapore.

On their own, these agencies and organizational innovations are not so remarkable, andeasily replicated (as for example, the economic development agencies which have beenemulated in Europe, such as the Welsh Development Agency). What is remarkable is thetotal system formed by their interaction and mutual support. It is this systemic characterof the elements that accounts for the capacity to learn. It is the adaptability of the total

93 See Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975. (Stanford, Stanford University Press, 1982).

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system that counts, with the facility to improve adaptation over time as experience isgained and stored in appropriate institutional form, generating what may be called‘institutional capacity.’94

Key features of this process of creating new knowledge-intensive industries through leverage andlearning make it very different from the conventional view of knowledge generation within theindividual firm, or from the view of technological ‘diffusion’ as instigated by the innovators andleading to ‘transfer’ to the recipients. Five features of the process may be identified, making senseof the kinds of institutional innovations remarked upon in the cases of Taiwan and Singapore. 95

1. New industries created as deliberate act of public policy

New high technology industries are created in Taiwan and Singapore not through thespontaneous diffusion of industries or production systems from advanced countries, butas a deliberate act of policy designed and implemented by the countries themselves,working within the technological dynamics of the industries concerned.

The creation and upgrading of a high technology industry involves creating theinstitutions of technology leverage. There is as yet hardly any discussion in the economicliterature of industry creation as a deliberate act of public policy. Yet this is clearly whatis at stake in the case of the emergence of high technology industries in East Asia. Theprocess of industry creation starts with the creation not of firms or technology agenciesbut of an institutional framework which provides a pattern or template for subsequentindustry growth. The process of high technology industrial upgrading is concerned notwith individual products or even individual technologies, but with the development of acapability to handle an expanding range of increasingly sophisticated products andtechnologies that are ‘knowledge-intensive.’

2. Industries created through management of technology leverage and diffusion

The process of high technology industry creation in Taiwan and Singapore is achievedthrough the management of technological diffusion, via imitation, leverage and learning,rather than through R&D-led knowledge generation by individual firms.

The generation and diffusion of knowledge is equivalent conceptually to the notion of‘innovation’ – except that the Western literature on innovation has an overwhelming biastowards the first stage, namely knowledge generation. It was the genius of Japan and theother East Asian countries to realize that the emphasis should really be placed on thesecond stage, diffusion, since this is where national wealth (as opposed to the wealth of anindividual person or firm) could be generated. Thus the processes of industrial and

94 See the working paper on this topic produced as part of the 'Building Institutional Capacity inAsia' research project of the Research Institute for Asia-Pacific (RIAP) of the University of Sydney: JohnA. Mathews and Fred Argy, 'Building Institutional Capacity in Asia,' Working Paper #1, BICA project,RIAP, March 1999.95 Adapted from the forthcoming book by John A. Mathews and Dong-Sung Cho, Tiger Technology:The Creation of a Semiconductor Industry in East Asia (Cambridge, Cambridge University Press, 1999).

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technological upgrading are concerned with the establishment of institutional frameworksdesigned to accelerate diffusion of technical knowledge and its uptake by sophisticatedfirms.

The focus on the diffusion of technology (knowledge) carries with it a commitment todevelop an institutional framework which is concerned not with the generation ofknowledge within firms, but with the management and acceleration of the process ofdiffusion itself. This is the perspective that has informed the establishment of publicsector research institutes and the formation of technology consortia, all of whichconstitute various institutional forms for the management of diffusion of technologicalcapabilities.

3. Focus on enhancement of firms' technological capabilities

Technological capability is enhanced through resource leverage, harnessingcollaborative networks as well as competition between sophisticated firms in adevelopmental, ‘catchup’ institutional setting.

Technological upgrading in a high technology setting is fundamentally a process ofleverage – of skills, technology, knowledge – from the advanced to the ‘relatively lessadvanced.’ The leverage is conceived and executed by firms and agencies within therelatively less advanced countries themselves. In this sense, its emphasis and focus isquite the reverse of the usual description in the Western literature of ‘technologytransfer,’ which takes the perspective of the technology exporting nation. While labor andcapital can be ‘hired’ (labor exacting a fee in the form of wages, and capital in the formof interest or dividends) knowledge can only be generated internally, or leveraged fromoutside. It is external leverage that is the defining feature of high technology upgrading.

The contractual forms within which knowledge is leveraged vary, from simple licensingarrangements to much more complex collaborative arrangements and joint ventures.The vehicles of technological upgrading are sophisticated firms. However large andsignificant may be the role of public sector agencies in the preparatory stages of theprocess, the goal is the creation of sophisticated firms capable of engaging with realtechnologies producing real products in real markets – as quickly as possible. These firmsare the primary vehicles of high technology upgrading. . The firms need to besophisticated enough to attract capital investments for high technology activities, and toact as leveraging vehicles, such as in securing licenses to advanced technologies andproducts, or in managing intellectual property portfolios.

4. Industries promoted through 'nurturing' rather than traditional protectivemeasures

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The process is effected through industry ‘nurturing’ rather than ‘protection,’ withindustry policy evolving as the industries themselves take root and diffuse, via a‘governed interdependence’ between state agencies and industries.

Industries being created through leverage call for ‘nurturing’ by public agencies to assistfirms and induce them to enter new high technology sectors by reducing the risks andcosts of entering. The ‘nurturing’ can consist of provision to firms of: infrastructuresupport (eg technology parks, high-quality power and water supplies); low-cost loans andtax breaks to stimulate investment and R&D; and technology leverage services, such asdevelopment assistance through public-sector research labs.

Japan utilized the full gamut of ‘infant industry’ protective measures, such as excludingforeigners from the domestic market, use of tariffs, and so on. But then Japan was thefirst country in Asia to penetrate to the core of advanced technologies. Korea utilizedsuch measures to a lesser degree; it did take measures to protect the home market, andexercized pressure on foreign joint-venture partners in the 1970s to withdraw, leaving thefield to Korean firms. It did insist on technology transfer arrangements as quid pro quofor allowing foreign firms access to its domestic market, particularly in the case oftelecommunications. It did employ tariffs on semiconductor products – but hadliberalized its trade and capital regimes for this sector by the mid-1980s.

Taiwan pursued a much more liberal strategy. It never imposed a tariff on semiconductorproducts. It did not exercize preferential purchasing of Taiwanese products. The roleplayed by the state in this case was very much one of ‘collective entrepreneur.’Singapore, in keeping with its reliance on direct foreign investment (DFI) by MNCs,pursued the most liberal of all strategies – no tariffs’ no currency restrictions. ButSingapore was not ‘open slather’ in its approach. Its government agencies such as theEDB were very active in ‘guiding’ investment into Singapore, and in leveraging skillsfrom the potential and existing investing firms. It was the sophistication of the ‘nurturing’devices utilized by the East Asian countries in the ‘seeding’ and ‘diffusion’ phases ofdevelopmental resource leverage of the semiconductor industry, that accounts for itssuccessful creation.

But such nurturing strategies call for levels of ‘institutional capacity’ that far exceed thecapacities exercized in simpler matters such as setting tariff levels or enforcingcompetition.

5. The process of high-technology industry creation is endless

The process of industrial upgrading is iterative, with each cycle leading to theenhancement of technological capabilities and ultimately to industrial sustainability,accomplished within national systems of economic learning.In all the cases of industrial upgrading in Taiwan and Singapore examined, transition tohigh technology industry was an over-riding goal of public policy, to which other issueswere subordinate. In the case of Japan, the effort was conducted under quasi militaryconditions of focused effort by a single-minded system of state agencies. In the case of

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Taiwan, the state went to extraordinary lengths to coax the private sector into eventuallyexposing itself to the risks of high technology industry activity. In the case of Singapore,the government’s role was critical in determining the opening to the MNCs, and then infashioning the opening itself.

One of the lessons of the semiconductor industry creation in East Asia is surely that hightechnology upgrading is effected more efficiently when there are public sectorcoordination and risk reduction processes and mechanisms available than when they arenot. This calls into play the institutional setting in which high technology upgrading iseffected – which, at bottom, rests on the country’s institutional capacity in an economicsense, and the level of sophistication of ‘governed interdependence’ between the playersinvolved. The more sophisticated this network of institutions, the faster the economiclearning. The less sophisticated, correspondingly the slower is the rate of economiclearning, and the less certain the outcome of the upgrading. The more sophisticated thefirms, the more they are able to leverage themselves abreast of the technological frontierthrough collaborative alliances and technology development consortia.

While some authors have discussed such issues utilizing the notion of a national systemof innovation, we choose not to use this term since our emphasis is on knowledgediffusion rather than generation. Hence a new term is preferable, national system ofeconomic learning (NSEL).

The point is that economic learning is accomplished not by firms working individually, oreven in isolated collaborative networks (such as private consortia) but in ‘industrialsystems’ that provide structure and process between firms and the market, or betweenfirms and the state. The process of economic learning takes place at a level ‘higher’ inaggregate than that of organizational learning. While the latter is essential to successfuleconomic learning, it is only a part of the story. The point about economic learning is thatthere are structures (institutions) that operate between firms and the market, or betweenfirms and the state, which enable their activities to be coordinated (or orchestrated), in amanner which approximates the capacity of a company management to coordinate andthe operations of the different divisions of a company.

The process of technological upgrading (as depicted here) is a process without end. Therewill never come a time when a country can state that it has attained a degree oftechnological sophistication that calls for no further advance. This would contradict ourbasic Schumpeterian view of the workings of the capitalist economy – let alone our basicsense of reality. Yet there is a goal to this process. The goal is to achieve a state of‘sustainable innovation’ in a particular technological field. In such a state, a country’sfirms will have become so sophisticated that they can enter into collaborativetechnological alliances with other sophisticated firms around the world. Such alliances,far from indicating a state of ‘weakness’ or ‘dependence,’ in fact represent an advancedstate in which foreign firms are prepared to collaborate with the newcomer in the pursuitof common technological goals.

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The process of industrial upgrading is never-ending. No sooner has a country acquired acapability in one technology, than the field moves on to the next. Capabilities in ICs inthe semiconductor industry have been succeeded by capabilities in Liquid CrystalDisplays, and in the mid-1990s by capabilities in multimedia and HDTV, and so thesequence continues. The point is that leveraging, once learnt, can become a permanentway of life for a company and for a country. It is practised initially to gain access totechnologies or skills that are beyond its reach. Once having become a player,collaboration within networks is practised as a way of staying abreast of activities whichindividually would be beyond the reach of even a large and advanced player.

The process of leverage and learning is one involving an iterative process of expandingtechnological capabilities. Each iteration broadens and deepens the technologicalcapabilities which serve as foundation for yet a further iteration. This process may bedepicted as in Figure 6-2, which shows (a) the upward spiral of capability enhancementby firms and agencies in latecomer nations, and (b) a cross-section of this spiral, showingthe complex patterns of inter-organizational institutional relations involved.

Figure 6-2 The process of industrial upgrading

Expanding cone of capability enhancement

External firms or agencies

Development Consortium

Core: R&D institutes, public agencies

Inner ring: Small and medium sized firms

Outer ring: Large firms

Foreign firms

Consortia

Industry associations

______________________________________________________

The process described is thus an endless upward spiral of expanding technologicalcapabilities, nurtured and disciplined through complex and sophisticated institutional

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frameworks, involving public institutes, private firms, consortia, industry associationsand government departments. This is the complex that we choose to describe as anational system of economic learning. This notion captures the pattern of ‘supra-organizational’ structures and processes that have been created in the East Asiancountries – supra-organizational patterns such as inter-firm networks, industry and tradeassociations, product development consortia, cross-subsidizing integrated firms andclusters.

It is these structures which provide the framework which facilitates, encourages,disciplines – in a word, accelerates – the processes of organizational learning that areundertaken within individual firms.

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7. CONCLUDING REMARKS:A WAY FORWARD FOR AUSTRALIAN

FIRMS AND INSTITUTIONS

This paper is not centrally concerned with Australian firms and institutions. But someremarks as to what conclusions might be drawn in Australia from the successes ofTaiwan and Singapore in promoting their capabilities and industries, are in order. Let memake just five points for the benefit of Australian decision makers and political leaders.

A focus on manufacturing

The first point to note is that success in manufacturing requires a focus on manufacturingas a strategic goal. Australia's manufacturing industries appear to be declining, both inabsolute and relative terms, and something drastic has to be done to revitalize them. Mostof the industries discussed in this paper -- semiconductors, including wafer fabrication,memory chips, silicon foundries, and associated specialist equipment and materialssupplies, hard disc drive production, flat panel displays, CD-ROMs -- are virtually absentin Australia. This is not to say that these are the only industries that we should befocusing on in Australia. But they are at the technological cutting edge, and our absencefrom them carries repercussions downstream as well. Governments have not successfullypromoted the need for firms to be involved in these kinds of cutting edge manufacturingactivities. Those firms which were involved, such as AWA Industries, have withdrawn,selling out their interests to overseas competitors.96

By contrast, we can see that in the cases of Taiwan and Singapore, both countries whichhave felt extremely vulnerable in geopolitical terms (Taiwan from mainland China;Singapore as an isolated city-state expelled from Malaysia), the governing elites resortedto manufacturing prowess as a means of securing their national identity and self-sufficiency. The drive to succeed in manufacturing has flowed from these premises. Thisis not to say that Australia 'needs' a national crisis of identity in order to focus onmanufacturing. But it does mean that a strategic focus on manufacturing as a nationalgoal (or at least a state goal) would be a good place to start the revitalization process.

A long-term outlook achieved through institutional innovation

Secondly, a focus on manufacturing cannot be of a short-term character, addressed bymacroeconomic concerns with budget deficits, balance of payments, tax levels and all theother paraphernalia which clutter public debate in Australia. A focus on manufacturingcalls not for a one-year or even a three-year program, but for a ten-year and twenty-yearstrategy. This has not been unknown in Australia in the past. In the early decades of the20th century, Australia's agricultural industries were built through painstaking attentionbeing paid to their long-term prospects, by governments and by farmers' associations. 96 AWA operated a small silicon wafer foundry in Sydney, for example, but investment was never ata level to make it internationally competitive. It was sold in 1997 to the US semiconductor firm QualitySemiconductor Inc, and renamed Quality Semiconductor Australia (QSA). QSI was taken over in 1998/99in the USA by the firm IDT, which therefore became the owner of QSA.

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The successes of CSIRO in the post-war period were built on a 10- and 20-year vision forimproving the productivity of these rural industries. But this long term vision has beenpoorly translated across to manufacturing.

By contrast, we see in Taiwan and Singapore the effects of long-term strategies. Taiwanbuilt its semiconductor industry from a standing start to become fourth largest in theworld, over the course of 20 years, from around 1975 to 1995, through consistently long-term strategies. What was put in place first was the infrastructure needed for success, interms of technological capabilities and manufacturing skills, embodied either in publicsector facilities (in the case of Taiwan) or in multinational activities (in the case ofSingapore).

The immediate objection to a long-term view being needed is a cultural one. It is thatAustralia is a democracy, and governments have three-year time horizons at the longest.But this is beside the point. What Taiwan and Singapore created were institutions whichembodied the long-term view -- institutions like ITRI and its laboratories, or the IDB orthe CDC; and in Singapore the all-important and pervasive Economic DevelopmentBoard, which has been operating continuously for 36 years and has been the anchor ofSingapore's manufacturing success.

It is institutions which count for a long-term vision. We have long-term institutions inAustralia, like CSIRO, and they have played a very important role in Australia'sdevelopment. Latterly CSIRO has been encouraging spin-off ventures, in the samefashion as is practised by, say, ITRI in Taiwan. 97 In the 1990s, new and innovativeinstitutions have been created, such as the Collaborative Research Centres (CRCs), whichalso take the long view. Yet the fact remains that Australia's institutional support forcommercialization of innovations remains weak. Many of the technical innovationscrafted within CSIRO have ended up in foreign hands -- an unthinkable outcome inTaiwan or Singapore.

So some form of institutional embodiment of a long-term manufacturing strategy needs tobe created in Australia, to kick start a manufacturing renaissance. One does not have tolook beyond Singapore's Economic Development Board for the appropriate model. Thisis an outstanding national institution, staffed by savvy and highly sophisticated younggraduates, which has a presence in every financial capital in the world. It is its worldwidenetwork of offices which ensures that the message that "Singapore is good formanufacturing" is always being heard and getting through to the right boardrooms. Thereappears to be no cultural or other impediment to our creating a comparable institution inAustralia.

97 An internal study conducted on behalf of the CSIRO Institute of Information Science andEngineering, by Ms Lyndal Thorburn, found that over the decade 1985 to 1995 a total of 42 firms could bedescribed as "spin-off" ventures linked to CSIRO. They were started by former CSIRO staff and theyrelied on expertise developed within CSIRO. Yet CSIRO does not publicize these spin-offs, and the wealththey contribute to the Australian economy remains uncomputed. The Thorburn study is summarized inLyndal Thorburn, Experience using spinoff companies in technology transfer, Les Nouvelles, March 1998,pp. 10-14.

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Firms and the upgrading of their capabilities the focus of policy

This links with the third point, that a focus on manufacturing and innovation does nothave to translate into a traditional 'industry policy' approach concerned with tariffs,bounties and all the other institutional impediments to good business practice with whichwe have burdened ourselves in Australia in the past. Rather, it needs to be translated intosimple and effective strategies to support the development of industry clusters andupgrading of technologies by firms themselves.98 Good institutions are needed which canfashion these programs and adapt them as necessary.

Australian governments and policy makers have shown a receptivity to innovative kindsof industry strategies, such as in the Factor F program that stimulated pharmaceuticalsdevelopment, and the Button automotive and steel plans of the 1980s, or the recent'Supermarkets to Asia' program and the START program. These are all excellentinitiatives in themselves. But they do not connect together, and need to be placed in amuch more focused, systematic and long-term institutional context.

Not lower business costs, but improved business outputs

Fourth, Australian firms, and the governments which seek to represent their interests,need to focus less on the costs of business inputs, and more on the effectiveness of theirbusiness outputs. So much business debate in Australia is concerned with the'unacceptably high' cost of this or that business tax -- leaving unspoken the assumptionthat if costs are all that count, then businesses must be pursuing second-rate 'least cost'business strategies. Business strategies based on innovation, quality and timeliness -- aspursued by Australia's best firms, particularly the 'emerging exporters' -- are far superior.The brutal fact of the matter is that business imposts could be reduced to zero, and somebusinesses in Australia would still be unable to compete -- because they lack innovativestrategies and lack the institutional support that shapes markets and business strategies incountries like Taiwan and Singapore. A forward-looking industry strategy would beclearly focused on outputs, and would reward or discipline firms according to theirachievement on this measure.

Government leadership and vision: setting the direction

The final point is that governments in Australia need to govern -- they need to show theleadership and set the vision that the private sector can then work towards achieving. Weseem to suffer in Australia from a 'governmental cringe' where elected officials cringe inthe presence of business, always fearing to offer a lead in case this is seen as 'anti-business' or elitist. But this helps neither business nor government. What we see inTaiwan and Singapore is a healthy and sustained dialogue between the partners, withgovernment constantly offering a guiding vision and shepherding investment by theprivate sector towards accomplishing that vision.

98 These points are further developed in the ABF study by Jane Marceau, Karen Manley and DerekSicklen, The High Road or the Low Road: Alternatives for Australia's Future (Sydney, Australian BusinessFoundation, 1997).

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Industry associations provide the vital 'missing link' in this dialogue, forcing thegovernment to take into account the real concerns of firms, but forcing firms as well torise to meet the challenges presented. Industrial upgrading is the toughest challenge firmshave had to meet in Taiwan and Singapore, and the governments there have been forcingfirms to engage with the challenge, not shirk it.

Consider once again the remarks of Michael Porter in his 1998 Harvard Business Reviewarticle. He argues that in successful manufacturing countries, business and government"together create the conditions that promote growth" and that governments "should striveto create an environment that supports rising productivity." This is not old-fashioned'industrial policy' involving picking 'winners' but a clear focus instead by governmentagencies on the inputs needed by firms if they are to be successful in knowledge-intensive industries. He says:

Governments -- both national and local -- have new roles to play. They mustensure the supply of high-quality inputs such as educated citizens and physicalinfrastructure. They must set the rules of competition -- by protecting intellectualproperty and enforcing antitrust laws, for example -- so that productivity andinnovation will govern success in the economy. Finally governments shouldpromote cluster formation and upgrading and the buildup of public or quasi-publicgoods that have a significant impact on many linked businesses.99

The striking feature of these remarks is how closely they fit the actual practices ofTaiwan and Singapore. These governments, for all their strategic intention to createspecific industries and specific sectors within these industries, never made the mistake oftrying to do this in a way which substituted for the efforts of firms themselves, or for therealities of world market forces. Their approach was always to create (or rather 'shape')the conditions in which firms would be induced -- cajoled, led, disciplined -- to engage inendless industrial upgrading. Clusters were created through the seeding of appropriateinstitutions and technological capabilities, and encouraging the formation of linkages.These are simple but straightforward policy measures that a country neglects at its peril.

In a Silicon Valley these things can be done entirely through the private sector -- althougheven Michael Porter subscribes to the view that government plays a role in shaping theclusters in Silicon Valley as well. But Taiwan and Singapore never made the mistake ofsupposing that they were at the stage of development of a Silicon Valley. Theyunderstood, more clearly than anyone else, that they had to catch-up in the first instance,and that to do so they needed to create the appropriate catchup institutions.

This is the fundamental conclusion that Australian firms and institutions can draw fromtheir experience. We need in Australia to create appropriate long-term institutions tofocus the efforts of firms on industrial catchup and technological upgrading.

99 Michael Porter, 1998, op cit, pp 89-90.

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Where to start? A one-paragraph policy on 'industry promotion' is all that is needed byany state or federal government in Australia today. It would state:

We undertake that within one month of assuming office, we will create a newinstitution modeled on Singapore's Economic Development Board, to promoteinvestment in innovative Australian business sectors. It will create, as one of itsfirst priorities, a science-based industry park modeled on Hsinchu in Taiwan. Itwill provide a regular comprehensive report card on Australia's wealth creatingefforts through foreign and domestic investment and the spinoffs they generate,designed to focus Australian public debate on the country's long-term industrialfuture.

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John A. MathewsAssociate Professor in International Management

Macquarie Graduate School of ManagementMacquarie University

Sydney NSW 2109

Tel: 02 9850 9016 (switch) 6082 (direct)Fax: 02 9850 7698

email: john.mathews@mq.edu.auURL www.gsm.mq.edu.au/staff/faculty/home/john.mathews