Taiwan ranked behind Japan, China, Korea, and India in its overall gross domestic product (GDP) in 1995; Taiwan's GDP rose 3.7% in that year to $250 billion.1 With a population of 21 million, per capita GDP was $11,882. Exports totaled $108.4 billion, and imports were $101.4 billion, giving Taiwan an overall trade surplus of $7 billion. Electronics and machinery represented about 41% and 31% of exports, respectively. With the growth of Taiwan's electronics industry, imports of key components and equipment have generated a deficit in trade with Japan. Between 1990 and 1995, the trade deficit with Japan increased from $13 to $18 billion. As a result, Taiwan's government has developed a strategy to localize production of a greater percentage of electronics components and equipment. As Table 5.1 shows, Taiwan's manufacturing segment declined from 33.3% to 28.1% of total GDP in the first half of this decade; at the same time, electronics manufacturing increased from 12.7% to 18.4% of GDP. The government wants to stimulate industry growth in order to provide jobs and taxes. Focus on high-technology industries has resulted in their generating 33.5% of manufacturing revenues. Taiwan's national goal is to attain fully developed status by 2002.
Taiwan's strategy is to become the "Asia-Pacific Regional Operations Center (APROC)." Announced on January 5, 1995, the APROC plan seeks to transform the Taiwanese economy by fostering freer flow of goods, services, human capital, funds, and information. According to Premier Lien Chan, "The plan demonstrates our commitment to integrate with regional economies and become a full member of the international community."
The strategy attempts to utilize Taiwan's geographic location, growing domestic market, entrepreneurial spirit, well-educated workforce, abundant capital, maturing technologies, modern management skills, global trading network, and cultural bonds with mainland China and other Asian markets. The plan calls for Taiwan to become the hub for regional manufacturing, sea transportation, air transportation, and financial, telecommunications, and media activities.Table 5.1
Sources: Executive Yuan; Taiwan Customs; ERSO/ITRI ITIS Project
According to Chan, "In the future, we will rely on competition rather than industrial development planning to guide our economic strategies. All economic measures should be facilitative and constructive, rather than regulatory and restrictive. Where the government regulates a market segment, it should not own or manage business in that sector. We also understand that market efficiency and national competitiveness can be enhanced through aggressive deregulation. To this end, I have instructed our government staff to reduce paperwork and streamline the bureaucratic review and approval process. By the same token, we have adopted a policy that government measures and rules should be simple and transparent." To meet Taiwan's goals, high-technology industrial parks have been established to allow for "one-stop" shopping for new investment permits. Special incentive programs have been established to encourage R&D and facilities investments in high-priority industries, products, components, and technologies. Relationships with mainland China are also being improved to encourage economic activity.
Government funds are used to support industry development and are directed through ministries and various councils to research institutes like the Industrial Technology Research Institute (ITRI), university research programs, and industry to stimulate technology development and facilitate its diffusion in order to encourage economic growth. As Fig. 5.1 shows, the Ministry of Economic Affairs (MOEA) and the National Science Council direct the majority of technology-based programs. The National Science Council has oversight of the science-based industrial parks and national laboratories and supports academic research programs. MOEA has oversight of the development center of biotech, ITRI, funding of technology development programs, and provides incentives (tax and matching funds) for industry investments. Additional science and technology programs are carried out by the Atomic Energy Council, Council of Agriculture, Ministry of Transportation and Communication, Ministry of National Defense, Ministry of Education, Department of Health, and the Environmental Protection Agency.
Ten strategic industries, 8 key technologies, and 69 key parts and products have been given priority for development. With low-interest loans and technology support from the government, these industries are expected to rekindle economic development. Research institutes are responsible for developing core technologies and key components, such as a common engine for automobiles or LCDs for computers.
Fig. 5.1. Taiwan's technology development programs (ERSO/ITRI).
ITRI plays a key role in technology policy and has provided the basic support for developing high-tech industries like semiconductors. It has also upgraded traditional industries and provided pollution control in the livestock industry. Research institutes also provide basic infrastructure for technology development by such as testing centers for electronic products and automobiles. ITRI further provides technical assistance, coordinates international cooperation, and provides information to industry. New industry developments then stimulate production and sales in both domestic and overseas markets. Technology-intensive industries have grown from nothing in 1976 to over 34% of the manufacturing base in Taiwan in 1995. They are projected to account for 40% of the manufacturing base by the year 2002. Between 1976 and 2002, traditional industries will fall in importance from 52% to 25% of the manufacturing base in Taiwan.
Taiwan's government contracted with ITRI to identify ten emerging growth industries that should receive incentives and support. The priority emerging industries ITRI identified are communications, information, consumer electronics, semiconductors, precision machinery and automation equipment, aerospace, advanced materials, specialty chemicals and pharmaceuticals, medical and health care, and pollution control and treatment industries. Growth in these industries is projected to increase production value from $27.3 billion in 1992 to $94.2 billion in 2002, a yearly growth rate of 13.2%. By 2002, information, precision machinery, and specialty chemical industries are expected to be Taiwan's leading industries.
For priority industries, the government's strategy includes the following:
Incentives apply to any company located in Taiwan; those that invest in priority industries and technologies get a 5-year tax holiday from the time they start making money. Individual investors get a 20% tax reduction.
In 1980, the government established the Science-based Industrial Park in Hsinchu to encourage high-tech industry. The park has over 1,500 developed acres and is close to the international airport and harbors, two national universities, and ITRI. There were 170 firms operating there in 1995, about 25% of which were foreign-owned. Annual sales were $6.4 billion in 1994. Within the park, there were 51 semiconductor firms, 39 PC/peripheral firms, 30 telecommunication firms, and 25 optoelectronic firms. In addition, there were 16 precision machinery and 9 biotechnology companies. High-tech companies that locate in the science and industrial parks are provided one-stop permitting and special incentives, including a 5-year corporate income tax exemption, low-interest loans, and tax credits for investments in R&D, factory automation, and human resource development support. In addition, no duties are levied on imported equipment, components, and materials. The total number of employees in the park in 1995 was 36,000. The number of these parks is growing rapidly across Taiwan. A new science park was planned to open in 1997. ITRI will establish a second campus for new programs that will be located within the new science park.
With the growth in Taiwan's electronics manufacturing industry came a growth in electronics exports from 20.3% in 1990 to 23.3% of total exports in 1995, while imports grew from 14.7% to 18.4%. Meanwhile, Taiwan's trade deficit with Japan grew from $13 billion in 1992 to $18 billion in 1995. A study showed that 90% of the deficit was due to the import of materials and key components. In response, government set a priority to balance the trade with Japan. MOEA established a program for the development of critical components and products. For example, by the year 2000, Taiwan plans to have 20 wafer fabs, although only one company grows silicon crystals in Taiwan. A joint venture was planned to start in July 1996 to supply 6-inch and 8-inch crystals, but most material will still be imported. This analysis resulted in formation of MOEA's Industrial Development Bureau to develop key components like CPUs, DRAMs, and LCDs. The aim is to centralize the resources of the government and private sectors and acquire technology for investment and production, replacing imports with domestic production, improving the industrial structure, and developing the newly emerging high-technology industries within the shortest possible time.
As of February 1995, MOEA's critical components program listed 48 critical components and 24 critical products, as shown in Table 5.2. These were classified into three groups. In the A group, a research institute like ITRI would be entrusted to develop the technology or product. In the B group, MOEA would employ government assistance in the development of targeted leading products and the program for application, promotion, and assistance of strategic technology for qualified manufacturers to conduct the development plan. In the C group, the government would provide investment incentives such as tax credits, acquisition of industrial land, government participation in investments, favorable loans and training of professional personnel, and special duties and import regulations. Examples of critical products include HDTV, digital audio tape recorders, electronic still cameras, and a variety of computer peripherals and manufacturing automation equipment. Critical components included as group A projects are fuzzy ICs, LCDs, high-density static and dynamic RAM, and a variety of RF (radio frequency) ICs, LEDs, and CCDs. Many of these are also open to group B and C incentives. Silicon wafer production was a group C priority.
ITRI is a nonprofit government-sponsored organization with a mission to promote development of high-tech industries, improve domestic product design and processing technologies, provide technical services to industry, and assist in development of defense technologies and industry. Most Taiwanese companies are too small to afford R&D, so ITRI is their sole source of R&D. ITRI has about 5,700 young and energetic engineers. In the past, there were as many as 10,000 engineers working at ITRI.Table 5.2
*ITRI-planned or on-going development program; **New item
With the recent uncertainty created across the Taiwan Straits in the People's Republic of China (PRC, or, simply, China), government funding growth has been curtailed. ITRI's current budget is about $260 million annually: about 80% of the funding comes from government (55% from MOEA and 25% from defense), and the goal is to increase support from industry to 25%. That means ITRI gets about $65 million per year from the private sector. Some of the divisions have already achieved this balance in funding.
Taiwan's small companies lack the resources to build a strong R&D position; ITRI therefore plays an important role in coordinating efforts to develop new industries. It is very good in the area of applied research. In the past, ITRI worked to improve the ability of companies to do product development. It has an incubator facility that can be utilized by companies that have worked on joint projects with ITRI, and it built a pilot production line that was then transferred to a private company. ITRI is also concerned about quality and has obtained ISO 9001 certification for its labs.
ITRI's policy is to be involved in MOEA's A group technologies where it can apply its own technologies. B group areas have only a limited number of companies capable of making early investments. ITRI's policy is to reduce its involvement in B area developments to only 10% by the end of 1996. Instead of being directly involved, ITRI will develop consortia or joint ventures with foreign companies to take advantage of their quick responses to market changes. C group areas have a lot of foreign companies that have technology. In the past, ITRI helped transfer technology to Taiwan in C-type industries. Wireless telecommunication is an area now targeted in this group. Companies like Acer form their own alliances with foreign companies to transfer technologies.
ITRI started by helping companies get new products out quickly. Companies are now able to do that well, so ITRI is less involved. ITRI now concentrates its efforts on development of key components that are middle- and long-term projects requiring over five years. ITRI moves a product from the laboratory to pilot production and then terminates its direct participation and funding. The government gets dividends after the business generates adequate revenues.
ITRI has 7 laboratories and 3 centers. The range of technologies is quite broad, with about half of ITRI's efforts going to support electronics technologies. With the growth in computers and communication, a lot of engineers have returned from U.S. companies like AT&T, IBM, Belcore, and Star Labs; over 200 engineers who formerly worked at IBM and AT&T now work at ITRI. The Institute's divisions include the computer and communications research laboratory (once part of ERSO - see next page), which is now researching broadband ISDN and HDTV. This lab has adopted MPEG II for image compression and is capable of 2-way interaction for "video on demand" delivery. ITRI also has mechanical, material, and energy research labs, and offices in Taipei, Tokyo, the United States, and Russia. Finally, it has centers for developing measurement standards, pollution control technology, and aviation and space technology.
The Electronics Research and Services Organization (ERSO) was established in 1974 within ITRI. Its mission is to develop and diffuse electronics technologies. Its major foci are semiconductor IC devices, display devices, microwave components, and electronic packaging. ERSO is committed to building Taiwan's high-tech industry base. Its strategy is to develop key electronic components and subsystems. Employing about 600 engineers, ERSO does the research and technology development for the government. The key is to transfer technologies into the market as quickly as possible. After four years, programs are spun off. The optoelectronics and systems lab was spun off from ERSO in 1985, and the computer and communication research lab was spun off in 1990 once its technical base was adequate. In addition, ERSO established consortia for PC computers in 1983 and 1984, submicron process development in 1991 and 1992, and LCD development in 1993.
ITRI has a planning department for technology forecasting and market research that proposes development projects to the Ministry of Economic Affairs and then carries them out. ITRI provides services for private companies to generate internal revenues for additional research projects. Pilot production allows transfer of operating capabilities into the private sector. ITRI's computer and communications laboratory looks at complete systems. ITRI developed a 3.5-inch hard disk drive and licensed it to three companies, but development was not fast enough to be successful - new products were being introduced every 6 months as product life cycles shortened.
The Industrial Technology Investment Corporation aids technology transfer from ITRI/ERSO to the private sector. After market research and technology forecasts, proposals are made for applied research, technology development, and pilot production. Once projects are completed, technology is diffused through spin-offs, investment, technology transfers, talent transfer (over its lifetime, ITRI has transferred 11,000 people to other organizations and companies), workshops, industrial services, and/or joint ventures. As with ICs, this has resulted in the creation of new industries. Other traditional industries are targeted to be upgraded. Companies come to ITRI if they have problems and need access to technology or technology development.
ITRI licenses technologies from foreign companies like IBM, AT&T, TI, and Intel for use in Taiwan. ITRI uses the technology to develop local industry and generate revenues. At the same time, ITRI has been rapidly increasing its own patents and encouraging local companies to apply for patents. Taiwanese patents are used for cross-licenses with foreign companies to reduce the royalties required by Taiwanese companies. ITRI has negotiated an umbrella agreement with companies like AT&T and IBM for technologies using a flat royalty rate. These arrangements reduce product costs and the risk of law suits against Taiwanese companies. This encourages firms to accumulate patents for use in negotiations with foreign firms.
The Taiwan Connection to China
In Taiwan, government controls on imports from mainland China, as well as on exports to and investment in the PRC, have been gradually liberalized since 1985. In the 1970s, Taiwan began its industrial restructuring with the move into high-tech and capital-intensive industries like chemicals and pharmaceuticals. At the same time, labor-intensive semi-manufactured products fell by over 30%. By the late 1980s, an economic slowdown drove the government to launch its new six-year development plan, which included $300 billion for infrastructure developments. Accounting for 34% of GDP in 1990, Taiwan's manufacturing sector was its strength. Heavy chemical products accounted for 47% of GDP in 1991, and other high-technology products represented 36%. The share of exports of primary products, consumer goods, and processed food declined while exports of components and capital goods increased.
With its roots in both the language and culture of China, Taiwan invested its surplus capital in the PRC. Relocation of manufacturing to the PRC also facilitated industrial and economic restructuring of Taiwan's mature footwear, plastics, and apparel industries. Dirty industries also found their way to the PRC. As of June 1993, Taiwan had invested over $2.9 billion in the PRC, including $364 million in electrical and electronic machinery. This has created concern in Taiwan over possible dependence on the PRC's resources, markets, and political influence.