Industrial Development of Taiwan

Past Achievement and Future Challenges Beyond 2020

Gee San, Patarapong Intarakumnerd, Gee San, Patarapong Intarakumnerd

• Publisher: Routledge
• Year: 2021
• Topic: Economics
• eBook ISBN:
  9781000375602
• Subtopic: Human Resource Management
• Index: Economics

Before the arrival of the twenty-first century, Taiwan was widely regarded as a successful model of a country which had not only transformed herself from an underdeveloped economy into a high-tech industrialised island, but had also undergone a revolution from an authoritarian regime to a democratic one. Taiwan is now experiencing a significant economic slowdown and facing multifaceted challenges including low productivity, stagnant innovation culture of small and medium-sized enterprises, ageing population, sustainable energy mix, pension reform, upgrading of human resources, devising competition policy to provide incentives for innovation as well as to limit abuses from monopolies, warding off competition from countries with lower labour cost and managing complicated cross-Strait relationship with China. The edited book looks at Taiwan's past successful development model, summarises Taiwan's current situation, outlines the future challenges beyond the year 2020 and provides policy recommendations in the aforementioned aspects.

The contributors of this volume are accomplished veteran scholars in the fields. Several of them used to be policy-makers at the level of ministers or deputy ministers. The book offers not only academic contribution but policy-relevant insights.

1 Introduction

Gee and Patarapong Intarakumnerd

1.1 The basics

Following the Second World War, with 50 years of Japanese colonial rule in Taiwan having come to an end, the then Chinese National Government actively began to develop the Taiwan economy. At that time, the international political and economic environment was conducive to Taiwan’s economic development, the most important factor being that, after the outbreak of the Korean War, the United States actively opened up its domestic market to assist its Asian allies with their economic development and the eradication of poverty, and thereby forestall the expansion of communism. Against the backdrop of such policies, Taiwan actively developed its export-oriented light industries under the auspices of the National Government. Measures adopted included the establishment of the world’s first export processing zone. At the same time, the National Government also actively transformed Japanese enterprises set up under the former Japanese colonial government into state-owned enterprises that were used to provide a stable supply of raw materials to effectively assist in the development of Taiwan’s private small and medium-sized enterprises (SMEs).

In the 1970s, along with the completion of the Ten Major Construction Projects and the establishment of the world famous Hsinchu Science-based Industrial Park, Taiwan experienced rapid economic growth and is widely considered to be a successful economic model for taking off. The world economy also gave Taiwan an excellent development opportunity in the early 1980s. At that time, an open architecture for the personal computer (PC) initiated by IBM was introduced. The electronics firms in Taiwan immediately noticed such an opportunity and jumped right into this new and relatively unknown area. With both these firms and the government taking two conscientious steps, the electronics firms swiftly transformed themselves into the world’s major PC producers. Good quality and reasonably priced PCs produced mostly on an OEM basis greatly enhanced the popularity of PC usage. The importance of this global popularity of the PC quickly triggered the arrival of the information age. In addition, beginning in 2015 the OECD published an annual report entitled the ‘OECD Digital Economy Outlook’ to draw attention to this important and irreversible transformation. It is fair to say that Taiwan did play an important role in facilitating and enhancing such an important global transformation.

During the past 30 years, many drastic things have happened, and they have all had a profound impact on the Taiwan economy. Before the arrival of the twenty-first century, Taiwan was widely regarded as a successful model of a country that had not only transformed itself from an underdeveloped economy into an industrialised one, but had also launched a silent revolution from an authoritarian regime to a democratic one. Nowadays, people in Taiwan can enjoy full political freedom but, ironically, the country is also experiencing a significant economic slowdown.

In this book, we are fortunate to have many distinguished scholars and experts address a wide range of important issues and problems behind the political economy in Taiwan and in light of the rapid rise of the Chinese economy across the Taiwan Strait. It is hoped that these chapters can serve as an important reference for further comprehensive studies on Taiwan. It is also hoped that through the in-depth discussions on the various issues raised in each chapter, this book can also serve as a valuable policy reference for policy-makers in Taiwan as well as for academics and experts in the field of economic development.

1.2 Overall framework

The holistic conceptual framework used in the book is illustrated in Figure 1.1. The book focuses on the past achievement and future challenges of industrial development of Taiwan. We start with an introduction of Taiwan’s successes during the technological catch-up phase (1950s–1990s) when Taiwanese firms actively climb up the technological ladder by relying on foreign matured technologies and support from the government (Chapter 2). Further, we argue that the past achievements are difficult to continue because of several factors. First, Taiwan’s situation has changed. Now Taiwan is in the post-catching-up phase. Several firms are at or not so far from technological frontiers and recognised as global players in several industrial sectors. Taiwanese firms and government cannot only target on promoting innovation based on foreign technology anymore. They have to create their innovation based on new and emerging technologies. Digitalisation (Chapter 3) and science and technology (Chapter 5) are increasingly important in this post-catching-up phase. Likewise, political and institutional processes underpinning policy-making and implementation have changed. Taiwan started democratisation in the 1990s. It is politically difficult for government to implement long-term and top-down policies. Similar to other democracies, government, to a large extent, has to implement populist policies in order to survive (Chapters 13, 14). The socio-economic challenges are also very different from the past. As Taiwan is increasingly being a part of global and regional value chains, economic and political relations with neighbours, especially China (Chapters 6, 7), Japan (Chapter 4) and ASEAN (Chapters 8, 9) are quite critical to Taiwan’s future success. Sustainability in terms of energy usage and environment protection (Chapters 10, 11), ageing population (Chapters 12, 13) and manpower and labour-related issues (Chapters 15, 16) present both challenges and opportunities for Taiwan.

Figure 1.1 The book’s conceptual framework: Taiwan’s post-catching-up national innovation system challenges

1.3 Industrial and innovation policy

The economic development process, broadly speaking, is all about industrial development. If the productivity of the industrial, services and agricultural sectors can be developed in a synchronised way, the outcome will surely be a balanced and competitive environment. Nevertheless, this is frequently not the case in practice, and government policies need to be implemented both within and across industrial sectors so as to achieve the best possible results.

In the 1960s, Taiwan’s domestic industry was mainly dominated by state-owned enterprises, and the numerous SMEs were mainly export-oriented. In those days, the KMT-led government wisely used the state-owned enterprises as a powerful development tool to promote the development of the private sector as well as of the SMEs. In the early 1970s, the private sector already accounted for more than 90% of the value-added in the industrial sector, reflecting a drastic industrial transformation from the 1960s.

The large number of nimble and energetic Taiwanese SMEs highlighted the distinctly different development strategies in Taiwan from those of Korea’s conglomerate development model. Korea and Taiwan were both under Japanese colonial rule for more than half a century and the key difference between these two economies was that the Korean government engaged in the privatisation of its state-owned enterprises right after the Korean War and then selected those firms that could serve as powerful tools in the drive to promote exports. It was these firms that then became big and powerful chaebols. At the present time, Korea is using chaebols as a spearhead for technological catching-up. In the case of Taiwan, by contrast, the KMT-led government did not engage in much of the privatisation drive until the mid-1980s. The KMT-led government always utilised the state-owned enterprises as a powerful policy tool, either through providing SMEs with a cheap and stable supply of materials or through technological support, or else through the establishment of supply chains, with the main purpose being to facilitate the development of the private-sector SMEs. The previously mentioned policies were both actively pursued and also effective, with many important industries being both nurtured and developed. Among them, the textile industry and the bicycle industry are two prominent examples and are certainly worth referring to and reflecting upon (see Chapter 2).

Such a development model also experienced a new twist in the late 1970s, when the government decided to fully commit itself to the establishment of the Industrial Technology Research Institute (ITRI). The role of ITRI as well as the Hsinchu Science-based Industrial Park, as already mentioned, was very important. They served as the arm for the government to gain access to the latest technological developments in the middle of the 1970s which eventually led to the establishment of the world famous Taiwan Semiconductor Manufacturing Company (TSMC) – a spin-off company from ITRI. In addition, ITRI also helped relevant SMEs to develop their needed technology or to play a key role in the formulation of relevant technological strategic alliances among qualified players. There are also other government-sponsored technology support research institutions for different industries. The development of the SMEs supported by relevant government-sponsored technology development research institutions proved to be an effective and successful innovation model. The development experience of the electronics industry as mentioned earlier is a typical example.

However, under the previously mentioned ‘traditional’ technological development model, in the current rapidly approaching digital age, the organisation, structure and future direction of Taiwan’s technological development have each needed to be adjusted and reviewed. The most important organisational reform in recent years has been the establishment of the Ministry of Science and Technology. In March 2014, after the government formally upgraded the earlier National Science Council to set up the Ministry of Science and Technology (MOST), the main driving force behind the development of science and technology in Taiwan has rapidly shifted from the Ministry of Economic Affairs (MOEA) under which it was in the past to this new ministry. If we take the year 2017 as an example, the science and technology budget under the Ministry of Science and Technology was 46.7%, an amount far higher than the 27% under the MOEA. This is a big change. However, this transformation does not in any way represent a weakening of the role played by the MOEA. Instead, other ministries are paying more attention to the development of science and technology and are working and cooperating with each other in different fields to meet the challenges of the digital age. It is this that deserves to be the focus of attention and the most important strategy. Moreover, such a strategy still needs other important supporting measures to be successful. For a related discussion, please refer to Chapter 3.

In terms of how Taiwan has developed over the years, the island economy has closely followed Japan in regard to its technological and industrial development. For this reason, Japan’s experiences in relation to industrial and technological development are particularly valuable to Taiwan to both reflect upon and refer to. As to the challenges that Japan is currently facing, one of the main problems is that Japan’s systems and policies are failing to give small and medium-sized enterprises the help they need. This is indeed a major concern for Japan in terms of the development of its science and technology for many outstanding scientific and technological research personnel seeking to establish SMEs, rather than choosing to join large Japanese companies. In addition, in regard to Japan’s protection of patent rights and its patent system, the enforcement of such protection has been insufficient and consequently ineffective. This has also given rise to major obstacles to Japan’s technological innovation at present. Of course, if we combine the unfavourable environment for Japanese SMEs focusing on scientific and technological development together with the insufficient protection provided to SMEs for their patent rights, we can see the major problems currently facing Japan in terms of its technological development (see Chapter 4). As for Taiwan, the previously mentioned problems will also constitute an important and urgent issue. In addition, if Taiwan’s performance in terms of its scientific and technological development is examined based on studies published (or referred to) in academic journals as well as patents, the results of such research indicate that Taiwan performed well in terms of published articles and patents from 1999 to the early 2010s. Such performance, however, reached its peak in 2013 and Taiwan has seen a (gradually) declining trend in both publishing and patenting since then (see Chapter 5). The gradual decline of course serves as an important warning. The reasons for the decline merit a detailed examination. This will be an important challenge that Taiwan’s Ministry of Science and Technology will face after 2020.

There are several other important economic issues that are relevant to industrial development in Taiwan, namely, the cross-Strait relationship, pension reform, energy and manpower policy. We shall briefly address each of them in turn.

1.4 Cross-Strait relationship

Ever since the Nationalist government retreated from the Mainland to Taiwan in 1949, the relations between the two sides of the Taiwan Strait have alternated between being tense and being cordial in accordance with the international situation and the economic strength of each side. The relationship has been affected by the results of Taiwan’s democratic political elections, as well as by the different political situations that have ensued. Undoubtedly, the development of the cross-Strait political and economic situation has a direct bearing on Taiwan’s economic and industrial development. This is a fate from which Taiwan cannot escape and is also an issue that cannot be avoided when discussing how Taiwan will develop both economically and industrially in the future.

During the period from 2000 to 2008, Taiwan was ruled by the pro-independence Democratic Progressive Party (DPP) and one of the direct impacts of the DPP government at that time was a cutting of ties and a tightening of the economic cooperation relationship with Mainland China. It resulted in a significant and adverse impact on the vast investments on the Mainland that Taiwanese enterprises had already made. Ironically, the relevant statistics show that the cross-Strait trade volume as a percentage of the total Taiwanese trade volume increased from 23.47% in 1999 to 39.15% in 2007 and to 41.7% in 2008. This ‘reverse’ trend was a direct response of the private sector to the suppression of the bilateral trade and investment activities across the Strait by the ruling DPP government at that time.

When the KMT regained power in 2008, the cross-Strait relationship needed to be re-established and it has become a pressing issue since. Basically, all the communication channels and cooperative mechanisms were suspended during the 2000–2007 period and the huge investments by Taiwanese enterprises in Mainland China were not properly safeguarded.

On December 20, 2008, the Vice-Minister of the Council for Economic Planning and Development (CEPD) from Taiwan and the Vice-Minister of the National Development and Reform Committee under the Chinese State Council were on the same stage in Shanghai and each of them delivered an open speech in front of an audience of hundreds. It was the first time such high-ranking government officials had met and interacted publicly, and it literally opened the door for formal communication, negotiation and dialogue across the Strait. More specifically, it led to the signing of the Economic Cooperation Framework Agreement (ECFA) in June 2010. The relationship between the two sides of the Strait has served as an important means of reconciliation and peaceful interaction. In addition, the leaders of the two sides, President Xi Jinping of the Central Committee of the Communist Party of China and President Ma Ying-jeou of the Nationalist government, also met in Singapore on November 7, 2015. Since this was the first time since 1949 that the leaders of the two sides had met, many expected that it would open a new page for cross-Strait development.

However, in actual practice things have not developed in this way. In May 2016, after the DPP government once again came to power, cross-Strait relations appeared to suddenly move in the opposite direction. More importantly, around this time, the international political situation had already undergone major changes compared to previously. Of these, the most important was the occurrence of the major ‘China-US trade war’ that came about as a result of the ‘America First’ policy following President Donald Trump’s success in the 2016 US presidential election. Since May 2016, cross-Strait relations have rapidly deteriorated, and so far there have been no mechanisms or channels for ‘official’ communications between the two sides. This is in spite of there being a huge trade relationship between the two sides of the Strait (Mainland China still accounts for more than 40% of Taiwan’s exports). The huge volume of trade despite the lack of communications can be regarded as a miracle, but there is of course also a huge risk involved.

Chapter 6 of this book provides a very important review of the historical development of the cross-Strait relationship. It also mentions that in June 2010 during the period when the Nationalist government was in office, Taiwan and Mainland China together signed the ECFA, which officially opened the door to friendly interactions between the two sides. As a consequence, cross-Strait economic and trade relations also developed steadily. However, as mentioned earlier, from the beginning of 2016 onwards, cross-Strait relations between the two sides of the Strait deteriorated rapidly, and there is a high risk that the ECFA ten-year agreement will be suspended after 2020 if it cannot continue to be implemented. As to the kind of impact that this may have on Taiwan’s major industries and the economy as a whole, it will be absolutely necessary to perform a comprehensive evaluation. While in this book we do not intend to perform a further in-depth analysis of this issue, its importance cannot be ignored, and it will also constitute a major challenge that Taiwan will face after 2020.

In addition, as already mentioned earlier, the trade war between China and the US under the leadership of President Trump has directly affected the industrial development and division of labour between Mainland China and Taiwan. In fact, 15 of the top 20 exporters to the US located in Mainland China are currently Taiwanese enterprises operating on the Mainland. Furthermore, behind these Taiwanese exporters, there is a huge supply chain of Taiwanese companies providing raw materials and semi-finished products. This is a reality that we cannot ignore and reflects the huge economic strength that these Taiwan businesses have on the Mainland. However, Taiwan’s huge economic might is now directly facing the deterioration in the cross-Strait political situation and indirectly the unfavourable situation brought about by the US-China trade war. This not only gives rise to a major challenge for Taiwan’s industrial development in the future, but also for Taiwan in particular between 2020 and 2030 (see Chapter 7).

From the time that it assumed office in May 2016, the DPP government has sought to promote a ‘New Southward Policy’. The main purpose of this...

Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of contributors
• List of abbreviations
• Preface
• 1 Introduction
• 2 How indigenous industrialisation began in post-war Taiwan
• 3 Digital transformation and structural change in Taiwan’s national innovation system
• 4 Japan’s national innovation system, small firms and patent system before and after the 1990s
• 5 Post-catching-up science and technology trajectories: publishing and patenting activities of Taiwan
• 6 Thirty years of economic relations across the Taiwan Strait: retrospect and prospects
• 7 The PRC’s ‘Red Supply Chain’ and the Sino-American trade conflicts: measurements and effects on Taiwan
• 8 Trade potential between ASEAN countries and Taiwan: the role played by information technologies
• 9 Technological learning and innovations of manufacturing firms in selected ASEAN countries: an implication for future collaboration with Taiwan
• 10 A prospect for Taiwan’s post-referendum energy policy
• 11 Towards better environmental governance in Taiwan
• 12 Taiwan population changes in the new century: causes and challenges
• 13 Taiwan’s pension fund crisis: is the defined benefit plan the answer to an ageing society?
• 14 The impact of populism on the growth of income: an empirical study of the four Asian NIEs
• 15 Factors affecting the performance of outsourced pre-employment training in Taiwan
• 16 The semi-long-term low-wages dilemma in Taiwan: an examination of the role of SMEs and other institutional factors
• Index