Hero without a name: The development of

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The Making of Unknown Heroes: National System of Learning, OEM, and Taiwan’s IT Industry. (draft only)

Jenn-hwan Wang, Ph.D. Professor of Sociology Tunghai University Taiwan

Paper to be presented at the 15th annual conference of SASE (Society for the Advancement of Socio-economics), held at LEST (Economics and Sociology research laboratory) in Aix en Provence, France, June 26 - 28, 2003. This paper is a partial result of a project supported by the National Science Council, Taiwan, ROC (NSC91-2412-H-029-001). 1

ABSTRACT This paper discusses two related issues regarding the development of Taiwan’s IT industry. The first question is how Taiwan has achieved it technology capability in the IT industry and to become one of the major players in the world IT market. The second is why Taiwan’s manufacturing products are, and continue to be, sold under the brands of world major firms without their own identities, even though Taiwanese firms has gained the technology capability almost at the front edge as the leading firms?

By utilizing the model of the national system of learning, this paper argues

that the national system of learning in Taiwan has characteristics of state’s involvements, overseas Chinese networks, learning firms, and OEM/ODM relationships. These factors together enhanced the learning capability of the firms and synergized to a system that generated technology learning and innovations. However, I also argue that the dependence of the firms upon the state and the close relationship with the leading firms through OEM/ODM model in consequence held up their incentives to engage into frontier innovation activities and confront directly with the OEM buyers in the market. In the end, the Taiwanese firms have increased investment into the Chinese market enormously in order to enlarge their production scale and to lower their production cost. The benefit of this out-ward investment is the increase of the organizational capability in building global logistic capacity rather than involving the deepening of the ability technology innovation.

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1, Introduction The features of fast economic development in East Asian countries has attracted volumes of works concerning the mechanisms and processes of their achievements (Amsden, 1985, 1990; Deyo, 1987; Haggard, 1990; Appelbaum and Henderson, 1992; Wade, 1990; White, 1988; Weiss and Hobson, 1995 ; Whitley, 1992; Hamilton, 1996; Field, 1995; Gereffi, 1994). However, most of these studies investigated factors related to macroeconomic and socioeconomic elements, such as state’s policies, business systems, state-business relationships, and global commodity chains, the technology elements that have carried the long-term economic development of these countries are rarely considered, or been treated as a black box (Roesenberg, 1994). Recently, there are more and more studies devoted to investigate the routes of technology learning in East Asia (Hobday, 1995; Kim, 1997; Kim and Nelson, 2000; Lall and Tebul, 1998; Lee and Lim, 2001; Methew and Cho, 2000), suggesting that technology learning on the one hand has contributed significantly on the long-term economic development for the East Asian countries and on the other hand shows different systemic characteristics of learning with those of the advanced countries. This paper intends to contribute to this burgeoning field by using the development of IT industry1 in Taiwan as a showcase to show how and in what ways that Taiwan’s technology learning can reach the level of progress, its distinctiveness of original equipment manufacturing (OEM) and original design manufacturing (ODM) models,

1 Information technology here is defined as microcomputers, personal computers, terminals,

monitors, disk drives, and other PC related peripherals, such as input components (semiconductors, chip-sets, motherboards, keyboards, and other optic-electric products and software), and output components (communication, internet) (Wang, 1999).

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and the continuation of the dominance of this OEM/ODM model. As a latecomer, Taiwan’s recent development in the information technology has gained impressive records. The value of production has been ranked as the third biggest countries in the world in 1996 (second only to the U.S. and Japan) and declined slightly to the fourth (follows China) in 2001 because of firms’ massive out-investments to China. Taiwan now also produces over half of the notebook PC (53%) for the world market, more than 70% of the motherboards, 60% of LDC monitor, 51% of CDT monitor (Fig 1). All these figures indicate that Taiwan has changed from a country based on labor-intensive industry to a technology-intensive one. However, similar to the former stage, where garments, shoes, and TVs are produced based on OEM model that were tagged to the buyers’ brand to sell to the world market (mainly the U.S.), the IT industry shared the same pattern in which most of the major producers have been producing products for the major brands (i.e. IBM, Compaq, HP, Dell), even though some of the firms have become the leading manufactures in its sector, for example, Quanta in the portable PC industry. Except for few firms, for example Acer, the Taiwanese IT industry indeed is a hero without a name in the world market. Different from the counterparts in South Korea, where Chaebols such as Samsung, LG, produce their own brand-named products to sell in the world market, Taiwanese firms have chosen the OEM/ODM route to produce for world leading firms. How have Taiwanese firms become success in the IT industry, and why Taiwanese firms choose this nameless route? What are the structural reasons that are essential to this chosen path? In addition, Taiwanese IT industry has massively invested into the ASEAN countries and the Chinese market in order to lower the production cost and to search for new markets from early 1990s on. Has this outward investment changed the OEM/ODM route or it has enhanced the existing 4

path? ***Fig 1 here

This paper argues that the success of Taiwan’s IT industry has benefited from the national system of learning, in which the state played a leading role, and close linkage of domestic firms to the global market through the OEM/ODM model. These two factors have enhanced the learning capacity of Taiwanese firms to build up and to catch-up technological ability, however, they also contributed to the limitation of Taiwanese firms’ capability in further innovation due to the path dependence effects that they have produced.

2, Latecomers’ technology learning Technology involves not only skills and techniques, but also social norms and organizations embodied in its operations. The generation and implementation of new technologies in every stage involves a set of choices between different technical options. How typical technologies are selected from various options involve a range of ‘social’ factors that affect the selection, along side with narrow ‘technical’ considerations (Williams and Edge, 1996: 886). The worldview of decision makers, their social networks, struggles among different scientific groups, or even the inputs from funding institutes, all have impacts on the development trajectory of technology. Therefore, technology is not simply a technique that follows its own momentum, or a sort of rational, goal-directed, problem-solving enterprise. Technology is a set of social institutions shaped by social factors (Bijker, 1995:241). Technology innovation in this sense involves not merely the input of money and 5

human skills, but also the ways in which the projects of technology development are arranged socially and politically. Relevant here is the national system of innovation (NIS) literatures that stress the importance of national variations of institutions in generating innovations (Lundvall, 1992; Nelson, 1993; Nelson and Nelson, 2002). NIS is defined by Lundavll (1992:12) as including “all parts and aspects of the economic structure and the institutional set-up affecting learning as well as searching and exploring ~ the production system, the marketing system and the system of finance present themselves as sub-systems in which learning takes place.” In these literatures, NIS is regarded as a set of institutions that guide and facilitate everyday actions in production, distribution and consumption. It also recognizes the importance of the role of nation states in supporting learning processes through policies, establishing intermediate associations, and creating learning institutions that facilitate collective learning. NIS assumes that innovation is a learning and cumulative process that is predominantly an interactive and socially embedded practice. In this sense, innovations takes place not only in R&D laboratories, but also through collective learning taking place in connection with routine activities in production, distribution and consumption that produces important inputs to the process of innovation. Therefore, as Lundvall (1992:9) argues, “if innovation reflects learning, and if learning partially emanates from routine activities, innovation must be rooted in the prevailing economic structure.” However, large majority of NIS’s studies have focused primarily on scientific and technical activities aimed at frontier innovations, especially, with R&D in advanced countries.

The major difference that the process of technology change in

developing countries with that of advance countries is one of acquiring and improving on existing technologies developed in advanced industrial economies rather than of 6

innovating at frontier of knowledge (Hobday, 1995; Kim, 1997; Lall, 2000). As Hobday (1995:43-44) maintains, technology learning in less developed countries is a reverse path along the standard product life cycle (PLC). PLC in the advance countries has undergone from experimental innovation, to ill-defined and non-standardized production, and to mass production. Products therefore undergo from intense innovation with uncertain market to standardized production with certain and mature market where price competition and cost minimization are the major factors. However, in contrast with the standard PLC theory, latecomer firms tend to enter at the standardized end of the PLC and gradually assimilate technology by learning, and catching up little by little as to close the technology gap between themselves and the market leaders. Therefore, the process of technical change of late industrialization is achieved by learning from technological diffusion and incremental innovation. Learning in these countries is the absorption of already-existing techniques, i.e., the absorption of innovations produced elsewhere in which the dynamic engine is the technological learning rather than frontier innovation (Viotti, 2002: 658). It is in this sense that the features of institutions of technology learning or innovation are different from those of the advanced countries (Kim, 1997; Mathew, 2001; Viotti, 2002). Recent studies have shown that technological change and accumulation in developing countries requires substantial technological development efforts in order to adapt and improve imported technology and, in some cases, to generate new technology (Choung, et. al. 2000; Viotti, 2002 ). The hardware is available equally to all countries, but the disembodied elements of technology cannot be bought or transferred like physical products. “Unlike the sale of a good, where the transaction is complete when physical delivery has taken place, the successful transfer

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of technology can be a prolonged process, involving local learning to complete the transaction” (Lall, 2000:16). Therefore, even imitation or reverse engineering involved activities that were purposively searching for relevant information, effective cooperation among research teams, interaction between marketing and production units within the firm, and the efforts of the state through its industrial policies. To the latecomers, by lacking resources and technological advantages, it is essential to identify the resources that are most available and then to implement a framework for actually tapping and incorporating these resources as to learn and improve existing technologies (Mathew, 2001:457). Therefore, the NIS model has to be modified as a national system of economic learning, according to Mathew (2001), as to correctly reflect the typical features of latecomers’ technology learning. A national system of economic learning accordingly relates to the institutions of technology diffusion management that may accelerate the uptaking and disseminating of technologies by firms, and enhance the capabilities of organizational learning through such devices as engineering research associations, development consortia and public research agencies (Mathew, 2001; Viotti, 2002). This technology learning is therefore an evolutionary process through which latecomers import and digest existing knowledge from advanced countries, improve them, and finally reach the level of innovation. At the firm level, it may start from reverse engineering by the assembly production of imported parts, then develop low to high-tech parts, and learn to design the existing product with some modification and finally reach the stage of the new product concept creation (Kim, 1995; Lee and Lim, 2001; Hobday, 1995). Therefore, technology learning is also a process of technology capacity building that is enhanced by past experiences and accumulated explicit and tacit knowledge through time. As Mathew (2001:470) suggests, this

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process “can be pictured as a spiraling, iterative sequence of technological enhancement and improving market access, each stage of the process providing the platform for the next.” National system of economic learning constitutes as a set of institutions for latecomers in facilitating technology learning. It relates to how resources of R&D are allocated to different sectors, the ways in which technologies are selected to learn, the actors of technology learning, and the institutional set-ups that support learning, etc. The dominant form of a national system of learning depends on the industrial structure and the institutional set-ups that support their operational functions. Different countries may have different features, therefore there are national variations. As will be discussed later, the Taiwanese national system of learning is characterized by the state’s heavy involvement and firms’ OEM linkage to the global firms that enhance their learning. However, latecomers may or may not be successfully to learn to catch-up and finally innovate, as do the advanced countries2. In some industries, the latecomers are easier to follow and even to ‘leapfrog’, while in others, they might have difficulties to catch-up. Technology paradigm is one of the major determinants and fundamentals of

2 There are three different paths of these learning: path-following, stage-skipping, path-creating

(Lee and Lim, 2001). A path-following catching-up means that the latecomer firms follow the same path as that taken by the forerunners.

The stage-skipping catching-up means that the latecomer firms

follow the path to an extent but skip some stage. The path-creating catching-up means that the latecomer firms explore their own path of technological development and turn to a new path after having followed the path of the forerunners, and thereby, create a new path” (Lee and Lim, 2001: 464-5).

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the expected chance for latecomers to learn to catch-up. Technology paradigm here is defined as the institutionalized knowledge base of an emerging and evolving trajectory in which technology leaders define the relevant problems, patterns of enquiry in the trajectory. A technological paradigm not only defines contextually the needs that are meant to be fulfilled, the scientific principles utilized for the task, and the material technology to be used, but also the relationships through which suppliers, customers, and other business partners associated with each other in the trajectory” (Dosi, 1988; also, Perez, 1985; Hung, 2000). Therefore, a technology paradigm is also a distinct set of accepted commonsense principles that define a broad technological trajectory towards a general best practice frontier that are applied in one firm after another, in one branch after another, within and across countries. The features of the technology paradigm of an industry largely influence the path of latecomers to learn to catch-up. As will be discussed later, the microelectronic revolution and its open architecture of the technology provide the latecomers an opportunity to follow to learn more effectively. The national system of economic learning assumes that a successful technology learning for the developing countries will go through a trajectory from reverse engineering, OEM to OBM (own brand manufacturing). That is, latecomer firms will learn from the leading firms and gradually build up their own technology as well as organizational capability, and finally develop their own brand design, organize their own sales and directly confront with the leading firms in the market (Hobday, 1995: 39). Therefore, the learning capacity of the latecomer firms occurs not only in the technology dimension but also does in organizational capacity building dimension. To the latecomer firms, the graduation from OEM/ODM model means that they shall have to learn the skills of marketing and extend from doing local sales to global 10

logistics management in order to build up their own brand. However, as we will illustrate, as Taiwanese firms have continued to enhance their technological capability to the level in which they have served for the leading firms from design to manufacturing, they nevertheless still have continued and strengthened the OEM/ODM route. This route is divergent from the evolutionary approach would have predicted.

3, The development of IT industry in Taiwan The development of Taiwan’s IT industry can roughly divided into 4 periods: the seeding period from early 1960s to late 1970s; the initial period from 1978 to 1985; the fast growth period from 1986 to 1993; and the maturation and globalization period from 1993 on till now. 3.1 the seeding period, 1960s and 1970s In electronics, the most significant technology change during 1960s and 1970s has been the invention and commercialization of large-scale integration circuit (IC) and the impact of this on the data processing industry, dictating a move from mainframe computers towards personal computing (Huang, 1995; Chang, Hsu, and Tsai, 1999). Taiwan has missed out completely in mainframe and mini-computers during this period when most of the firms in Taiwan were producing simple labor-intensive manufacturing products to the world market. However, the investments from foreign firms in the electronic sector in Taiwan, such as RCA, Toshiba, Phillips, Texas Instruments, had built up the basis of technology knowledge and skills that paved the way for later development. During this period, there were also massive SMEs and domestic electronic firms who cooperated with foreign firms and began to produce simple electronic products, such as tube transistor, simple 11

integrate circuit, print board for the OEM buyers as well as for the domestic market (Hobday, 1995). Many local electronic firms also in this period began to use explicit knowledge to produce simple calculator and game machines. The simple technology learning from foreign firms and explicit textbook knowledge increased the base of implicit knowledge in the electronic industry. Based upon these, Chuan-ya company launched its EDU-80 computerized learning-aid product in 1977 that marked the birth of Taiwan’s computer industry. Many domestic firms, such as Tatung, Multitech (former Acer), Mitac, began to follow suit and producing similar products in late 1970s. 3.2 the initial period, 1978-1985 In 1978, Taiwan held a Science and Technology conference which set the government’s goal to develop and promote small computer systems in Taiwan for the long-term development object. Under this policy, the Industrial Technology Research Institute (ITRI) started to carry out technology projects for computer industry. Based on the emergence of firms in Taiwan in microprocessor-based product areas such as calculators, game machines, and microcomputers, ITRI targeted the micro-computer field and imported some foreign technology to establish its own R&D facilities and systems. The catalyst was IBM’s introduction of its successful PC based on an open architecture, paving the way to “IBM-compatible” machines. This created an opportunity which Taiwan firms, led by Acer, Mitac, Tatung, were quick to seize (Chang, Hsu, and Tsai, 1999; Zhang and Yo, 2001). Before IBM announced its open architecture, many Taiwanese firms had already begun to copy Apple II model by themselves and to sell the products to the world market. However, because of the series patent suits from Apple, the copy-route was 12

stagnated. The local firms then turned to the help from ITRI to use the opportunity of IBM open architecture and develop IBM-compatible model. On the other hand, by following the long-term policy goals, ITRI during this period built up a solid infrastructure

for

computer

technology

development,

such

as

computer

product-design and manufacturing technology, as well as PC-related technology, including computer peripheral products, software technology, and IC/semiconductor technology through joint research with foreign scholars and personnel training programs. Furthermore, ITRI sent representatives to the American Wang computer Co. for training and a transfer of experimental factory was established to enhance production engineering (Hsu and Chiang, 2001). In 1983, ITRI assisted eight computer manufactures, including Acer, with R&D for the IBM compatible PC-XT and in 1984 for the technology upgrade to PC-AT. In 1985, Acer and Mitac gained the first OEM order from ITT, began the stage of OEM model of the PC industry (Tan, 1995; Zhou,1996). Later, IBM, HP and other major firms also joined this OEM order through which Taiwan’s PC and PC-related manufacturers gained footholds in the global market. During this period, the state also actively promoted the integrated circuit (IC) industry that largely enhanced the technology capability of local firms in producing PC-related products. By using the overseas Chinese networks, the state recruited many scientists from the U.S. who had worked for IBM, Intel, Texas Instruments, to return to Taiwan in helping establishing this emerging industry (Zhang and Yo, 2001; Chen, 2003; Henderson, 1989). Through this networks and other efforts, RCA transferred a whole set of IC technology and knowledge to ITRI and built an experimental laboratory in Taiwan. Under the technology transfer agreement, ITRI sent a team of technicians to RCA to learn IC design and production technology. ITRI 13

then transferred these technologies to local firms. The former laboratory then spun-off to become UMC, the first private-owned IC manufacturers, in 1982 and commenced mass production. This had largely upgraded the technology capability of PC-related peripheral industries, such as motherboard, that depended very much on the chip-set technology. In 1986, Taiwan became the 7th largest producer in the world IT industry. 3.3 the fast growth period, 1986-1993 During this period, the domestic IT industry began to integrate into a dynamic system, ranging from IC design houses, semiconductors manufacturers, PC producers, PC-related peripherals, to other related hardware (Huang, 1995; Wang, 1999). The learning capacity of ITRI and local firms had been enhanced through the former years. At the launch of 386-AT in 1986, Taiwan’s technology was only behind by 2 months. By 1989, Taiwan was able to launch its 486 PC at the same time as developed countries. The same pattern also occurred in the formation of Notebook PC consortium in which ITRI worked with 42 domestic firms to develop notebook PC technology. In 1993, Taiwan already became the second largest notebook PC producer (mainly through OEM/ODM model), secondly only to Japan, in the world market. It was also during this time that ITRI began to negotiate with Sun Microsystems for technology transfer of workstation computer regarding matters of patent licensing and royalties. In 1989, Tatung, Datatech, Twinhead, and ITRI signed an international joint production agreement with Sun. Sun transferred the source code and object code technology to ITRI and ITRI then sub-licensed the technology to local manufactures. In 1993, Taiwan already became one of the major producers in this industry. During this stage, the industry became linked closely with the world market 14

when most of the world leading firms became OEM buyers to the local companies. Many of the local firms also stepped into OBM production. But in 1992 when Compaq announced that it would cut the PC price by 30 to 40% percent, Dell and Harkard Bell followed in consequence, many of the local firms went bankruptcy (Zhou, 1996; Wang, 1999).

In order to survive, Taiwanese firms began to migrate to

ASEAN countries, particularly China, in order to reduce its cost of production. 3.4 the maturation and global logistic contracting period, 1993As Taiwanese firms began to pursue for global production strategy, their production technology and organizational capability have concurrently been enhanced through working with OEM buyers. In 1996, Taiwan became the third largest producer in the world market, followed the U.S. and Japan. Taiwan is the world’s largest supplier of computer monitors, motherboards, switching power supplies, mouse devices, scanners, notebook PC, and a variety of add-on cards (fig 1). However, as Taiwan becomes the major supplier to the world IT market, its major production sites in IT industry has gradually shifted to other areas, especially in China. For example, the proportion of desktop PC produced in overseas sites in terms of value was 94% whereas China took 52% of the overseas production in 2002. Notebook also had 40% of overseas production in which China took 37% of it (Table 1).

Also, most of all these products were sold under OEM arrangement, although

these products were designed and manufactured by Taiwanese firm (Table 2). In fact, the proportion of OBM in contrast to OEM/ODM has decreased over the years, desktop PC has declined from 47% vs. 53% in 1996 to 17% vs. 83 in 2001, and notebook PC from 14% vs. 86% in1998 to merely 7% vs. 93% in 2001. The declining of OBM in contrast to OEM/ODM of Taiwan’s IT industry is contradictory to what 15

Hobday (1995) has predicted that the tendency of technology learning in developing countries is a movement from OEM to OBM models. Why have Taiwanese firms taken this particular route? This has to do with the path dependence effects of the national system of economic learning and the OEM/ODM linkage. ***Table 1 ***Table 2

4, Taiwan’s national system of learning This section will describe the main features of Taiwan’s national system of learning. It will describe how the state functioned to compensate for the SMEs’ weakness in technology innovation in building up public research institutes and agencies in R&D; the OEM/ODM model of industrial development; the production network of SMES; the private/public cooperation in technology learning; and the role of overseas professionals in shortening learning gap. All these factors constitute the learning system of Taiwan’s IT industry (Fig 2) . ***Fig 2 4.1 The roles of the state The path of Taiwan’s economic development was characterized by a developmental state-led, export-oriented, and SMEs dominated features. As many have argued that the state used financial incentives and other means to induce private capitals into the strategic industries in order to promote economic development (Amsden, 1985; Wade, 1990). However, less have been paid attention to were the ways in which the state involved into technology transfers and R&D activities in

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upgrading domestic technology level and enhancing firms’ learning capability. The role of the state in this national system of learning can be identified as the leader, the actor, as well the facilitator of the development of IT industry.

As the

leader, the states set the priority of the target industry and pump resources into its development. As an actor, the state set up public-funded research agencies in taking the R&D works, by learning from leading foreign firms and engaging in reverse engineering, and later transferred to the domestic firms. As a facilitator, the state built up various R&D consortia with local firms to develop key industrial components and products, as well as use formulate policies that encouraged cooperation among local firms in R&D. The leader’s role: In late 1970s, the Taiwanese state took the IT industry as its new target strategic industry in order to upgrade its technology level as encountering the rising challenges from ASEAN countries and China in competing for low-cost labor-industrial products. Various policy measurements were taken as to induce domestic and foreign capital to enter this industry. Among these policies, the establishment of the Hsinchu Science-based Industrial Park (HSIP) was later proved to be very successful in terms of attracting investments that led to the agglomeration effects of the industry. The state’s targeting on IC and semiconductor industries in the late 1970s also paved the basis for the later development of Taiwan’s IT industry (Mathews and Cho, 2000). The actor: Before the state decided to take the IT industry as its new strategic industry, the ITRI as founded in Hsinchu in 1973 under the Ministry of Economic Affairs as the state support research agency for upgrading Taiwan’s technology level. In 1974, Electronic Research Service Organization (ERSO) was created under the 17

auspices of ITRI in charging of the task of developing the technological capabilities needed to generate a semiconductor industry, following the suggestions provided by the Technical Advisory Committee under the Executive Yuan. When the HSIP was built, ITRI and ERSO played the leading role in learning and transferring technology to local firms. Moreover, rather than depending on MNCs for transferring technology in the semiconductor industry, the state established experimental factories through technology acquisition from abroad, such as Philips, RCA, and began to build up core expertise for nourishing the indigenous industry. The state acted like an entrepreneur that launched new firms by itself, and later these firms were then spun-off to private-owned firms. The most famous ones were UMC (United Microeletronic Corporation) and TSMC (Taiwan Semiconductor Manufacturing Corporation), the former was originated by ITRI as a pilot plant that transferred technology from RCA on its obsolete 7-micron IC technology to Taiwan. Over the course of a year, the engineers learned to produce simple chips for watches and calculators. The pilot plant was improved steadily through a form of learning by doing, and deepened the technical capability. TSMC was also spun-off from ITRI but was built for establishing a new very large-scale integrated (VLSI) IC manufacturing facility. It was due to ITRI/ERSO’s intention to catch up the DRAM technology of leading firms in US and Japan by using VLSI geometry of 1 micron line-width standard, the state make an technology transfer agreement with Silicon Valley start-up such as Mosel and Vitelic to develop VLSI chips in 1984 and made it within one year. While the design capabilities were leaping, its fabrication facilities lagged behind when UMC still was operation at a

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relatively low (LSI) level. The product ended by licensing to Korean firm Hyundai for fabrication. In 1985, the president of ITRI, Morris Chang proposed that Taiwan should build a new spin-off venture from ERSO that would take Taiwan into VLSI era.

TSMC was proposed and was advocated for operating as a pure-play ‘silicon

foundry’ for making chips for small Taiwanese firms and international clients. In 1986, TSMC was announced that would have Phillips as its leading partner, and the latter agreed to transfer technology to the new company with its own portfolio of cross-licensing agreements. The establishment of TSMC indicated that Taiwan’s IT industry has reached the level of industrial integration from IC design to fabrication that largely upgraded the competitiveness of IT industry. The state’s role as an actor therefore indicated that it not only formulated policies but also built up firms and then spun-off to promote the industry (Mathew and Cho, 2000; Zhang and yo, 2001). The facilitator: the state’s role as a facilitator for technology learning was done by creating various types of R&D consortia to enhance technology learning, upgrading, and catch-up (Mathews, 2002). These consortia were formed as institutional set-up to facilitate public-private cooperation. In the 1980s, these consortia were formed to encourage firms to cooperate with ITRI in raising their technology levels to the point where they can compete successfully in advanced technology industry, such as PC-XT, PC-AT, work stations. In 1990s, the consortia flourished, bringing together firms, public sector research institutes, with the organizational inputs from trade associations, and state’s financial assistance, including notebook PC, multiprocessors, multimedia, LCD, HDTV, Ethernet switch, etc. The public-private alliance have evolved from a fairly simple organization

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structure, where ITRI identified the technological issues and develops the specifications and prototype and hands this over to interested firms; to one where there is a lengthy process of co-development between ITRI and partner firms conducting works partly in ITRI and in the firms, and to the type where firms themselves are taking the initiative and work with local universities. The ITRI thereby act as facilitator for accessing new technology on behalf of Taiwanese firm, and play as the vehicle or gateway for Taiwanese firms to access a technology that would otherwise be beyond them (Mathew, 2000:647). 4.2 The learning firm and the OEM/ODM model To the latecomer firms, various channels were used to overcome technological barriers to enhance technology learning, including licensing, foreign direct investment, joint ventures, subcontracting, OEM activities, overseas training and education, hiring, foreign acquisitions, joint ventures, as well as the help from public research agencies. These channels were undertaken by Taiwanese firms by different types of combination. I will use the development of PC industry as an example to illustrate. For the firms that started up in the 1970s, reverse engineering, licensing, and overseas training were the common methods that they used to learn new technology and later to improve these technologies into new or copied products. For example, Mitac (1974) began with a representative firm in selling Q1 mini-computer (1974), Intel microprocessor (1975), and Perkin-Elmer minicomputer (1976) that they had the opportunities to establish close contact with the leading firms (Tan, 1995). Through overseas training programs of these leading firms, Taiwanese technicians were able to learn from abroad the most updated skills and knowledge back home.

Later they

used and improved this knowledge to build up capability of Chinese character

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interface into the minicomputer system (1977). Acer was another example (Zhou, 1996). Before Stanley Shi (the founder) established Acer in 1976, he was one of the pioneers who were able to use reverse engineering method to develop desktop calculator. In the later years, Acer began to sell products from different leading firms in Taiwan, i.e., Zilog microprocessor in 1976 and Taxas Instruments on some components of semiconductor in 1978, and contacted closely with those firms and learn from them. In 1980, Acer developed its own brand of Chinese character-interfaced monitor, Professor no.1 based on copying Apple PC in 1981, and Professor no. 2 based on Apple II in 1982.3 For these firms, the technology learning in the initial stage was mainly based on themselves and from foreign firms. In the 1980s, there were different approaches that enhanced the technology learning. The first was the state’s step in into the industry in which ITRI and ERSO played important role in developing and transferring new technology to local firms. Good examples of these were the start-up of the IC industry in which the state established an experiment factory and later transformed into private own UMC; the PC-consortia to develop IBM compatible PC-XT in 1983, and so on as discussed above. The second approach that local firms enhanced their technology learning was to recruit overseas Chinese professionals who worked for American leading firms and

3

More examples, Leo’s became the representative firm for Prime and Harris minicomputer in 1979 and learned form it; Inventec worked with Zenith on the laptop PC and transferred technology from it (interview data).

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were able to bring back the most up-to-date technology back home. This recruitment enhanced the technology capability of the existing firms. For example, in the PC industry, Mitac’s president Miao Feng Qiang was one of the team technicians who worked for Intel’s original team for designing 80280 Microprocessor (Tan, 1995); Leo’s president Jian ming-ren worked in Bell Lab in New Jersey (Zhou, 2000). They were able to use their networks to recruit most talented minds back to their firms that had largely shortened the learning curve between Taiwanese firms and world leading firms. The third approach began in 1980s was the OEM relationship with the world leading firms. OEM is a specific form of subcontracting that evolved out of the joint operations of TNC buyers and NIE suppliers. Under OEM, the finished product is made to the precise specification of a particular buyer (or TNC) who then markets the product under its own brand name, through its own distribution channels (Hobday, 2000; Wu and Hsu, 2001). This OEM approach was widely used in traditional labor-intensive industries, like shoes and garments, in Taiwanese SMEs (Gereffi, 1994). It was in 1985 that Taiwanese firms, Mitac and Acer, began to gain desktop PC OEM order from ITT through an overseas Chinese technician who worked for ITT as a general manager. It was from this time that Taiwan’s IT industry began to involve in OEM approach as the traditional labor-intensive industry. In the early PC days, Taiwanese firms were involved only in very simple OEM arrangements. However, the OEM customer provided detailed technical ‘blueprints’ and technical assistance to allow the Taiwanese contractor to produce according to specifications and learn from intensive interactions with the OEM buyers (Ernst, 2000:125). The learning processes involved foreign OFM partners’ helping with the selection of capital equipment, the training of managers, engineers, and technician, as well as advice on production, 22

financing, and management (Wu and Hsu, 2001). Successful OEM arrangements have led to close long- term technological relationships between buyers and sellers (Hobday, 2000: 134). As the learning process evolved, the OEM relationship might lead to ODM (own design and manufacture). Under ODM model, the local firm carries out some or all of the product design (as well as production) tasks needed to make a good, usually according to a general design layout supplied by the TNC. In some cases, the buyer cooperates with the local supplier on the design, suing the skills developed by the local firm. This ODM model indicates that local firms capture the design and manufacturing capability that enhance their values in the production chain. However, it also shows that the latecomer firms are still avoiding the risk of launching own-brand products as directly compete with the leading firms. Table 3 indicates the close relationship between Taiwanese firms with the world leading firms. **table 3: OEM/ODM Still there was the fourth approach that the firms were start-up in 1990s when they either developed key component technology niches themselves or bought innovative firms in the Silicon Valley that began their own adventures. For example, Asus developed the first-rated motherboard in 1994 that led it to cooperated closely with Intel, and works with it on motherboard designs when Intel would announced its new types of microprocessors (Zhou, 1999). For another, Via, an IC design house that was originally founded in Silicon Valley and was later bought by Taiwanese and moved back to Taiwan in 1992. All the technologies were transferred to Taiwan and further developed into frontier areas such as CPU through buying a new innovative firm (a CPU design house- Cyrics) in the Silicon Valley.

Via now become the one 23

of the leading IC design house in the world. The learning paths of local firms therefore involve mainly reverse engineering and copy in the l970s, state’s support, overseas Chinese recruitment, and OEM/ODM learning in the 1980s, and new start-ups from local technologies and overseas Chinese in the 1990s. The trajectory finally evolves to one that has close relationship with the OEM buyers and established global logistics production networks (Fig 3). ***Fig 3 Trajectory of technology learning of Taiwanese firms In order to understand the patterns of firms’ technology learning, this study conducts a survey to the IT related firms in Commonwealth top 1000, and parts of the results can be shown in table 44. Regarding the sources of technology of the firms, most of the firms said that they got their technology from the US firms, secondary from Japanese, and third form local firms. Regarding the source of new technology information, the responses rank from the OEM clients, networking firms, to exhibitions and science and technology magazines. As to the methods the firms use to enhance their technology learning and capability, the major ones are internal training programs, OEM clients, ITRI, and local universities. These findings clearly indicate the importance of OEM learning in which the US and the Japanese firms play important role in transferring technology. Moreover, the data also show that local networks and public research institutes are significant in enhancing the firms’ learning

4 Our survey use the database of the Commonwealth top 1000 (Commonwealth Magazine, 2002,

May issue) which consists of 422 electronic and information technology firms. We randomly sample half of the total population (211) and use the mailing questionnaires method and gained 51 responses (about 20%).

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of technology. ***table 4: Patterns of Technology learning of Taiwanese firms. 4.3 The SME’s production and learning networks Taiwan’s industrial structure was dominated by a majority of SMEs and their important role in producing export products (Chen, 1994; Chou and Lin, 1999; Field, 1998; Ernst, 2000). This had to do with the state’s policy that had not promoted big private-owned conglomerates that in consequence led to Taiwan’s industrial structure lacking world-renowned businesses, like South Korean Chaebols. In general, SMEs have the flexibility and the capacity more than big firms to adjust to abrupt and frequently unexpected change in demand and technology, due to their high specialization by engaging in single tasks and by producing in small lots that avoid heavy fixed capital costs (Ernst, 2000:114). Social networking, or Guanxi, or “semi-familism” (Chen 1994; also Whitely 1992; Pan, 2001), was the social basis that buttressed this flexibility and enhanced SMEs’ competitiveness in the world market. This production network transforms into a learning network when intensive interaction among firms occurs through various formal and informal channels (Chen, 2003; Wang and Gao, 2001). First,

the establishment of formal tight linkage

between firms along the supply chain can enhance the prospects of inter-firm learning, for instance between end product manufacturers and component suppliers (Ernst, 2000:115). The routine checks from core firms to peripheral downstream firms and sometimes exchanges of technicians in trouble-shooting are helpful for learning. Second, learning also occurs through informal channels, such as university alumni or associations of former colleagues in ITRI. The informal interactions enhance the flow of information and may result in formal organizational contact which is favorable for 25

technology learning as a whole. Thirdly, the HSIP itself also produces the agglomeration effect that may strengthen the learning effect (Hsu, 1999). Particularly, the constant job changes in the park in effect produced the flow of personnel among firms that enhance knowledge exchange and technology learning. According to a survey, the annual replacement of R&D personnel as well as on-line workforce was about 15% for the semiconductor industry (cf Chen, 2003). 4.4 The overseas Chinese networks Taiwan’s development of IT industry has benefited very largely from overseas Chinese networks (Saxenian and Hsu, 1999; Hsu and Saxenian, 2001). Not only the overseas scientists had substantial input to the formation of the policy making process in the late 1970s, but also themselves returned to Taiwan to start up their own businesses, as well as being recruited by local firms to involve in production and R&D activities. This contributed to a close relationship between HSIP and Silicon Valley. According to a survey, up to 1991, there were 66 firms among the total 135 firms established in HSIP that were either established or involved technical assistance by returnees. Among the 66 firms, there were 44 returnees either as the founders or general managers, and 22 were in high position in R&D (Ho, 1992). Also, according to HSIP office’s data, 39.6% (97) of the companies in the park in 1997 were started up by US trained engineers, many of whom had considerable managerial and professional experiences in Silicon Valley; up to the same year, there were about 3 thousand returnees worked in the park. Among the channels of Hsinchu-Silicon Valley connection, the Monte Jade Science and Technology Association is deserved to be mentioned. It was initiated by a group of overseas Taiwanese engineers and professionals in high-technology firms in 26

the Silicon Valley in order to promote mutual flows of technology and investment between Taiwan and Silicon Valley. The Monte Jade association held seminars, and social events through which many networking were created that were helpful for conducting face-to-face communication as well as helping gathering information. Also, the Monte Jade assist its members to gather the latest information on the trends in high technology in monthly published newsletter, and help them to find the opportunities of investments and technology transfer. The Hsinchu-Silicon connection has shortened the time lag of technology learning, especially when the returnees were involved in frontier areas of technology development in the US. They helped mediating the recruitment of overseas engineers, establishing listening posts in Silicon Valley to tap into the brain power, and integrating local networks to ensure gaining access to technology and market information (Hsu and Saxenian, 2001). These doings indeed enhanced the collective learning and connected Taiwan’s IT industry to the global core and avoided the ‘lock-in’ effect of the local production networks. Taiwan’s national system of technology learning therefore is characterized by the state’s involvement, public research institutes’ facilitation of technology absorption, private firms’ efforts, networking, and OEM/ODM learning, as well as overseas Chinese networking. These elements constitute a systemic synergy that evolved overtime and largely upgraded the technology capability of Taiwan’s IT industry which in consequence resulted in the closing of technology gap after the advanced countries. In the PC industry, Taiwan was able to market the Intel Pentium PC only one month later than the leading firm in 1993 (Fig 4). Now Taiwan had launched the Tablet PC at the same time as HP and other leading firms in 2002. In the

27

semiconductor industry, TSMC and UMC were no longer depended on foreign technology transfer to move on new stage, they are in the frontier of foundry technology. Another indicator that can show the upgrading of Taiwan’s IT technology is the US patents. In 2000, Taiwan gained 4667 patents in the US, followed US, Japan, Germany, and led France, UK, South Korea and other OECD countries (National Science Council, 2002).

*** Fig 4:

5, Why has the OEM/ODM route continued? Taiwanese firms have benefited from OEM/ODM relationship with leading firms and have acquired production design capabilities. Logically, they could have pursued for OBM approach that could enlarge their profit share and visibility. However, this route has not been chosen. On the contrary, the proportion of OEM/ODM of the total output has increased overtime. Why? This has to do with the characteristics of the national system of learning as well as the close linkage of Taiwanese firms to the OEM buyers that hampered the OBM approach. First, the national system of learning has been largely depended on the public sector to compensate for the weakness of SMEs dominated industrial structure. As regard to the total R&D expenditure, the public sector spent over 50% in 1991 and 1992, and has declined to 37% in 2001. These figures was much higher than those of OECD, i.e. Japan 9.9%, USA, 7.2%, UK, 10.7%, S. Korea, 14.5% in 2001 respectively. In other words, Taiwanese firms are much depended on the public sector for R&D activities (National Science Council, 2002). Moreover, though the public sector has played important role in R&D, the whole expenditure of R&D as 28

percentage to GNP was still low as compared to OECD countries. In 1998, Taiwan’s figure was 1.98%; compared to Japan 2.87% in 1997; USA 2.71% in 1997; and South Korea 2.89% in 1997. ***Fig 5 R&D expenditure Second, the R&D expenditures as percentage of sales to Taiwanese enterprises in the manufacturing sector were low in international standard. In 1998, this expenditure was only 1.4% of the total sale in average, compared to Japan’s 3.7% in 1997, U.S.’s 4.0% in 1996, and South Korea’s 2.6% in 1996. Taiwanese firms spend much less expenditure in R&D compared to OECD countries. They are much more concerned with production expansion than on exploring new product through research and development. Third, the reluctance of the private sector in expenditure on R&D may have to do with the squeeze of OEM buyers to the profit margins of Taiwanese firms that in consequence led the firms to have difficulty to have capital to invest in R& D (Ernst, 2000:125). This can be indicated by the profitability in the electronic and information industries in the late 1990s (table 5). It is because big players pursued aggressive price-cutting strategies, eroding the comparative advantages of Taiwanese firms in developing their own brands.

The logical consequence of the close OEM

relationship is a focus on mass production rather than on niche market; avoiding direct confrontation and pursuing markets where the market leaders are not present (Latin America, Southeast Asia—attack from the sidelines). This is the approach that Acer, Mitiac, Leo, Twinhead, Asus are taking nowadays. ***table 5

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Fourth, the OEM/ODM relationships have also created pressures that forced the Taiwanese firms to extend their production capability rather than to increase their technology innovation capacity. On the one hand, the Taiwanese firms have to out-invest into the adjacent areas, particularly China, in order to lower down production costs as to meet the squeezing effect from the leading firms to their own profit margins. On the other hand, they also have to enhance their organizational capacity in order to fulfill the complexity of requirements imposed from the leading firms. Indeed, leading buyers such as HP, Compaq and Dell have outsourced all stages of the value-chain for some of its desktop PCs, notebooks, PDA, and other IT products, except marketing for which they retain sole responsibility. This new arrangement of OEM has move beyond production to encompass an increasing variety of high-end support services. Taiwanese firms now need to provide more sophisticated services, including design and global supply chain management, or even to set up new production and R&D facilities that can fulfill the requirements of the leading firms’ time-to-market competition (Ernst, 2000:131). As a result, the global logistic capability of Taiwanese firms has increase enormously, their products and sales have also increased by ODM orders, however, and they are locked into OEM relationships that hindered independent brand name as well as technology innovation investment. Our survey data show that 44 of the 51 firms, that is 86.3% of the firms have already invested in China, in which assembly is the major investment activity (70.6%). This assembly activity will continue, as the firms perceive that China will be the major production site for them in three years. More surprising is the fact that some firms (27.5%) already began to take OEM order from China’s major firms, continuing the OEM/ODM pattern with the world leading firms.

But different from the latter 30

where Taiwanese firms can learn from the world leading firms technologically and organizationally, now the main purpose of the OEM/ODM pattern with the Chinese firm is for extending market share and profits. The major Chinese firms are widely regarded as technology followers of Taiwanese firms, however, the OEM/ODM model seem also apply (see also table 3). This contradictory feature seems to confirm the path dependency effect of the OEM model in which the Taiwanese firms follow the previous path with little attempt to break off from it. ***table 6 Investment in China

6, Conclusion This paper discusses the learning system of Taiwan’s IT industry. I have pointed out that the national system of learning in Taiwan has characteristics of state’s involvements, overseas Chinese networks, learning firms, and OEM/ODM relationships. These factors together enhanced the learning capability of the firms and synergized to a system that generated technology learning and innovations. However, I also argue that the dependence of the firms upon the state and the close relationship with the leading firms through OEM/ODM model also hindered their further development as to buildup their own brands and put more resources into innovation activities. The increasing investment of Taiwanese IT firms into China and other areas indicated that they have increased the organizational capability in building global logistic capacity. However, the expansion of production capability does not represent the upgrading of the ability technology innovation. On the contrary, the continuation of some Taiwanese firms to take OEM/ODM orders from China’s major firms indicate that the route is and has been taken to enter the Chinese market. If the above 31

analysis is correct, then the route of OEM/ODM will still be the dominant route for Taiwan IT industry. Whether this route will be changed seem to depend on the firms willingness to encounter the barrier and limitation rest by the OEM/ODM model.

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