The East Asian Technological Miracle

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The East Asian Technological Miracle
Invited Paper dti/UNIDO Conference on
Competitiveness Midrand, South Africa June
2004    Professor John A. Mathews Macquarie
Graduate School of ManagementSydney  
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Your presenter
Professor of management at MGSMTeaches courses
in international business and international
management, with focus on Asia-Pacific Researches
competition and strategy in Asia-Pacific Most
recent books Tiger Technology The creation of a
semiconductor industry in East Asia
Dragon Multinational A New Model of Global
Growth
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Your presenter (cont)
Worldwide editor Industry and Innovation Invited
presentations to World Bank development
forums OECD Knowledge Economy conference
ILO Asia-Pacific comp strategy UNCTAD
World Investment Report UNIDO Industrial
Development Report 2002
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The starting point a world rich in resources
Global economy rapidly changing 64,000
MNEs/TNCs Control 870,000 subsidiariesPlethora
of inter-firm arrangements UNCTAD WIR
2003 Unprecedented scale of technology transfers,
licensing, subcontracting UNIDO WIDR
2001Capital transfers World FDI (651 b in
2002) now 10 of global gross domestic capital
formation (cf 2 in 1980) UNCTAD World
Investment Report 2003
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East Asian Miracle A case of resource leverage
Creation of new high technology industries eg
electronics, semiconductorsUsed latecomer status
to overcome incumbent advantagesLatecomer firms
fashioned complementary strategies, eg OEM
contracting, second-sourcing, licensingBuilt new
knowledge-intensive industries very fastRepeated
the process over and over again, eg Taiwan
DRAMs in 1990s Korea CDMA cellular telephony
Taiwan Optoelectronics in 1990s Best described
as managing the process of resource leverage--
But calls for comprehension of latecomer
industrial dynamics
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The Growth and Development of Taiwan, 1951-2000
(1950s)
Source Industrial Development Bureau, Ministry
of Economic Affairs, Taiwan
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The Growth and Development of Taiwan, 1951-2000
(1980s)
Source Industrial Development Bureau, Ministry
of Economic Affairs, Taiwan
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The Growth and Development of Taiwan, 1951-2000
(1990s)
Source Industrial Development Bureau, Ministry
of Economic Affairs, Taiwan
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Latecomer industrial dynamics
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Flying geese
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Latecomer industrial dynamics The flying geese
paradigm
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The flying geese paradigm lives on Revealed
Comparative Advantage data for East Asia
Source World Bank
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RCAs in East Asia Consumer Electronics
Source World Bank
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RCAs in East Asia IT
Source World Bank
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RCAs in East Asia Electronic Parts and
Components
Source World Bank
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RCAs in East Asia Telecommunications products
Source World Bank
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RCAs in East Asia Semiconductor products
Source World Bank
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Taiwans Export Performance in Electronics,
1976-2001
Source World Bank
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Manufacturing the Engine of Growth in Taiwan

• Source Industrial Development Bureau, Ministry
  of Economic Affairs, Taiwan
• Note
• Industry includes Manufacturing, Construction,
  and Electricity, Gas and Water sectors.
• Services include Trade Eating-Drinking Places,
  Transport, Storages and Communications,
  Government Services,
• and Finance, Insurance Business
  Services.

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Electronics the Engine of Manufacturing in Taiwan
Source Industrial Development Bureau, Ministry
of Economic Affairs, Taiwan
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One way forward Latecomer MNEs
Examples Ispat, Cemex, Acer, Li Fung Overcome
initial disadvantages eg accelerated global
coverage through linkage and leverage OEM
contracts Second sourcing Global scope --
bypass earlier ethnocentric and polycentric
phases
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Ispat International
World Top 5 steel industry Small company,
origins in India Rapid expansion in NICs Late
1990s penetration into US, Europe
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Cemex
Worlds 3rd largest cement company Worlds
largest cement trader Rapid expansion following
opening of Mexican economy Advanced management
and technology, e.g. GPS
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Acer
Now a worldwide IT company Founded 1976 began
international expansion in 1986
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Acers cellular structure
Acer consists of 40-50 business cells Each
business autonomous Seeks own customers,
growth Each business internationalizes eg AIPG,
API
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Acers global organizationCircle dragon no head
 
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Another way forward Insertion in Global Value
Chains An interconnected global economy
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How a GVC worksMultiple value-adding steps
multiple points of insertion
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How a GVC works (2) Three strategies of
industrial upgrading
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Emergence of GVCs

• Global value chains constitute a new form of
  integration in the global economy
• Traditional GVCs producer networks
• Examples Japanese supplier pyramids (Toyota,
  Nissan, Mitsubishi)
• Generated enormous advantages for Japanese
  automotive companies over western rivals
  (vertically integrated)
• New GVCs buyer networks
• Examples US garments retail chains (The Gap,
  Tommy Hilfiger)
• Opportunities for local firms? Case Torreon,
  Mexico (Gereffi Martinez)

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Creation of GVCs

• New GVCs being created all the time as source
  of global competitive advantage
• Example EMS
• Driven by outsourcing trends by leading MNEs
  Ericsson, Sony, Nokia, IBM, Motorola et al
• Main arguments for outsourcing
• Focus on brand and core activities
• Getting to market faster
• Leaner and more agile
• Better supply chain management (global logistics)
• Lower levels of tied-up capital

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Flextronics Global Manufacturing Operations
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General features of GVCs
What drives the location decisions of
instigators?What drives the competitiveness of
the GVC? What issues govern investment
decisions? How does the GVC develop competitive
advantages over Integrated MNEs Local firms What
do local firms need to do to become integrated
within (linked to) GVCs? How can local firms
leverage advantages (e.g. knowledge, technology)
from their linkage to GVCs? Can these processes
be repeated, with local firms learning from the
process? How does the GVC as a whole learn?
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GVCs and clusters

• Latecomer firms practising LLL can operate
  within GVCs and local clusters simultaneously
• vertically integrated in GVC
• horizontally integrated in local cluster
• The two kinds of network/cluster can operate
  synergistically
• Example Ammar and Sarah in Pakistan (successful
  knitwear group)
• member of GVCs created by US buyers, such as The
  Gap
• member of local Pakistan cluster of knitwear
  firms, with complementary skills
• operates itself as a group, rather than as
  discrete firm i.e. cellular organization

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The latecomer strategy
Formulate a strategic goal industrial
development through catchup Strategize as a
latecomer overcome barriers through utilizing
knowledge available Harness latecomer industrial
dynamics The flying geese paradigm Utilize the
connections available in the global economy
Linkage, leverage, learning Think globally use
global tools and institutions (e.g MNCs
GVCs) Build domestic institutions to support
linkage, leverage and learning Taiwans NSEL as
exemplar Innovation as management of technology
diffusion
to Management of knowledge generation and
diffusion (IPR, patents) A never-ending process
of capability enhancement
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Ingredients of success
Linkage Links with global players --gt drawn into
collaborative networks Acer links with TI
(DRAMs), IBM Leverage Technology leverage from
links with advanced firms Long-term focus
Capabilities enhancement Securing more from
contractual link than revenues Learning Repeated
application of linkage and leverage Enhancement
of capabilities Rapid catchup as goal
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Propagation of innovations competitive postures
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Innovation vs. diffusion management
Diffusion management calls for organizational
and institutional innovationIdentification of
technological possibilities Linkage to frontiers
of technology Leverage of knowledge, e.g. from
MNCs Examples EDB (Singapore) ITRI
(Taiwan) Such public institutions overcome
diseconomies of scale and promote organizational
and economic learning Cases of latecomer
industry creation strategies Electronics in
East Asia semiconductors flat panel
displays
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Taiwan electronics production, 1986-1998
Source Tung (2001).
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Semiconductor capital spending By regionArrival
of East Asians

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World semiconductor investment, 2003

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DRAM Generations
Source IC Insights
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How did Korea do it?
Large firms (chaebol) as vehicles of
Developmental Resource Leverage Prior
experience in mass manufacturing (eg
electronics) Prior market entry contacts Prior
OEM contractual links Leveraged access to
product technology eg circuit designs from
Silicon Valley Leveraged access to process
technology eg US suppliers and Japanese
engineers Leveraged access to strategic
alliances Needed strategic goals and
combinative capabilities
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The key to Korean success A national system of
economic learning
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Korea Closes the Technology Gap in Memory Chips
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How did Taiwan do it?
Taiwan -- started with smaller firms Utilized
public sector research institutes eg ITRI
Industrial Technology Research Institute Strategy
of managed diffusion of technologies Foreign
partners -gt ITRI -gt small Taiwan firms Use of
innovative institutions, RD alliances
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The key to Taiwan success A system of strategic
alliances
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Taiwan Closes the Technology Gap in
Semiconductors
Source ERSO
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Value Chain in Semiconductor Sector

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Taiwan IC related revenues 1989-1998 Starts at
back-end of value chain, and moves forward
Source ERSO/ITRIS
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How did Singapore do it?
Singapore had neither large firms nor small
firms Started with nothing in 1965 banished from
Malaysian federation a free port (19thC
innovation) no industry Took gamble invited in
MNCs 1960s first arrivals 1970s unemployment
solved 1980s technological upgrading promotion
of local enterprises as suppliers to MNCs 1990s
build up of public sector research institutes, eg
IME 2000s Cluster-driven strategy, MNCs
upgrading, plus local technopreneurship A
remarkable success story
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How is China doing it?
Can make the case that China is utilizing all
three models Model 1 Large firms as vehicles
China State-owned enterprises Model 2
Smaller firms plus public sector RIs China
Township enterprises scientific research
institutes Model 3 MNC-linkage China Open
door policy since 1978 Results Developmental
resource leverage through three avenues
simultaneously Walking on three legs
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Repetition of the three approaches Flat panel
displays
   
Source PIDA, compiled by DigiTimes, August
2003.
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Flat panel displays in 2003
FPDs now dominated by firms from East Asia
Japan, Korea, Taiwan and Singapore, with China
just entering in 2003 Model 1 Large firms as
vehicles Korea Samsung and LG-Philips Model 2
Smaller firms plus public sector RIs Taiwan Six
startups plus ITRI laboratories New TFT-LCD
consortium Pooling of TFT-LCD patents
transferred from ITRI Model 3
MNC-linkage Singapore New FPD fab, Advanced
Flat Panel Display (AFPD) opened 2003 (JV
Matsushita-Toshiba) Results A strong pattern
of national innovation systems Again expect
China to utilize all three models
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FPDs market growth, 1990-2003, and TFT-LCD share
  Source DisplaySearch CIBC World Markets
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The crystal cycle and strategic initiatives    
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FPD Revenues 2003, by firm
Source CIBC World Markets
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Static competitive forces analysis of the Taiwan
TFT-LCD
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Propagation of innovations competitive postures
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A national system of economic learning
 
Vehicles for financial leverage e.g. CDC, SDB, BIM
Agencies for nurturing knowledge intensive firms,
e.g. ITRI incubator
Vehicles for technology leverage e.g. ITRI, KIET,
IME
Industry self-organization bodies e.g. KSIA, TSIA
Investment-attracting vehicles e.g. EDB, PDC
Agencies for industrial upgrading and technical
training e.g. Penang Skills Centre
Agencies for market shaping and creation, e.g.
III, NCB (domestic) KOTRA (exports)
Agencies for industrial promotion and discipline
e.g. IDB
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Silicon Glen, Scotland The Alba Centre
The Alba Centre grew out of an initiative by
Scottish Enterprise, Scotland's leading economic
development agency, to develop Scotland as a
leading world location for System Level
Integration technology. Working in partnership
with four of Scotland's top Universities in this
field (Edinburgh, Heriot-Watt, Strathclyde and
Glasgow) and a range of private sector partners
(e.g. Cadence) both inside and outside Scotland,
the vision has become reality. The initiative
consists of The Institute for System Level
IntegrationThe Virtual Component ExchangeThe
Alba Campus
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Going beyond competitive imitation
Maintain emphasis on LLL, but in new context
Linkage Between public sector institutions and
startup firms e.g. HKUST Incubator RD
collaborative alliances Venture Capital
specialized services new industries, e.g.
biotech aquaculture Leverage Spinoffs leverage
knowledge, contacts from PRI e.g. new
aquaculture technologies for Tropical
countriesLearning Repeated application of
linkage and leverage Template for knowledge
transfer and spinoff The goal to move beyond
imitation to innovation
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Imitation to innovation East Asia
From management of technology diffusion
to Management of
knowledge generation Example of Singapore A
regional centre for finance (HK), logistics (HK),
IT and semiconductors and biotech Investment in
absorptive capacity PRIs that maintain links
to technology vanguard (e.g. Inst of Molecular
Cell Biology) Investment in economic learning
e.g. policies and institutions to drive
high-tech spinoffs and sustain them Investment in
attraction of FDI e.g. for RD Example East
Asian patenting experience
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Patenting in USPTO
Top 12 patenting organizations,
1997-2001   1997 2001 CAGR 97-01 IBM 1,724 3,411
18.6 Canon 1,377 1,877 8.1 NEC 1,095 1,953 1
5.6 Sony 861 1,363 12.2 Samsung
584 1,450 25.5 Motorola 1,058
778 -0.7 Toshiba 862 1,149 7.5 Fujitsu
903 1,166 6.6 Matsushita 746 1,440 17.9 Lucent
768 1,109 9.6 Hitachi 903 1,271
8.9 Mitsubishi 892 1,184 7.3 Source
USPTO
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Country statistics Averages for 5- and 30-year
periods (Utility Patents Only)
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Patenting in USPTO East Asians
Top patenting firms and institutions Taiwan,
Korea, Singapore, 1997 2001 Total
97-01 Taiwan UMC 149 584 1,603 TSMC 130 529
1,552 ITRI 153 221 998 VISC 53 112
528 Korea Samsung Elect. 584 1,450 6,325 Hyundai
Elect. 154 533 1,435 LG Elect. 113
284 1,025 ETRI 58 72 504 KIST 29
35 184 Singapore Chartered 30 135
327 Source USPTO
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South Africa and LLLWhere does a country start
on this journey?

• South African government agencies can promote
  linkage
• e.g. backward linkage with MNEs as suppliers
• e.g. promoting GVCs
• It could start by mixing and matching local
  suppliers and global buyers or producers
• Can promote leverage
• e.g. by making leverage a goal, as in an outcome
  of training programs
• e.g. by providing technical training as
  prerequisite for leverage (and not as end in
  itself)

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South Africa and LLL (2)

• Can promote learning
• e.g. by developing a model of national systems of
  economic learning, and promoting this
• e.g. by promoting institutional interaction
• e.g. by promoting technical upgrading for
  suppliers
• Learning is at a collective level it is distinct
  from training

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Development and GVCs

• An optimal strategy place focus on GVCs
• GVCs are constantly being created
• By whom? Usually, lead firms act to establish a
  train of suppliers
• But actually GVCs can be created by brokers,
  acting to bring the various parties together
• Can be private sector brokers, e.g. merchant
  banks, impannatori in Italian industrial
  districts
• Can be public sector brokers, e.g. Singapore EDB
  actively seeks to plug gaps in value chains
  located in and around Singapore
• What about working with agencies like UNIDO to
  create new GVCs?

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UNIDO and creation of GVCs

• UNIDO could play a role as broker of new GVCs
• Bring potential partners together
• GVC needs to have a strategic purpose serving
  strategic needs of buyer firms, and of supplier
  firms
• New GVCs can provide an ample field of
  application of LLL interventions by UNIDO
• After all, private firm strategies already do
  this e.g. Li Fung based in Hong Kong

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Summary

• Nothing new in the notion of promoting national
  competitive advantage USA and Germany best in
  19thC, Japan in first half of 20thC, East Asian
  tigers in second half
• In global era with WTO, simple measures no longer
  possible, e.g. tariffs
• But sophisticated knowledge enhancing measures
  (LLL) are certainly possible, and indeed
  necessary
• Frameworks like Porter useful, especially for
  large countries (need to adapt for small
  countries)
• Building NCA is essentially a strategic issue
  nothing is guaranteed

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The latecomer strategy
Formulate a strategic goal industrial
development through catchup Strategize as a
latecomer overcome barriers through utilizing
knowledge available Harness latecomer industrial
dynamics The flying geese paradigm Utilize the
connections available in the global economy
Linkage, leverage, learning Think globally use
global tools and institutions (e.g MNCs
GVCs) Build domestic institutions to support
linkage, leverage and learning Taiwans NSEL as
exemplar Innovation as management of technology
diffusion
to Management of knowledge generation and
diffusion (IPR, patents) A never-ending process
of capability enhancement