The Competitive Advantage of Taiwan
Professor Michael E. Porter
Harvard Business School
Commonwealth Speech
Taipei, Taiwan
July 31, 2001
This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press,
1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report 1998, (World Economic Forum,
1998), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998)
and ongoing statistical study of clusters, Competing for Prosperity: The Microeconomic Foundations of Development, forthcoming, and “What is
Strategy?” (Harvard Business Review, Nov/Dec 1996). No part of this publication may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter.
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Current Malaise
•
Recent economic downturn
•
Highest unemployment in decades
•
Uncertainty of future relationship to China
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Performance
Weighted average
OECD
35,000
US
33,000
31,000
29,000
Canada
27,000
GDP per
capita
25,000
(PPP
adjusted)
in US-$, 23,000
2000
Japan
Finland
Germany
Weighted
average
OECD
Australia
Ireland*
Singapore
Sweden
UK
21,000
New Zealand
Israel
19,000
South Korea
TAIWAN
17,000
15,000
0%
1%
2%
3%
4%
5%
6%
7%
Compound annual growth rate of GDP per capita, 1990-2000
Note:
Irish GNP per capita is about 20% lower than the reported GDP per capita figure due to large dividend outflows to foreign investors. We use
GNP per capita for Ireland because it is more representative. For other countries GDP and GNP are very similar.
Source: WEO
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Copyright © 2001 Professor Michael E. Porter
Asian Economic Performance By Country
Annual Real
GDP growth
rate,
1990 - 2000
15%
10%
Malaysia
TAIWAN
5%
Singapore
Indonesia
0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Hong Kong
S Korea
Thailand
-5%
Australia
New Zealand
-10%
-15%
Source: EIU
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Copyright © 2001 Professor Michael E. Porter
International Patenting Output
Annual U.S. patents
per 1 million
population, 2000
450
400
USA
350
300
TAIWAN
250
Japan
Sweden
200
150
Germany
= 10,000
patents
granted in
2000
Israel
Canada
100
Singapore
South Korea
UK
New Zealand
50
Australia
0
0%
5%
10%
15%
20%
25%
30%
35%
40%
Compound annual growth rate of US-registered patents, 1990 - 2000
Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
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Copyright © 2001 Professor Michael E. Porter
International Patenting Output
250
200
Increase in
the annual
number of
U.S. patents
per 1 million
population,
1990 to 2000
150
100
50
Au U K
st
ra
l
Fr ia
an
ce
Sw It
itz aly
er
la
nd
U
Sw S
ed
en
Ja
S i pa
ng n
ap
or
e
Is
r
S ael
Ko
re
Fi a
nl
a
C nd
an
G ada
e
N rm
et
a
he ny
N
ew rlan
Ze d s
al
an
d
TA
IW
AN
0
Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
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Copyright © 2001 Professor Michael E. Porter
U.S. Information Technology Investment
Share of Real Private Non-residential Investment by Type
Share of Real
Private US NonResidential
Investment
50%
45%
IT Equipment and
Software
40%
35%
Other Equipment
30%
25%
Business
Structures
20%
15%
10%
5%
2
1
Q
Q
20
0
1
20
0
00
20
99
19
98
19
19
97
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
19
87
1
0%
Note: Quarterly data seasonally adjusted at annual rates
Source: BEA, author’s calculations
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Copyright © 2001 Professor Michael E. Porter
U.S. Information Technology Investment
Level of Real Private Non-residential Investment by Type
Real Private US
Non-Residential
Investment,
Billions of 1996
US-$
700
IT Equipment and
Software
600
500
Other Equipment
400
Business
Structures
300
200
100
01
Q
20
00
1
20
0
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
19
87
1
Q
2
0
Note: Quarterly data seasonally adjusted at annual rates
Source: BEA, author’s calculations
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Challenges
Three Agendas
I. Addressing some chronic weaknesses
II. Making the transition from an Investment-driven to a true
Innovation-driven economy
III. Defining Taiwan’s economic relationship to China
•
These agendas are integrally connected
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Copyright © 2001 Professor Michael E. Porter
Sources of Rising Prosperity
•
A nation’s standard of living (wealth) is determined by the productivity with which
it uses its human, capital, and natural resources. The appropriate definition of
competitiveness is productivity.
–
Productivity depends both on the value of products and services (e.g.
uniqueness, quality) as well as the efficiency with which they are produced.
–
It is not what industries a nation competes in that matters for prosperity, but
how firms compete in those industries
–
Productivity in a nation is a reflection of what both domestic and foreign firms
choose to do in that location. The location of ownership is secondary for
national prosperity.
–
The productivity of “local” industries is of fundamental importance to
competitiveness, not just that of traded industries
–
Devaluation does not make a country more “competitive”, rather it reveals a
lack of fundamental competitiveness
•
Nations compete in offering the most productive environment for business
•
The public and private sectors play different but interrelated roles in creating a
productive economy
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Copyright © 2001 Professor Michael E. Porter
Innovation and Prosperity
Prosperity
Competitiveness
(Productivity)
Innovative Capacity
•
CAON Taiwan Presentation 07-31-01 CK
For advanced economies innovation has the
critical role supporting high levels of prosperity
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Copyright © 2001 Professor Michael E. Porter
Determinants of Productivity and Productivity Growth
Macroeconomic,
Macroeconomic,Political,
Political,and
andLegal
LegalContext
Contextfor
forDevelopment
Development
Microeconomic
MicroeconomicFoundations
Foundationsof
ofDevelopment
Development
Sophistication
Sophistication
of
ofCompany
Company
Operations
Operationsand
and
Strategy
Strategy
Quality
Qualityof
ofthe
the
Microeconomic
Microeconomic
Business
Business
Environment
Environment
• Sound macroeconomic policies and a stable political / legal context are
necessary to ensure a prosperous economy, but not sufficient
• Competitiveness ultimately depends on improving the microeconomic
foundations of competition
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Productivity and the Microeconomic Business Environment
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
andRivalry
Rivalry
Factor
Factor
(Input)
(Input)
Conditions
Conditions
• A local context that
encourages efficiency,
investment, and
sustained upgrading
• Open and vigorous
competition among locally
based rivals
Demand
Demand
Conditions
Conditions
• High quality, specialized
• Sophisticated and
inputs available to firms:
demanding local customer(s)
- human resources
• Unusual local demand in
Related
- capital resources
specialized segments that can
Related and
and
- physical infrastructure
be served globally
Supporting
Supporting
- administrative infrastructure
• Customer needs that
Industries
Industries
- information infrastructure
anticipate those elsewhere
- scientific and technological
• Presence of capable, locallyinfrastructure
based suppliers and firms in
- natural resources
related fields
• Presence of clusters instead
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of isolated industries
CAON Taiwan Presentation 07-31-01 CK
Copyright © 2001 Professor Michael E. Porter
The California Wine Cluster
Grapestock
Grapestock
Fertilizer,
Fertilizer, Pesticides,
Pesticides,
Herbicides
Herbicides
State Government Agencies
(e.g., Select Committee on Wine
Production and Economy)
Winemaking
WinemakingEquipment
Equipment
Barrels
Barrels
Bottles
Bottles
Caps
Caps and
and Corks
Corks
Grape
Grape Harvesting
Harvesting
Equipment
Equipment
Labels
Labels
Irrigation
Irrigation Technology
Technology
Growers/Vineyards
Growers/Vineyards
Wineries/Processing
Wineries/Processing
Facilities
Facilities
Public
Public Relations
Relationsand
and
Advertising
Advertising
Specialized
SpecializedPublications
Publications
(e.g.,
(e.g.,Wine
WineSpectator,
Spectator,Trade
Trade
Journal)
Journal)
California
California
Agricultural
Agricultural Cluster
Cluster
Educational,
Educational, Research,
Research, && Trade
Trade
Organizations
(e.g.
Organizations (e.g.Wine
Wine Institute,
Institute,
UC
UCDavis,
Davis,Culinary
CulinaryInstitutes)
Institutes)
Tourism
Tourism Cluster
Cluster
Food
Food Cluster
Cluster
Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA 1997 students R.
Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda.
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Copyright © 2001 Professor Michael E. Porter
Global Competitiveness Report 2000
The Relationship Between Microeconomic Competitiveness
and GDP Per Capita, 1999 Data
35,000
United States
30,000
Singapore
Switzerland
Denmark
Canada
Japan Belgium
Ireland
Australia
Austria
Netherlands
Hong Kong
Germany
Finland
France
Italy
United Kingdom Sweden
Norway
25,000
20,000
TAIWAN
Spain
1999 GDP per
Capita*
15,000
Portugal
Greece
Czech Republic
Argentina
10,000
New Zealand
Israel
Korea
Chile
Mauritius
Hungary
Slovakia
Poland
Colombia
Mexico
Costa Rica
Russia
Brazil
Thailand
Peru
Bulgaria
Ecuador
China Egypt
Philippines
Ukraine
El Salvador
Bolivia
Indonesia Jordan
Zimbabwe
India
Vietnam
Venezuela
5,000
Iceland
Malaysia
South Africa
Turkey
* Adjusted for Purchasing Power Parity
Microeconomic Competitiveness Index
Source: Porter, Michael E. “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity.” The Global
Competitiveness Report 2000, New York: Oxford University Press, 2000
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Copyright © 2001 Professor Michael E. Porter
Stages Of Economic Development
ResourceResourcedriven
driven Economy
Economy
InvestmentInvestmentdriven
driven Economy
Economy
InnovationInnovationdriven
driven Economy
Economy
• Basic factor conditions (low cost
labor, natural resources, geographic
location) are the dominant sources
of competitive advantage
• Efficiency in producing standard
products and services is the
dominant source of competitive
advantage
• Innovative products and services
at the global technology frontier
are the dominant sources of
competitive advantage
• Technology is assimilated through
imports, FDI, and imitation
• Technology is accessed through
licensing, joint ventures, FDI, and
imitation
• The national diamond is
characterized by strengths in all
areas together with the presence
of deep clusters
• Companies compete on price and
lack direct access to consumers
• Companies have limited roles in the
value chain, focus on assembly,
labor intensive manufacturing, and
resource extraction
• The economy is highly sensitive to
world economic cycles, commodity
prices, and exchange rates
Source: Porter, Michael E.,
The Competitive Advantage of Nations,
Macmillan Press, 1990
CAON Taiwan Presentation 07-31-01 CK
• The nation is not only assimilating
foreign technology, but has the
capacity to improve on it
• The national diamond supports
heavy investment in efficient
infrastructure and modern
production processes
• Companies compete with unique
strategies that are often global in
scope
• The economy has a high service
share, and is resilient to external
shocks
• Companies serve OEM customers
and extend capabilities more widely
in the value chain
• The economy is concentrated on
manufacturing and outsourced
service exports
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Current Position
•
•
•
•
Primary focus on manufacturing
•
•
•
•
Strong capabilities to improve and enhance foreign technology
Compete on price and efficiency
Prevalent strategy of serving OEM customers
High rate of investment in modern production methods and
assimilating technology
Export-led growth
Substantial government role in steering the economy
Emerging innovative capacity
•
CAON Taiwan Presentation 07-31-01 CK
Investment-driven stage
17
Copyright © 2001 Professor Michael E. Porter
Limits Of The Current Strategy
•
•
•
Labor costs are now high relative to neighboring countries
Other domestic costs are rising
Taiwan is facing increasing pressure in export markets
•
Taiwanese companies are investing heavily in lower wagelocations in the region to maintain current strategies
– The proximity of China offers an easily available alternative location
with access to a huge domestic market
•
Taiwanese exports are heavily dependent on a single cluster
in which other Asian countries also compete
– The U.S. downturn in IT investment has a large impact on Taiwan
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
II. Making the transition from an Investment-driven to a true
Innovation-driven economy
III. Defining Taiwan’s economic relationship to China
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Global Competitiveness Report 2000
Taiwan’s Ranking
Rank
Current Competitiveness
Index
Company Strategy &
Operations Index
National
National Business
Business
Environment
Environment Index
Index
11
22
33
44
55
66
77
88
99
10
10
11
11
12
12
13
13
14
14
15
15
16
16
17
17
18
18
19
19
20
20
21
21
22
22
23
23
24
24
25
25
Finland
United States
Germany
Netherlands
Switzerland
Denmark
Sweden
United Kingdom
Singapore
Australia
Canada
Belgium
Austria
Japan
France
Hong Kong
Iceland
Israel
New Zealand
Norway
Taiwan
Ireland
Spain
Italy
South Africa
Germany
United States
Finland
Japan
Switzerland
Sweden
Netherlands
Denmark
France
Belgium
United Kingdom
Austria
Israel
Iceland
Singapore
Canada
Italy
Taiwan
Ireland
Australia
Norway
New Zealand
Hong Kong
Spain
Korea
Finland
United States
Netherlands
Denmark
Singapore
Germany
Australia
Canada
United Kingdom
Switzerland
Sweden
Austria
Belgium
Hong Kong
France
Iceland
New Zealand
Norway
Japan
Israel
Taiwan
Ireland
Spain
Chile
South Africa
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
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Copyright © 2001 Professor Michael E. Porter
Factor
Factor
(Input)
(Input)
Conditions
Conditions
Physical Infrastructure
Taiwan’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
General Internet Use
Country Ranking
6
Government Infrastructure Investment 12
Railroad Infrastructure Development
14
Availability of Cellular Phones
33
International Direct Dial
Communication Costs
30
Overall Infrastructure Quality
25
Telephone / Fax Infrastructure Quality 25
Computer Utilization
24
Air Transport Infrastructure Quality
24
Port Infrastructure Quality
22
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)
Source: Global Competitiveness Report 2000
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
– Upgrade domestic financial markets
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Factor
Factor
(Input)
(Input)
Conditions
Conditions
Financial Markets
Taiwan’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
Country Ranking
Ability to Finance Start-ups
10
Financial Market Sophistication
29
Ease of Access to Loans
14
Financial Disclosure Requirements
28
Venture Capital Availability
18
Access to Local Equity Market
26
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)
Source: Global Competitiveness Report 2000
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
– Upgrade domestic financial markets
– Increase transparency, openness and legal accountability
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Factor
Factor
(Input)
(Input)
Conditions
Conditions
Openness and Accountability
Taiwan’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
Country Ranking
Judicial Independence
39
Adequacy of Private Sector Legal
Recourse
37
Political Protection of Private
Businesses
30
Extent of Required Financial
Disclosure
28
Bureaucratic ‘Red Tape’
27
Business Information Availability
24
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)
Source: Global Competitiveness Report 2000
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
– Upgrade domestic financial markets
– Increase transparency, openness and legal accountability
– Boost the efficiency of domestic industries
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Competition and Local Prices
Relative Prices for Local Goods and Services, 2000
Source: WEO
CAON Taiwan Presentation 07-31-01 CK
Rank
GDP per capita (current
exchange rate) Index rank
GDP per capita (PPP)
Index rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Luxembourg
Japan
United States
Norway
Switzerland
Denmark
Iceland
Singapore
Sweden
Ireland
United Kingdom
Finland
Hong Kong
Netherlands
Austria
Germany
Belgium
Canada
France
Australia
Italy
Israel
Spain
Taiwan
New Zealand
Portugal
Luxembourg
United States
Norway
Iceland
Ireland
Switzerland
Canada
Denmark
Belgium
Austria
Japan
Australia
Netherlands
Germany
Finland
Hong Kong
France
Sweden
Italy
United Kingdom
Singapore
New Zealand
Israel
Spain
Korea
Taiwan
Taiwan
28
Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
– Upgrade domestic financial markets
– Increase transparency, openness and legal accountability
– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy
– Transform company strategies
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Determinants of Relative Performance
Types of Competitive Advantage
Differentiation
(Non-Price Value)
Competitive
Competitive
Advantage
Advantage
Lower Cost
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Sources of Competitive Advantage
Operational
Effectiveness
Strategic
Positioning
• Assimilating, attaining, and
extending best practice
•
Do the same thing better
CAON Taiwan Presentation 07-31-01 CK
Creating a unique and
sustainable competitive
position
Compete in a different way
31
Copyright © 2001 Professor Michael E. Porter
Position: Variety/Needs/Access-Based
Dell Computer
Particular
Product Variety
Set of
Activities
• Prices 15% below rivals
• Employees of institutional customers
• Large corporate and institutional
customers and their employees
get same discount on personal
machines
• Direct sale via sales force, telephone,
and the Internet
Particular
Customer Group
• Models include most up to date
components
• Moderate range of standard, mid- and
large capacity personal computers, PC
servers, and PC workstations with low
support requirements
• Build to order from a menu of options
• Assemble only, using just-in-time
relationships with nearby suppliers
• Outsource maintenance and repair
• Limited R&D
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Copyright © 2001 Professor Michael E. Porter
Typical Company Strategies in Taiwan
•• Concentrate
Concentrate on
on manufacturing
manufacturing versus
versus services
services
•• Rapid
Rapid adoption
adoption of
of new
new technologies
technologies
•• Compete
Compete on
on price
price and
and time-to-market
time-to-market
•• Serve
Serve OEM
OEM customers
customers in
in the
the US
US and
and other
other Asian
Asian countries
countries
•• Focus
Focus R&D
R&D on
on cost
cost and
and process
process improvements
improvements
•• Seek
Seek low
low cost
cost inputs
inputs
•• Invest
Invest modestly
modestly in
in human
human capital
capital
Many Taiwanese companies face a strategic transition
from competing on cost to competing on unique products and services
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Company Operations and Strategy
Taiwan’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
Country Ranking
Customer Orientation
3
Capacity for Innovation
24
Licensing of Foreign Technology
9
Senior Management Recruitment
23
Extent of Branding
22
Marketing Expertise
21
Production Processes
20
Attention to Staff Training
20
Extent of Regional Sales
19
Product Designs
19
Control of International Distribution
15
Company Spending on R&D
15
Breadth of International Markets
15
Note: Rank by countries; overall Taiwan ranks 21 (18 on Company Operations and Strategy)
Source: Global Competitiveness Report 2000
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
– Upgrade domestic financial markets
– Increase transparency, openness and legal accountability
– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy
– Transform company strategies
– Upgrade Taiwan’s scientific and technological capacity
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Change in R&D Investments
Compound Annual Growth Rate in R&D Expenditures, 1985-1998
R&D Spending as
Share of GDP, 1998
4.5%
Sweden
4.0%
3.5%
Japan
3.0%
2.5%
Germany
Israel
France
2.0%
UK
1.5%
South Korea
USA
TAIWAN
Ireland
Canada
1.0%
Italy
Singapore
Australia
New Zealand
0.5%
0.0%
0%
5%
10%
15%
20%
25%
R&D Expenditures, Compound Annual Growth Rate, 1985 - 1998
Source: US Competitiveness 2001: Strengths, Vulnerabilities, and Innovation Priorities Report; Global Competitiveness Report 2000
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Copyright © 2001 Professor Michael E. Porter
Science and Technology Infrastructure
Taiwan’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
Patents Per Capita (2000)
Country Ranking
4
Capacity for Innovation
24
Computer Utilization
24
Quality of Scientific Research
Institutions
22
Intellectual Property Protection
21
Company Spending on R&D
15
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)
Source: Global Competitiveness Report 2000
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Copyright © 2001 Professor Michael E. Porter
Composition of Taiwanese Patenting in the US
Top Patenting Industries and Companies, 1999
•
Top 15 Taiwan-based companies by U.S. patents filed in 1999
–
–
–
–
–
–
–
–
–
–
–
–
–
–
•
•
TAIWAN SEMICONDUCTOR MANUFACTURING CO., LTD. (288 patents)
UNITED MICROELECTRONICS CORPORATION (285)
INDUSTRIAL TECHNOLOGY RESEARCH INSTITUTE, TAIWAN (203)
VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION (107)
WINBOND ELECTRONICS CORP. (102)
HON HAI PRECISION IND. CO., LTD.
NATIONAL SCIENCE COUNCIL
TEXAS INSTRUMENTS - ACER INCORPORATED
MOSEL VITELIC, INCORPORATED
MUSTEK SYSTEMS, INC.
UNITED SEMICONDUCTOR CORP.
MACRONIX INTERNATIONAL CO., LTD.
ACER PERIPHERALS, INC.
PRIMAX ELECTRONICS LTD.
The top 15 Taiwan-based companies account for 23% of all patents
filed by all Taiwanese entities
Electronics cluster dominates patent filing with more than 80% of all
filings
Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
– Upgrade domestic financial markets
– Increase transparency, openness and legal accountability
– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy
– Transform company strategies
– Upgrade Taiwan’s scientific and technological capacity
– Upgrade the quality of human capital
CAON Taiwan Presentation 07-31-01 CK
39
Copyright © 2001 Professor Michael E. Porter
Comparison of Expenditure on Education
Growth and Level of Spending by Country
Public expenditure on
education, Share of
GDP 1996
9%
Sweden
8%
Finland
Canada
7%
TAIWAN
New Zealand
Ireland
6%
US
UK
Australia
Malaysia
5%
4%
Thailand
S Korea
3%
Philippines
Singapore
2%
1%
0%
0%
2%
4%
6%
8%
10%
12%
14%
Growth of public education spending,
CAGR 1990 - 1996
Source: UN
CAON Taiwan Presentation 07-31-01 CK
40
Copyright © 2001 Professor Michael E. Porter
Improvements in the Quality of the Workforce
Researchers Per Ten Thousand Workers, 1998 and 1985
Number of researchers
per 10’000 workers
120
100
1985
1998
80
60
OECD 1998
40
20
ly
Ita
S.
Ko
re
a
d
la
n
Ir e
.K
.
U
an
a
da
y
C
m
an
ce
G
er
Fr
an
ia
st
ra
l
Au
or
e
ap
Si
ng
.S
.A
.
U
Ja
pa
n
TA
IW
AN
*
Sw
ed
en
0
Note: Taiwan data is for 1988 and 1998
Source: US Competitiveness 2001: Strengths, Vulnerabilities, and Innovation Priorities Report; Taiwan National Statistics
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Factor
Factor
(Input)
(Input)
Conditions
Conditions
Education System
Taiwan’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
Quality of Public Schools
Country Ranking
9
Quality of Business Schools
25
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)
Source: Global Competitiveness Report 2000
CAON Taiwan Presentation 07-31-01 CK
42
Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
– Upgrade domestic financial markets
– Increase transparency, openness and legal accountability
– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy
– Transform company strategies
– Upgrade Taiwan’s scientific and technological capacity
– Upgrade the quality of human capital
– Create advanced demand conditions
CAON Taiwan Presentation 07-31-01 CK
43
Copyright © 2001 Professor Michael E. Porter
Demand
Demand
Conditions
Conditions
Demand Conditions
Taiwan’s Relative Position
Competitive Advantages
Relative to GDP per Capita
Competitive Disadvantages
Relative to GDP per Capita
Country Ranking
Country Ranking
Consumer Adoption of Latest Products 8
Demanding Regulatory Standards
22
Extent of Regulatory Distortion
of Competition
Stringency of Environmental
Regulations
21
12
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)
Source: Global Competitiveness Report 2000
CAON Taiwan Presentation 07-31-01 CK
44
Copyright © 2001 Professor Michael E. Porter
Finnish Wireless Cluster
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
andRivalry
Rivalry
!
Factor
Factor
(Input)
(Input)
Conditions
Conditions
!
!
!
!
Demand
Demand
Conditions
Conditions
!
Related
Related and
and
Supporting
Supporting
Industries
Industries
!
CAON Taiwan Presentation 07-31-01 CK
!
!
Substantial public investment
in telecommunications-related
R&D, with a focus on wireless
technology
Significant local venture
capital for mobile applications
Finland is becoming an
international center for WAP
development (e.g., Hewlett
Packard, Siemens)
Source: “The Economic Impact of ThirdGrowth Wireless Technology,” U.S. Council
of Economic Advisors, October 2000Sou
!
A history of competition in
telecommunications services
throughout the 20th century
Early to deregulate in telecom
related industries
More than 100 local
operators
Active local rivalry in wireless
communications
!
!
!
Finland is home to Nokia, the world’s most competitive
handset company
!
There are approximately 3,000 Finnish firms in telecom
and IT related products and services
45
World’s most sophisticated
consumers
70 percent penetration of
mobile phones (20 percent of
households have abandoned
wireline phones)
First country to allocate
licenses for 3rd generation
wireless networks (3
competitive groups)
Heavy usage of short
message services
Finland is a test market for
WAP applications
Copyright © 2001 Professor Michael E. Porter
Environmental Regulation and Competitiveness
• Competing based on weak environmental standards perpetuates low
incomes
• Corporate pollution is a sign of inefficient and unproductive use of
resources
Firm
• Inefficient extraction of resources
• Incomplete material utilization
• Unnecessary waste products
• Unnecessary energy use
• Unproductive land use
•
•
•
Customer
• Usable materials in products that
are discarded
• Products that use energy
inefficiently
• Discarded or unnecessary
packaging
The need to control or treat pollution causes companies to perform activities
that add cost but create no customer value
- e.g., handling, storage, processing, disposal
Pollution is a reflection of unsophisticated technology and weak
management
Strict environmental regulation stimulates the upgrading necessary to
achieve advanced economic development
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
– Upgrade domestic financial markets
– Increase transparency, openness and legal accountability
– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy
– Transform company strategies
– Upgrade Taiwan’s scientific and technological capacity
– Upgrade the quality of human capital
– Create advanced demand conditions
– Encourage private sector-led cluster development
– Widen the base of cluster in the economy
CAON Taiwan Presentation 07-31-01 CK
47
Copyright © 2001 Professor Michael E. Porter
Houston Oil and Gas Cluster
Upstream
Oil & Natural Gas
Exploration &
Development
Downstream
Oil & Natural Gas
Completion &
Production
Oil
Transportation
Oil
Trading
Oil
Refining
Oil
Distribution
Oil
Wholesale
Marketing
Oil
Retail
Marketing
Gas
Gathering
Gas
Processing
Gas
Trading
Gas
Transmission
Gas
Distribution
Gas
Marketing
Oilfield Services/Engineering & Contracting Firms
Equipment
Suppliers
(e.g. Oil Field
Chemicals,
Drilling Rigs,
Drill Tools)
Specialized
Technology
Services
Subcontractors
(e.g. Surveying,
Mud Logging,
Maintenance
Services)
(e.g. Drilling
Consultants,
Reservoir Services,
Laboratory Analysis)
Business
Services
(e.g. MIS Services,
Technology
Licenses,
Risk Management)
Specialized Institutions
(e.g. Academic Institutions, Training Centers, Industry Associations)
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwanese Clusters
Established Clusters
•
•
•
Electronics
Plastics
Textiles and apparel
Other Clusters
?
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Public / Private Cooperation in Cluster Upgrading
Minnesota’s Medical Device Cluster
Context
Context for
for
Firm
Firm
Strategy
Strategy
and
andRivalry
Rivalry
Factor
Factor
(Input)
(Input)
Conditions
Conditions
• Joint development of vocationaltechnical college curricula with the
medical device industry
• Minnesota Project Outreach exposes
businesses to resources available at
university and state government
agencies
• Active medical technology licensing
through University of Minnesota
• State-formed Greater Minnesota Corp.
to finance applied research, invest in
new products, and assist in technology
transfer
CAON Taiwan Presentation 07-31-01 CK
• Aggressive trade associations
(Medical Alley Association, High
Tech Council)
• Effective global marketing of the
cluster and of Minnesota as the
“The Great State of Health”
• Full-time “Health Care Industry
Specialist” in the department of
Trade and Economic Development
Demand
Demand
Conditions
Conditions
• State sanctioned
reimbursement policies
to enable easier adoption
and reimbursement for
innovative products
Related
Related and
and
Supporting
Supporting
Industries
Industries
50
Copyright © 2001 Professor Michael E. Porter
Massachusetts Clusters
Widening the Cluster Base
Information
Information
Technology
Technology
Healthcare
Healthcare
Financial
Financial
Services
Services
Environmental
Environmental
Products
Products and
and
Services
Services
Metalworking
Metalworking
Knowledge
Knowledge
Creation
Creation
Specialty
Specialty
Paper
Paper
Polymers
Polymers
Tourism
Tourism and
and
Leisure
Leisure
CAON Taiwan Presentation 07-31-01 CK
Apparel
Apparel
Textiles
Textiles and
and
Footwear
Footwear
51
Marine
Marine
Copyright © 2001 Professor Michael E. Porter
Organizing for Competitiveness
Commonwealth of Massachusetts
Governor’s
Governor’sCouncil
Councilon
onEconomic
EconomicGrowth
Growth
and
andTechnology
Technology
Functional
Functional
Task
TaskForces
Forces
•
International Trade
•
•
Marketing Massachusetts
•
•
•
•
Financing of Emerging
Health Care
Restructuring
Technology Policy and
Defense Conversion
Cost of Doing Business
Companies
Tax Policy and Capital
Formation
•
Revitalizing Western
Massachusetts
CAON Taiwan Presentation 07-31-01 CK
Industry
IndustryCluster
Cluster
Working
Groups
Working Groups
Issue
IssueGroups
Groups
52
•
•
Advanced Materials
•
•
Defense
•
•
•
•
Medical Devices
Biotechnology and
Pharmaceuticals
Marine Science and
Technology
Software
Telecommunications
Textiles
Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
– Upgrade domestic financial markets
– Increase transparency, openness and legal accountability
– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy
– Transform company strategies
– Upgrade Taiwan’s scientific and technological capacity
– Upgrade the quality of human capital
– Create advanced demand conditions
– Encourage private sector-led cluster development
– Widen the base of cluster in the economy
– Shift the role of government
CAON Taiwan Presentation 07-31-01 CK
53
Copyright © 2001 Professor Michael E. Porter
Appropriate Roles of Government in Economic Development
1.
Establish a stable and predictable macroeconomic, political, and
legal environment
2.
Improve the availability, quality, and efficiency of general purpose
inputs, infrastructure, and institutions
3.
Set overall rules and incentives governing competition that
encourage productivity growth
4.
Facilitate cluster development and upgrading
5.
Create an explicit, ongoing process of economic change and
competitive upgrading which informs citizens and mobilizes the
private sector, government at all levels, educational and other
institutions, and civil society.
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Recent Taiwanese Economic Policies
• Public sector investment to stimulate the economy
• Direct loans, tax relief, and export processing zones
• “Job creation program” to attempt to create 44,000 new regional
jobs
• ‘Special’ measures of the Cabinet’s Financial and Economic Task
Force:
− Guarantee to keep tax rates stable for 4 years
− Rescind the 2% business tax on banks
− Enlarge SME Credit Guarantee Fund and provide preferential loans
− Encourage the entry of international asset management companies to
help speed up financial sector modernization
− Assure reliable supplies of power and water
− Allocate funds to ensure availability of land in industrial zones
− Assist traditional industries and SMEs with upgrading and restructuring
− Enhance local workforce skills and import foreign labor
Source: ROC Government Reports
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Government Policy Towards Employment
Job
Job Creation
Creation strategy
strategy
Competitiveness
Competitiveness strategy
strategy
•• Subsidies
Subsidies to
to create
create jobs
jobs
-- Wage
Wage subsidies
subsidies
-- Foreign
Foreign Direct
Direct Investment
Investment
subsidies
subsidies
•• Creating
Creating the
the conditions
conditions for
for
productivity
productivity and
and cluster
cluster development
development
-- Improving
Improving the
the efficiency
efficiency of
of
infrastructure
infrastructure
-- Cluster-based
Cluster-based training
training
-- Improving
Improving the
the flexibility
flexibility of
of labor
labor
markets
markets
•• Jobs
Jobs are
are costly
costly and
and often
often
unsustainable
unsustainable
•• Healthy
Healthy clusters
clusters generate
generate competitive
competitive
jobs
jobs that
that are
are sustainable
sustainable
•
There is no direct and easy answer to job creation; short-term solutions are
costly and do not often succeed in the long run
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Taiwan’s Tax Revenues
Percent of
GDP
24
20
16
12
Public Sector Balance / GDP
8
Tax Revenue / GNP
4
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
-4
-8
-12
Source: ROC Government National Statistics, May 2001.
CAON Taiwan Presentation 07-31-01 CK
57
Copyright © 2001 Professor Michael E. Porter
Tax Revenues As Percentage Of GDP
Selected Countries, 1998
Tax revenues
share of GDP
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Finland
Ireland
US
TAIWAN
Source: ROC Government National Statistics, OECD
CAON Taiwan Presentation 07-31-01 CK
58
Copyright © 2001 Professor Michael E. Porter
Cluster Policy versus Industrial Policy
Industrial
Industrial
Policy
Policy
Cluster-based
Cluster-based
Policy
Policy
• Target desirable industries /
sectors
• All clusters can contribute to prosperity
• Focus on domestic companies
• Domestic and foreign companies both
enhance productivity
• Intervene in competition (e.g.,
protection, industry promotion,
subsidies)
• Relax impediments and constraints to
productivity
• Centralizes decisions at the
national level
• Encourage initiative at the state and
local level
• Emphasize cross-industry linkages /
complementarities
Distort competition
CAON Taiwan Presentation 07-31-01 CK
Enhance competition
59
Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses
– Improve physical infrastructure
– Upgrade domestic financial markets
– Increase transparency, openness and legal accountability
– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy
– Transform company strategies
– Upgrade Taiwan’s scientific and technological capacity
– Upgrade the quality of human capital
– Create advanced demand conditions
– Encourage private sector-led cluster development
– Widen the base of cluster in the economy
– Shift the role of government
III. Defining Taiwan’s economic relationship with China
CAON Taiwan Presentation 07-31-01 CK
60
Copyright © 2001 Professor Michael E. Porter
Taiwan’s Export Destinations
1995 to 2000
Share of
Taiwan’s total
exports in 2000
Taiwan average export
growth 1995-2000: 6.1%
35%
USA
30%
25%
Hong Kong /
China
20%
Japan
15%
European
Union
10%
5%
Singapore
S Korea
Thailand
Malaysia
0%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Export growth CAGR,
1995 - 2000
Note: Size of bubble is $ volume of exports to destination country
Source: Taiwan National Statistics
CAON Taiwan Presentation 07-31-01 CK
61
Copyright © 2001 Professor Michael E. Porter
Taiwan’s Trade With China
10,000
Exports
9,000
Imports
8,000
7,000
$M US
6,000
5,000
4,000
3,000
2,000
1,000
0
1989
1990
Source: Taiwan National Statistics
CAON Taiwan Presentation 07-31-01 CK
1991
1992
1993
1994
62
1995
1996
1997
1998
1999
Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Relationship To China
•
•
•
•
The economic relationship with China will inevitably be important
– Common language
– Strong historical ties
– Strong personal ties through family relationships and migration
– Substantial economic presence of Taiwanese companies in China
The key question is what kind of relationship it will be
Taiwan’s goal should be to create a mutually beneficial relationship
that supports Taiwan’s higher standard of living
Taiwan needs to define a unique role vis-à-vis China that
– Builds on its distinctive strengths
– Offsets China’s weaknesses and rigidities
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Economic Relationship To China
Criteria for Mutually Beneficial Roles for Taiwan
•
A unique position builds on specialization in areas where
Taiwan can give China access to its competitive advantages
– In clusters where Taiwan will for the foreseeable future
provide a more conducive environment than China
– In parts of the value chain where Taiwan has developed
unique advantages that China will have difficulty replicating
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Economic Relationship To China
Illustrative Roles for Taiwan
Role in the Value Chain
•
R&D and Design
– For the foreseeable future, Taiwan should offer a better R&D infrastructure and
more conducive environment for innovation than China
– Taiwan can play this role combined with manufacturing activities located on the
mainland and provide a competitive advantage to the region
•
Sophisticated Services
– Taiwan can develop its professional services for China’s export industries
Complementary Fields of Specialization
•
Education and Training
– Taiwan can improve its management education capabilities to educate the business
leaders of the region
– Taiwan can build on its science and technology base to become the center of
science education in the region
•
Media/Entertainment
– Taiwan’s more liberal media environment gives it the potential to become a
media/entertainment/publishing-hub for the region
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter
Economic Transition And Relationship To China
Reinforcing Agendas
Successful transition to the Innovation-driven
stage makes a mutually beneficial relationship to
China more likely
Transition to an
Innovation-driven
Economy
Economic
relationship to
China
Proximity to China increases the pressure
on Taiwan to move from the Investmentdriven to the Innovation-driven stage
CAON Taiwan Presentation 07-31-01 CK
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Copyright © 2001 Professor Michael E. Porter