Experimental Learning, Inclusive Growth and Industrialised Economies in Asia: Lessons from South Korea and Taiwan 9811934355, 9789811934353

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Experimental Learning, Inclusive Growth and Industrialised Economies in Asia Lessons from South Korea and Taiwan Chan-Yuan Wong

Experimental Learning, Inclusive Growth and Industrialised Economies in Asia “This is an interesting book as it not only examines the catch-up experience of the successful industrializers of Republic of Korea and Taiwan, but also offers rich, on the ground, clustering experience of Hsinchu and Suvon. It is a welcome edition to studies on industrial policy experience for latecomers.” —Dato’ Dr. Rajah Rasiah, Distinguished Professor, Universiti Malaya, Malaysia “This book features many development policy lessons from Korea and Taiwan. It lays out convincing perspectives on the industrial catching-up and inclusive growth and demonstrates the economic value of agility for small economies. The book makes important contributions to the literature of innovation and development studies.” —Keun Lee, Distinguished Professor, Seoul National University; Winner of Schumpeter Prize “This is an excellent book which focuses on a comparison between the Korean and Taiwan models. Both countries have a remarkable achievement in high-tech development, but they are also facing their own domestic challenges. The discussion in this book can surely make an important contribution to the understanding of these two Asian Tigers.” —Gee San, Professor Emeritus, National Central University, Taiwan

Chan-Yuan Wong

Experimental Learning, Inclusive Growth and Industrialised Economies in Asia Lessons from South Korea and Taiwan

Chan-Yuan Wong Institute of Technology Management National Tsing Hua University Hsinchu, Taiwan

ISBN 978-981-19-3435-3 ISBN 978-981-19-3436-0 (eBook) https://doi.org/10.1007/978-981-19-3436-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: Alex Linch/shutterstock.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

To Jazvynn, Leonard and Morris

Acknowledgements

This work was supported by the Laboratory Program for Korean Studies through the Ministry of Education of the Republic of Korea and the Korean Studies Promotion Service of the Academy of Korean Studies (AKS-2018LAB-1250001). In this book, contents for each chapter are drawn and adapted from published works by Chan-Yuan Wong. The degree of revisions varies for each chapter. Chapter 1: It is written to provide an overview of the chapters of this book. It presents a common theoretical foundation for all chapters. This foundation is used to derive different narrative frameworks to explain the target case(s) of each chapter. The theoretical foundation and explanation are partially extracted from “Wong, C.-Y. (2016). Evolutionary targeting for inclusive development. Journal of Evolutionary Economics, 26(2), 291–316”. Chapter 2: It is a revised version of “Wong, C.-Y., & Cheong, K.-C. (2014). Diffusion of catching-up industrialization strategies: The dynamics of East Asia’s policy learning process. Journal of Comparative Asian Development, 13(3), 369–404”. Chapter 3: It is an updated version of “Wong, C.-Y., & Lee, K. (2018). Projecting the arena of inclusion: The case of South Korea in pursuing a phased inclusive growth process. Review of Policy Research, 35(4), 590– 616”. Chapter 4: It is an updated version of “Wong, C.-Y, Hu, M.-C., & Shiu, J.-W. (2015). Governing the economic transition: How Taiwan

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strategically transformed its industrial system to attain virtuous cycle development. Review of Policy Research, 32(3), 365–387”. Chapter 5: It is based on “Wong, C.-Y., & Park, S. (2021). Diverged evolutionary pathways of two public research institutes in Taiwan and Korea: Shared missions and varied organizational dynamics in ITRI and KIST. East Asian Science, Technology and Society, 15(4), 417–438”. Chapter 6: It is based on “Wong, C.-Y., & Lee, K. (in press). Evolution of innovation systems of two industrial districts in East Asia: Transformation and upgrade from a peripheral system and the role of the core firms, Samsung and TSMC. Journal of Evolutionary Economics ”. Chapter 7: It is based on “Wong, C.-Y., Ni, F.-C., & Sugano, T. (in press). Detouring route of SMEs in post catching-up conditions: Context and dilemmas behind the quest for science-based business model innovation. Asian Journal of Technology Innovation”.

Contents

1

Introduction

1

Part I Macro-Meso Level of Analysis 2

An Overview of Industrial Catch-Up Strategies

13

3

Driving Inclusive Growth in (Post) Industrial Catch-Up Era of Korean Economy

41

Achieving Virtuous Cycle Development in Post Industrial Catch-Up Era of Taiwan Economy

77

4 5

Post Industrial Catch-Up Public Research Institutions: The Cases of ITRI of Taiwan and KIST of Korea

109

Part II Meso-Micro Level of Analysis 6 7

Evolution of Two Industrial Districts: The Cases of Hsinchu of Taiwan and Suwon of Korea

141

Detouring Route of SMEs in Post Catching-Up Conditions: Context and Dilemmas Behind the Quest for Science-Based Business Model Innovation

187

Index

213

ix

Acronyms

BMI CPO DRAM ERSO IC ITRI KIST MNCs NIEs NIS OBM ODM OEM PORIM PPO PRI RIS SEC SMEs SSI TMC TRIMS TRIPS TSMC UIG UMC VLSI

Business Model Innovation Crude palm oil Dynamic random-access memory Electronics Research Services Organization Integrated circuit Industrial Technology Research Institute Korea Institute of Science and Technology Multinational corporations Newly Industrialized Economies National Innovation System Original Brand Manufacturing Original Design Manufacturing Original Equipment Manufacturing The Palm Oil Research Institute Processed palm oil Public Research Institution Regional Innovation System Samsung Electronics Company Small and Medium sized enterprises Sectoral innovation systems Taiwan Mask Corporation Trade-Related Investment Measures Trade-Related Aspects of Intellectual Property Rights Taiwan Semiconductor Manufacturing Corporation University-Industry-Government United Microelectronics Corporation Very large-scale integration

xi

List of Figures

Fig. Fig. Fig. Fig.

1.1 2.1 3.1 3.2

Fig. 3.3 Fig. 3.4

Fig. 3.5 Fig. 4.1 Fig. 5.1 Fig. 5.2 Fig. 5.3 Fig. 5.4 Fig. 6.1 Fig. 6.2 Fig. 6.3 Fig. 6.4

Different levels of analysis Development paths trajectories of South Korea and Taiwan Gini index of market income of South Korea, 1966–2018 Korean government’s spending on education as percentage of GDP Enrolment of tertiary education as percentage of population Government expenditure for social protection and gross expenditure of R&D as a percentage of GDP for South Korea South Korea’s inclusive measures timeline, 1960–2000s The emergence of a new multi-agent structure Organization structure depicting levels between scientists and engineers, and managers Shares of biotech and pharmaceutical-related patents granted to KIST and ITRI respectively, 2008–2018 Career ladder and spin-off depiction in ITRI’s organization structure Career ladder and spin-offs depiction in KIST’s organization structure Patent counts for Hsinchu and Suwon in 1976–2018 Share of TSMC’s and Samsung’s patents in Respective Regions, 2000–2018 Concentration (HHI) index of Hsinchu and Suwon from 1990 to 2018 Localization index of Hsinchu and Suwon in 1988–2018

2 33 57 60 61

63 69 103 114 117 121 127 149 155 158 161

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LIST OF FIGURES

Fig. 6.5

Fig. 6.6

Fig. 6.7 Fig. 6.8 Fig. 6.9 Fig. 6.10 Fig. 7.1 Fig. 7.2 Fig. 7.3 Fig. 7.4 Fig. 7.5

Self-citations, local non-self-citations and non-local non-self-citations indexes of the two core firms (a) TSMC, 2001–2018 (b) Samsung Group, 2001–2017 Intra-regional, inter-regional and international collaborations indexes (a) Hsinchu, 1987–2018 (b) Suwon, 1992–2018 Science-based linkage index in Hsinchu and Suwon, 1987–2018 University-Industry (U–I) linkage index of Hsinchu and Suwon, 1995–2019 Technological Diversification of Hsinchu and Suwon, 1979–2018 The trends in the sales of six industries in Hsinchu The evolution of industrial systems and the role of SMEs in Taiwan Sales revenue of the three business lines of Chiao Fu enterprise Sales revenue of Argox Business model innovation and industrial value migration Aspiring cases to build new business models

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164 166 167 168 178 190 195 196 197 209

List of Tables

Table 2.1 Table Table Table Table Table Table Table Table Table

2.2 2.3 2.4 3.1 4.1 4.2 4.3 4.4 4.5

Table 4.6 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 5.6 Table 5.7 Table 5.8 Table 6.1

R&D investment as a percentage of GDP in selected economies of Asia Developmentalist regimes in selected East Asian economies Catch-up models of selected economies Policy objectives for catching-up in Malaysia Description of interviews Transformational failures perspective Policy profiles and salient features of phases of development AoD framework Descriptions of the interviews Evolutionary mechanism of pre-emergence-virtuous cycle development processes of Taiwan Salient principles for structural transformation A comparative case study framework Financial and technological performances of the two PRIs (2018) Selected former presidents of ITRI and their incubated companies Dynamic views of ITRI’s competencies Spin-off PRIs and think tanks/agencies from KIST Selected former presidents of KIST—note that all the presidents since 1989 are in-house Dynamic views of KIST’s competencies The roles of the selected PRIs in innovation systems and their unique characteristics and capabilities Basic profile of Hsinchu and Suwon

14 15 17 35 52 80 82 83 86 98 99 113 116 122 123 126 128 129 130 148

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LIST OF TABLES

Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 7.1

Top 10 assignees of the patents of Hsinchu and Suwon in 2014–2018 Means, medians and SD of the indexes of Hsinchu and Suwon in 2003–2010 and 2011–2018 Comparison of the core firms and the regions without the core firms (2000–2002 and 2016–2018) Analytical variables and their definitions Typology on SMEs’ inherent characteristics (derived from the two cases)

156 159 173 179 208

CHAPTER 1

Introduction

Background This book consists of collection of studies the author made in the past few years. Building upon the industrial catch-up literature, this book provides contents about catch-up and post catch-up industrialization contexts and strategies adopted by South Korea and Taiwan to achieve their anticipated advanced development outcomes. While there are plenty of studies about economic development and industrial catch-up of East Asia economies, this book goes beyond the common conceptualization of industrial development process and elucidation of economic catch-up. It has two levels of analysis: macro-meso (Chapters 2–5) and meso-micro (Chapters 6 and 7). It has a general depiction (Fig. 1.1) of a connection that corroborates dynamisms between national-industrial (macro-meso) level and regional-firm (meso-micro) level of a nation. To provide an overview of industrialization and economic development of the two economies, Chapter 2 provides explanation on how the two economies fostered growth and populate industrial activities that drive technological learning and economic development. This chapter also provides tangential analysis by comparing the dynamics of industrialization of the two to that of another latecomer nation—Malaysia. Malaysia case provides a viewpoint of experimental industrial learning that is different to that of South Korea and Taiwan. Chapter 3 elucidates the catch-up and post catch-up processes with inclusive dimension. This © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 C.-Y. Wong, Experimental Learning, Inclusive Growth and Industrialised Economies in Asia, https://doi.org/10.1007/978-981-19-3436-0_1

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Macro

Macro

Macro

Meso

Meso

How industrial activities and inclusive agendas are Meso

made coevolved and populated (Chapter 2-5)

Micro

Micro

Micro

How regional-industrial stakeholders are empowered and what they need to excel in advanced phase of development (Chapter 6 and 7)

Fig. 1.1 Different levels of analysis

dimension is often overlooked in many catch-up studies. With the case of South Korea, Chapter 3 points to how Korea achieved development by coevolving distribution of wealth and knowledge (skills) and industrial growth. The case of Taiwan in Chapter 4 explains how a nation can strategically transform industrial system that is inclusive and responsive to the needs in the global production value chain. It shows how Taiwan attained pro-poor growth industrialization in the catch-up phase to proniche growth development in the post catch-up development. Chapter 5 provides analysis on how South Korea and Taiwan established public research institutions to drive technological learning in the catch-up phase and how these institutions are empowered to define technological niches in the post catch-up development. For meso-micro (regional-firm) level of analysis, Chapter 6 elaborates how Hsinchu of Taiwan and Suwon of South Korea developed industrial clusters and how their champion firms (TSMC and Samsung Electronics, respectively) drove high-tech activities in the catch-up periods. It maps the evolution of the two clusters and characteristics that enable readers to understand what are the desired industrial dynamics for a cluster

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3

to upgrade and transform industrial activities. While Chapter 6 elaborates the success of two clusters and their champion firms, Chapter 7 provides explanation about the context and dilemma of traditional SMEs in post catch-up phase of development. Through firm-level case studies, Chapter 7 maps the quest of traditional SMEs in the catch-up period and elaborates what challenges they face in the post catch-up development. Industrial development is not just about making local firms competitive and capable in driving productive activities. Readers of this book will find important insights about industrialization from inclusive and experimental policy learning points of view. Research students and scholars in the fields of development economics and development studies will find this book useful for their studies.

Theoretical Foundation1 The theory and concept of innovation and economic development elucidated in Nelson and Winter’s (1982) evolutionary economics model provided many studies with a guide to explore the dynamic process of technological and institutional innovation. It acknowledges Schumpeter’s (1934) perspective on development and focuses on the factors that influence the demands of potential contributors to knowledge, as well as the elements of supply that influence the spread of knowledge. These factors of influence (shaped by institutions, policy and the market) reveal how nations compete in a dynamic economic and institutional environment. In this book, we recognize the importance of institution functions and configurations described in innovation system literatures. We take the root of Schumpeter’s (1934) perspective on cumulative causation, where the forces that the government, society and firms exert to fashion change in the industries are reported in detail. Chapter 2 of this book utilized these factors of influence to provide an overview on how South Korea, Taiwan and Malaysia (as tangential analysis to examine what development measures are used after the Korea and Taiwan models) developed their industrializing economies. In evolutionary economics, the National Innovation System (NIS) is the classical approach to studying the interaction of institutions that 1 Unless otherwise be noted, much of the content of this section is derived from “Wong, C.-Y. (2016). Evolutionary targeting for inclusive development. Journal of Evolutionary Economics, 26(2), 291–316”.

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determine the rate and direction of science and technology development in a country. Nelson and Winter (1982), Freeman (1987) and Lundvall (1992), in their respective works on innovation economics, used the evolutionary concepts to explain the dynamism of linkages among agents and structural change of economic systems that determine the actions of individuals and agents. Building upon Nelson and Winter’s (1982) conceptual model and scholarly works on NIS Morris Teubal and others (see Avnimelech & Teubal, 2008; Lall & Teubal, 1998; Teubal, 1996, 1997, 2002; Teubal & Andersen, 2000; Teubal & Kuznetsov, 2012) have formulated policy frameworks to provide an appropriate guide for design and implementation of science and technology policy (in concrete settings). Teubal’s system perspectives on innovation policy offered a framework separate from the orthodox economics and “Picking Winners” approaches. Avnimelech and Teubal (2008) pointed to other strategies and mechanisms that render their evolutionary targeting model truly unique. They alluded to a new catch-up policy that many developing countries probably did not adopt, i.e. the Program Portfolio Profile for Schumpeterian firms (the innovators) and leveraging class market forces that would stimulate the cumulative process of emergence of new industries or businesses. The stylized evolutionary process discussed in these studies has overlooked the dimensions of inclusive growth and development, such as targeting policy-specific approaches in tackling inequalities between individuals, households or groups. Many frameworks stylized for articulation of the innovation processes were criticized for having a bias towards analysing Schumpeterian entrepreneurs as the main actors in NIS (Cozzens, 2008). If the upgrading (by promoting those “elites” who have advantageous positions in the market) of a nation is not matched by human capital development and a positive change in the socio-economic structure, then the informal sector will emerge/persist. This phenomenon has indeed occurred in many underdeveloped and developing economies. For example, Mexico and the Philippines emerged as fast-growing economies in the 1990s. In the early 2000s, they aimed to establish a structure driven by knowledge-based sectors in order to achieve the desired sustainable economic growth and developed economy status. They assumed that promoting those with economic advantage and the will to invest in service sectors in their markets would ultimately lead to a structure that reduces the informal sector activities. However, to date, such pursuits have yet to attain the aforementioned “structure”

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5

that is progressive in building their economic system or addressing their high-income inequality and the social issues of poverty (Gallagher & Shafaeddin, 2010; King, 2007). Informal sector activities and their related issues persist in these economies. We believe this occurrence can be attributed to the failure of the state to equip economic agents with general skills that can be employed across industries, on the one hand, and the failure to create market forces that would absorb the surplus labour, on the other hand. Cozzens (2008, p. 16) argued that such pursuits and policies oriented entirely (or exclusively) towards economic growth had distracted attention from building conditions conducive to inclusive growth. Such pursuits and policies do not help these economies benefit from technologies that are useful for social development or structural change. Lanchovichina and Lundstrom (2009, p. 2) define the notion of inclusive growth as growth that encompasses equity, equality of opportunity and protection in market and employment transitions. The idea of equality of opportunity refers to “the access to markets, resources and an unbiased regulatory environment for businesses and individuals”. It “captures the importance of structural transformation for economic diversification and competition, including creative destruction of jobs and firms”. The concept is found to be consistent with that of the Commission on Growth and Development (2008). Corresponding to this conceptual idea, many studies attempted to connect sustainable economic growth with a broad range of activities in terms of (high value work) employment opportunities (Kanbur & Rauniyar, 2009; Khan, 2012). Khan (2012) maintained that growth is inclusive if it supports a high level of employment and rising wages. It is a process that leads developing countries to acquire competitiveness in new sectors and technology. Some recent studies demonstrate the need for research that uses the concept of the innovation process and evolutionary economic theory to depict how science, technology and innovation policies frameworks embed with social policies (or pro-poor policies) to foster a virtuous cycle between science, technology, innovation and socio-economic development. Altenburg (2009) and Arocena and Sutz (2012) proposed the concept of the “inclusive innovation system” to articulate an interactive learning space for actors in an innovation system, whereby they learn through interactions during the search for solutions to social problems. Following these pioneering works on inclusive growth and development, this book attempts to revise the common view on evolutionary phases

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by incorporating the dynamic perspectives of industrial upgrading and inclusive development. The contents of this book used evolutionary economic concept as the common theoretical foundation to derive different narrative frameworks to provide insights into the co-evolution between attempts to achieve inclusive growth and structurally oriented innovation systems in different chapters. There are two important aspects in the evolutionary view that are found to be useful to derive narrative frameworks for all chapters in this book: 1. The need of detailed description of sequential development processes in achieving industrial upgrading and inclusive development. The view refutes the simple measures of the neoclassical approach in overcoming the vicious cycle of underdevelopment (Lall & Teubal, 1998). 2. The hypothetical projection of development trajectory is built and induced on the case studies, to provide a context for that which is conceptual in orientation (Teubal, 1996). The trajectory provides a useful guide for economies aspiring to emulate catching-up industrialization. Chapter 3 with the case of South Korea and Chapter 4 with the case of Taiwan in this book would provide a trajectory-like narration about inclusive-industrial development in phases. The phases generally will cover: • Pre-emergence development: phase in which underdeveloped economies inherent a critical mass of economic agents. They are driven to create institutions conducive to variation, selection and retention processes for industrial-economic development. The phase is marked by a series of government interventions intended to create favourable conditions for agents who have acquired some productive skills and thereby are able to perform certain activities that are perceived by the state as favouring the emergence of a highly functional system. From a dynamic perspective, the interventions represent the pursuit of a transition towards more productive routines by improving existing technologies and markets.

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• Emergence: The formerly underdeveloped economies consciously target technologies/industries and build indigenous productive capabilities with deliberate social equity-driven agendas in mind. This leads the economies to enter a phase where a functional innovation system emerges. It is in which developing economies attain a critical mass of highly capable economic agents and an institution conducive to further variation, selection and retention processes in a highly sophisticated (globally connected) market structure. We may observe stabilization of technology or institutions in this phase, thus leading to better cost–benefit calculations for policymakers or firms to underpin large-scale investment decisions (Geels, 2010, p. 505). This phase is configured with industrial activities that are led and defined by productive agents, whose activities then triggered the formulation of new industrial structures. Chapter 5 provides analysis with cases of ITRI of Taiwan and KIST of South Korea to explain how publicly funded research institutions championed certain activities to attain desired industrial structures in advanced development phase. In the emergence phase, “non-national” meso-micro level policy programs (e.g. empowerment of industrial leaders/stakeholders/ associations to drive collective exporting activities, regional development policy to advanced local productive capabilities, etc.) emerged and then evolved to provide different platforms that enabled firms or market agents to configure new industrial structures (Shiu et al., 2014). Meso-micro level policy programs are deemed more inclusive from Regional Innovation System (RIS) point of view as they are created to address local needs/problems or dedicated for regional industrial growth and development. Chapter 6 elucidates the cases of Hsinchu and Suwon of Taiwan and South Korea respectively to depict how regional entities mould local industrial and innovation characteristics and how local core firms champion certain industrial structures for high-tech industrial development. This follows with case studies in Chapter 7 to learn how non-big firms (the small and medium sized enterprises; SMEs) search their niches in different phases of development and examine if state’s policy programs are conducive in supporting their upgrading process.

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References Altenburg, T. (2009). Building inclusive innovation systems in developing countries: Challenges for IS research. In B.-A. Lundvall, K. J. Joseph, C. Chaminade, & J. Vang (Eds.), Handbook of innovation systems and developing countries: Building domestic capabilities in a global setting (pp. 33–56). Edward Elgar. Arocena, R., & Sutz, J. (2012). Research and innovation policies for social inclusion: An opportunity for developing countries. Innovation and Development, 2(1), 147–158. Avnimelech, G., & Teubal, M. (2008). Evolutionary targeting. Journal of Evolutionary Economics, 18(2), 151–166. Commission on Growth and Development. (2008). Growth report: Strategies for sustained growth and inclusive development. The World Bank. Cozzens, S. (2008) Innovation and inequality (Working Paper: 30). Georgia Institute of Technology: School of Public Policy. Freeman, C. (1987). Technology policy and economic performance: Lesson from Japan. Pinter. Gallagher, K. P., & Shafaeddin, M. (2010). Policies for industrial learning in China and Mexico. Technology in Society, 32(2), 81–99. Geels, F. (2010). Ontologies, socio-technical transitions (to sustainability), and the multi-level perspective. Research Policy, 39, 495–510. Justman, M., & Teubal, M. (1995). Technological infrastructure policy (TIP): Creating capabilities and building market. Research Policy, 24(2), 259–281. Kanbur, R., & Rauniyar, G. (2009). Conceptualizing inclusive development: With applications to rural infrastructure and development assistance (Occasional Paper, 7). Asian Development Bank. Khan, M. (2012). The political economy of inclusive growth. In L. de Mello & M. A. Dutz (Eds.), Promoting inclusive growth: Challenges and policies (pp. 15–53). OECD Publishing. King, E. B. (2007). Making sense of the failure of rapid industrialization in the Philippines. Technology in Society, 29(3), 295–306. Lall, S., & Teubal, M. (1998). Market-stimulating technology policies in developing countries: A framework with examples from East Asia. World Development, 26(8), 1369–1385. Lanchovichina, E., & Lundstrom, S. (2009). Inclusive growth analytics: Framework and application (Policy Research Working Paper, 4851). The World Bank. Lundvall, B.-A. (Ed.). (1992). National innovation systems: Towards a theory of innovation and interactive learning. Pinter. Mathews, J. A., & Cho, D.-S. (2000). Tiger technology: The creation of a semiconductor industry in East Asia. Cambridge University Press.

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Nelson, R. R., & Winter, S. G. (1982). An evolutionary theory of economic change. Harvard University Press. Rosiello, A., Mastroeni, M., Teubal, M., & Avnimelech, G. (2013). Evolutionary policy targeting: Towards a conceptual framework for effective policy intervention. Technological Analysis and Strategic Management, 25, 753–772. Schumpeter, J. (1934). The theory of economic development. Harvard University Press. Shiu, J.-W., Wong, C.-Y., & Hu, M.-C. (2014). The dynamic effect of knowledge capitals in the Public Research Institute: Insights from patenting analysis of ITRI (Taiwan) and ETRI (Korea). Scientometrics, 98, 2051–2068. Teubal, M. (1996). R&D and technology policy in NICs as learning processes. World Development, 24(3), 449–460. Teubal, M. (1997). A Catalytic and evolutionary approach to horizontal technology policies (HTPs). Research Policy, 25(8), 1161–1188. Teubal, M., & Andersen, E. (2000). Enterprise restructuring and embeddedness: A policy and system perspective. Industrial and Corporate Change, 9(1), 87– 111. Teubal, M., & Kuznetsov, Y. (2012). Sequencing public interventions to support techno-entrepreneurship. In L. de Mello & M. A. Dutz (Eds.), Promoting inclusive growth: Challenges and policies (pp. 177–219). OECD Publishing. Teubal, M. (2002). What is the systems perspective to innovation and technology policy and how can we apply it to developing and newly industrialized economies? Journal of Evolutionary Economics, 12(1–2), 233–257.

PART I

Macro-Meso Level of Analysis

CHAPTER 2

An Overview of Industrial Catch-Up Strategies

Background Much contemporary writing has been devoted to explaining the explosive growth and industrial development in East Asian economies. Basically, four development trajectories define the East Asia’s political-economic miracles (Kohli, 2009): 1. Japanese success in identified key industries since the 1950s; 2. Successful catching-up industrialization in newly industrialized economics (NIEs) such as South Korea and Taiwan in the 1960s; 3. Extraordinary episodes of high growth such as Malaysia, Thailand and Indonesia since the 1970s; 4. Economic transition of socialist economies such as China and more recently Vietnam that managed not only to avoid a devastating collapse as occurred in the Soviet Union but produced explosive growth. These countries have been transformed from being agriculture- and primary commodity-dependent to manufacturing-based and exportdriven economies, and beyond to post-industrial knowledge-based economies. In effecting this transformation, their economies had to overcome political turbulence and military conflicts arising from the Cold War from the early 1950s to 1970s that hindered their development. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 C.-Y. Wong, Experimental Learning, Inclusive Growth and Industrialised Economies in Asia, https://doi.org/10.1007/978-981-19-3436-0_2

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Table 2.1 R&D investment as a percentage of GDP in selected economies of Asia

South Korea Taiwan Malaysia

1970

1980

1990

1996

2000

2006

0.38 – –

0.77 0.70 –

1.95 1.70 0.20

2.42 1.80 0.22

2.30 2.05 0.47

3.01 2.58 0.64

2007

2018

3.21 4.52 2.77 (2008) 3.49 (2019) 1.01 (2009) 1.04

Source Ministry of Science and Technology of Korea (various reports); National Science Council of Taiwan (various reports); Ministry of Science and Technology of Taiwan (various reports), the World Bank R&D expenditure (% of GDP) data; MOSTI Facts and Figure 2012

In their current stage of development, these countries are promoting growth in high-technology investments, high-technology industries and more high-skilled labour. Employment is growing in high-technology and science-based sectors. Investments in research and development (R&D), education and training are among the important factors to promote growth that is based on the knowledge economy. Table 2.1 shows the R&D expenditure as a percentage of GDP of selected Asian economies. The R&D investments of South Korea and Taiwan have seen a quantum jump in the past decades, reflecting the seriousness with which these two countries are pursuing knowledge-based economic development.1 The East Asian economies’ rapid growth through industrialization raises several questions: 1. How have these economies managed to achieve such phenomenal growth through industrialization in only a few decades? 2. How have the states promoted industries successfully and fostered the growth of indigenous firms as vehicles for effective technological learning and industrialization?

1 With the R&D/GDP percentage less than a quarter of Korea’s in 2007, Malaysia, among the most economically advanced of the Southeast Asian countries, was ranked at the bottom in the list. Recognizing the seriousness of low R&D activities, which is viewed as the major bottleneck in the near future development of the knowledge economy, the government of Malaysia launched a series of science and technology policies to raise the R&D investments from the private sector. Its implementation and following efficacy remain to be seen.

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Table 2.2 Developmentalist regimes in selected East Asian economies Regime

The renowned architects of economics and industrial structure

Influential entrepreneurs/organizations during the early catch-up

South Korea (1961–1979)

Park Chung-Hee’s Regime

Taiwan (1961–1985)

Chiang’s Regime (Chiang Kai-Shek and Chiang Ching-Kuo) Mahathir Mohammad’s Regime

Park Chung-Hee and Kim Chung-Yum Li Kuo-Ting and Yin Zhongrong (K. Y. Yin)

Chung Ju-Yung of Hyundai and Park Tae-Joon of Pohang Iron and Steel Stan Shih of Acer, Morris Chang of TSMC and Fang Xian-Qi of United Microelectronics Shamsuddin Abdul Kadir of Sapura Group, Perwaja Steel, and Proton (automobile)

Malaysia (1981–2003)

Mahathir Mohammad, Daim Zainuddin and Anwar Ibrahim

An extensive body of works provides insights that help answer these questions. Following the pioneering work of Amsden, Chu and Kim on Asian industrialization, many studies2 have contributed evidence to support views on how these states developed learning capabilities and thus achieved successful industrial development. Many “developmental dictators” of Asia (see Table 2.2) had organized and reorganized the socioeconomic systems and purposefully engineered institutions (including acceptance of growth ideology by the general public) of their respective economies to ensure the success of their development policies (see Suehiro, 2008, pp. 107–122). These development policies legitimized many methods to mobilize capital and human resources to serve the interests of the state to achieve its goals. This experience corresponds to the theoretical perspectives of Friedrich List and Alexander Gerschenkron on catching-up industrialization (see List, 1885; Gerschenkron, 1962). The governments under regimes listed in Table 2.2 enjoyed high levels of political legitimacy based on economic policies that delivered growth and development.

2 For instance, Hobday (1995), Wong (1999), Amsden (2001), Lee (2005), Fuller (2005), and Chang (2006).

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It has been argued that the role of the state in the economic development of South Korea and Taiwan provides valuable lessons for other developing countries. The economies are now joining the high-income nations in driving advanced and productive activities. Many acknowledged them as Newly Industrialized Economies (NIEs) that are capable of spawning niches in the global production value chain. This chapter attempts to review the diffusion of catching-up industrialization strategies and the dynamic process of policy learning of the latecomer economies. Our longitudinal account will show how catching-up strategies evolve through moving from the NIEs’ model towards what is best described as a “mixed-mode” model. In so doing, we update and extend the findings of existing studies (Hobday, 1995; Lall & Urata, 2003; Suehiro, 2008; Wong & Ng, 2001). Our choice of the three economies in this chapter—South Korea, Taiwan and Malaysia—is predicated on their being examples of successful catch-ups, although to a lesser extent for Malaysia. Success is judged by the ability to reach the technological frontier for specific industries (South Korea and Taiwan) or to maintain technological pre-eminence (palm oil in Malaysia), the speed at which technological catch-up has been achieved, and the scale of the catch-up process, reflected by global competitiveness and/or pre-eminence for specific enterprises. In terms of speed, the benchmark is the so-called Industrial Revolution, which Hobsbawm claimed “broke out” in Britain in 1780, taking 60 years to be fully felt.3 By these criteria, the rationale for the selection of these countries is contained in Table 2.3. We shall first discuss the methodology for this chapter. Then, we shall provide a brief overview of how a few renowned scholars have defined Asia’s catch-up industrialization strategies, moving from a “linear” Flying Geese model to a leapfrogging and path-creating catching-up model of interpretation. Our study for this chapter will provide a systematic and critical analysis of the catching-up models, updating and extending the contemporary analysis of the industrialization theory. Then, we shall provide a mixed-mode type of model to articulate what we observed in latecomer such as Malaysia. The last sub-section concludes our findings.

3 See Hobsbawm (1962). The precise period remains a matter about which there is no agreement. Distinction has also been made of a First Industrial Revolution centred in Britain and a Second Industrial Revolution centred in Germany and the USA.

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Table 2.3 Catch-up models of selected economies Catch-up Indicators

South Korea

Taiwan

Malaysia

Catch-up model(s)

Picking winners and leapfrogging

Evolutionary targeting, path creating

Years taken to catch up

30+ years Late 1960s to 2000s

Nature of catch-up

Reach technological frontier Globally competitive firms

30+ years Late 1950s to 1990s Reach technological frontier Globally competitive firms

Examples of catch-up

Samsung, Hyundai

FDI and comparative advantage leveraging 30+ years 1970s to 2000s Exploit dominance as producer Reach technological frontier PORIM, PPO firms

TSMC, Acer

Note The full names of firms and institutions can be found in the text

Catch-Up Industrialization The scarcity of capital has long been viewed as a hallmark of underdeveloped countries, thanks in part to the seminal work of W. Arthur Lewis (1954) on dualistic development. The early development focus on augmenting physical assets was therefore understandable, but the role of technology, though not focused on developing economies, was emphasized by Solow (1957), and subsequently by Romer (1990) in his endogenous growth model. Set within a neoclassical framework, these models emphasized optimizing the use of scarce resources under increasing returns to scale. Also implied is the persistence of leadership by industries in a few (advanced) countries. These notions are consistent with the phased approach to development best represented by the work of Rostow (1960), and its application to East Asia by the Flying Geese Model of Akamatsu (1962). Yet the 1960s also saw recognition of the possibility of “catch-up” growth (Abramovitz, 1956; Gerschenkron, 1962) although again not with reference to developing countries. But catch-up models of this genre, while emphasizing institutions, were bereft of the role of technology. It is left to evolutionary economics (Schumpeter, 1934, 1950; Winter, 1984)

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to integrate the role of learning and technology as mechanisms of catchup. While Gerschenkron’s work was intended to counter the somewhat mechanistic stage-theory of economic growth suggested by Rostow, the catch-up process itself was also hypothesized to be phased (Abernathy & Utterback, 1978; Kim, 1980). It was therefore not the stage-theory that was challenged but the lack of explicit consideration of the possibility of catch-up that evolutionary economists objected to. The rapid rise of Korea and Taiwan, unprecedented in the annals of economic development, in terms of both speed and magnitude, has generated voluminous literature specific to how these economies not only achieved technological catch-up but also began to push technological frontiers. These studies, including the Flying Geese Model for catching-up (Suehiro, 2008), the OEM-ODM-OBM4 Model for capability development (Hobday, 1995; Lee & Lim, 2001), guided competition and the role of government in industrialization (Amsden, 1989; Wade, 1990) and the evolution of industrial technological systems (Mathews & Cho, 2000), themselves represent a breakaway from the developed country-focused works cited earlier. Thus, while these Asia-specific theories share with their advanced country counterparts the importance attached to institutions, learning and the benefits to be reaped by seizing windows of opportunity (Perez & Soete, 1988), they assign a dominant role for the state. This role stems not only from the historic dominance of the state in East Asian governance, but also the unique context within which these economies’ catch-up took place. This context consisted of Korea’s recovery from the Korean War, Taiwan’s breakaway from China in 1949 and decolonization in Southeast Asia. In all these territories, new regimes were installed that could drive change and facilitated the rise of the “developmental dictators” referred to earlier. Thus, with respect to both the role of the state and the context in which this role is played, theories applicable to East Asia are distinct from those for Western countries. Our review of literature takes as the starting point these Asia-specific studies. We pursue the exploratory approach of Dodgson et al. (2008), focusing on the collective case studies involving both strategic (planning) 4 OEM stands for “original equipment manufacturer”, ODM for “original design manufacturer” and OBM for “original brand manufacturer”. Manufacturing firms can begin operations as OEMs, making products designed by and for other firms, then progress to manufacturing products they themselves design and finally brand their own products.

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and tactical (execution) approaches to understand what learning processes eventually led to desired economic outcomes. Our elucidation of the processes of industrialization lies on the root of Schumpeter’s (1950) perspective on evolutionary economic pathways, where the pathway taken is the outcome of political-societal choice (Breznitz, 2007; Mathews & Cho, 2000). Drawing on the synthesis of this literature, we underline the mechanism of these change processes by narrating the role of the government as institutional entrepreneurs in performing strategic interventions and diffusing new practices or routines for productive activities. The forces that the government, society and firms exert to fashion the competitiveness of the industries are reported in detail. There are basically two critical domains to be discussed in this chapter: • Domain one: The state’s decisions on what industrial structure is to be developed and how the targeted industries can be used as building blocks for economic development. The decisions include how and whom to finance. • Domain two: The state’s decisions on the degree of support to be given as it attempts to develop indigenous technology and what degree of foreign firms involvement is to be allowed within its national borders. The decisions will shape the diffusion trajectory of specific technological and industrial capabilities. These domains help in elucidating how the states strategically shape the development trajectory of selected industries and ultimately contribute to economic growth and development. Through this narrative, we relate country experience to these success factors.

The Flying Geese Model and Its Unravelling The Flying Geese Model (Akamatsu, 1962) was often cited to articulate the relocation of manufacturing activities from Japan to the first-tier newly industrializing developing economies (i.e. South Korea and Taiwan), then to the second-tier NIEs (Malaysia, Thailand and Indonesia) and then to China and Vietnam. It was often depicted as a hierarchy of industrialization. The Flying Geese Model portrays Japan as the driving force for economic and technological innovation in the Asia–Pacific Region, but

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when wages and other costs in manufacturing rose in Japan, the production activities were relocated and technology flowed outward to other Asia–Pacific countries. Japanese industries then shifted their manufacturing activities to produce more sophisticated high-technology products. This relocation was initially to the first-tier NIEs. When wages and other costs rose in these first-tier NIEs, they then relocated their production activities to the second-tier NIEs and China. The first-tier NIEs then followed the path of Japan, shifted their manufacturing activities from labour intensive to technology intensive to produce more sophisticated high-technology products. The intention of relocation of manufacturing firms and upgrading of domestic manufacturing activities of Japan and the first-tier NIEs was to compete for market share in the open market of the United States (see Suehiro, 2008, p. 51). However, the Flying Geese Model suffered the same flaw Rostow’s model was alleged to possess—that there was a stable developmental hierarchy. In fact, Japan’s position at the head of the hierarchy was not guaranteed. Many latecomer firms in the first-tier NIEs caught up with Japanese firms at the technology frontier. For example, Samsung Electronics of South Korea came from behind to outperform Sony of Japan in liquid crystal display (LCD) and dynamic random-access memory (DRAM) technologies (Chang, 2008, p. 8). Second, the Flying Geese Model implicitly assumes that there is a simple linear relationship between the leading economy (Japan) and the followers (the NIEs). At a certain stage of their development, the followers will automatically pursue upgrading strategies to advance their technological capabilities to challenge the dominant position of the technological leaders. This would keep them away from competing with the lower-wage NIEs. However, this fails to recognize the possible existence of impediments to latecomer upgrading. This is particularly evident in Southeast Asian economies during the 1990s, when they pursued a low-wage policy to counter the emerging competitiveness of China and Vietnam.5 In our view, not all economic pathways and development trajectories can converge to that of Japan. Only a few can achieve convergence, while others are destined to stand still, or even fall behind. The Flying Geese Model has not provided a good explanation of the East Asian experience because it ignores the

5 This process was particularly evident in Malaysia. See Jomo (2007, pp. 14–17).

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relationship between the state, private sectors and institutions embedded in the social system of an economy.

The Leapfrogging and Path-Creating Model for Latecomers Instead of a stable hierarchical growth à la Akamatsu, many studies (see Hobday, 1995; Kim, 1997) have highlighted the adoption of an OEM-ODM-OBM strategy in Asia to develop technology capability. The conceptual model used by these studies is described by a sequence of development processes. The strategy involved is to first develop the process capability through the mastering of contract assembly operations (original equipment manufacturing, OEM), followed by developing sophisticated products through imitative R&D. Finally, firms invest in R&D for their own product and process technologies (original design manufacturing, ODM). There are also firms that attempt to develop their own products to be sold under their own brands (original brand manufacturing, OBM). Building upon this “OEM-ODM-OBM” framework, Keun Lee proposed the Leapfrogging and Path-creating Model (Lee, 2005; Lee & Lim, 2001) to explain the process of catching-up. First, there is a pathfollowing catching-up, which is similar to the OEM-ODM-OBM strategy. The latecomers develop their capabilities by following the path taken by the forerunners. Second, there is leapfrogging catching-up, when the latecomers pursue the forerunners’ path but skip some development stages and start competing with the technological leaders. Third, there is pathcreating catching-up, when the latecomers explore their own path of development after pursuing just a few stages of the forerunners’ path. Keun Lee’s proposed framework was used by many studies (e.g. see Fan, 2006; Chen & Li-Hua, 2011) to articulate the catching-up process and the sequence of industrialization. Drawing on the synthesis of these literatures, it can be concluded that this framework is important for the catching-up study for two reasons. First, in conformity with the evolutionary theory, it defines the role of institutions and the agents of change in the catching-up process and their interactions with each other (as a system) for leapfrogging or pathcreating development. The concept has a strong foundation as a tool for analysis at the system level. Second, the framework provides a macro-meso

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view of institutional arrangements that stimulate catching-up industrialization with a focus on technological competencies. This framework is important to compare the competencies of development among Asian countries. The following sub-section uses this framework to narrate the industrialization processes of South Korea and Taiwan.

South Korea: Picking-Winners-Cum-Leapfrogging Approach The South Korean strategy for technological development is to build up the process capability in the initial stage, followed by the mastering of sophisticated production through imitative R&D. Foreign knowledge and technology were the main sources for technological catch-up of the local firms during the 1960s. Many Korean firms assimilated imported technologies with subsequent expansions and improvements to compete with the forerunners. South Korea pursued a similar path of development to Japan where local conglomerate firms were selected as the main agent of development. To move up the value chain of technology, South Korea practised a state protection strategy and mobilized resources targeted at chaebols (conglomerate firms) to build technology capabilities and competencies, particularly during the infant stage of industrial development. While waiting for domestic savings to be accumulated, the government during Park Chung-Hee’s regime borrowed heavily from abroad to fund the chaebols ’ industrial projects.6 As noted by Kim (1997, p. 15), “the government held the wheel and supplied the fuel, while private firms, particularly cheabols, functioned as the engines”. The government, on the one hand, deliberately promoted chaebols to acquire learning capabilities, while, on the other, constructed crises to stimulate entrepreneurship from chaebols to meet the imposed targets (Kim, 1997, p. 26; 1998). The strategic crises often related to export targets set by the government. Many incentives and supports were provided to chaebols to ensure the imposed crises stimulated entrepreneurship under pressure rather than produced destructive outcomes that would hinder learning of technology.

6 A chaebol, translated loosely as “business family” or “business group”, is the South Korean form of business conglomerate.

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The Korean government also played an orchestrating role in its institutional system, directing a large pool of investments and entrepreneurial talents into productive venues by reducing profitable opportunities in those unproductive areas. For example, during Park Chung-Hee’s regime, many businessmen of large conglomerates were arrested for engaging in illegal businesses during the preceding years. However, many of these businessmen were then released and required to undertake the industrial projects that were perceived by the state to be efficient for the economy as a whole (Kim, 1997, p. 25). These businessmen have to comply with the government-imposed targets. The direct support for large chaebols not only facilitated the development of their own products which were sold under their own brands in the local market, but also enabled them to establish their R&D capability to compete successfully in a few global industries, such as automobile, semiconductors, construction, consumer electronics and telecommunication equipment. The government incentives and supports fuelled the entrepreneurial activities in the 1970s and 1980s, reduced risks for firms involved in costly investment for innovation and stimulated R&D investments for science and technology (Wong, 1999, pp. 62–63). Their dynamic technology policy led to systemic learning and catching-up with the advanced technology of developed countries in most chaebols, which subsequently led to growing technological capabilities (Amsden, 1989, pp. 11–23; Wong & Goh, 2012). Many South Korean companies are now renowned internationally in many industries and technologies. Most of the chaebols have ventured into engineering consulting services, exporting innovative solutions to many firms abroad. This is largely attributed to the efforts to develop indigenous technological capabilities (particularly on the assembly-type industries, such as automobile and shipbuilding) of local conglomerate firms and OBM activities. These processes are in accordance with the institutions and learning as prescribed by theory, in the country’s context, but what these theories miss is the downside of such strategies. In the case of Korea, this strategy had ignored the development of SMEs’ technological capabilities. The leapfrogging approach, directing resources to develop chaebols, had marginalized the progress of the small and medium enterprises (SMEs) in South Korea. Furthermore, many SMEs went bankrupt since the 1990s due to the implementation of the amended competitive policy to comply with the World Trade Organization’s standard (Kim, 1997, p. 37).

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Although South Korea committed considerable resources to advance the technology of small firms since the middle of 1980s, SME technology innovation performance remained insignificant. Many chaebols remained dependent on Japanese technology-intensive components and parts to support their manufacturing activities. The South Korean SMEs have not acquired the technological capabilities to supply components and parts of sufficient quality to chaebols (Kim, 2003, p. 94; Shin & Chang, 2003, p. 128). In addition, many South Korean SMEs preferred to do business with Korean chaebols instead of building relationships abroad. Independent entrepreneurial growth by engaging their businesses with firms abroad may lose their business legitimation with Korean chaebols (Dodgson, 2009, pp. 602–604). Therefore, many SMEs of South Korea had failed to operate, explore and venture beyond the chaebols ’ networks. The dominance of manufacturing and competency of the semiconductor, electrical and electronics and construction technologies and institutional rigidity of South Korea may limit the large firms in competing in technological dynamic industries like biotechnology and chemicals that are anticipated as the technological innovation of the forthcoming longwave period. Similar to the large firms of Japan, the organization inertia built over the years may prevent them from leapfrogging into a new economic paradigm.

Taiwan: Evolutionary Targeting with the Path-Creating Approach The early industrial policy of Taiwan was targeted at agricultural output and developing light manufacturing industries. An import-substitutioncum-export policy was used to promote and protect the infant industries in Taiwan. K. Y. Yin, the Chairman of the Industrial Development Commission in the 1950s, regarded Taiwan as an underdeveloped economy. There were few entrepreneurs and most of them lacked entrepreneurial experience, capital, technology and efficient organizations to compete with the world leaders. Therefore, according to Wang (2006, pp. 95–100), the government decided the direction and goal of industrialization. There was a set of targeted industries to be developed and the milestones of what degree of development should be at which specific point of time had to be mapped (Evans, 1995, pp. 54–60). On the one hand, many tax incentives, subsidies and other technical supports were provided to promote the locally-owned industries. On the other hand,

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there was the government machinery to ensure the supported industries or firms remained interested in long-term investment rather than focused on short-term profits. To promote investment in productive industries in Taiwan, K. T. Li, the Secretary General of the Council for US Aid, advised the government to encourage domestic savings through tax exemption or rebates so that investment in targeted industries increased (Wang, 2006, pp. 129–145). These were the early efforts from the government to achieve a critical mass of entrepreneurs in productive sectors capable of triggering a self-propagating co-evolutionary process of sophisticated production system and socio-economic development. By the end of the 1970s, Taiwan’s economy shifted from being dependent on light manufacturing industries and agricultural products to being dependent on high-technology and skill-intensive activities. Information and communication technology was identified as the strategic sector to be promoted, and information, electronics and machinery were thus identified as targeted industries to be developed (Khan, 2004, pp. 511– 512). In the 1980s, most of the Taiwanese firms were small. Therefore, the R&D resources for developing new technology were limited. The Industrial Technology Research Institute (ITRI) was established by the government to support the technology development of SMEs. The strategic plan sought to build a “national champion” using the bottom-up approach. Those firms in targeted industries gradually moved to higher value-added products and were involved in science-based technological R&D activities. ITRI also plays an important role in fostering domestic industrial competencies by linking SMEs to foreign large corporations (Fuller, 2005). It also created a conducive environment for technoentrepreneurs to develop indigenous technologies through encouraging Taiwanese abroad to return home to build a knowledge-based economy. Taiwan pursued an OEM-ODM-OBM strategy to develop its technology (see Amsden & Chu, 2003, pp. 19–76; Hobday, 1995, pp. 95– 135; Hou & Gee, 1993; Wong, 1999). Many SMEs produce components and parts that were once produced within a single large corporation. The large corporations outsource their mature production technologies to Taiwanese SMEs while retaining cutting-edge processes in-house. The final systems or products are marketed and distributed by the large corporations (Saxenian & Hsu, 2005, p. 240). Therefore, many Taiwanese firms continue to seek long-term relationships with large corporations such as Dell, HP and Toshiba to smooth out the cycle of dependency (Fuller, 2005, pp. 488 and 503). For example, the government invested in a

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very large semiconductor manufacturing corporation (Taiwan Semiconductor Manufacturing Corporation, TSMC) in 1986 to produce silicon wafer for semiconductor industries. The firm was established with both public and private capital (Phillips of the Netherlands and other private investors). While conventional semiconductor manufacturers focused on both production and design, TSMC produces only the silicon wafers designed by the clients (Wang, 2006, p. 218). Many fabless firms such as Qualcomm, Marvell and Broadcom were convinced that such arrangement will not make TSMC their competitors and outsourced many of their fabrication projects to TSMC. In addition, fab-owning firms7 such as Intel also outsourced some of their production to TSMC due to the sophistication and capabilities of the fabrication technology TSMC acquired. While some Taiwanese firms such as ACER and HTC attempted to develop their own products which were marketed using their own brands (OBM), many pursue niche positions in OEM and ODM from foreign alliances via leveraging of superior skilled human resources, R&D supports from the government in technology assimilation from foreign counterparts, sustained business cooperation with large corporations and cost competition (Chu, 2009, pp. 1056–1058; Hung et al., 2012, p. 19). ITRI in conjunction with SMEs is now forging new directions for new technologies. Wireless technologies, software development, medical equipment, TFT-LCD and internet apps are among the targeted technologies considered critical to the convergence of electronics, computer and communications industries. The establishment of TSMC had induced many returnees from abroad to start up their own integrated circuit (IC) design houses and other high-technology companies in the Hsinchu Science Park. Many Taiwanese from abroad, particularly from the Silicon Valley, started their business and R&D activities in Taiwan (Lin, 2009; Saxenian & Hsu, 2005). The recession of the US economy in 2000 and the conducive environment in Taiwan for science and technology development had spurred Taiwanese abroad to return home and they contributed towards building the knowledge-based economy. In addition, the reduction of government involvement to allow the private sector to lead science and technology

7 There are many foreign firms sought to work with the local system to integrate their products design architecture into the designs done by local firms (Fuller, 2005, p. 503).

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development in 1993 brought about a subsequent boom in 2000.8 Many Taiwanese firms such as TSMC and UMC are now able to develop stateof-the art manufacturing techniques and engineering solutions to meet the demand of their customers.9 The experience of Taiwan depicted in this section corresponds to the theoretical framework proposed by Morris Teubal (Avimelech & Teubal, 2008; Dutrenit et al., 2011, p. 61). The development stages10 discussed in the evolutionary model could be seen in the trajectory of industrialization of Taiwan. It is also in conformity with what is envisaged by evolutionary economists—learning and institutions—as well as Asiaspecific theories—the role of the state and the importance of context. This context consists of the dominant role of agriculture when industrialization began and the fact that the leadership that came from the Chinese Mainland was not keen to see the rise of powerful native Taiwanese industrial groups to challenge its power (Hsieh, 2011). Contextual differences explain why the experience of Taiwan provides an interesting contrast with that of South Korea. While South Korea produced firms that are now competing at the world technological frontier and enjoying brand name recognition, Taiwan emerged as subcontractors for large corporations. Most Taiwanese firms are brandless. Many of the branded firms failed to enhance their global brand value, and some have to trim down their OBM operations due to losses made in their own-brand sales (Chu, 2009; Khan, 2004, p. 516). According to Chu, the innovation system of Taiwan which supports technology upgrading of SMEs along the subcontracting route had failed to support firms to pursue own-brand strategies (Chu, 2009, p. 1064). A proper risk-sharing mechanism from the government to support OBM activities is crucial for 8 However, according to Fuller (2005, p. 488), the possible pool of talents in integrated circuit fabrication for recruits from the Silicon Valley may have eventually dried up. 9 According to Keller and Pauly (2003), Taiwanese semiconductor firms were prudently managed, developing selective equity-based technology alliances with their customers. 10 The stages include (1) Pre-condition: The state sought to achieve critical masses of entrepreneurs/talents. (2) Take-off: A matching supply–demand of skilled labour for the economy is essential to avoid the phenomenon of brain-drain. Strengthening financial and technical infrastructures is crucial in this stage. (3) Self-propagating development: A dynamic self-propagating development allows for the trajectory of technology to reinforce itself with a positive feedback that enhances growth and economic development.

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Taiwan to develop its industries beyond the subcontracting route. As in the Korea case, theories that seek to explain successes have been silent on Taiwan’s policy failures.

What’s After Korea-Taiwan Approaches: Mixed-Mode Model and Policy Learning of Latecomers Many (so-called) second- and third-tier Asian NIEs adopted a strategy that emphasized government facilitation of multinational corporations (MNCs)-induced industrial learning. Through heavy reliance on the massive inflows of foreign direct investment (FDI) since the 1970s, significant economic progress and rapid industrialization had been made. These economies also used export manufacturing orientation policy as a tool for growth and attracted leading international textile, garment, electric and electronics multinationals to relocate their labour-intensive stages of assembly plants to the export processing zones (Archibugi & Pietrobelli, 2003). The industrial policies were established to favour the MNCs that seek to upgrade their production and manufacturing process capabilities to manufacture new and advanced products. Unlike the industrialization models of South Korea and Taiwan that were tailored to ensure strong institutional support fostering nationally-owned industries, many economies in Southeast Asia positioned their national competitiveness towards an embrace of FDI-led integration into the globalization of production through MNCs’ international operations (Ariffin & Bell, 1999; Rasiah, 1999; Techakanont & Charoenporn, 2011). The strategy involved is to first develop the production capability and then expand the capabilities towards the world production frontier. This strategy sought to create production technological capability development among the local contract assembly firms contracted by the MNCs. Many public training institutions were established to support the local firms in building technological capability to meet the needs of the MNCs. However, the concentration of production and process technological activities of these economies in MNCs has increased the dependence on the lead of foreign

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firms in driving the technological agenda11 and may have stunted the technological growth of domestic firms (Wong & Goh, 2012). In the transition to an industrialized and knowledge-based economy, many second and third-tier newly industrializing economies such as Malaysia have committed to promote upstream activities and to raise national investments in R&D and the number of researchers since the 1990s. These economies anticipated that the economic growth that depended on FDI which mainly took advantage of the availability of low labour costs may not be sustainable for long-term development. They foresaw the potentials for high growth in medium and hightechnology sectors, and were aware of the need for commitment in building competitive and dynamic industrial regions.

Malaysia: FDI-Leveraging with Policy Learning Approach Unlike the industrial policies of South Korea and Taiwan that were designed to avoid over-reliance on MNCs’ technologies during early industrialization, many economic policies in tier-2 NIEs have to comply with TRIPS and TRIMS rules and agreements and other WTO standards. Many important policies to protect infant industries were not implemented to maintain reputation as a friendly foreign investment host. In addition, the newly revised labour policy allows the MNCs to employ expatriates and foreign unskilled labour to address the shortage of skilled labour and keep the wages for unskilled labour from rising.12 Thus, labour immigration had discouraged industrial upgrading and limited indigenous technological development. However, selected industries in Malaysia operate under a different trade regime. For example, automobiles, telecommunications equipment and steel production are highly protected in the Malaysian market since the mid-1980s. In addition, the implementation of the New Economic Policy

11 For example, Penang of Malaysia and Bangkok of Thailand emerged as industrial clusters for electronics and automotive, respectively. These clusters are dominated by large manufacturing plants of leading multinationals and serve both national and international markets. 12 The Malaysian government sought to remain competitive in low wage economic activities, not only in manufacturing sectors, but also in plantation agriculture. See Jomo (2001, p. 42).

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(NEP) by the Malaysian government in the early 1970s had a profound effect on the development of these industries (Kennedy, 1995). The NEP was implemented to eradicate poverty as well as redress the economic imbalance between the major races in the country. To emulate the industrial policies trust of South Korea,13 Malaysian Prime Minister Mahathir launched a number of state-initiated projects for heavy industries development. There were a number of joint ventures between the state and foreign manufacturers to produce for the domestic market and for export. The state-initiated projects were intended to enhance bumiputera 14 participation in heavy industries (in which the rents provided by the government had to be shared with the bumiputera suppliers), to promote linkages between the SMEs and large-scale industries, and to move up the technological chain. However, these industries have not been able to become globally competitive or reach the levels of technical efficiency that can compare with that of South Korea. In automobiles, many key technologies remain controlled by foreign firms.15 That Malaysia achieved only modest technology development was probably the result of the state’s resistance to practice meritocracy by incorporating non-bumiputera Malaysian firms or expertise into the indigenous production system. It was also evident that industrial policies were biased towards large firms and/or a few privileged business elites (Gomez, 2009, p. 358). In addition, there is lack of effective and systematic performance monitoring to ensure that rent-recipients did learn to move up the technological ladder as had occurred in South Korea and Taiwan. These industries are now facing competitive pressure from the World Trade Organization (WTO) agreements (Rasiah, 2003, p. 328). They might not be able to survive if these systemic problems remain in the indigenous production system.

13 Like South Korea, the state limited the number of firms entering this targeted industries. 14 The term bumiputera refers to the indigenous peoples of Malaysia. It is used to distinguish them from the population of immigrant descent, specifically Chinese and Indian. Bumiputeras are the beneficiaries of the Malaysian state’s affirmative action programme. 15 Having said that, the Malaysian automotive manufacturers outsource many components and parts to non-bumiputera-owned SMEs while retaining the assembly line in-house. After-sales services are also outsourced to many non-bumiputera-owned auto repair shops.

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Malaysia also initiated a number of science parks and high-tech clusters targeting information technology and biotechnology as part of the Malaysian government’s intention to develop a post-industrial knowledge-based economy.16 However, unlike the Hsinchu Science Park in Taiwan, the majority of the firms in these clusters have yet to invest extensively in technology development (Rasiah, 2003, pp. 326–327). The inability of these firms to shift to higher value-added activities and R&D is mainly due to the scarce supply of engineers and R&D scientists, poor quality of some local graduates from a politicized education system, poor entrepreneurial infrastructures, non-conducive environment for high-tech investment and the reluctance of most qualified Malaysians to return home from foreign places of work or residence (World Bank, 2011). The pre-condition to achieve a critical mass of entrepreneurs/talents for techno-entrepreneurial take-off has not been met. According to Felker and Jomo (2007, pp. 143–147), Malaysia’s technology policy often targeted high-technology industries with scant regard to social capabilities or to the need for production learning. In addition, the brain drain issue in Malaysia has been worsening17 and probably will hinder the implementation of an evolutionary targeting model for high-tech startups. The ongoing technological promotions may instead hamper the growth of local-owned productive firms that might able to learn to obtain high-growth niches. One exception that stands out from other state-initiated industrial projects is the palm oil refining industry (Jomo et al., 2003, pp. 145– 163). The government had sought to use duty exemptions and tax incentives as the industrial policy instrument to promote the export of higher value-added processed palm oil (PPO) products.18 The intention was to distort (reduce) the domestic prices of crude palm oil (CPO) from the real market price while keeping the price of PPO products at the world market prices. Such policy had promoted many local firms

16 This is the substance of the Mahathir-initiated “Vision 2020” strategy. 17 The rate of brain drain of Malaysia (10%) is doubled than the world average (5%).

There are approximately 1 million Malaysian-born migrants in the world. Of these, 350,570 migrated to Singapore in 2010 and 227,540 to OECD countries. About 45% of these migrants are talented and highly skilled workers. See Foo (2011, p. 111). 18 This was the early efforts from (in the 1970s and 1980s) the government to promote indigenous production. The plan sought to substitute a significant share of exports of raw materials by the export of processed or semi-processed materials.

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to invest in PPO businesses and discouraged the export of CPO. The expansion of PPO businesses in the 1970s and 1980s had also expanded Malaysian export markets, from developed countries to developing countries such as China, India, Pakistan and West Asia. The Palm Oil Research Institute (PORIM) was established in the late 1970s to support the technology upgrading of the PPO industry. It plays an important role in initiating, developing and supporting industrial R&D activities, including the chemical and technology of processing (Jomo et al., 2003, p. 150). The promotion of PPO businesses had led to a new breed of local entrepreneurs and talents in agro-businesses. There are engineers who left PORIM to venture into process engineering consulting services, exporting palm oil processing machines and sustainable and environmental engineering solutions to many firms abroad. Many PPO industries shifted their manufacturing activities from labour based in the 1970s to technology intensive to produce more sophisticated high-technology products. How does the Malaysian experience speak to theory? Malaysia has fairly robust institutions that have supported its development. In terms of technological upgrading, however, their record has been patchy. Since 1971, this role has been made subservient to that of affirmative action while the capture of the state by allies of the political leadership has resulted in these institutions also catering to these parties. Together with an education system also compromised by affirmative actions, Malaysia achieved limited learning despite its reasonably sound institutions. Yet the success of palm oil is a reminder that important as leapfrogging and path-creation are in creating competitive advantage, it can also come from building on existing comparative advantage.

How South Korea and Taiwan Did It The anecdotal evidence on the formation of economic and industrial systems of South Korea and Taiwan corroborates the dynamisms of upgrading shown in Fig. 2.1, which stylizes two development path processes. While South Korea focused on the OBM strategy during early catching-up and R&D infrastructure to induce investment in productive and R&D activities from chaebol firms, Taiwan adopted an evolutionary targeting approach to develop their SMEs and technology capability. The evolutionary targeting approach allowed Taiwanese firms to move

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Hierarchical Level OBM

South Korea

ODM

Taiwan OEM

Early catching-up Upgrading Sophistication of technology/know-how

Development Path of South Korea Development Path of Taiwan

Fig. 2.1 Development paths trajectories of South Korea and Taiwan

gradually to higher value-added activities and involve themselves in nichebuilding routines for industrial diversification. For Korea, there was direct state support targeted at large chaebol firms to develop targeted industries and produce brands in both local and international markets. The industrial targeting of Korea ultimately moved to upgrade ODM and OEM activities for industrial diversification. In the cases of South Korea and Taiwan, we observe a few strategic decisions that have led them to successful catching-up in technological development: • An import-substitution-cum-export policy was instrumental in promoting and protecting the indigenous industries. • The government instituted an R&D routine in both public and private entities and committed government resources in various R&D programs and activities for indigenous firms to enter the promising targeted industries (ICT). • While South Korea cautiously avoided reliance on multinational participations in developing its economy in the early catch-up phase, Taiwan created a critical mass of indigenous entities to support

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multinationals’ operations in specific industrial clusters. Although these strategies had propelled them to unprecedented success in ICT industries, they have drawbacks in that many indigenous firms have failed to achieve success.

What Can We Learn from the Case of Malaysia? During the early stage of catching-up, Malaysia adopted a FDI-leveraging model to favour the MNCs that sought to relocate their labour-intensive manufacturing activities due to the raising comparative production costs. The early strategies were intended to foster the spillover of know-how from the multinationals and spawn the local supporting industries. Many local firms pursue a non-offensive approach for technological catchingup, but continue to seek long-term relationships with MNCs to smooth out the cycle of dependency. As the indigenous firms in Malaysia gradually established their technological foundation and acquired manufacturing experience, the governments started to pursue some “offensive” strategies to encourage their local firms to challenge the dominant position of the advanced economies in certain products and services. Some capable firms were encouraged by their governments to master the sophisticated products through imitative R&D. The development models and manufacturing experiences of South Korea and Taiwan appear to serve as useful policy guides for Malaysia to architect their catching-up policy. To explore a workable model for catching-up, it is important for a state to institute an “experimentation routine” to try different approaches to develop specific sectors or regions and to manage the complex challenges of economic change without systemic breakdown. The success of one sector/region would provide some guides and policy implications to other sectors/regions to adopt similar policies or model for development. The strategy of discovering a productive potential may entail some failures. Like the case of Malaysia, some promoted industries failed to acquire the learning routine and develop niches in the global production value chain. The normative principle that is enshrined in catching-up policy is having a platform for policy experimentation with a “fail fast-learn fast-fix fast” administrative mode. A proper administrative mechanism will eventually acquire policy learning and self-discovery of national productive potentials.

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Table 2.4 Policy objectives for catching-up in Malaysia Phase

Policies focus

Objectives

Model

Early catching-up

Pro-poor growth

• Quantity of jobs • Critical mass of agents

Catching-up

Pro-indigenous growth

• Quality of jobs • Indigenous capacity building

FDI-leveraging model (e.g. free trade zones with basic infrastructures for MNCs) Business conglomerates, industrial cluster to spawn indigenous firms, foreign-local partnerships and joint ventures

With the continuing rise in economic uncertainty, dynamism and complexity, it is essential for a government to institute an experimentation routine with a “fail fast-learn fast-fix fast” administrative mode in the policymaking process. Exploratory efforts are crucial to seek and leverage the productive potentials of the indigenous entities. The salient policy objectives for the catching-up phases and the summary of our observations are documented in Table 2.4.

Remarks The orderliness of industrial development envisaged by the Flying Geese Model of Akamatsu has been shattered in the last decades of the twentieth century and the first decade of this century by the East Asian economies’ adoption of various catch-up strategies. These strategies have brought the major industries in these economies to the technological frontier that was formerly the preserve of advanced countries. The experiences of catch-up in several economies analysed in this chapter—leapfrogging in Korea, path-creating in Taiwan and multi-mode with policy experimentation in Malaysia—have generated and are generating a growing body of theoretical models to enrich the earlier theories developed for advanced countries. They show not only the diversity of catch-up strategies that can lead to a successful outcome but also the

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evolution of strategies within a single economy as technological capabilities develop. There is, however, one constant running through these different strategies. That is the central role of the government, not only in setting strategic priorities but also in ensuring the necessary policy and institutional support are in place. This role must take the form of single-minded commitment to the ultimate goal—that of achieving technological catch-up. This brought home at the industry or firm level when comparison is made between Korea’s highly successful automotive industry which was subjected to the government’s strict performance benchmarks and Malaysia’s moribund automobile industry which was never subject to such benchmarks and can only survive because of heavy government protection decades after its establishment.

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Hung, S.-W., Tsai, J.-M., Cheng, M.-J., & Chen, P.-C. (2012). Analysis of the development strategy of late-entrants in Taiwan and Korea’s TFT-LCD industry. Technology in Society, 34(1), 9–22. Jomo, K. S. (2001). Growth after the Asian Crisis: What remains of the East Asian model? (G-24 Discussion Paper Series, No. 10). United Nation Conference on Trade and Development, Geneva. Jomo, K. S. (Ed.). (2007). Malaysian industrial policy. NUS Press. Jomo, K. S., Rasiah, R., Alavi, R., & Gopal, J. (2003). Industrial policy and the emergence of internationally competitive manufacturing firms in Malaysia. In K. S. Jomo (Ed.), Manufacturing competitiveness in Asia, how internationally competitive national firms and industries developed in East Asia (pp. 106– 172). Routledge. Keller, W. W., & Pauly, L. W. (2003). Crisis and adaptation in Taiwan and South Korea: The political economy of semiconductors. In W. W. Keller & R. J. Samuels (Eds.), Crisis and innovation in Asian technology (pp. 137–159). Cambridge University Press. Kennedy, L. (1995). Telecommunications. In K. S. Jomo (Ed.), Privatizing Malaysia: Rents, rhetoric, realities (pp. 219–235). Westview Press. Khan, H. (2004). Technology and economic development: The case of Taiwan. Journal of Contemporary China, 13(40), 507–521. Kim, L. (1997). Imitation to innovation: The dynamics of Korea’s technological learning. Harvard Business School Press. Kim, L. (1998). Crisis construction and organizational learning: Capability building in catching-up at Hyundai Motor. Organization Science, 9(4), 506–521. Kim, L. (1980). Stages of development of industrial technology in a developing country: A model. Research Policy, 9(3), 254–277. Kim, L. (2003). Crisis, reform and national innovation in South Korea. In W. W. Keller & R. J. Samuels (Eds.), Crisis and innovation in Asian Technology (pp. 86–107). Cambridge University Press. Kohli, A. (2009). National versus dependent capitalist development: Alternate pathways of Asia and Latin America in a globalized world. Studies in Comparative International Development, 44(4), 386–410. Lall, S., & Urata, S. (Eds.). (2003). Competitiveness, FDI and technological activity in East Asia. Edward Elgar. Lee, K. (2005). Making technological catch-up: Barriers and opportunities. Asian Journal of Technology Innovation, 13(2), 97–131. Lee, K., & Lim, C. (2001). Technological regimes, catch-up, and leapfrogging: Findings from the Korea industries. Research Policy, 30(2), 459–483. Lewis, W. A. (1954). Economic development with unlimited supplies of labour. The Manchester School, 22(2), 139–191.

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Lin, Y. (2009). The contribution of the diaspora to Taiwan’s high tech industrialization. Paper presented at the Tenth Malaysia Plan Brain Gain Workshop: A Review of Successful Brain Gain Programmes, Putrajaya, Malaysia, June 18– 19. Ministry of Science, Technology and Innovation, Wilayah Persekutuan Putrajaya, Malaysia. List, F. (1885). The national system of political economy. Longman, Green and Co. Mathews, J., & Cho, D.-S. (2000). Tiger Technology: The creation of a semiconductor industry in East Asia. Cambridge University Press. Perez, C., & Soete, L. (1988). Catching-up in technology: Entry barriers and windows of opportunity. In G. Dosi (Ed.), Technical change and economic theory (pp. 458–479). Pinter Publishers. Rasiah, R. (1999). Government-business coordination and the development of eng hardware. In K. S. Jomo, G. Felker, & R. Rasiah (Eds.), Industrial technology development in Malaysia: Industry and firm studies (pp. 231–246). Routledge. Rasiah, R. (2003). Industrial technology transition in Malaysia. In S. Lall & S. Urata (Eds.), Competitiveness, FDI and technological activity in East Asia (pp. 305–333). Edward Elgar. Romer, P. M. (1990). Endogenous technical change. Journal of Political Economy, 98(5), S71–S102. Rostow, W. W. (1960). The stages of economic growth: A non-Communist manifesto. Cambridge University Press. Saxenian, A. L., & Hsu, J.-Y. (2005). The Silicon Valley-Hsinchu connection: Technical communities and industrial upgrading. In S. Breschi & F. Marlerba (Eds.), Clusters, networks, and innovation (pp. 235–260). Oxford University Press. Schumpeter, J. (1934). Depressions. In D. V. Brown, E. Chamberlin, & S. E. Harris (Eds.), Economics of the recovery program (pp. 3–21). McGraw-Hill. Schumpeter, J. (1950). Capitalism, socialism and democracy. Harper and Row. Shin, J.-S., & Chang, H.-C. (2003). Restructuring Korea Inc. Routledge Curzon. Solow, R. M. (1957). Technical change and the aggregate production function. Review of Economics and Statistics, 39(3), 312–320. Suehiro, A. (2008). Catch-up industrialization: The trajectory and prospects of East Asian economies. NUS Press. Techakanont, K., & Charoenporn, P. (2011). Evolution of automotive cluster and interactive learning in Thailand. Science, Technology and Society, 16(2), 147–176. Wade, R. (1990). Governing the market: Governing theory and the role of government in East Asian industrialization. Princeton University Press.

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Wang, L. S. K. (2006). K. T. Li and the Taiwan experience. National Tsing Hua University Press. Winter, S. (1984). Schumpeterian competition in alternative technological regimes. Journal of Economic Behavior & Organization, 5(3–4), 287–320. Wong, P.-K. (1999). Technological capability development by firms from East Asian NIEs: Possible lessons for Malaysia. In K. S. Jomo & G. Felker (Eds.), Technology, competitiveness and the state (pp. 53–64). Routledge. Wong, C.-Y., & Goh, K.-L. (2012). The pathway of development: Science and technology of NIEs and selected Asian emerging economies. Scientometrics, 92(3), 523–548. Wong, P. K., & Ng, C. Y. (Eds.). (2001). Industrial policy, innovation and economic growth. NUS Press. World Bank. (2011). Malaysian economic monitor—Brain drain. World Bank.

CHAPTER 3

Driving Inclusive Growth in (Post) Industrial Catch-Up Era of Korean Economy

Background Inclusive growth and development have been the subject of great interest for many innovation and development scholars. In order to determine (with the benefit of hindsight) exactly what pre-conditions promote inclusive growth in developing economies, their research features many aspects of development studies. These include aspects of income distribution mechanism, human capital development, supports for marginalized groups in society, job creation, upgrading of SMEs, etc. In the innovation and development studies literature, there is work reporting on the economic catching-up process (e.g. Abramovitz, 1986; Gerschenkron, 1962; Lee & Marleba, 2017) and innovation systems (Altenburg, 2009; Mazzoleni & Nelson, 2007). These are suitable for latecomer firms seeking to learn new technology and become competitive in the global production value chain. The work provides readers with important hindsight about the industrial development process, and what policy instruments were used to achieve it. However, what we observe to be lacking is the policy aspect of inclusive growth and development in the process of catching-up. This chapter attempts to highlight the policy principles that led to concomitance between economic growth and social well-being. Such an evolution is seen as the mechanism for inclusive growth.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 C.-Y. Wong, Experimental Learning, Inclusive Growth and Industrialised Economies in Asia, https://doi.org/10.1007/978-981-19-3436-0_3

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There is a view maintaining that income inequality is a common consequence of economic growth—it increases as an economy begins to develop (or witness a growth spurt) and decreases once the economy attains a certain average income level. The relation follows in the form of a Kuznets (see Kuznets, 1955) curve (inverted-U). The turning point (see Lewis, 1954) occurs when relatively modern sectors in the urban areas absorb all surplus labour from the rural, agricultural sectors. The dualistic nature of the economy then follows, with wages rising—suggesting labour shortage conditions and an increase of productivity, and thus leading to reduction of inequality (Jin & Lee, 2017, p. 6; Lee, 2016b). South Korea emerged as an appealing case that seems to fit this model. There are studies pointing out that Korea faced issues of the rising income inequality as it sought to mobilize its resources to venture into modern manufacturing out of agriculture in the 1960s and the 1970s (Lee, 2016b). It then witnessed a sharp decrease in its Gini index of market income in the 1980s as Korea passed the Lewis turning point in the mid-1970s (Bai, 1982). The modern sectors in the urban areas absorbed all surplus labour from the agriculture sector, and sustained growth pushed up wage rates as labour became in shortage. Further, more of the population attained higher levels of education, watering down the premium wages enjoyed by the very few in the earlier phase. Therefore, the view was that encouraging (big) businesses to invest in modern sectors—allowing firms to attain economies of scale and agglomeration in the urban space for production—would eventually decrease income inequality. Some may go further to suggest that this kind of growthenhancing strategy inevitably experiences income inequality in the early stages of development. The issue of deprivation and exclusion would be solved (automatically) as the process of promoting modern sectors eventually raises the average income of the population. We contend that such a view is only one side of the story, as the case of South Korea (Teichman, 2016, pp. 133–158) informed us that there were also intense efforts to implement inclusive agendas during the process of empowering big businesses for growth. Our proposition is that the organization process for inclusive growth over the decades was deliberate and systematic. The following are some aspects of inclusion in the pursuit of economic development:

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• Different mechanisms to distribute income (especially targeting poor farmers) were established during the time of rapid industrialization in the 1970s; • Mitigated migration and industrial concentration issues in the 1970s; • Balancing economic ownership structures for social equality since the 1970s; • Empowering groups that are perceived to be marginalized via various social-related policies and social welfare spending in the 1980s; • SMEs as a target for productive upgrading at the end of the 1980s; • SMEs as a target for technology capability upgrading since 2013. Our reading on the case informed us that the South Korean government in the 1960s and 1970s believed that the (perceived) well-being would in turn lead to sustained growth. A series of events since the 1960s instituted an inclusive agenda in the pursuit of economic and industrial development. This chapter attempts to provide an overview of how South Korea’s governance and development trajectory enabled inclusive growth and development to take place. It is of interest to explore the reinforcing (or amplifying) sort of co-evolutionary process between inclusive growth and the development of the economy. It attempts to elaborate on the context and pre-conditions for development, as well as provide policy implications for other developing economies which aspire to move up the value chain and attain inclusive growth.

Inclusion, Institution and Development Inclusive growth in the context of economic catching-up is perceived as an essential process for development (Paunov, 2013). It implies economic growth that encompasses “equity, equality of opportunity and protection in market and employment transition” (Ianchovichina & Lundstrom, 2009, p. 2). It is important to note that such growth does not mean just an increase of real gross domestic product, nor merely an increase of income per capita. It also reflects progress in a broad sense for different aspects of development—whether market value of goods and services, tacit knowledge to search out and define niches, certain levels of control by individuals over their environment or the capability of expressing needs. The values of inclusion expand on what Sen (1999) defined as an individual’s capability to achieve a desired life that they have reason to value. It is therefore maintained by many scholars that

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inclusive agendas should be incorporated into any policy matters that promote economic and technological activities. The policy objectives are set to attain competitiveness in new sectors and technology, high levels of employment and rising wages (Khan, 2012), and eventually the desired outcome—expansion of individual capability. What appears to be the general consensus on what inclusive development means is the kind of development that provides “basic physical security for the population, achieves the elimination of poverty, and mitigates the deprivations that prevent citizens from participating fully in society” (Teichman, 2016, p. 2). While inclusive growth denotes growth that generates wealth and orchestrates inclusive agendas, it is important to note that growth which generates wealth for a nation may lead to problems of deprivation, exclusion and income inequality. This can be attributed to certain measures of the state which favour higher performing sectors—while marginalizing certain other sectors, societies or regions in an economy. Teichman (2016) maintained that economic growth that is fuelled by certain sectors in an economy requires the state to play a proactive role in pursuing social programs, funded via a progressive tax system. The program would need to create mechanisms and channels to distribute income. The distribution mechanism can be general in form—such as support for social welfare or education. It is also can be targeted—such as support of SMEs or farmers to increase productivity, whereby technology diffusion or transfer acts as a channel to help the marginalized participate in high-growth sectors. The latter measures might create a growth-enhancing path that empowers both the engines of economic growth and welfare in general. Such processes are acknowledged as inclusive growth in this chapter, as these empower an individual’s capability to pursue their own well-being. The role of institutions in the pursuit of inclusive growth is widely acknowledged as well. The path-dependent nature of institutions that shapes daily decisions and routines (and the evolution of such) is recognized by many as a determinant for scientific and technological activities. While the scope of defining “institutions” is rather wide, the studies for inclusion and innovation highlight the importance of the role of government in various processes. These include processes of industrialization and technological development (Amsden, 1989; Evans, 1995; Foxley & Stallings, 2016; Haggards, 2004; Lall & Teubal, 1998; Wade, 1990); certain political measures that led to specific productive rents (Khan &

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Jomo, 2000); policy tools and incentives that established (inclusive) innovation systems (Altenburg, 2009; Lundvall et al., 2006; Nelson, 1993); and certain inherent routines1 or institutional environments2 that are conducive for inclusive growth and development (Moon, 2016; Nelson, 1994). Many East Asian economies have been acknowledged as successful due to their ability to create engines for growth and industrialization (Hobday, 1995; Jomo, 2003; Mathews & Cho, 2000) and construct mechanisms to distribute income and provide social welfare. The role of the state in this achievement is seen to be significant. The state witnessed its role transforming over the years of progress—from directing industrialization agendas in the early development phase; to empowering technocrats and professionals to assume administrative roles and develop higher value-added industries; and finally to facilitating talented individuals in searching for niches and defining new industrial structures in the advanced phase of development.3 The transforming role of the state is particularly evident in the cases of Taiwan and South Korea (Amsden, 1989; Mathews & Cho, 2000; Wade, 1990). It is noteworthy that transformation is attributable not only to the conscious efforts of the state in response to technological and industrial needs. Transformation is sometimes also due to an unconscious response to factors such as security threats from elsewhere; societal demand for participative democracy; desire for electoral democracy; and compassion for the poor and marginalized, who are keen to pursue competitiveness in all aspects of development. The routine for inclusion and competitiveness in development is very much rooted in the established institutions that emerged during the early and catching-up periods. It is argued that many of the economies of East Asia are conscious (see Amsden, 2001, 2007) 1 This reflects certain states or societies which perceive the importance of education and commit (a large part of) their savings for the education of their children. The routine can also be connected to rote memorization of (i.e. dedication to) knowledge in learning, that led to rapid diffusion of knowledge. 2 Certain institutional environments such as societal empathy for the poor and marginalised led to the establishment of a welfare state that is capable of promoting growth and distribution of income. 3 It is noteworthy that the state of China pursued a rather diverging approach since 2003. Direct government intervention via techno-industrial policies is evident. The policies sought to achieve the desired industrial structure that is perceived by the state as useful for creating new wealth in the economy (Chen & Naughton, 2016).

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of the advantages and limitations of different socio-political systems (e.g. market capitalism of the United States and the welfare state of the Eastern European countries) and are capable of creating systems that entail both a welfare system and growth.

Why the Case of Korea? The case of South Korea’s innovation and industrial development has been the subject of interest for many innovation scholars. The state has had a profound role in the early industrialization stage. The early, authoritarian regime charted an industrialization plan and devised a series of measures to achieve productivity and export targets (see Chapter 2). The chaebols (Korean business conglomerates) were the entities targeted for empowerment to boost productivity and economic growth. Such measures have been viewed by many as a kind of trickle-down approach. Besides this, there were various strategies such as: imposing high tariffs on imported products versus subsidises for intermediate goods for manufacturing, with the aim of protecting the infant industries (Lee, 1991a); low interest loans for local firms to expand (Lee, 1997, pp. 24–28); and mobilization of human capital and resources to build infrastructure in designated regions, where specific business groups would achieve a rural– urban balance in terms of industrial development (Cho & Kim, 1991b). The economic activities then expanded, and the economy that relied on low-cost labour reached its peak in the 1980s. The increase of wages and limited labour pool for low value-added jobs led Korea to upgrade and pursue higher value-added activities instead. Export of high-tech manufactured products and engineering services (such as consultation for construction tasks or building infrastructure) were sought out in order to dominate the economic landscape. Many public research institutions were endowed to support this upgrading process. Korea now possesses an economic landscape that relies on exports of high-technology products and services by the chaebol firms. The chaebol firms of Korea are highly competitive and capable of producing brands that compete with the world’s foremost firms. The designated regions for their operations have become highly productive hub-and-spoke industrial districts,4 and 4 Hub-and-spoke district denotes industrial clusters that emerged from highly productive, large local firms (chaebol firms). The SMEs emerged to supply and support the operations of the large firm. See Markusen (1996).

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spill over of economic activities that led to the emergence of supporting SMEs is clearly evident. However, it is noted that the development path of Korea also entailed the execution of many social programs. The programs were first oriented for public service officers and those serving in the military. The coverage of the social programs then expanded to cover those who work for the targeted industries.5 These commitments appear to have led Korea to attain inclusive growth and relatively low-income inequality in its society. Reading from the literature, we conjecture a strong interconnected series of events that led Korea to pursue a path that co-evolves industrialization and social well-being. Our proposition is that there was a collective pursuit of inclusive growth and development. We believe that there were conscious efforts and measures to tackle perceived issues in the early development phases (1960s–1970s), which set the conditions that led to Korean civil society and the state to pursue growth with inclusive agendas in the catching-up periods (1980s–1990s). The agendas institutionalized a routine that shapes policies in the post catching-up phase (2000–now). These policies are explicit and oriented towards supporting inclusive agendas in the advanced phase of development. This chapter examines the political, structural and historical conditions that institutionalized a path, whereby Korea was able to persistently acquire a diversified position for the targeted industries in the global production value chain. While this position enabled Korea to upgrade its export market and develop its socio-economic activities, it is noted that it also hindered SMEs or individuals from pursuing niche positions in the global value chain. Many SMEs faced a lock-in phenomenon that made them unable to break out of the orbit of the chaebols and be independently capable of supplying to foreign entities. It is also in the interest of this chapter to explore the measures of the state in addressing this issue. We utilize Arena of Development (AoD) as the framework for narrating the proactive path of inclusive growth and development. We highlight the defining events that formed inclusive agendas for salient normative principles, which will be useful for economies aspiring to institutionalize an inclusive path.

5 This was done to attract more people to work as industrial labour in the 1960s and 1970s.

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Narrative Framework Latour’s (1992, 2005) thesis on actor-network theory (ANT) elaborating on the use of “context” in social studies and the intuition of social sciences has been influential and impactful in the field of innovation and development studies. This view of association and network emergence and subsequent stabilization—a process comprising mutual transformation between science, technology and society—has inspired many studies to narrate the transition process of development. The network building strategies of an actor in a production system are elaborated via mapping the generation of and co-shaping between agency, knowledge, institutions and organizational power (Jorgensen, 2005). Transition in the context of development denotes: changes involving an economic structure that is maintained for a production system, as it moves through different phases towards a desired structure that is configured for a higher value-added production system (Wong et al., 2015). ANT is useful to this chapter, as it can convey and describe how networks of different actors (who together hold social order or part of the institutional routine) are formed and then stabilize—or alternatively, break down or destabilize into a new configuration. The notion “Arena” of Development (AoD) is used by Jorgensen (2005, p. 721) as a metaphor for “cognitive, institutional and physical space where interactions shaping socio-technical systems take place”. The space constitutes “involved actors, technologies, institutions and perspectives” that coshape to attain the desired economic structure and configuration for new production systems. They populate the arena, and the factor that changes the space is (collective) action towards a certain agenda, knowledge and vision (Jorgensen et al., 2009). Vision is a societal imagination of achieving desired outcomes. It is either articulated by the leaders of the state (top-down) or shared among the societal members. It forms the basis of negotiation and planning among actors for achieving a desired outcome. Actors who want the vision to be shared engage others in society in order to build alliances, to make sense of the vision and possibly to perform actions and pursue collective efforts to achieve it (Jorgensen, 2012, p. 1001). A path that is eventually pursued based on a vision would witness controversies or tensions in society—most often unexpected ones—about the ongoing changes. This is can be due to the “utopian” ideal of achieving an unachievable goal in the process of vision sharing or overlooking the possible negative

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outcomes in the pursuit of particular vision (Jorgensen et al., 2009). It is noteworthy that controversies are seen as an essential part of development, as they form doubts about a particular path and allow renegotiation and revision of plans. They challenge what is believed to be a sustainable path-dependent route,6 reorganize interest and deliberately produce arenas for possible reconfiguration. In addition, it is important to note that certain outcomes can be unintentional results, such as measures that were originally deliberated for other purposes. The aspect of Arena of Development provides us with a guideline to narrate the catching-up process of South Korea and its arena of inclusion. The defined boundary of the narrative is composed of the following: – Physical space that manifests the setting and establishment of productive organizations in Korea to generate wealth, technologies to generate more wealth and the knowledge to acquire them. This includes firms, public research institutions (PRIs) and universities. – Cognitive state that manifests vision, perspective and sense-making of the state and society in terms of policy priorities, i.e. between industrialization and inclusion. – Institution that manifests routines, formal and informal rules, and policy agendas that shape industrial activities; that on the one hand led Korea to achieve significant wealth, and on the other hand led to distribution of income and the creation of a welfare system. Arena of inclusion focuses on societal elements such as social groups and their interpretations, motivations, cognitive frames, negotiations and alignments (with the state and business groups), and views that matter to inclusive growth. Such elements are the reference point in which the economic and industrialization aspects are embedded (Geels et al., 2008, pp. 525–526). Through a narrative inspired by AoD and evolutionary economic concept as the common theoretical foundation for this book (see Chapter 1), this chapter details events that led Korea to mobilize its resources in order to achieve desired goals. It elaborates on the ability 6 It is maintained that the AoD approach downplays the consistency of rules and mechanisms of a particular system, in order to allow the study of actors’ political engagement to address tensions and controversies. It enables the understanding of the process of sense-making dynamics in the society (Jorgensen, 2012, p. 1008).

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of the state and society to manifest visions, (re)negotiate goals and objectives, and perform collectively to achieve industrialization and inclusive growth. We review previous works to track the implicit and explicit guiding visions,7 and to frame societal problems and their interpretations. There are a number of studies that serve as excellent sources of knowledge about Korea’s process of transition towards development with an established welfare system, including about: the role of the state, big business groups and hierarchical structures in the societalinstitutional-routine for Korea’s economic development (e.g. Amsden, 1989; Moon, 2016); Korea’s innovation systems and ventures into hightech industries such as semiconductors and telecommunication (e.g. Kim, 1997; Mathews & Cho, 2000, pp. 105–156); industrial and technological catching-up (e.g. Hobday, 1995; Kim, 1997; Lee, 2016a, 2016b; Mazzoleni & Nelson, 2007); studies on politics, organizations and public administration (e.g. Khan & Jomo, 2000 and Kim and Sorrensen, 2011); and social welfare systems and policies and their impacts (e.g. Cho & Kim, 1991a; Teichman, 2016). A stylized trajectory that manifests the transition process of the economy—from underdeveloped to developed—will be presented in this chapter. We explore the change of priorities and institutional routines and detail the normative principles that led Korea to acquire a progressive welfare system during the pursuit of development. Our discussion will connect three phases8 of development, which witnessed the state of Korea execute a series of inclusive-related measures in the early phase of development; followed by process negotiation for inclusive agendas when the economy pursued its catching-up strategy for expansion; and finally evolving to implement micro level policies in the pursuit of inclusive growth. The phases are: 1. Pre-condition phase: Manifesting the aspiration to develop its economy, Korea mobilized resources to establish institutions and infrastructure for productive activities. It is important to highlight the leadership style of key founders for institutions that populate routines in the arena of development and inclusion. The early

7 A measure recommended by Jorgensen and Jorgensen (2009, p. 368). 8 This also corresponds to the policy implications of “new diamond” proposed by Guth

(2005, p. 338).

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commitments to economic and social cohesion can be viewed as the pre-condition for rapid industrialization (Guth, 2005, p. 338). The impact of leadership on organization building for catching-up in the subsequent phase can be enormous. It determines the kind of organization in governing institutions. This corresponds to the views of the former CEO of POSCO (Yoon, 2011). 2. Catching-up phase: Projecting the attempts of the state, civil society and private firms to establish a routine that produces inclusive agendas during the economy’s pursuit of expansion and higher value-added activities. 3. Post catching-up phase: Projecting the attempts to promote inclusive growth. “Inclusion” via empowering SMEs and advancing the social system appear to be the social contract of the state. We entail each phase with an “arena” of inclusion and how this space is (re)negotiated and expanded for social well-being. The engagement of actors for the arena of inclusion is highlighted. This includes: land distribution and state support for poor farmers in the early catching-up phase; promotion of industrialization and subsequent projects to move industrial hubs to different regions; job creation and social programs; diversifying ownership of large corporations (chaebols) in the second phase of development; and finally, deliberate measures to upgrade SMEs and promote start-ups. The elaborated phases of development are then cross-checked with field results from on-site interviews. The details of the interviews are presented in Table 3.1. We interviewed experienced professionals who are attached to organizations that played prominent roles and were influential in the history of South Korea’s development. The positions of interviewees include senior government officers, an experienced management administrator who worked for established firms, a leader of an SMEs association, directors and distinguished professors. We emulate the procedure of interviews presented in Wong et al. (2015) by conducting a semi-structured interview and promoting interviewee-instigated discussions for in-depth insights that went beyond our grounded theoretical perspectives. The interviewees provided validation for our projected inclusive growth path of Korea, as well as insights into what kind of impact was created by certain inclusion measures. The findings of this chapter provide evidence and validation for those who maintain the importance of inclusive agendas in the process of development. Such exercises form important policy lessons for aspiring

Description of interviews

• Background • Relationship with the government, PRIs and universities (from inclusive point of view) • Aspect of CSR • The relationship with SMEs • View about inclusive growth of Korea

11. Chairman 12. Former Senior Trading Officer 13. Business Manager and Value Operation Manager

Firm 11. Korea Industry 4.0 Association 12. Samsung Corporation 13. POSCO

• The role during the early catching-up phase • The role during the post catching-up phase • Research priorities • Programs that were used to develop human workforce • Inclusive agendas—relationship with SMEs

6. Senior Professor 7. Adjunct Professor 8. Senior Professor 9. Senior Professor 10. Senior Professor

University 6. Seoul National University (SNU) 7. SNU Foundation for Start-up 8. Korea Advanced Institute of S&T (KAIST) 9. Korea University 10. Yonsei University

3.

2.

4. 5.

Main topics discussed

• The role of an agency in different phases and interactions with other entities Director for International Relations • Priorities and inclusive aspect • Diffusion of (ethical) professionalism Vice President • Platform or conducive environment for actors in innovation and aspects of Senior Fellow inclusion Senior Fellow • Types of infrastructure to prepare SMEs or start-ups for the different waves of development • View about inclusive growth of Korea

1. Senior officers

Position

Government Agency/Public Research Institute 1. Korea Institute of S&T Evaluation and Planning (KISTEP) 2. Korea Institute of Science and Technology (KIST) 3. Science and Technology Policy Institute (STEPI) 4. Korea Development Institute (KDI) 5. Green Tech Centre

Organization

Table 3.1

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economies that are struggling to develop mechanisms that can promote both inclusive agendas and industrialization.

Process of Transition Towards Inclusive Growth The following elaboration begins with an overview of the pre-condition phase of South Korea which eventually led the economy to develop social programs that populate the arena of inclusion.9 It describes the attempts of the state to develop a salience productive routine to generate income via the export market, mobilize resources to develop industrial power that is capable of producing arms to defend against a possible invasion by the North (Democratic People’s Republic of Korea) and certain politically driven inclusive agendas to gain the trust of the public—and thus in return, expecting public support for state projects that were seen controversial. Pre-condition Phase (1960s–1970s) There was a widespread concern about poverty and lack of human welfare after the Korean War in the early 1950s. The war weakened the landowning class and allowed the state to effectively perform land distribution10 to rural dwellers. It is reported that compensation to the landowners was minimal. This land distribution measure was seen as crucial, since North Korea imposed land distribution without compensation in the areas it occupied (Teichman, 2016, p. 136). Poor Rural Policies and Saemaul Movement General Park Chung-Hee assumed administrative power over South Korea through the May 16 coup and acted as the head of the state, 9 We acknowledge that there was a series of events in the long history of Korea which shaped its profound societal ideological thinking and cultural roots. We believe that these roots influenced the revolution in education, collectivism, and compassion and empathy in Korean society. Rowe and Kim (1997), however, reminded us that the roots evolved along with political and economic changes that accompanied industrialization. Thus, highlighting the policies that entailed salient inclusive growth agendas is useful in informing the literature and policy makers who aspire to develop similar programs and development agendas. 10 It is noted that land distribution increased in magnitude since the uprising of rebel peasants in 1946.

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subsequently being elected President in 1963. Many rural dwellers—the majority of the population at the time—supported his continued assumption of administrative power. Park adopted pro-rural policies, such as: legislation limiting farm size to 3 hectares (to ensure farmers were able reap reasonable benefits from the land); subsidies for farming equipment and material purchases; and monetary credits and funds for hardcore poor farmers (Teichman, 2016, p. 139). The Social Welfare Service Act that is seen inclusive was also enacted in 1970 during Park’s regime. The impact of such measures and supports led South Korea to attain high productivity in agricultural products, particularly in rice (Moon, 1991). The state also mobilized resources to empower the Saemaul movement (launched in 22 April 1970)—a program that exhorted rural dwellers to cooperate with each other and work diligently to build roads, bridges and wells, and replace their old thatched roofs with tiles. The slogan “selfhelp” was promoted to encourage rural dwellers to develop and maintain welfare collectively, while the government provided the means (materials and resources) for building the infrastructure. Park’s regime managed to prove its legitimacy to govern, as farmers witnessed well-being and progress in terms of their businesses (Sorensen, 2011). The state maintained low agricultural prices—particularly for rice—by acquiring those products through various programs at prices set by the state. Many farmers tended to dispose of their products through the state program, as the program allowed them to pay their land tax in kind as well as in cash. The procured rice was then supplied for military use, relief, grain distribution, exchange, or loan and contingency programs. It is seen as effective in stabilizing the price for sale of grain. In addition, it reduced government expenditure on import of grain and enhanced the income of farmers—and subsequently, consumer welfare (Moon, 1991). The ratio of rural to urban per capita income remained low,11 at 0.75 in 1966, 0.93 in 1975 and 0.89 in 1978 (Cho & Kim, 1991b, p. 358). The ratio of rural to urban household income was 0.99 in 1965, 1.01 in

11 The resultant equality is also attributable to the restriction of agricultural imports, leading to an increase of prices for domestic produce. Local farmers were among the beneficiaries of this measure.

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1975 and 98.3 in 1978 (Moon, 1991, p. 391). This mitigated the issue of massive migration12 from rural to urban areas. HCI and Mitigating Industrial and Economic Concentration of Power The state that was led by Park, however, was not just seeking legitimacy of governance through welfare and socio-economic development for dwellers in the rural areas. It also had an ambitious goal to achieve, which was a delineated economic structure commanding hierarchical industrial power. The junta government in 1961 had drawn up a Five-Year Economic Plan to transform its industrial structure—from one that was labour intensive, to one based on relatively sophisticated manufacturing of intermediate products. Import substitution policy was used as leverage (and a threat, as the state could withdraw it) to influence private firms to commit to manufacturing activities. The collusion between the state and firms then took shape (Ringen et al., 2011, p. 44). Many firms borrowed financial resources from various foreign entities to expand their businesses in various sectors. As firms became larger in size and capital (chaebols), the government commanded them to penetrate the export market. Chaebols that sought to penetrate the export market were supported through leeway in access to foreign loans, subsidized credit, tax exemption on imported materials for manufacturing and different forms of protection. Park declared martial law in 1972 and created the Yushin13 constitution that expanded the president’s powers of governance. With that power, the state launched the Heavy-Chemical Industry Drive (HCI) to promote what was perceived as strategic industries.14 As part of a treaty for normalizing relations between South Korea and Japan, the former received reparation payments from the 12 This by no means implies that the issue of migration did not exist; it is simply that the magnitude of negative impact due to inequalities between urban and rural households was not as drastic as in other developing countries. 13 As industrial cities emerged—filled with city dwellers who voted against the Park regime—Park realized that he was losing his grip on votes (Sorensen, 2011, p. 146). Park was keen to seek legitimacy of governance through (more advanced) socio-economic development, as the Yushin measure implies the retreat of democracy in the Park regime. 14 The early intention of having targeted industries—particularly steel—was to construct a defensive measure in case the US government withdrew its troops from Korea (Lee, 1991a). The state of Korea organised the industries in a modular manner so that they could reform and assemble defensive arms if needed (H.-A. Kim, 2011, p. 31).

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latter. Park mobilized a significant share of the funds to support the steel project with the Pohang Iron and Steel Company (POSCO), launched in 1968 with a steel mill capable of producing (rather substandard) steel products. With the support of the government,15 POSCO constructed a second steel mill (Yoon, 2011, p. 54). The state also appropriated the remittances paid by the United States for participation by South Korean military personnel in the Vietnam War during the mid-1960s. The targeted industries were seen as a means to generate new wealth and break the vicious cycle of low value-added activities if they succeeded in penetrating the export market. The plan to have highly capitalbased heavy industries allowed many urban areas to develop rapidly. The placement of manufacturing plants near the urban areas was sought in order to allow firms to attain economy of scale and agglomeration for production in a short period of time. Many industrial complexes and infrastructure were developed near the two major urban areas, Seoul and Busan16 (acknowledged as the Seoul-Busan corridor). Satellite regions such as Banwol (for SMEs), Ulsan (for automotive industry) and Pohang (for steel industry) witnessed rapid development since then. To reduce concentration of economic and market power in the two areas (Cho & Kim, 1991b; Kwon, 1988), the following measures (in the Migration Policy and the Industrial Distribution Law, both executed in 1977) were implemented: • Controlled development of satellite regions and restriction of development of the two urban areas (Seoul and Busan), which led to significant decrease of population growth rates in the urban areas: from 6.35 in the 1960s to 5.15 in the 1970s (Cho & Kim, 1991b, p. 350). • Relocation of universities and research organizations from Seoul to other regions. • Allocation of resources to improve infrastructure of recognized depressed regions (such as Cheongju and Kwangju). • Incentives for relocation of manufacturing to the depressed regions. The government also executed a number of measures to inhibit 15 The second steel mill project was first commissioned to Hyundai, as the government sought to reduce its financial burden in supporting ambitious projects (Yoon, 2011). 16 The strong export drive led four new towns (Ulsan, Pohang, Changwon and Kumi) near Busan to be designated as national growth poles (Kwon, 1988, p. 124).

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39 37

Gini Index

35 33 31 29 27 1966 1969 1976 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2018

25

Fig. 3.1 Gini index of market income of South Korea, 1966–2018 (Source SWIID [2016]; Data for 2015 and 2018 are drawn from SWIID [2020])

land speculation and specified land prices if firms wished to relocate manufacturing plants from Seoul to other regions. It is informed that 93% of commodities and 62% of shipments were produced under monopoly, duopoly or oligopoly conditions in 1977. The top three producers accounted for 60% of market share, and the top 10 chaebols (in terms of size) accounted for 48% of GNP (Kim, 1999, p. 363). The Gini index for income inequality rose around the time when HCI was implemented (Fig. 3.1). The Park government took drastic measures to address the issue of rising inequality and realized that merely taxing the earnings of the rich and chaebols and redistributing it to the poor would not solve the problem. The government studied the wealth ownership patterns and the inefficiencies created by industrial aggregate concentrations,17 and tackled the issue by diversifying ownership of chaebols’ businesses and limiting aggregate concentration (Lee, 1991b). The execution of the Comprehensive Measures for the Stability of Prices on 29

17 Chaebols often diversified into areas (such as producing parts for large-scale manufacturing) where SMEs ventured. The government realized that the SMEs were more capable of operating in those areas, yet chaebols were often interested to acquire the SMEs businesses, as they wished to have full control of the entire production chain (Lee, 1991b).

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May 1974 and Fair Trade Law in 1976 is seen as implementing important measures on the issue of ownership, which include: • The government is authorized to set price ceilings for goods and services, and monopoly and oligopoly businesses are obliged to declare the prices of their products and services. • The government is authorized to control supply of goods if the prices of goods increase due to shortage in supply. On the other hand, cartels are permitted to form if rationalization of certain (oversupplied) goods occurs. • Monopoly and oligopoly firms are prohibited from engaging in unfair trade businesses or restricting competition. Allied plutocrats would be punished. • Ownership of big businesses was pushed to be publicly offered in order to develop equity and bond markets. This sought to distribute returns to society via paying dividends to a wider range of equity holders. The opening up of big business ownership to the public also pushed firms to engage professionals (e.g. lawyers, managers and accountants) as they undertook roles in business administration and important decisions. • More stringent loans—particularly to firms with outstanding loans exceeding 5 billion Won—and credit allocation mechanisms to limit purchases of other firms. The credit is monitored to ensure that it will be used only for expansion of certain production capacity. The criteria of the measures are detailed and the translated Acts are explicit. There were no tangible grey areas or loopholes that chaebols could manipulate to their advantage. Inclusive measures for interterritorial cohesion and to reduce concentration of economic and market power followed, with another series of stringent measures executed in the catching-up phase that led Korea to witness a dramatic decrease of Gini index for inequality (Fig. 3.1). It is clear that the state executed regional planning to reduce industrial concentration on the one hand, and on the other hand intervened in business affairs to reduce concentration of economic and market power.

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Catching-Up Phase (1980s–1990s) The year 1980 marks a significant change in relationship between the state and its allies, the chaebols. The economy was in turmoil—due to the assassination of Park and subsequent assumption of power by Chun Doo-hwan, high levels of previous government debt to finance costly projects and high debt per equity ratio remaining for some firms. To further reduce concentration of economic and market power in the chaebols, the state enacted a number of Acts related to trade (Lee, 1997, pp. 46–50). These Acts (such as the Systematization Promotion Act in 1982 and the Banking Act in 1984 with subsequent Loan and Payment Guarantee Management Rules) led to the regulation of chaebols in areas that they were not specialized in, especially real estate-related businesses. The largest 20 chaebols were audited and advised to maintain the areas of business that fit their competencies, and dispose of those which were not a good fit in order to gain financial liquidity. The plan was executed on a voluntary basis (Lee, 1991b, p. 497) as the Chun regime distanced itself from the practice of direct intervention in business affairs.18 The chaebols started to lobby for more liberal policies in the financial markets (Ringen et al., 2011, p. 48) as the economy slowly recovered. The phase of catching-up has indeed led Korea to witness close cooperation between firms and public research institutions.19 The Chun regime also engaged in supporting small and medium sized companies (SMEs). It legislated the SMEs Product Procurement Promotion Act in 1981 to encourage purchase of SMEs’ products, and SMEs Business Coordination Act in 1982 to protect SMEs from the aggressive diversification measures by chaebols (Lee, 1997, pp. 48–50). Budget for Education and People’s Share The rapid changes in industrial structure demanded a more educated workforce to participate in the upgrading process in the early 1980s. 18 Unless the affairs prove unsatisfactory. 19 It is the view that the measure to expand PRIs derived from KIST was well supported

by society. This is because the population—with gross enrolment for tertiary education of 32% in 1985, and as high as 95% in 2013—would favour the pursuit of science and technology. The approach of appropriating derived science and technology of PRIs to support the upgrading process was generally agreed on as the measure to break the middle-income trap.

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5.5

Share

5 4.5 4 3.5

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

3

Fig. 3.2 Korean government’s spending on education as percentage of GDP (Source OECD Indicator: https://data.oecd.org/gga/general-government-spe nding.htm)

The budget allocation for basic education, higher education and research activities was given high priority.20 The government budget for education (Fig. 3.2) increased as the economy recovered from the financial turmoil in the early 1980s. Many industrial employees were incentivized to pursue higher education programs, and young graduates found themselves greater employment opportunities and career prospects. Figure 3.3 shows the increase in tertiary education enrolment. This led to the rise of an educated middle-income population, which in turn reduced the premium wages enjoyed by the very few in the previous phase of development. The educated labour force with more disposable income also created the conditions for labourers to organize and form

20 This can be attributed to the increasing utilitarian/societal demand for equal education opportunities (Rowe & Kim, 1997, p. 33). The society in general believed that attainment of (formal) education would enable one to break the vicious cycle of poverty and enhance social mobility in the job market. There is a strong belief that an individual’s success in higher education would increase the chances of obtaining modern jobs or careers (Kim, 2010, p. 312). It is also highlighted that Korea’s historical emphasis on education and tendency towards collectivism has led individuals to achieve in (formal) education, as it has long been used as indicator to measure the success of an individual (Kim, 2010, p. 311). Women in Korean society who seek to enter the labour market are keen to acquire (formal) education, as it is an important bearing on occupation and mobility in the catching-up phase (Rowe & Kim, 1997, p. 44). Thus, it is not uncommon to witness intense competition among candidates for university placements in Korea.

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35 30

Share

25 20 15 10 5 0 19501955196019651970197519801985199019952000200520102015

Fig. 3.3 Enrolment of tertiary education as percentage of population (Source Barro-Lee [2021]: http://www.barrolee.com/)

unions for certain movements (Kim, 1994, p. 208). Korea then witnessed protests by the middle class for better democracy, wages, wealth distribution and social justice. Teichman (2016, p. 148) observed—from a survey attesting to middle class commitment to social justice—that middle class respondents expressed very strong “sympathy for poor farmers, factory workers and slum dwellers”. The state responded to the demands by improving the social welfare system and holding a presidential election in 1987. The state launched “people’s share” to privatise state-owned enterprises (e.g. POSCO and KEPCO) via selling the stock to urban poor and farmers at below market value (Yoo & Lim, 2000, p. 100). The business groups, on the other hand, paid attention to the requests of the trade and labour unions21 on working conditions and welfare issues. 21 It is noted that inadequate job opportunities in the pre-condition phase of Korea had led its productivity to grow faster than real wages in the job market (S. Kim, 2011). The perceived unlimited supply of labour in the job market and state-favoritism given to business groups may had led employers to treat employees as a “perishable resource in the industrialization process rather than as growing human capital to be developed constantly” (p. 431). This is particularly evident for the case of Vietnam. As the labour market tightened and real wages grew faster than productivity in the catching-up phase, employees were then motivated to claim compensation for past oppression. The year 1987 witnessed a turning point for the rise of trade unionism, prompted by the declaration of democracy (p. 435). It is observed that Korea has yet to achieve employer-employee compromise

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The return of industrial upgrading and development led affluent urbanites to demand a higher quality of food. Such demand led farmers to diversify their businesses and cultivate cash crops (Moon, 1991, p. 372). Government, on the other hand, appropriated substantial tax revenue to develop more advanced infrastructure in the farming areas. Such measures allowed farmers to benefit from the rapid industrialization. Social Insurance and Security Schemes The social insurance and social security schemes that had been reserved for public employees were extended to provide social protection for private sector employees. There were revisions of the Pension (1986, 1995, 1998 and 1999) and Health Insurances Acts (1981, 1986, 1987, 1989, 1991, 1994 and 1995) to cover more protections for employees. Funds were allocated for social welfare services and the establishment of the Welfare Service Fund Act for the marginalized (1980), Welfare Act for children (1981) and unemployment insurance (1998). The insurance and welfare acts were used to enforce companies with 500 or more employees to provide social protection (Ringen et al., 2011, p. 35). The aforementioned events and attempts of the state to develop social welfare systems led Korea to attain a powerful and well-informed middle class, constituting about 70–75% of households between the period of 1990 and 200022 (Cho, 2015). Korea witnessed its share of government expenditure for social protection increase dramatically since the mid-1980s23 (Fig. 3.4), having a high correlation with gross expenditure of R&D (GERD). This coincides with the view of Gerschenkron (1962) on concomitance between achieving social capability (pointed out by Sen, 1999) and advancing technology. The increase of welfare development is attributable to the rise of a highly educated and well-trained middle-income class, which led to the (rather than confrontation) relations when conflicts are resolved by institutions of law and established customs (i.e. no class consciousness and middle-of-the-road pragmatism). By contrast, this sort of compromise is evident in countries like Japan, Ireland and Germany (pp. 433–434). 22 Korea witnessed a decrease in middle-income population, with only 70% middleincome households by the year 2000. This can be attributed to the negative impact of the 1997 Asian financial crisis. 23 The share of social expenditure “spike” in 1998 and 1999 as shown in Fig. 3.4 is largely due to the commitment of the government to mitigate the socio-economic damage of the 1997 Asian financial crisis.

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8 7

Share of GDP

6 5 4 3 2 1 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

0

Share of Gov. Exp.

GERD

Fig. 3.4 Government expenditure for social protection and gross expenditure of R&D as a percentage of GDP for South Korea (Source OECD Indicators: https://data.oecd.org/gga/general-government-spending.htm)

emergence of a civil society that has empathy for the marginalized. They are highly informed and hold bargaining power to negotiate deals with the state and business groups (that have gained from their cooperation for industrial upgrading) to populate the arena of inclusion. The high consciousness of who is at what income level and the ownership structure of the economy is also seen as a contributing factor in the negotiation for a more progressive welfare system. Such a process allows for the virtuous cycle of inclusive growth. This is somewhat in contrast to the case of Mexico. While Mexico’s economy may have gained from industrial growth, it failed to create a critical mass of informed and well-trained middle-income population who share empathy for the poor (Teichman, 2016). The share of social contribution (as well as the progressive tax mechanism) is not well progressed compared to that of Korea (OECD, 2017). Supports for Productive SMEs While Korea attained significant progress in its development numbers, many are of the view that the economic structure that appropriated the dynamic chaebols to produce and venture into niches has obstructed the growth prospects of SMEs. The expansion of chaebols’ ventures is seen to

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have come at the cost of developing the capabilities of SMEs and creating start-ups. As more liberal policies emerged to replace of the rigid ones that regulate acquisition activities, it is common to see chaebols acquire SMEs or start-ups that have the potential to expand. There are many talented young individuals who are keen to build their careers through the prospects offered by chaebols. The wages offered by chaebols are often rewarding, and this leads to a crowding phenomenon for jobs offered by them. Many view career prospects in SMEs or start-ups as inferior, which leads to a limited capable workforce for SMEs to utilize in searching for new niches. The measure to upgrade the SMEs and promote start-ups has been the mandate of all political parties in every election since 1988 (Teichman, 2016, p. 149). The government after the Chun regime introduced the Support System for the SMEs Business Structural Adjustment Fund in 1988. This was in order to support SMEs via: providing funds to firms that were suffering during the appreciation of the Won; fiscal support; financing promising firms; and tax exemption for firms suffering during the financial crisis (Doh & Kim, 2014, p. 1558; Lee, 1997, pp. 48–50). There were funds and loans for SMEs and start-ups to pursue new businesses, funds to launch start-ups and tax allowances for new entries. The supporting programs include: • Capital Goods Industries Promotion Program in 1995, requiring financial institutions to allocate 45% of their annual loans for SMEs. • The Korean Small Business Innovation Research Program (KOSBIR) which started in 1998, to promote regional R&D activities of SMEs. The policymakers working for the government ministries are highly trained and empowered with knowledge through foresight exercises and planning. They identified the technologies that would build up the economy and instituted a public procurement system—on the one hand to be used as test-bed, and on the other hand to create demand for the technologies. There are a number of government initiatives committed to procure technologies produced by the SMEs. This includes: • Mandatory Procurement Program in 1996 from the Ministry of Trade, Industry and Energy to acknowledge the quality of the

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technologies and promote their application, and to facilitate the commercialization process. Similar measures were adopted by the Public Procurement Service unit. • Measures from the SME Administration (SMBA in 1996) to procure technological products of SMEs and promote the use of the products to other SMEs. The efforts in promoting SMEs of Korea have been significant, and it is noted that the state is keen to empower the SMEs via its procurement system (Thurbon, 2015). The early supports and protections for SMEs—as well as the subsequent assistance for them to acquire productive capability—led the SMEs of Korea to narrow the gap in value-added manufacturing compared to the chaebols. The share of SMEs in valueadded manufacturing matched that of the chaebols in 2000 (Lee & Xin, 2015, p. 95). Post Catching-Up Phase (2000–Now) Towards the phase of advanced development, Korea achieved about USD 18,000 GDP per capita in the year 2000. It has achieved an established democracy-based society. The economy is well organized and acquired productive routines in which the national growth rate for productivity is above the growth rate of wages for labour. Cities such as Seoul and Busan witnessed negative net migration, attaining −1.4 and −0.6, respectively, in 2016 (KOSTATS, 2016). The population density of Seoul saw only a marginal increase from 16,221 in 2005 to 16,362 in 2015. In addition, there was planning in 2003 to relocate the main government offices in Seoul to elsewhere in Korea. This was intended to shift administrative power away from Seoul. A special administrative district in Yeongi county (acknowledged as the centre of the country) was created in 2007, and many government offices have been moved there since. Busan, on the other hand, showed decreasing population density from 4609 per sq. km in 2005 to 4479 in 2015 (KOSIS, 2016). Meanwhile, regions that used to be recognized as depressed witnessed positive net migration. The SMEs of Korea are highly productive, with the share of valueadded manufacturing reaching 51.2% in 2013. SMEs produced about 38%

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for the export market and are seen as important economic entities to generate wealth and employment for the economy.24 Commitment to R&D has been spectacular. Korea’s R&D expenditure as percentage of GDP (GERD) rose from 2.18 in 2000 to 4.64 in 2019, becoming one of the highest in the world in terms of commitment to R&D. This is largely attributed to the unceasing investment of the private sector in technological innovations as they continued to witness increasing returns of scale. Business firms contributed about 75 percentage of the national GERD. As the economy advanced, the rate of social welfare expenditure increased. This can be attributed to two main factors. First, Korea has been identified as the economy that spends the least for social welfare relative to the OECD economies. It is in the interest of the government to narrow the gap. Second, the increasing expenditure on social welfare is consistent with the rise of contingent workers and income inequality, as many firms preferred to employ non-regular/non-standard and part-time workers in order to minimize labour costs after the 1997 financial crisis. The crisis led Korea to embrace a labour market flexibility approach which allows firms to lay off redundant employees and engage contingent workers (Park & Mah, 2011; Shin, 2010). It is noted that the income inequality index of Korea started to increase at the end of the 1990s (see Fig. 3.1). The index started to fall again since 2007, as there has been significant social expenditure by the state since the early 2000s. This can be viewed as a response to a series of protests by the contingent workers25 with the help of labour and social activists. Said so, it is of note that the index started to raise since 2015. Public expenditure for social protection in terms of percentage of GDP rose from 2.0% in 1990 to 3.2% in 2000, and achieved 7.6% in 2019. It is noted that the global financial crisis which struck Korea’s economy in

24 Figures are obtained from the SMBA page, available at: http://www.smba.go.kr/ site/eng/02/10202000000002016111504.jsp. 25 The contingent workers realized that the labour unions had become defensive in protecting jobs and wages of members, and hesitated to secure desired protections for the contingent workers (S. Kim, 2011, p. 443; Shin, 2010, p. 223).

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2008 did not deter Korea from its commitment to social welfare expenditure.26 The insurance and welfare acts were revised to force companies with as few as 4 employees to provide social protection (Ringen et al., 2011, p. 35). The relatively low inequality (Fig. 3.1)27 while the economy of Korea expanded can be attributed to the unceasing commitment of the state to social welfare.28 Support for Technology-Based SMEs Nonetheless, the share of SMEs and start-ups for business R&D has been small, attaining 12.5 and 11.4%, respectively, in 2015. This is in contrast to the chaebols, which contributed 76.1% in the same year. It is noted that chaebols absorbed almost 48.7% of researchers working for private firms in 2015, with the top 5 chaebols alone acquiring 22.7%. Chaebols have seized the advantage of technological production capabilities. Many patents of Korea are owned by chaebols. It is the view that the SMEs of Korea have yet to gain technological capabilities that enable them to perform on par with Taiwan (Wang & Tsai, 2010). Many SMEs produce and supply to chaebols, and they are cautious of the risk of offending chaebols by operating beyond the latter’s knowledge scope. Nonetheless, there are SMEs such as Jusung Engineering and SunStar that are capable of creating new paths and operating beyond the orbit of the chaebols (Lee, 2016a, pp. 288–309). The state then made KOSBIR a mandatory program in 2013 as a step-up effort to promote SMEs. This led to the devotion of 5% of R&D budget to KOSBIR and mandated government procurement of 26 It is our view that Korea emerged to be resilient in face the capital inflows problem that could lead to (frequent) boom-bust cycles and vulnerability to external credit tightening since the 2000s (Kim, 2009, p. 281). This is in order to avoid the recurrence of destructive effects from the financial crisis which it witnessed in 1997. Kim (2009, p. 277) noted that Korea has a substantial cushion of official reserves, policy framework to weather the boom-bust cycle and restrained its capital from exposure to toxic assets in other economies. 27 The trend generally echoes the Gini index for household income revealed in Korea’s e-National Index (available at http://www.index.go.kr/potal/main/EachDtlPageDetail. do?idx_cd=1407). It indicates gradual contraction, from 0.312 in 2007 to 0.295 in 2015 (retrieved on 20 November 2017). 28 The local government of Korea played a role in contributing to social welfare. In 2013, it spent 22.6% of the total local government budget on social security, 10% on environmental protection and 9.6% on transportation. A share of 2.6% was used to support regional SMEs operation (The Budget System of Korea, 2014).

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qualified technologies from SMEs (Thurbon, 2015, p. 589). There are also supports and endowments for SME owners to form associations and promote technology associated with Industry 4.0 (such as Internet of Things and Big Data) and emerging technologies. Many projects funded by the government resulted in cooperation between those from SMEs and academics from universities. The government also dedicated its resources to develop industrial clusters that are conducive for spinoffs and expansion of SMEs. It identified 17 potential clusters that are capable of producing specific industries. The clusters consist of chaebols and universities as stakeholders, and there are institutions promoting spin-off routines and upgrading of SMEs. As more and more SMEs participated in technological markets, a fund was established to protect SMEs against certain lawsuits from big firms or patent trolls. Korea Development Bank (KDB) and Industrial Bank of Korea established the KDB Infrastructure IP capital fund in 2015 with a value of 100 billion Won to defend Korean firms—particularly the SMEs—from lawsuits by foreign patent trolls. The measures taken to promote SMEs in the post catching-up phase emerged to be highly inclusive, with the focus targeted at the micro entities (SMEs and start-ups). These entities are acknowledged as an important means to achieve sustainable wealth development. The measures sought to enable micro entities to appropriate both private and public sector resources for emerging technologies. In time, we will see if the measures are effective in leading SMEs and start-ups of Korea to develop technological niches and new competitiveness for their economic and technological gain.

Remark The view on growth cum equity highlights the importance of economic growth as it leads an economy to a “turning point”, suggesting that the issue of inequality would be addressed—assuming that the process of promoting modern sectors in the urban areas would ultimately reduce income inequalities. In addition, there is the view that an economy would attain inclusive growth via (simply) investing in education in order to create an educated workforce and in technology in order to gain business efficiency. We contend against this simplistic view. The case of Korea evidently shows different sorts of interventions and supports throughout the three phases of development (Fig. 3.5). This chapter detailed the

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Ownership of big businesses pushed to go public, 1974

Pro-rural policies, Welfare Act & Saemaul, 1970

Increased budget allocation for education, KOSBIR, a mandated program 1988 People’s share, 1987 for SMEs, 2013 Various social insurance security schemes, since 1981

Pre-condition (60s-70s)

HCI cum mitigating the issue of migration, 1977 Reduced industrial concentration and concentration of economic and market power, 1977

Catching-up (80s-90s)

Post catching-up (2000 onwards)

Protection for SMEs from chaebols, 1982

SMEs Structural Adjustment Fund, 1988

Infrastructure IP capital fund. 2015

Procurement dedicated for SMEs, since 1995 R&D support for SMEs, 1998

Fig. 3.5 South Korea’s inclusive measures timeline, 1960–2000s

arena of inclusion of Korea in the pursuit of development. It is clear that the organization process for inclusive growth over the decades emerged to be deliberate and systemic. The growth which Korea attained is capable of deriving skills and income distribution mechanisms. The first phase of top-down approach for industrialization witnessed execution of pro-poor policies that favoured farming activities. The state was keen to build industrial power at the end of 1960s and executed various industrial projects in order to attain it. Chaebols benefited from the HCI period and then were pushed to release their ownership to the public. The state actively reduced regional industrial concentration and the concentration of economic power attained by chaebols. It is the view that the state implemented measures to maintain stability of worker-employer relations by populating the arena of inclusion—as the state feared that worker protests for better welfare and working environments in chaebol firms would obstruct productive activities. However, there is the view that the state committed itself to modernization of administration, via cooperating with non-state actors to deliver part of the governance. The state outlined the governing objectives and missions, and delegated some of them to actors such as firms and rural dwellers (Ringen et al., 2011, pp. 23–24). Chaebols performed what they were commanded to achieve, and rural dwellers cooperated under the

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Saemaul movement to modernize rural sectors. The state also recognized the importance of balance of ownership structures for social equality. Measures for the Stability of Prices and Fair Trade Law were enacted in the 1970s and are acknowledged as important measures to achieve social equality. The seeds for inclusive agendas were sown early, leading to the establishment of principles for maintaining equal society in the following phases of development. The phase of catching-up witnessed a change of relationship between the state, chaebols and civil society. We observed in many occasions intense negotiations between them for social welfare and better working environments. Civil society negotiated social democracy and mechanisms to help the poor, as many empathized with them. The economy was becoming advanced and the state channelled significant resources to improve the welfare system. The policy measures included budget allocation for education, people’s share for the poor, social insurance and social security schemes, and Acts such as Pension, Health Insurance and the Welfare Service Fund Act. There were also funds and programs to empower the SMEs such as Business Structural Adjustment Fund and SMBA. The income (and ownership) inequality was maintained at low levels. The pursuit for competitiveness and emerging technologies in the post catching-up phase blended many inclusive agendas together to realize growth that coevolved industrial upgrading and social welfare. Microentities such SMEs and start-ups were seen as important stakeholders since the end of the 1990s. Many supports for technological upgrading and R&D targeted the SMEs and start-ups, such as the Mandatory Procurement Program and Infrastructure IP capital fund. A convergence trajectory is observed that connects advanced industrialization and social inclusion via supporting the SMEs to participate in R&D activities and pursue production of advanced technology. This chapter highlighted the aspect of inclusion in the process of industrialization. The case of Korea emerged to be useful, as it both attained rapid industrialization and established welfare systems. Our case coincides with that of Taiwan (see Chapter 4), as both states deliberately intervened in their respective markets and populated the arena of inclusion in the early phase of development. They witnessed intense measures to distribute income and reduce inequalities throughout the process of development. Thus, it is our view that it is neither neo-liberal measures (that limit

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the role of the government) nor favours29 to big businesses (based on the growth cum equity view) that induced the significant progress and development of Korea. The conditions for inclusive growth were instituted early and moulded a civil society that is emphatic to welfare. We believe that the commitment to mould such conditions can be replicated. Therefore, the inclusion discussed in this chapter through the lens of arena of development can be used as an important policy lesson for other economies that aspire to attain similar inclusive growth and development.

References Abramovitz, M. (1986). Catching-up, forging ahead and falling behind. The Journal of Economic History, 46, 385–406. Altenburg, T. (2009). Building inclusive innovation systems in developing countries: Challenges for IS research. In B.-A. Lundvall, K. J. Joseph, C. Chaminade, & J. Vang (Eds.), Handbook of innovation systems and developing countries: Building domestic capabilities in a global setting (pp. 33–56). Edward Elgar. Amsden, A. (1989). Asia’s next giant: South Korea and late industrialization. Oxford University Press. Amsden, A. (2001). The rise of the “rest”: Challenges to the West from lateindustrializing economies. Oxford University Press. Amsden, A. (2007). Escape from empire: The developing world’s journey through heaven and hell. MIT Press. Bai, M. K. (1982). The turning point in the Korean economy. The Developing Economies, 20, 117–140. Chen, L., & Naughton, B. (2016). An institutionalized policy-making mechanism: China’s return to techno-industrial policy. Research Policy, 45, 2138– 2152. Cho, K.-W. (2015, February 13). South Korea’s middle class is shrinking, according to recent report. The Hankyoreh. http://english.hani.co.kr/arti/ english_edition/e_business/678354.html

29 There are many governments around the world that believe in the trickle-down approach for development, assuming that empowering the rich would then witness wealth being transferred to the poor. While there is the view in recent years questioning the effectiveness of such an approach in the context of globalization and the political setting of Korea today, there are not many who deny the practical use of such an approach in the 1960s and 1970s. They see a rather simplified correlation where favours from the state allow (big) businesses to attain influential positions in the government’s targeted heavy industries in the global production value chain.

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CHAPTER 4

Achieving Virtuous Cycle Development in Post Industrial Catch-Up Era of Taiwan Economy

Background The notion of socio-technical transition has caught the interest of many scholars since the 2000s. A number of previous studies have demonstrated the individuality of how transition processes respond to new economic development and competitiveness in the domain of science and technology (see, e.g., Geels & Schot, 2007; Rip & Kemp, 1998). Specifically, these authors adopt a narrative frame that connects a theoretical model of co-evolutionary dynamics with selected economic sectors in order to question the sustainability of their transition. Although much of this literature stream provides a coherent view of the processes of innovation and technological change, they have been confined to addressing only the structural deficits present in innovation systems, and researchers have yet to provide a concrete normative principle that addresses the persistence of transformative problems in socioeconomic or political systems. Weber and Rohracher (2012), therefore, proposed the notion of “transformational system failures” that legitimize “transformational policy”, which has “goal-oriented transformative change” as its main aim. Such a framework targets transformative change from these possibly neglected evolutionary and system perspectives. In the present chapter, by building upon Weber and Rohracher’s (2012) notion of transformational system failures, we examine the political, structural and historical conditions that have shaped the strategic © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 C.-Y. Wong, Experimental Learning, Inclusive Growth and Industrialised Economies in Asia, https://doi.org/10.1007/978-981-19-3436-0_4

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transformation of the industrial system in a prominent and outstanding “latecomer” or “post catch-up” economy, Taiwan. Since its early catchup efforts of the 1980s, Taiwan has been proactively transforming its industrial system to reach a persistent niche position in the global production value chain, achieving admirable cycle growth since the early 2000s. This chapter expands the transformational process proposed by Weber and Rohracher (2012) by incorporating Taiwan’s evolutionary targeting policy processes. It highlights the positive principles of Taiwan’s evolutionary targeting policy and provide salient normative principles as guides for transformational policymaking.

Narrative Framework “Transition” is widely considered to be a process in which new technologies or institutions are ultimately developed, and in which new markets or linkages in the innovation system are created. For example, Avimelech and Teubal’s (2008) work on evolutionary targeting policy to govern economic structural change and Geels’ (2002) taxonomy on adapting socio-technical regimes through a series of selection processes both articulated the importance of transition and offered aspiring developing economies a framework within which to shift an existing or undesirable economic landscape to a more functional economic system based on displaying certain strategic behaviours. Geels’ work led to subsequent research by Jorgensen and Sorensen’s (2002) and Weber and Rohracher’s (2012), which used the multi-level perspective model as the foundation for, and approach to, discussions of the (re)configuration of socioinstitutional-political factors for new socio-technical systems, examining the relationships between agents during transition or the development of new technology. It is argued in Avimelech and Teubal (2008) that infant industry protection theory and the winner picking approach may not provide adequate developmental guidelines for economies that encounter structural change, or appropriate policy tools with which to address other system failures (e.g. institutional setting, market structure and governance issues). They rather proposed an evolutionary targeting approach that can provide policymakers with an alternative to targeting infant industries by specifying selection mechanisms for transforming the industrial system. This approach involves the design and implementation of

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targeted programs in order to create a multi-agent structure by leveraging existing market forces. The term “multi-agent structure” denotes a configuration of industrial activities that is collectively oriented by industrial stakeholders, whose activities subsequently trigger the formulation of new industrial structures (Avimelech & Teubal, 2008). With the emergence of a multi-agent structure, an economy must negotiate and witness several sequential complicated phases before reaching competitive maturity (Simmie et al., 2014). Avimelech (2007, 2013) elucidates the targeting policy portfolios which are used for the advancement of each development phase: first experimenting and executing different functional types of science and technology policies; searching for capabilities and accumulating experience in productive activities; subsidizing technology diffusion via a selective type of policy for the development of pre-emergence indigenous capabilities; and finally leveraging R&D activities from start-up intensive high-technology clusters. Avimelech et al. (2010) attribute the relative success of the venture capital industries in Israel over other advanced economies to this series of (sequential and path dependent) policy arrangements. Jorgensen and Sorensen (2002) proposed a productive framework termed “Arena of Development” (AoD), which is a concrete set of normative principles underpinning transformation to an eventual transition.1 The model is based on mapping different configurations of actors framed by the institutional environment of an innovation system. By using special dimensions, this process can create or redefine boundaries for specific arenas of change. Jorgensen (2012, p. 1001) later maintained that actors in an arena comprise a heterogeneous set of entities—humans, technologies, institutions, visions and practices—given specific meaning, position and identity through their interconnectedness in networked relationships. Moreover, structuring and stabilization within networks result from the alignment and mediation of actors in the arena.

1 Geels and Kemp (2007, p. 441) defined “transformation” as “a change in the direction of existing trajectories, related to a change in rules that guide innovative action”, while “transition” refers to a discontinuous shift (and may refer to structural change) to a new trajectory and system.

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Table 4.1 Transformational failures perspective

Transformational failures

Type of failure

Failure mechanism

Directionality failures

(1) Lack of shared vision in the transformation process that may ultimately lead to collective coordination failures (2) Lack of policy infrastructure to establish a development path Insufficient space/platforms for learning user/market demands Lack of multi-level policy coordination in a governing system (1) Lack of policy learning opportunities (2) Lack of adaptive policy portfolios to address uncertainty

Demand articulation failure

Policy coordination failure

Reflexivity failure

Source Adapted from Weber and Rohracher (2012)

Building on studies analysing market failures and structural system failures, Weber and Rohracher (2012) proposed a framework for transformational system failures2 that can articulate possible government failures in the transition towards sustainable development (see Table 4.1). Their work provided a comprehensive analytical framework for explaining how innovation policy settings can govern transformational change based on the perspectives of market failure, structural system failure and transformational system failure. This integrated framework, combining AoD and multi-level perspectives, has since enabled policymakers and managerial decision-makers to reinforce and broaden their outlooks on long-term change by observing changing production and consumption behaviours, institutional settings and reflexive mechanisms.

2 Weber and Rohracher (2012) proposed a framework for transformational system failures that, if overcome, could promote transformative change for development. Transformational system failures are based on the absence of dynamic coevolution between society, institutions and technology, and they may appear in systems of production and consumption.

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While previous studies have provided a comprehensive analytical framework for understanding transformational change, the present chapter addresses the lack of empirical evidence by using the case study of Taiwan to shed light on policy processes and normative transition principles. In particular, we highlight the positive views on macro- and meso-level changes and present salient normative principles as guidelines for elaborating on the evolving industrial transformation policies of governments. The study for this chapter borrows the theoretical perspective of Weber and Rohracher (2012) on transformational system failures (Table 4.1) in order to explain the stylized transition trajectory of an economic system. In addition, the evolutionary economic concept presented in Chapter 1 and transitional path discussed in Dutrenit et al. (2011) are used in this study to depict three distinct phases of economic and technological development. The first phase of development (phase 1) involves a development policy that targets productive manufacturing industries and a critical mass of economic agents. Such policy aims to generate sufficient employment opportunities to address the issue of surplus labour during the early part of the catch-up period, which then provides a sufficient workforce for subsequent development. This process ultimately leads to the emergence of a new regime that reconfigures and restructures a new equilibrium.3 Institutional change or structural reform in an economy is used to create a new form of interdependency among stakeholders in the production system. Once the new form of interdependence has been stabilized, a new structure of governance (or new rational procedures) would be formed (phase 2) to respond to new opportunities appearing in the economy. In this phase, the government must invest heavily in policy infrastructure in order to promote the emergence of new industries and modernize the manufacturing sector in the pursuit of higherlevel industrialization. Schumpeter (1934) observed that the collective entrepreneurial behaviour in organizations brings about new combinations of knowledge and technologies, leading to innovations. The co-evolution of a state’s policy coordination at different levels then shapes collective entrepreneurship and the market in order to better devise new technologies, create new organizational norms and develop new human skills that in turn reinforce growth and economic development. The 3 The new equilibrium points conceptualize different the variations needed to be systematically coordinated for further development.

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final phase (phase 3) represents a virtuous co-evolutionary policy process between adapting the innovation system (and the subsequent impact on institutions) and formulating new policies on sustainable development in response to emerging market opportunities. Table 4.2 provides a generic overview of the policy profiles and salient features of phases of development discussed in the literature of evolutionary economic transitions Table 4.2 Policy profiles and salient features of phases of development Phase

Features

Background conditions

Lacking of supportive institution for development Lacking of productive and efficient entrepreneurs/employees (1) Broad supports to productive firms (2) Promotion of technology transfers/spillover (3) Government schemes for training and education A significant increase in the supply of efficient entrepreneurs Lacking of conducive environment for innovations High-technology clusters do not exist Lacking of productive/Schumpeterian-type of firms (1) Selective intervention targeting high-technology investments and to enhance selection process (2) Coordination for integrated program design Witness an established high-technology cluster with very high economic impact A cumulative growth process caused by positive interactions between industries, universities and research institutions, collective learning, scale economics and network effects (1) Measures to ensure diversification of the core industries/businesses (2) Continues creation of new radical technologies and development of new technological clusters

Interventions to achieve pre-emergence settings

Pre-emergence phase conditions

Interventions to achieve emergence settings

Emergence phase conditions

Interventions to achieve virtuous cycle development

Source Adapted from Lall and Teubal (1998, pp. 1379–1380) and Avimelech (2008, p. 85)

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and development. The transition from background conditions to the preemergence phase is, simply, the development of broad promotions and supports for productive firms and the diffusion of generic capabilities and professional practices. The successful emergence of multi-agent structure (in the emergence phase) requires selective interventions and the targeting of industries that would lead an economy to attain niche positions in the global technological value chain. Once an economy attains its multi-agent structure, the subsequent interventions will attempt to create a landscape that will allow different possible outcomes in the creation of new industry paths. As shown in Table 4.3, because the processes of development expounded in the AoD framework proposed by Jorgensen (2012) explain the transition and evolution of an economic system, they provide clear guidelines on how to formulate a normative direction for our case study. This chapter thus aims to shed light on the ways in which the actors in an innovation system navigate and perform strategic interventions in these evolving processes, which ultimately leads to a sustainable transition. We expect that developing economies with aggressive science and technology policies are likely to create a transition policy infrastructure characterized by this framework (see Table 4.3), particularly if their backbone industries are undergoing modernization. Inspired by the narrative of AoD, we have reviewed the literature on the roles of prominent technocrats in transforming industrial structure, explained how Taiwan’s state policies (both in industry and in innovation) were executed, and how these successfully translated into productive activities that ultimately led to sustainable transition. By drawing on these studies, we have underlined the mechanisms of these change processes by investigating the roles Table 4.3 AoD framework Concept of transition

Narration

Theoretical inspiration Concept of change

Actor-network theory and sense making processes Actors navigate, plan (for transformation policy) and perform strategic interventions Navigators, performing visions and diffusing new practices and routines for productive activities

Role of actors

Source Adapted from Jorgensen (2012)

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of institutional entrepreneurs in performing strategic interventions and diffusing new practices or routines to encourage productive activities. Much contemporary writing has been devoted to explaining the explosive growth, industrial development and economic transformation of the East Asian economies. Evans (1995), Lall and Urata (2003) and Dodgson (2009) all compared selected lacklustre economies with East Asian successes to present a novel interpretation of so-called embedded autonomy. The role of the state in the economic development of Taiwan, which is one of these thriving East Asian economies, provides valuable suggestions for other developing countries on the types of governance practices that can encourage gradual change (see Wade, 1990). The policies on innovation development proposed by the Taiwanese government are distinct from both orthodox economic approaches and “winner picking” frameworks. Indeed, previous governments have enjoyed high levels of political legitimacy based on their economic principles, which have delivered inclusive growth and industrial development. Drawing on anecdotal evidence on the development of the Taiwanese industrial system, we present a stylized trajectory that articulates the transformational processes of transition from an underdeveloped economy to a developed and knowledge-based one. This chapter thus explores the transitional processes of Taiwan by describing strategic changes to its evolutionary targeting policy over time. In particular, we were interested in the application of normative transition principles during structural change in the economy. The data on Taiwan’s approach towards attaining what we term “virtuous cycle development” were derived from extensive secondary sources on its economic development policies. We then cross-checked our findings with the results of fieldwork in first-hand on-site interviews. We reported our reflections on how established routines pushed local industries into vulnerable “local fit” positions in the global market and on the measures taken by the Taiwanese government to address such issues. We first surveyed and reviewed both recent and historical works on Taiwan’s transformation-related initiatives and economic development in order to understand the evolution of the economic landscape and its current transition processes. Both the four volumes of Heather’s (2002) collection of East Asian development policies and the descriptions by Amsden and Chu (2003), Siichi (2001) and Chu (2009) of Taiwan’s industrial performance provided us with positive views of trade and industrial economic policy. Moreover, our literature review of Taiwan’s

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innovation policy clarified our understanding of the country’s innovation system and its learning mechanisms in the domain of science and technology production. Further, a number of studies provided excellent sources of knowledge on transformation processes, including the process of change within Taiwan’s innovation system (Chu, 2009; Hou & Gee, 1993; Wong, 1999; Wong & Goh, 2012), the development of Taiwan’s R&D consortia (Mathews, 2002; Mathews & Cho, 2000, pp. 157– 202), guided competition and the role of government in industrialization (Fuller, 2005; Wade, 1990; Wang, 2006), the evolution of Taiwan’s clusters (Chang & Tsai, 2002; Dodgson et al., 2008; Hu, 2012; Ku et al., 2007; Saxenian & Hsu, 2005), the role of institutional entrepreneurs in disseminating organizational best practice (Hung & Whittington, 2011; Kenney et al., 2013), and studies of politics, organizations and public administration (Avimelech & Feldman, 2010; Hayek, 1945; Pavitt, 1998; Surowiecki, 2004; Taylor, 2007; Tonon, 2007; Wang, 2006). We relied on the framework of Weber and Rohracher (2012) for the on-site interviews, because this emphasizes the use of transformational system failure as the anchor for all discussions in order to add greater structure to the normative principles of transitional processes. The details of these fieldwork interviews are presented in Table 4.4. The organizations selected in this study represent the most prominent actors in Taiwan’s shift towards an advanced economy.4 Specifically, we interviewed 21 professionals in 14 organizations that have influenced Taiwan’s three transitional phases. The positions of interviewees ranged from former deputy ministers and architects of industrial and technology policy to distinguished professors, vice presidents and directors. We conducted our interviews in a semi-structured manner. Numerous interviewee-instigated discussions provided further and deep insights that were beyond our grounded theoretical perspectives. We believe that its sequential historical perspective and the fact that the present case study is informed by a number of visits to our selected organizations provide a positive view of both Taiwan’s transformational policy and the normative principles that can assist developing economies that aspire to follow a similar path of transformational change and can guide the systematic development of their own industrial systems. 4 In order to allow them to move up the industrial value chain, the state had targeted its resources towards these organizations’ specific functions to build up the technological capabilities of SMEs (see Mathews & Cho, 2000, pp. 157–202).

Organizations

1. Council for Economic Planning and Development 2. Industrial Technology Research Institute (ITRI) 3. Ministry of Economic Affairs 4. Academia Sinica 5. National Science Council 6. Taiwan External Trade Development Council

7. National Chiao Tung University (NCTU) 8. National Tsing Hua University (NTHU)

Government agencies

Universities

Descriptions of the interviews

Type of organization

Table 4.4

7. Academic professors 8. Academic professors

1. Former deputy minister 2. Deputy division director, former president 3. Industrial policy advisor 4. Senior fellow 5. Director general for science and technology policy research 6. Researcher

Position of interviewee

What is the process for policy design and development? What types of programmes and innovation financing activities are administrated? The history and role of agency in every transition and in interactions with other actors How the agency created a new platform/conducive environment for actors to innovate? What types of infrastructure prepared existing actors for the next wave of innovation? Diffusion of vision and professionalism Research priorities What types of programmes were used to develop human capital for the new wave of innovations?

Main topics discussed

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Organizations

9. United Microelectronics Corporation (UMC) 10. Taiwan Semiconductor Manufacturing Company (TSMC) 11. Precision Semiconductor Mask Corporation 12. Global Unichip Corporation 13. Kingston 14. Phison

Type of organization

Private firms

9. Engineers, vice president of the development division 10. Division manager, senior engineers 11. Division vice president 12. Division manager 13. Division manager 14. Founder

Position of interviewee Any interaction with government agencies or universities? How your organizations adapt to become a niche players in the global supply chain Diffusion of vision and professionalism in the global value chain

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Transformational Trajectories of Taiwan The present analysis began by examining the pre-emergence phase of Taiwan, in order to describe the sequence of transformational processes used to establish routines of creative accumulation, namely the diffusion processes that led industries to form relevant industrial clusters and supporting institutions. We then stylized a trajectory that articulated those routines leading to the institutionalized activities, in which the transitional process of high-tech industrial development between the 1960s and the 2010s is highlighted. The explanation is divided into three substantive sections that follow a heuristic structure of the transformational failures perspective. In the first phase of policy interventions, massive interventions by the Taiwanese government are made to establish macroinstitutional fundamentals. The second phase’s strategic priorities are towards the creation of a domestic high-technology industry. The subsequent phase highlights the measures taken by the government to spawn new industries. The phases of transition are grounded in the concepts discussed in the AoD framework. Interventions to Achieve Pre-emergence Settings: Establishing Macro-Institutional Fundamentals (1960s to Mid-1970s) Preventing Directionality Failure Through Professional Appointments After losing the civil war to the Communist Party in Mainland China, Chiang Kai-Shek, the general director of the KMT Party, was forced to relocate his authority to Taipei (Taiwan) in 1949. Chiang had little understanding of economics and therefore delegated economic decisionmaking in Taiwan to the vice president, Chen Cheng. Cheng recruited a group of highly qualified economic policymakers (technocrats) to advise him on Taiwan’s economic affairs. Although the group of policymakers were trained in the field of science and engineering, they were able to instil their professionalism into the management of economic affairs. This approach greatly reinforced the public entrepreneurship in the Executive Yuan of Taiwan (see Wang, 2006, pp. 121–167). The economic policy in this phase aimed at increasing employment opportunities as much as possible so as to address the surplus of labour during the early catch-up period. In particular, its target was to increase the productivity of agricultural outputs and the development of light manufacturing industries, since farmers were once a political force in

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Taiwan. By doing so, widespread land reforms were initiated in 1953 for the acquisition of scaled land as well as for the stabilization of political authority. This large-scale transfer of land ownership led to the lands being managed efficiently by farmers, increasing the marketable surplus and generating higher productivity in the agricultural sector (Wade, 1990, pp. 73–77; Myers, 1984). Led by the group of professional technocrats, a number of development plans were also implemented to stimulate the economy, ultimately leading to resource redeployment from lower value-added to higher value-added activities. For example, the government provided diverse vocational and technical training programs for farmers, while encouraging them to switch their occupations into higher value-added occupations. Consequently, various economic occupations in urban areas, such as street vendors, motorcycle and bicycle repair shops and taxi drivers, can trace their roots to farming villages. As a result, the social status and economic welfare of these rural workers greatly improved from the 1960s onwards (Myers, 1984). The directionality failure in the early transitional phase was thus overcome by recruiting the group of professional technocrats. Reducing Coordination Failure by Promoting Investment Throughout the 1950s and 1960s, an import-substitution-cum-export policy was used to promote and protect infant industries in Taiwan due to a lack of entrepreneurial capital, low levels of technological advancement and inefficient managerial decision-making compared with overseas competitors. The government thus devised a series of industrialization measures, including targeting certain industries and suggesting developmental milestones and timeframes (Evans, 1995, pp. 54–60). Trade was championed as a means to increase manufacturing output and employment, with the aim of improving income distribution and reducing income inequality. The Production Board even helped entrepreneurs (who had mostly emigrated from China during the civil war) build light manufacturing enterprises, such as textile and glass, in order to increase their production scales and scopes, as well as their capabilities. While the promotion of international trade becomes the ultimate goal, the macroeconomic policy was thus inspired by an export-led growth model and by an import substitution strategy under which significant investments were required. On the one hand, such outward policies help domestic firms avoid the danger of increasing inertia in the cultivation of long-term economic development. But, on the other hand,

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encouraging exports during the import substitution and industrialization phase accelerates industrial upgrading by expanding production and market competition. With a significant number of the investments derived from the export-led and import substitution activities, the goal of various ministries was channelled and focused on the promotion of international trade and the prevention of coordination failure. Avoiding “Demand Articulation Failure” by Targeting Productive Sectors To upgrade Taiwan’s manufacturing processing capabilities, its industrial learning policy was designed to favour multinational companies. Consequently, many domestic firms began to support international standardization activities, build up production capacity and capability and focus on import substitution activities, in which they were able to catchup quickly.5 Nevertheless, the import substitution policy was cautiously revised from time to time, with some programs terminated gradually or even phased out in order to avoid unproductive rents for domestic firms. The timing review programs tended to ensure the supported industries or firms remained focused on long-term investment rather than on short-term profits. The relationships between and among government, technocrats and private firms were thus socially legitimized. In particular, technocrats were assigned to audit the government’s import substitution policies in order to ensure that their commitments to accountability and transparency convinced the public of the benefits of supporting specific industrial activities in the name of economic development. This administrative principle served as a useful tool to constrain unproductive rent-seekers and avoid monopoly power derived from government inefficiency. All these activities were aimed at creating and ensuring effective market demands along with government efficiency in the economic transitional phase.

5 For example, textiles firms were able to operate independently within three years of inception. This rapid catch-up was largely attributed to the competencies of the targeted entrepreneurs, who held sufficient manufacturing experience to enter the textiles industry under state support.

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Interventions to Attain Industrial Emergence Settings: Building a Multi-agent Structure and Institutional Entrepreneurship (Mid-1970s to 1990s) Addressing Directionality Failure: Overseas Returnees Initiating the Industrial Transition The termination of USAID funding in 1965 and the oil crisis in the early 1970s reduced the comparative advantage of Taiwan’s labourintensive industries in international markets. Against this background, the Taiwanese government formulated a new economic plan that aimed to generate new areas of comparative advantage by focusing on high-tech knowledge-based industries in the domestic setting. In particular, the cessation of USAID funding led domestic savings and loans to become the main sources for financing industrial investment and development. Furthermore, the Credit Guarantee Fund was established to guarantee bank loans to SMEs investing in targeted production sectors. In addition, the Taiwanese government adopted an endogenous growth policy for exports despite intense pressure from the US government to instil the laissez faire market policy adopted by many other developing countries. To develop high-tech knowledge-based industries, many local professionals and nationals living abroad were invited to advise the government about sectors that had the greatest potential for technological spillover and to provide strategies for complementary investments linked with other sectors. K. T. Li,6 a Cambridge-trained scientist, suggested shifting the representation of high-tech knowledge diffusion and investments from central authorities to new public agencies/institutes as well as various types of non-profit organizations. This shift greatly reduced the attractiveness of the status quo and paved the way for institutional entrepreneurs in the later growth phase, as well as providing more incentives and opportunities for overseas talents to return Taiwan.

6 Yin passed away in 1963 and Li, his successor, was initially promoted by Chiang to a post that could expand Taiwan’s industrial activities. He was appointed in 1965 as the Minister of Economic Affairs, with the remit to transform Taiwan from an agricultural economy to a high-value-added industrialized economy.

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Addressing Coordination Failure by Empowering Institutional Entrepreneurs for Industrial Upgrading A new science and technology law was enacted to empower new agencies to develop technological innovation and reduce the bureaucracy that might impede this process. The government’s objectives were to decentralize public knowledge for new industries and to establish an environment that was more conducive to technological development. K. T. Li, S. S. Shu (president of the National Science Council) and Chintay Shih (an integrated circuits project manager at ERSO/ITRI who later became the president of ITRI) all played essential roles in encouraging institutional entrepreneurs to make use of the specialized institution by developing and diffusing advanced marketable technologies into Taiwan’s industries. Their efforts kicked-off an era of high-tech industries that developed information technology, semiconductors and many others that followed these. Addressing Reflexivity Failure by Building Domestic Technological Capabilities and Spawning New Areas of Specialization The Taiwanese government was pursuing an upgrade strategy to advance domestic technological capabilities and protect them against competition from lower-wage economies. On the one hand, given its limited resources and technological capabilities, Taiwan in this phase was cautious to commit significantly in certain industries such as large steel mills, national airlines or nuclear reactors. On the other hand, the strategic plan sought to build a “national champion” by using a bottom-up approach, a new avenue in which private entrepreneurs could bid for support by putting forward new ideas or pre-investment proposals. National competitiveness was achieved by original equipment manufacturing (OEM), through the subcontracting and international operations of multinationals, in order to enter the global market quickly. Moreover, industrial ecosystems were oriented in favour of domestic firms or new start-ups (Fuller, 2005, pp. 484–486) in order to exploit their experience and knowledge and thereby secure a leading position in the growing market. Technological specialization is one of the best choices for the efficient utilization of limited resources. Therefore, together with other industrial agencies, ITRI was assigned the task for seeding, by technology transfer from foreign firms, the semiconductor industry as the nation’s champion in 1976. As such, the US electronics firm RCA agreed to transfer its obsolete integrated circuit technologies, while Philips of the

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Netherlands transferred its VLSI technologies. These transfer agreements enabled ITRI to form the two pillars of Taiwan’s semiconductor industry, namely UMC and TSMC, in the 1980s. This germinated a centre-satellite system for SMEs.7 With significant assistance from ITRI, many SMEs, notably in the Hsinchu Science Park (HSP), were incorporated8 into the international operations of UMC and TSMC in order to increase their productivity and drive them further up the technological chain (Amsden & Chu, 2003, pp. 77–118). Nevertheless, the governments concerned not only generated new areas of comparative advantage, contributing to the knowledge-based economy, but also phased out uncompetitive programs from earlier projects. For example, those subsidized entrepreneurs that emerged early (e.g. the home appliances business groups SAMPO and TATUNG), which had limited entrepreneurial abilities and were only devoted to short-term profits, ultimately submitted to the so-called built-in sunset clause (Rodrik, 2004, p. 22) and withdraw from government supports (Mathews & Cho, 2000, p. 167). On the other hand, those showing institutional entrepreneurship (e.g. Stan Shih, the creator of the personal computer company Acer) were helped to become local techno-entrepreneurs, while overseas Taiwanese (e.g. Morris Chang) were encouraged to return to help build a knowledge-based economy. Addressing Demand Articulation Failure by Networking and Clustering The collective ideas proposed by institutional entrepreneurs, overseas returnees and techno-entrepreneurs increased Taiwan’s ICT capabilities (Khan, 2004, pp. 511–512). Moreover, the government’s science and technology policy committed to building national laboratories for the commercialization of applied R&D, absorbing foreign knowledge and technologies, establishing software infrastructures such as venture capital funds for new start-ups, and providing vocational and technical training for workers in order to reinforce Taiwan’s technological capability as a whole.

7 Many other firms, such as Winbond and Phison, have successfully spun off from the technology acquired by ITRI’s laboratories. 8 Many farmers trained by ITRI were recruited by UMC and TSMC as suppliers to support the upgrading processes.

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ITRI provided SMEs with product- and process-oriented support in the form of technical services, consultancy, licensing and workforce training, in almost all the government-engineered clusters. It also played an important role in fostering domestic industrial competencies by linking SMEs with large foreign corporations (Fuller, 2005). In this regard, those farmers that had acquired the requisite technological capabilities and manufacturing experience were able to become value chain suppliers in these clusters, further supporting the overall upgrading process. Among the prominent scientific and industrial clusters, the HSP emerged as the home of six main industries, namely integrated circuits, computers and peripherals, telecommunications, optoelectronics, precision machinery and biotechnology. National Tsing Hua University (NTHU) and National Chiao Tung University (NCTU) were also leveraged to undertake research in material science and process engineering, respectively, in order to support industrial upgrading and human capital development. Many professors at these universities were chosen to set up labs with industrial partners in the HSP for carrying out joint research activities and testing new products. Further, graduates who had worked in these collaborative labs were subsequently recruited by their industrial partners or started new businesses to provide them with solutions to particular problems. Virtuous Cycle Development: Initiating Platforms to Develop Industrial-Level Niches (Since the 2000s) Addressing Directionality Failure by Diversifying and Extending Industrial Technologies: Configuration of a New Industrial Structure The accumulation of knowledge in the semiconductor industry laid a solid foundation for Taiwan to develop and extend other related industrial sectors. The TFT-LCD and integrated circuits design industries, for example, are two prominent industries that have been catalysed by the growth of the semiconductor industry since the early 2000s, leading to the emergence of new industrial fields, including solar photovoltaic (PV), LED and medical devices, which have developed rapidly since mid-2000s. The accumulated resources in terms of workforce, capital and technology have also facilitated the development of derived industries (Jang et al., 2009; Mathews et al., 2011). TSMC, for example, has broadened its investment in its core technologies since 2002, targeting LED and solar

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PV technologies to exploit innovation rents in the existing technological surge. Meanwhile, UMC established a thin-film solar PV company, NexPower, in 2005 and has been diversifying its investment in LED technologies since 2006. The following sub-sections demonstrate how Taiwan established its virtual innovative platform to attain commanding positions in new technological value chains. Initiating Collaboration Platforms: Measures for Coordination, Reflexivity and Demand Articulation Failures As late arrivals such as China opened the door to the rest of the world in the 1990s, the role of the Taiwanese government has changed from being a public investor and facilitator to a mediator of private R&D activities, with the particular aim of stimulating causation learning and niche innovations in SMEs. For example, ITRI provides various IP mechanisms (e.g. IP bank9 and patent pools) and related services to help establish start-ups and allow Taiwanese multinationals to reinforce their patent portfolios in order to guard against IP lawsuits from international competitors. In addition, ITRI has been aggressively investing in the next wave of technologies, aiming to build stronger IP portfolios in new technological areas such as green technologies, biotechnology and nanotechnology. Such investment is intended to smooth the cycle of cumulative processes by adding new technological knowledge to the know-how accumulated from the earlier waves (e.g. semiconductors, machinery, etc.). Public research institutions have also emerged to provide latecomers with specific platforms to facilitate their transformation processes. These platforms are intended to support the key stakeholders of specific industries (including technology users), which, through their activities, in turn generate new industries and markets. There are programs of public research institutions that have been deliberately developed to assist stakeholders to conduct interdisciplinary research and exchange knowledge in order to create virtual ecosystems characterized by diverse commercial opportunities. This is evident in the cases of both the LED and solar PV industries of Taiwan. ITRI, in 2008, announced an accomplishment in AC (alternating current) LED technology that led ITRI to secure a portfolio of 70 patents 9 The government-sponsored IP bank project aims to assist Taiwanese firms that face disputes with foreign companies. For instance, patent portfolios in ITRI help Taiwanese firms adopt defensive strategies during the early phases of R&D development.

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in local patent offices for specific LED structure, chip, packaging and applications. This technology is positioned as a substitute for DC (direct current) transformer powered LED technology. It is designed to offer LED users a lower cost of adoption and installation and performance at a higher level of energy efficiency than that of DC-LED technology. To ensure the rapid dissemination of this technology, ITRI has established a platform to allow Taiwanese LED producers to tap into this technological knowledge to create niche market applications (LEDInside, 2009). ITRI and other leading LED makers, including Epistar, Lite-On Technology, Tyntek, Everlight Electronics and Forward Technology, have collectively paved a path for the creation of various downstream markets and customized products, including high brightness home lighting devices, specific medical and fishing lamps, vegetable factories and freezer lighting businesses. Likewise, the success of the solar PV industry is largely attributed to a number of niches oriented towards various applications, such as green buildings, electric cars, mobile phones and outdoor equipment. ITRI initiated the Taiwan CIGS (copper-indium-gallium-selenide) Industrial Alliance project in 2010 to bridge the technological gaps between the small thin-film producers and leading producers such as TSMC and AU Optonics (Semiconductor Today, 2010). This strategic move by ITRI shares its objective with that of the AC-LED platform, which is to pave a path for the creation of niche applications and customized products relating to solar PV.

The Three-Phase Policy Targeting Model The trajectory of Taiwan’s industrial development over the past half century clearly demonstrates improvements in resource efficiency, knowledge accumulation and market targeting, as well as the ways in which Taiwan has transformed its economic production towards strategized development across the three transition phases described herein. In particular, our findings highlight the role of a number of agents in each of these phases: (1) Technocrats and multinationals, who interacted under a top-down policy in the first pre-emergence phase; (2) Techno-entrepreneurs and institutional entrepreneurs, who interacted under a mixture of top-down and bottom-up policy settings in the second take-off phase; and

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(3) Stakeholders in R&D consortia and niche markets, who interacted under a bottom-up policy and top-down initiated collaboration platform in the third virtuous cycle development phase. Many essential interventions and activities have indeed facilitated the building of a multi-agent structure and institutional entrepreneurship during the transition phases. We have detailed our observations made in this case study in Table 4.5. Our discussions in this chapter connect the three phases of the evolutionary targeting policy cycle. Firstly, macro-level policy focused on the transition from agricultural to light manufacturing in the 1970s and 1980s, which laid a solid foundation for the mass production of semiconductors in the 1990s. Secondly, the formation of a multi-agent structure at the meso-level focused on cluster-specific policy to breed techno-entrepreneurs for high-tech semiconductor industries. Finally, virtuous cycle development at the industrial level focused on collaboration platforms that were conducive to user-centric innovation and that spawned new areas of specialization. Table 4.6 presents our main observations regarding the various interventions described by this study. A critical mass of entrepreneurs was reached firstly by empowering poor farmers10 at the end of the 1970s. Later, technocrats and institutional entrepreneurs became involved in Taiwan’s high-tech industries during the 1980s and 1990s. Since then, this production system has aimed to integrate niche innovators and users in order to create new areas of specialization, thereby laying the foundations for a sustainable economy. In Table 4.6, the transitional process over the past half century in Taiwan is explained in three phases. Phase 1: Achieving Pro-poor Growth The advantage of the policymaking style used in the early 1960s in Taiwan was that it triggered broad economic growth. Industrial emergence was fostered by market-led variety, the pre-selection of activities, accelerated market-led selection and reproduction processes, which were developed through coordination activities, targeted incentives and state-directed change and then imposed as institutional routines. 10 The experience of Taiwan in achieving critical mass provides an interesting contrast with that of Israel, which achieved its critical mass by growing the number of graduates in the fields of science, technology and engineering (Dutrenit et al., 2011).

Evolutionary mechanism of pre-emergence-virtuous cycle development processes of Taiwan

Background condition Lacking of productive and efficient entrepreneurs Surplus of unskilled labours and subsistence farmers Interventions to achieve pre-emergence phase • Explicit policy direction aimed at addressing issues in poverty and inequality • Coordinated and devised a series of measures (e.g. vocational training) and built credible communication between bureaucrats and the state to create market settings conducive for industrial diversification and development • Central government administrated by sensible technocrats appears to be the core coordinator in policy targeting • Timing review of macroeconomic programs and upgrading of production capacity and capability to inform economic agents the forces of market demand Pre-emergence phase A significant increase in the supply of efficient entrepreneurs A need to upgrade and transform industrial sectors to address the falling comparative advantage of Taiwan’s labour-intensive industries Interventions to achieve emergence phase • Explicit vision targeting at higher value-added high-technology industries • Experimentation with technological organization projects (UMC and TSMC) and learned how to leverage knowledge networks (e.g. TSMC-Phillips) and in-house R&D activities to access complementary assets to meet the demand of fables semiconductor firms • ITRI as new entity empowered to manage new projects • Public research organizations and technological organizations devising and creating market demand forces Emergence phase Created a very high economic impact cluster—Hsinchu Science Park A cumulative growth process caused by public research institutions , organizations and universities Interventions to achieve virtuous cycle phase • Explicit visions targeting at niches devised by the leading stakeholders of the industries • Established consortia to learn and create new markets and to attain commanding position in global value chains. It attempts to create a new “creative” accumulation path to avoid (lock-in) following the same OEM routine as before

Table 4.5

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Coordination/governing approach (perspective: policy coordination failure)

Productive activities Quantity of jobs Critical mass of agents Pro-poor growth policy (top-down)

• Diffusion of professionalism through highly credible institutional entrepreneurs • Building credible communication between bureaucrats and the state • Market-led variety and pre-selection settings • Targeting activities (such as financial infrastructure and vocational and technical training) to accelerate the emergence of new industries

• • • • • Pro-domestic growth policy (top-down and bottom-up approaches) • Local professionals and those abroad must be involved in planning transformation activities and making sense of restructuring processes • Pursuing and experimenting with different organizational approaches to articulate demand for leading-edge technologies • Make way for domestic growth • Intermediaries to spawn new start-ups • Bridging science and technology

• Quality of jobs • Domestic capacity building

Phase 1 (to attain pre-emergence) Phase 2 (to attain industrial emergence)

Salient principles for structural transformation

Policy focus (perspective: directionality failure)

Objectives

Table 4.6

(continued)

• Establishing R&D consortia to provide entrepreneurs with a platform/test bed to learn the markets (direct top-down policy measures must be reduced)

• Pro-niche creation growth policy (bottom-up)

• New industries • New areas of specialization

Phase 3 (to attain virtuous cycle development)

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99

Principles for transformation

• Vocational and technical training to support productive industries • Support provided only to productive activities • Institutionalize managerial professionalism in both government and businesses operations • Built-in sunset clause

Demand articulation

• Cluster/satellite model • Internationalize domestic operations • Market-led selection • Guided competition

• Divisional entities to engage in alliances with the central government and other agents

Phase 1 (to attain pre-emergence) Phase 2 (to attain industrial emergence) • The central government as the main component of targeting policies

(continued)

Administrative components (perspective: reflexivity failure)

Table 4.6

• Facilitating the process of new niche/business emergence

• Divisional entities to engage in alliances with stakeholders and other agents to foster user-centric innovations (direct top-down policy measures must be reduced) • Interacting with major stakeholders

Phase 3 (to attain virtuous cycle development)

100 C.-Y. WONG

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In particular, two important values protected Taiwan’s transformation during the pre-emergence phase from failure: 1. Effective demand articulation: early policy programs aimed to increase the quality and scope of the entrepreneurial capabilities of local agents. Farmers were targeted to become effective economic agents in order to accumulate technical knowledge in productive activities. These programs thus enhanced market-led variety and ultimately accelerated the formation of market-led selection, which was used as a means of disciplining unproductive players. 2. Effective policy coordination: many credible professionals with strong science and engineering backgrounds were appointed as technocrats to improve the communication of information and policy analysis between administrators and the state (the Executive Yuan). Such communication ensured that rents were only transferred to credible business entrepreneurs, which reduced learning and search costs in this phase. Furthermore, privileged elites were driven to engage in productive activities, while many state-created rents were managed professionally and translated into productive activities. The administrative structure was then tasked with persuading the public of the benefits of the government’s chosen development program. Phase 2: Achieving Pro-domestic Growth in High-Tech Industries The second phase of Taiwan’s development illustrates the importance of the emergence of multi-agent structures (rather than top-down government projects) for industrial upgrading. By resting on those systematic interactions derived from pursuing industry-oriented production knowledge through navigation agents, the macro-level policy implemented in the first phase laid the platform for the meso-level technological regime adopted in this phase to meet the demands of the dynamic global marketplace. Taiwan decentralized its state responsibilities towards the end of the 1970s in order to foster new economic activities and redirect national competitiveness towards high-tech knowledge-based industries. A new pool of technocrats and business entrepreneurs was empowered to transform existing economic structures and production systems during this

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transition to a knowledge-based economy. Those entrepreneurs with credible engineering backgrounds interpreted the need for specialist infrastructure to support advanced technological development and transformed many businesses into professionally run enterprises as they emerged from the critical mass. Moreover, new priorities were set by the government in order to address the challenges that had arisen from the cessation of USAID in 1965 and the oil crisis in the early 1970s. The government specified new growth targets to scale up certain technologies and the implementation of these policies by professionals and technocrats effectively convinced the public of the merits of the program for supporting selected industrial activities in the pursuit of economic growth. Setting generic conditions for pre-emergence largely routinized the self-searching processes and accelerated the emergence of multi-agent structures. For example, integrating the operations of the market and the government, and increasing social trust reduced the incidences of failed R&D investments. These operations also improved the flow of reliable information and reinforced a collective performance-oriented commitment to building productive activities. In addition, the early efforts of the government to achieve a critical mass of entrepreneurs in productive sectors triggered a self-propagating co-evolutionary process of sophisticated production systems and socio-economic development. The quantity and quality of the established networks, based on the trust built among institutions and networks, were thus important determinants in this phase of development. Taiwan implemented a range of policies to enable learning in both public and private organizations. For instance, although ITRI, TSMC and UMC played different roles in the production system to foster a multi-agent structure, they collectively configured a development path for market agents by spawning new areas of specialization. Semiconductors were identified as the strategic technology to be promoted in the HSP, while the building of manufacturing plants and design houses was promoted by the new multi-agent structure (see Fig. 4.1). This cumulative process led to transformational change at the institution level, which promoted endogenous structural change. Achieving Pro-Niche Growth: Multi-stakeholder Deliberation The promotion of the semiconductor industry in the industrial emergence phase led to the establishment of a new breed of entrepreneurs who subsequently diversified their enterprises into LED and solar PV

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ICT sector

Semiconductor Manufact- Design houses uring plants

Solar PV and Medical devices, green technologies, LED fishing LEDs, etc.

Spillover

Fig. 4.1 The emergence of a new multi-agent structure

businesses. These entrepreneurs sought to shift their activities from OEMbased to niche-oriented in order to supply, and provide solutions for, the niche market. The driving force for this phase of transformation was the targeting of niche sectors. For example, public agencies sought to encourage user-centric innovations by providing different policy platforms for industrial stakeholders. The experience of Taiwan depicted in the final phase of its evolutionary targeting policy concurs with the theoretical perspectives proposed by Pavitt (1998) and Nill and Kemp (2009) on the strategic ventures of new businesses and creative accumulation routines. Indeed, we demonstrated in this chapter that Taiwan sought to add new elements in order to extend existing technological regimes and stimulate domestic industrial growth. These strategies created industries that were in essence extensions of the technological regimes that more advanced countries had previously dominated. During this phase, the configuration of new industrial activities was also defined and determined by industrial stakeholders, whose activities then triggered the formulation of new industrial structures. Moreover, public research institutions ensured that these new structures remained coherent with the overarching goals of the Taiwanese government. Such actions served as a mechanism for endogenously configuring industrial clusters by providing stakeholders with an avenue for interaction through which their collective activities could generate crucial information about (including the performance, potential impacts, economic feasibility and desirability of the technological innovation in industry/society). Indeed, this virtuous cycle development—creating new industrial structures in order to endogenously configure selected clusters and define administrative principles—is still being observed.

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Remarks The causes and effects of economic growth and innovation activities have become more complicated and diverse; however, the set of measures for transformational system failure remains essential for guiding how we understand transitional processes. This study provides immediate empirical evidence of Taiwan’s industrial development experience over the past five decades to verify the elements of change in a multi-level sociotechnical system. In particular, this study provides novel and salient normative principles that can guide transformational policymaking. Our findings show the processes for the governance of industrial transition are designed, accessed, effected and performed, so as to attain endogenous structural change. In particular, our analysis emphasizes how transformational system failures are able to be overcome and achieve sustainable development, as has been discussed in the literature.11 The evolving trajectory of Taiwan’s economic governance in the last half century shows that the state-led policy, institutional mechanism and entrepreneurs, and collaboration platform play critical roles with respect to the three developmental phases. Evolutionary targeting and institutional entrepreneurship has enabled effective governance and the reduction of the risk of transformation failures and improved consistency with market dynamics in each transitional phase. Our findings imply that there is a need for the government of an economy to devise and deliver, consciously and systematically, a set of policy interventions to address its transformational failures. In order to advance its evolutionary targetoriented and context-adapted policy approach, the government of Taiwan engaged professionals with strong science and engineering backgrounds to assess the path-dependent nature/issues of Taiwan’s productive industries and thereby adapt appropriate policies12 The proposition of this chapter is first to target: a series of macro-level policies for inclusive development and subsidize diffusion of generic entrepreneurial skills to 11 Haggard (2004, p. 67) questioned the research designs of previous studies (e.g. Evans, 1995; Wade, 1990) that select a successful industry, demonstrate the existence of specific policies and conclude the significance of these policies. He maintained that such studies were guilty of “post hoc ergo propter hoc reasoning”. Therefore, our assessment offers a basis on which to explore how strategies can be approached to achieve development. 12 See Nill and Kemp (2009) for the assessment of evolutionary approaches for sustainable innovation policies.

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achieve pre-emergence settings; then meso-level institutional mechanisms to attain industrial emergence settings; and finally establish an industriallevel collaboration platform, to gain a strong foothold for the integration of different indigenous technologies into the global innovation system. The need for direct, top-down policy interventions from the government, to build a market selection environment that is based on long-term gains, gradually disappears as the industrial technological innovations benefit from a multi-agent structure, a configuration that is fostered to achieve a learning economy. The principles discussed in this chapter thus provide essential policy lessons for other developing economies whose industrial structures are composed of SMEs, who may be inspired to adopt and adapt the developmental trajectories of Taiwan’s economic catch-up, technological upgrade and niche innovations.

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CHAPTER 5

Post Industrial Catch-Up Public Research Institutions: The Cases of ITRI of Taiwan and KIST of Korea

Background The success of economic catching-up (Berger & Lester, 2005; Lee, 2016) and development (e.g. Amsden, 1989; Amsden & Chu, 2003) of Taiwan and Korea are well captured and reported in the literature. It is not uncommon to learn of the important roles played by public research institutions (PRIs) in defining the paths of the two catching-up economies (Mathews & Cho, 2000, pp. 113, 163). The cases of the Industrial Technology Research Institute (ITRI) of Taiwan and the Korea Institute of Science and Technology (KIST) are among the most acknowledged PRIs. They seem to share many comparable roots in the catching-up period (1960s–1990s). With the assistance of the United States Agency for International Development (USAID) and funding from the World Bank, Korea established KIST in 1966 to build its own basis for applied science research. This was to meet the dire need for upgrading in the local industries, as Korea wished to develop its export market. KIST was modelled after the US Battelle Memorial Institute, which set not only the initial design but also the evolutionary direction going further. Meanwhile, ITRI was established in 1973, modelled after KIST and the Japan Science and Technology Agency. Their respective roles revealed, among other things, the crucial factors in defining the success of the electronics and semiconductor industries of the two economies. They played an intermediary role in connecting the production activities of their respective © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 C.-Y. Wong, Experimental Learning, Inclusive Growth and Industrialised Economies in Asia, https://doi.org/10.1007/978-981-19-3436-0_5

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small-to-medium-sized enterprises (SMEs) to the global production value chain and (from time to time) upgrading both their technologies and networks. As the two economies entered the post catching-up phase of development (1990s–2000s), ITRI and KIST evolved towards becoming institutions performing both basic and applied research activities, as well as leading high-tech commercialization and entrepreneurial activities. We see their performances diverging, to a very large extent, with each gaining momentum for different types of activities. On the one hand, ITRI allocated resources to activate dynamic spin-offs and technological startups. ITRI has been engaged in coordinating research and development (R&D) consortiums for different technologies and in populating startups and commercialization activities. On the other hand, KIST showed a clear preference for academic research. For example, KIST spun off Korea Advanced Institute of Science and Technology (KAIST), which is now one of the leading technological universities in Asia. KIST is the leading entity in the University of Science and Technology1 (UST) group, and has been active in performing science-based research activities. KIST is seen as instrumental, since many big businesses (chaebols) in Korea are seeking joint efforts to advance their collective capabilities in science-based technologies. Despite their similarities in terms of given roles and missions during the early catching-up period, they headed towards different paths as their respective national economies (or in other words, national systems of innovation) evolved. What defines the divergence? This chapter seeks to review the roots and paths that the two PRIs took to define their functions in their respective national innovation systems (NIS). We are particularly interested in the organizational structures that each built to advance their desired activities. This chapter seeks to shed new light on development and science and technology studies. We accomplish this by drilling down into what structures define spin-off dynamics in a research organization, and what would be instrumental for basic research. This chapter provides useful insights to those involved in designing organizational structure for a research-oriented entity.

1 Members of UST are given equal status as research universities. They are allowed to offer postgraduate courses and grant postgraduate degrees (Master’s and Ph.D.) to students.

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Narrative Framework From the technological catching-up point of view (Lee, 2013, pp. 72– 100), a developing economy should first build short cycle technologies (such as semiconductor) as it does not need to invest heavily to develop industrial prior knowledge. Semiconductor has a global production value chain with a complex web of industrial network that enables latecomer firms in developing economies to search and acquire niches. PRIs have been noted to play many important roles in various developing economies. They function as an intermediary (Mazzoleni & Nelson, 2007) to inform local firms about the market information from both locally and abroad and are useful in connecting SMEs to play a role in the global production value chain. PRIs in many countries are mostly endowed by government funds and perform applied research (Coccia, 2004, p. 274; Shiu et al., 2014, pp. 2054–2055) to appropriate foreign technologies and derive indigenous short cycle technologies. The assimilated technologies and derived knowledge are then diffused for local use or disseminated as public goods. The cases of ITRI and KIST are particularly germane with regard to the diffusion of assimilated technologies for local use (see Chapter 4 and Lee et al., 1991). Some endowed PRIs have the capacity to fund technological ventures and support start-ups, while other endowed PRIs coordinate R&D consortiums to mobilise research resources and bridge technology push and market pull forces. As developing economies move towards the advanced phase of development, PRIs are mandated to learn the market conditions of advanced economies, perform advanced (basic) research activities to develop long cycle types of technologies and invest in novel basic infrastructure to lead in state-of-the-art technologies. It is not uncommon to see many developed economies that invest in long cycle science-based industries as they hope to avoid competing in a cut-throat short cycle technological market. There is no lack of other studies that review the organization governing measures to achieve the PRIs’ missions and goals. Intarakumnerd (2011) differentiates the dynamics between functional (productive) and less functional PRIs in terms of role and mental model (whether the organization is driven to meet industrial needs), degree of specialization (technological competencies), the background of the organizational board members (leaders must carry with them the industrial knowledge), strategic position in government sectors (whether the PRI is part of a powerful ministry such as the Ministry of Economic Affairs), technology transfer mechanism

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(flexible organizational structure in supporting entrepreneurial activities) and source of revenue (not to be [overly] dependent on government funding). Coccia (2004), Chu et al. (2006), Mitsutaka et al. (2010) and Shiu et al. (2014) highlighted the use of intellectual capital and its indicators to measure the performance and contribution of PRIs. Chen and Chen (2016) studied the repositioning and reforms of a PRI to highlight the evolution of roles in regard to societal-industrial development facilitation. Intarakumnerd and Goto (2018) elucidated the organizational governing measures of PRIs in industrialised countries. They observed that many PRIs have evolved towards more business-like operational models, having been conditioned by competitive channels of funding and confronted with the challenge of recruiting and maintaining capable research staffs. The study of this chapter does not intend to build another case to echo what has already been highlighted in the literature. Instead, we wish to drill down into what has not been well addressed in previous studies. It is of note that there is a lack of a comparative view in analysing the dynamics of spin-offs between PRIs of different countries. This chapter seeks to elucidate what moulds the dynamics of ITRI and KIST, which are considered the two most acknowledged PRIs in Asia. They began from similar roots, but then parted ways to achieve their desirable outcomes. We are interested to examine what organizational structures are functional for particular research agendas. The findings of this study would shine some light on why there are performance differences between PRIs even though they share similar roots, and the kinds of organizational structures that could be considered in order to achieve desired research outcomes. In this study, we compare and contrast structures for effective start-ups and spin-offs and science-based research routines, respectively. Comparative Case Study Framework To highlight the divergent evolutionary pathways, a comparative case study was deliberately designed and carried out for ITRI and KIST. A comparative analysis framework has been developed as presented in Table 5.1. The framework has taken the account of evolutionary perspective, acknowledging the roles of PRIs as building block in the process of establishing a functional national innovation system (NIS) of a country. For this chapter, we first review the history of the two PRIs via their official documents and annual reports and literature that provide us some

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Table 5.1 A comparative case study framework Criteria

Description

Given roles and mission

(1) The national R&D policy and the mandated role of the PRIs (2) Background and the context behind the PRIs establishment (1) The model in which PRIs emulate (2) Organizational structure (3) Responsibilities and the role of scientists and engineers (1) External factors and national R&D policy direction (2) Evolution of NIS (1) The position and orientation of the PRIs in the NIS (2) Observed tendencies if PRIs are evolving towards a market actor (or a public entity) – Organizations that were spun off from PRIs (e.g. start-ups, agencies and research labs) – The evolved organizational structure

Design principle as initial condition that shaped the evolutionary path

Key environmental factors that influenced the evolutionary pathway Network orientation

Spin-off organization

Renewed PRI model Source Authors’ design

useful perspectives. Our review takes into account the context and rationale behind each organization’s early establishment. The narrative flow would entail the mandated role of PRIs in the evolution (see Dodgson & Bessant, 1996 for the role of traditional PRIs in the innovation processes) of NIS, and the role of scientists and engineers in driving research agendas. As we elucidate the role of PRIs in bridging technology gaps between local capability and that from advanced economies, we highlight the network dynamics that the PRI configured in NIS. Their relationship with the private sector and the government are viewed as instrumental to derive industrial-related research activities, moderate technology transfer to SMEs and institute entrepreneurial routines (start-ups and spin-offs). As the NIS of Taiwan and Korea matured (the development phase of their NIS since the 2000s is generally acknowledged as post catching-up), we observe renewed roles of their respective PRIs, which diverged from merely the bridging role. We report our observations on the renewed roles and derive policy implications for aspiring PRIs in searching for workable models in supporting their own NIS.

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Organizational Dynamics Analysis This chapter borrowed the evolutionary concept (Nelson & Winter, 1982, pp. 96–136) in narrating the organizational dynamics of the two PRIs. The narrative has the following focuses: initial organizational establishment in instituting research activities; variation that defines junctures that drive organizational changes; and routines that elaborates the organizational career ladder in driving the motivation of scientists and engineers in pursuing certain activities. The narrative, we believe, enables us to describe how the two PRIs configured their respective dynamics to achieve their desired outcomes. To depict the dynamics of organizational structure, we use the Ter Wal et al. (2020) stylised networking chart (Fig. 5.1) that was used to illustrate the communication between technologists (scientists and engineers) and managers of different levels (peers or seniors) in a high-tech organization. The networking chart is found effective in describing how one moves up the career ladder and how (effective) ideas flow in an organization. As we have been acquainted on many occasions and worked in different capacities for the past decade in assessing the organization structures and performances of the two PRIs, we believe that our observations and written views in this chapter would provide a rich, narratively robust and

Fig. 5.1 Organization structure depicting levels between scientists and engineers, and managers (Source Adapted from Ter Wal et al. [2020, p. 19])

SENIORS

PEERS

ENGINEERS AND SCIENTISTS

MANAGERS

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contextually rigorous review of the two. We conducted interviews and discussions with scientists, engineers and managers who were able to validate the views in our previous assessments of the two organizations (Wong et al., 2015a, 2015b; Wong & Lee, 2018). The topics in mind during the discussion include the followings: • • • •

The evolving roles of PRIs The roles played by the senior managers How visions of the leaders were communicated and realised The evolving organizational structure and how it supports scientists and engineers in prototyping and commercialising their researches • The issues resulting from the organizational structure. To complement our study, we extracted useful secondary data on financial performances from the PRIs’ annual reports and other accessible materials, revealing important information about the two organizations. We also extracted United States Patent and Trademark Office (USPTO) patenting data from the PatSeer database to tabulate the assessment of technological performance of the two PRIs. For comparative purposes, we use indicators such as patent counts to reflect the technological capability of the organizations, and non-patent citations and biotech and pharmaceutical-related patent counts to reflect the interests of advancing science-based technological ventures. Such comparative analysis is found useful to verify our conception of organizational growth for certain research agendas.

Comparative Analysis Between ITRI and KIST Table 5.2 shows the financial and technological performances of the two PRIs. ITRI has about 6 times more staff than KIST, and generated about 5 times more in terms of revenue. ITRI also produced 2.5 times more patents than KIST. However, revenue per staff and patents per staff of ITRI are less than KIST. ITRI generated 55% of its revenue from royalty income, while KIST attained about only 4%. ITRI’s start-up and spin-off activities are evident. However, it is of note that KIST is more capable in producing science-based patents and has 5.6 times more in terms of average share of biotech and pharmaceutical-related patents (based on sub-domain search) when compared to ITRI. Figure 5.2 shows an

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Table 5.2 Financial and technological performances of the two PRIs (2018)

Number of staff Financial performance Total revenue (USD) Revenue per staff (USD) Technological services (royalty income) (USD) Royalty income/total revenue (%) Transferred technology cases Royalty income per transferred case (USD) Technological performance Patent based on assignee (applied in USPTO) Patent based on assignee (granted in USPTO) Patent (granted) per staff (%) Average share of science-based patents (2008–2018) (%) Average share of biotech and pharmaceutical-related patents (2008–2018) (%) Total start-ups and spin-offs since establishment

ITRI

KIST

6164

928

794.7 million 0.13 million 439.8 million

163.3 million (estimated) 0.18 million 6.8 million

55

4

613 0.71 million

330 0.02 million

364

145

292

96

4 70

10 81

1.2

6.7

281 (i.e. 3–8 per year)

39 start-ups 18 spin-off PRIs 1 university 3 think tanks/agencies

Source ITRI (2018) and NST (2018)

increasing trend of KIST’s share of biotech and pharmaceutical-related patents, while ITRI remained below 2% since 2011. While KIST and ITRI were once the focal PRIs for short cycle semiconductor-related2 technologies in the 1980s and 1990s. KIST is found to gain some advantages in supporting science-based3 long cycle industries in Korea. 2 Semiconductor is characterised as short cycle technology, which is the intensity (Narin, 2012) to appropriate more recent technological knowledge (past 6 years) and is higher to that of biotech (7.7 years) and pharma (8 years). 3 Narin (2012) and Bessant and Tidd (2015, pp. 450–454) observed that science references per patent in industries such biotechnology (14.4) and pharmaceutical (7.3) is higher than that in semiconductor (1.3).

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14% 12% 10% 8% 6% 4% 2% 0% 2008

2009

2010

2011

2012 KIST

2013

2014

2015

2016

2017

2018

ITRI

Fig. 5.2 Shares of biotech and pharmaceutical-related patents granted to KIST and ITRI respectively, 2008–2018 (Source USPTO. Authors’ compilation from PatSeer database. Extracted on February 13, 2020)

The Case of ITRI Taiwan is acknowledged as a nation-state excelling at manning change in comparative advantages and grounding new market segments in the global production value chain, in which local firms can compete (Balaguer et al., 2008, p. 31). Many SMEs, even those without advanced technological core competencies, possess dynamic capabilities to adjust at will in responding to changes in global demand. Such capacity can be traced back to the attributes of the Productivity Centre that was established by the government in 1955 to diffuse modern management and technological knowledge in order to advance the productivity of the SMEs (Balaguer et al., 2008, pp. 57–58). The 1970s witnessed Taiwan’s commit to capital-intensive high-technology industries. Policies that previously promoted original equipment manufacturer (OEM) firms to address the needs of multinational corporations (MNCs) were extended to promote R&D activities. Meanwhile, the 1990s witnessed a drive to cultivate knowledge-intensive service capabilities domestically, as it was realised that productive firms lacked interest in committing to science-based industrial activities. ITRI, being a close ally of the government and industry for decades, mobilised at the end of the 1970s to configure niches and spin-off capable firms to drive high-tech industries. The national mandate for science-based industries once again endowed ITRI

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in the 1990s, this time to orchestrate biotechnology and health-related research, as the government envisioned the role of local pharmaceutical industries in developing generic drugs for the export market. ITRI has been seen as instrumental in the evolution of Taiwan’s innovation system. ITRI was founded in 1973 with endowment to provide various kinds of technical support for SMEs in Taiwan (Mathews & Cho, 2000, pp. 157–202; Shiu et al., 2014; Wong et al., 2015a, 2015b). ITRI was modelled after KIST of Korea, which the then government of Taiwan believed to be an essential entity in facilitating the upgrading of local industries. The roles and functions of ITRI in the 1970s were very much mapped in accordance with that of KIST and the Japan Science and Technology Agency. The provision of technical training and technology transfer (of assimilated foreign technologies) programs for SMEs was the priority. As ITRI gained competencies in assimilating foreign technologies, it mobilised to expand its role towards becoming a champion in pilot production. The Electronics Research Services Organization (ERSO) project is well acknowledged in the literature, as it is among the pioneer projects of ITRI that grounded the practice of assimilating foreign technologies, a routine to seed and fashion new industries via spin-off ventures. The effective assimilation of foreign technologies and fast spinoff (in timespans of 5–8 years between firms) was attributed to ITRI’s effective technology transfer mechanism that was shaped to identifying emerging technologies, determined and speedy purchase of foreign technologies, readiness of the scientists and engineers in appropriating these technologies and effective mobilization of resources for spin-offs. These include UMC (United Microelectronics Corporation) in 1980 to produce simple consumer IC (integrated circuit), TSMC (Taiwan Semiconductor Manufacturing Company) in 1987 to appropriate VLSI (very large-scale integration) technology from Phillips and to lead advanced IC fabrication services, Winbond in 1987 to produce chips and DRAM (dynamic random-access memory) and TMC (Taiwan Mask Corporation) in 1989 to provide masking services in IC wafer fabrication process. As the then government was conscious about (over) intervention measures in the process of spawning new industries, the spun off firms of ITRI were fashioned via public–private joint ventures. Many private firms locally and abroad (with some being the earlier technology originators in the ERSO project) were invited to invest in such partnerships. As some credible and globally renowned firms (such as Philips of the Netherlands)

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were convinced to invest, the spin-offs were able to pull in sufficient investments to fund their desired business operations. The governance of market affairs in Taiwan often stipulates (Mathews & Cho, 2000, p. 167) the importance of market demand and circumvents full government financing for spin-offs. Thus, it is not uncommon to see public–private joint ventures in ITRI’s spin-off businesses. UMC was the first spin-off with capital raised from a consortium comprising public investment arms and private firms. The founders of the spun off firms were required to find financial backers locally and abroad. It was important for the founders to be conscious in proposing a sustainable business that would meet a break-even point in a “not too long” time period, and subsequently generate profitable income to allow investors to gain from a profitable exit. Therefore, most spin-off businesses from ITRI targeted the short cycle information and communications technology (ICT) related technologies, and not many wanted to embark on long cycle science-based businesses. As ITRI accumulated technical knowledge from abroad, as well as accumulated talent to perform applied research and experience in transferring them to SMEs, it then mandated (on behalf of the Ministry of Economic Affairs) to identify technologies and niches in the production global value chain for national strategic investment and partnership. To this end, ITRI provided incubation facilities to spawn new industries. ITRI founded a patent bank that was intended to transfer its inventions to SMEs for commercialization purposes. This was also used as a patent stock to protect SMEs from imitation and legal threats from established firms.4 Throughout the 1980s and 1990s, ITRI spun off many firms that are capable of defining state-of-the-art technologies, and this in turn allowed the emergence of new business models that shaped and added value to the structure of the semiconductor production value chain. As Taiwan witnessed the maturity of the semiconductor industry and its ability to advance short cycle technologies at the end of the 1990s, it pledged to mobilise resources to build novel basic infrastructure for

4 It is of note that there are many PRIs in developing countries that pursue patenting for reputation purposes. They wish to gain image and position for their organizations in the high-tech market. Such measures may negate the effective use of resources and supports for SMEs and may accumulate unnecessary baggage in the process of incubating start-up firms.

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science-based longer cycle (high entry barrier) ventures. ITRI has initiated many joint ventures with research universities locally and abroad since the 2000s to advance its scientific knowledge stock. However, it has been facing many hiccups as it embarked on this venture while relying on the old niche creation routine from the 1980s, believing that local firms would be able to re-configure the biotech value chain for their own advantage. Many sought to specialise in preclinical research to support clinical development in big pharmaceutical and biotech firms abroad. Yet, such a strategy produced little success, as (unlike the semiconductor industry) pharmaceutical or biotech industries do not need a sophisticated global endeavour to cultivate process innovation and to achieve optimal production and logistic efficiencies. ITRI has also been active since the 2010s to internationalise its developed technologies, which support the local infrastructure upgrading process of the developing economies (e.g. India and Thailand). ITRI has been seeking a broad diffusion landscape to enhance its global R&D footprint and potential market ventures for its incubating business entities. Research labs in ITRI are devised to perform applied research activities. Recruited scientists and engineers are often mobilised to provide solutions in different labs or are given the mission to expedite industrial applications. Many engineers and scientists are recruited at the Peer level (Fig. 5.3a) on contract basis and are expected to vacate their positions in ITRI and run spun off businesses as their labs are turned into business organizations. On top of being an incubator for scientists and engineers to commercialise their research, ITRI is commissioned by the government to roll-out ambitious projects to spin-off firms that would lead to significant spillover effects on the economy. Seasoned scientists and engineers recruited from abroad (most of them having gained industrial experience via working for established firms in the United States) are positioned to play a role at the senior level of the organization for a few years (Table 5.3). This is to allow them to gain second order learning with other employees, which expedite the ambitious quest of their technological ventures. One from the senior level will be appointed as President of ITRI to chart, lead and devise his/her ambitious endeavours. The appointed President of ITRI would have power to prioritise research activities that he/she perceives as mattering. They are mandated either to lead others in ITRI to perform start-ups, or else spin-off a company that would carry significant weight in

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SENIORS Engineer/scien st recruited abroad

Engineer/scien st trained abroad being appointed as President

PEERS

ENGINEERS AND SCIENTISTS

MANAGERS

a) Career Ladder

Grand business spin-off; usually led by the President

Start-up from incubator

Smaller business spin-off

b) Spin-off Depiction

Fig. 5.3 Career ladder and spin-off depiction in ITRI’s organization structure (Source Authors’ observations)

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Table 5.3 Selected former presidents of ITRI and their incubated companies Name

Employment history

Tenured Years in ITRI

Morris Chang

Texas Instruments

1985–1988

Otto Lin

DuPont; Westlake Chemical

1988–1994

Chin-Tay Shih

Burroughs Corp

1994–2003

Johnsee Lee

Argonne National Lab.; Johnson Matthey Inc National Tsing Hua University

2003–2010

Jonq-Min Liu

2015–2018

Contribution Spun off and led TSMC Ltd Significant numbers of transferred technologies to firms producing for micro-electronics (ULSI), notebook PCs, automobile engines and carbon fibre composite bicycles Incubation centre to commercialise nanotechnology, biomedicine and knowledge services Spun off and led Personal Genomics Inc Led many spin-off companies (e.g. Epistar Co., Giga Solar Co., Giga Storage Co., Asia Electronic Materials Co.)

Source Authors’ compilation

terms of contributing to the economy (Fig. 5.3b). Most of ITRI’s predecessor Presidents had incubated their own companies during their tenure. As their companies attained sufficient financial resources to fund business operations and to scale up, they released their position in ITRI and led the spin-off process to form their business corporations. The dynamic views of ITRI competencies are elucidated in Table 5.4.

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Table 5.4 Dynamic views of ITRI’s competencies Criteria

Observations

Given roles and mission

Upgrade the capability of SMEs Assimilate foreign technology and spin-offs Technology transfer to SMEs in the 1970s Additional role to derive new (high-tech) industrial structures via pilot production and spin-offs in the 1980s Scientists and engineers are on contract basis and expected to vacate their position to run spin-off businesses Instituted dynamic capabilities and entrepreneurial routines among the population Many scientists and engineers regard jobs in ITRI as an apprenticeship towards their entrepreneurial careers Strong public–private joint ventures in deriving new industries UMC and TSMC (which in turn populated many generations of spin-offs in Taiwan) An institute devising commercial (short cycle) technologies

Design principle as initial condition that shaped the evolutionary path

Key environmental factors that influenced the evolutionary pathway

Network orientation Spin-off organization

Resulting PRI model Source Authors’ observations

The Case of KIST KIST as an institution for technical training provision and absorptive capacity was started early on. KIST aggressively imported and assimilated foreign technologies, as the then Korean government endowed it to develop and upgrade local industries. Since being established in 1966, KIST enjoyed a generous endowment from the government and gained the mandate to upgrade the SMEs in Korea. Moon (2006; 2010; 2017) maintained that the birth of KIST was part of the US agenda during the cold war period, and its initial establishment (e.g. institutional autonomy), despite being funded by the government, was made under the US stylised organizational principles. The Battelle Memorial Institute did not only facilitate but also solidify the transplantation of the US organizational and operational system (Kim, 1990; 2017) in the public R&D of Korea. As

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KIST grew a reputation for championing research, it gained access to a supply of talented scientists and engineers seeking for a long-term research career in KIST. As a developing country in the 1960s, Korea lacked qualified scientific researchers. Starting a research institute was only possible thanks to South Korean (hereafter, Korean) researchers abroad who returned to their motherland (Hentges, 1975). It was fortunate that there was a small but sufficient number of Korean researchers in the United States, Germany, Japan and other developed countries in which most of them having studied abroad since as early as the 1940s. The government of Korea attracted them to work at KIST with a good salary, housing and the promise of generous research funds. In many cases, the government of Korea appealed to patriotism and nationalism. However, a modern and favourable research environment would be necessary to satisfy their minds. KIST’s relatively strong institutional autonomy, weak organization and high independence on individual researchers (principal investigators) were what “invited” early members wanted, which crucially affected the evolutionary pathways of KIST.5 Basically, KIST required leading scientists and engineers to seek their own financial support for their laboratory expenditures, which means those holding senior research positions would need to apply for either public or private research funding on a competitive basis. KIST is funded early and indeed a well-endowed institution. KIST had its own in-house R&D funding scheme even during the time Korea faced the lacked of a public R&D funding to build NIS. As Korea started to develop and witness an increasing number of organizations performing R&D, the government of Korea sought a spun off from a division in KIST as a national agency to plan, coordinate and evaluate R&D. KIST thought this as a good idea since it did not wish to build one up from scratch. The spun off agency had two main functions, namely managing R&D programs and researching the impact of science and technology (S&T) policy. A few years after spinning-off, the agency was divided into two institutes: KISTEP (Korea Institute of Science and Technology Evaluation 5 From the very beginning, KIST was very much like a US research institution, of which the organizational career ladder was found different to that of a Japanese one. Throughout the 1950s, Japanese colonial legacies in Korea’s science and technology sector had rapidly vanished. Kim (2011) observed such phenomenon in terms of the personnel, physical, and institutional dimensions. The legacies were very much wiped out not only because of the Korean War but also because of the then public sentiment to do away with whatever left during the Japanese colonial period.

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and Planning) and STEPI (Science and Technology Policy Institute). The former was the first public funding agency of Korea, and the latter is a social science PRI that focuses on S&T policy research. Over the years, KIST expanded its research portfolio from applied to academic and basic research activities. KIST was once merged with the Korea Advanced Institute of Science (KAIS) in 1980 as it wished to bridge academic, basic and applied research activities. However, KIST was split up again in 1989. Many scientists and engineers in KIST were involved in important national science projects (e.g. to lead the design of humanoid robots in 1999 and to host the Linux supercomputer in 2003) and mandated to lead the International R&D Academy with the mission to diffuse its governing and administrative practices to developing countries abroad. As the organization advanced, some in KIST were assigned the mission to spin-off full-fledged, specialised PRIs. Some were tasked to form think tanks to advise the then appointed Ministers on science and technology matters. KIST has been acknowledged as the mother of many public S&T organizations, rather than simply being dedicated to derive technology start-ups (as opposed to ITRI). Table 5.5 shows the list of spun off PRIs and other types of institutions. This evident “public bias” indicates that the government of Korea has used KIST (its first established research institute) as a mothership and/or incubator for expanding the public portion of its national innovation system. Also, KIST has long been working very closely with the government by carrying out research programs for the nation’s strategic needs for S&T. The scientists and engineers in KIST enjoyed the privilege of generous research funding, relatively higher job security, minimal time pressure, networks with industries (as there were many coordination with R&D consortiums) and time to venture into academic and basic research.6 6 This is particularly so before the mid-1980s. As the cold war ended in the early 1990s, the world started to witness a more integrated global economy. It was not uncommon to see a shift of focus in public R&D towards more market-oriented agendas such as research to advance industrial productivity and competitiveness. Korean PRIs are also pushed to reform its organizational practices as the government wished the organizations to be seen as competitive and instrumental. The changes include: (1) the funding allocation, which is endowed based on project basis (implying that no one would be guaranteed a lucrative salary as PRIs subscribed to a competitive payroll program); (2) required performance evaluation of engineers and scientists; and (3) strict control of budgeting and personnel headcount planning (Eum, 2016). However, this does not imply that KIST would lose its institutional autonomy or abandoned (totally) its public institution-centric organizational practices (e.g., KIST retained the instituted career ladder that is seen common in public institutions).

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Table 5.5 Spin-off PRIs and think tanks/agencies from KIST Spin-off institution types

Name of institution

PRI (18)

KRISO (Korea Research Institute of Ships and Ocean Engineering) KIOST (Korea Institute of Ocean Science and Technology) KITECH (Korea Institute of Industrial Technology) KIMM (Korea Institute of Machinery and Materials) ETRI (Electronics and Telecommunications Research Institute) KIER (Korea Institute of Energy Research) KOTI (Korea Transport Institute) KISTI (Korea Institute of Science and Technology Information) KRIBB (Korea Research Institute of Bioscience and Biotechnology) KFRI (Korea Food Research Institute) KIT (Korea Institute of Technology) KRICT (Korea Research Institute of Chemical Technology) GTC (Green Technology Center) KERI (Korea Electrotechnology Research Institute) KARI (Korea Aerospace Research Institute) NSRI (National Security Research Institute) KIMS (Korea Institute of Materials Science) KOPRI (Korea Polar Research Institute) STEPI (Science and Technology Policy Institute) KISTEP (Korea Institute of S&T Evaluation and Planning) KAIST (Korea Advanced Institute of Science and Technology)

Think tank and agency (2)

University Source Authors’ compilation

There is virtually no mechanistic push in the organization driving scientists and researchers to commercialise technologies and draw income via spinoff companies. In addition, KIST’s push to pursue academic and basic research has been gaining ground since it joined UST in 2003. Therefore, many in KIST gained the privilege of investing in science-based technological research activities, and some were interested to chart a career path in biotech and pharmaceutical-based business ventures in the long run. Figure 5.4 shows the career ladder and spin-offs depiction of KIST. Unlike ITRI, higher rank managerial officials of KIST were generally promoted in-house senior scientists and engineers. There were some

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SENIORS

Allegiant engineer/scien st being appointed as President

PEERS

ENGINEERS AND SCIENTISTS

MANAGERS

a) Career Ladder

Spin-off research division to become full-fledged PRI

Spin-off of agencies (KISTEP; STEPI)

Start-up from incubator

b) Spin-offs Depiction Fig. 5.4 Career ladder and spin-offs depiction in KIST’s organization structure (Source Authors’ observations)

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Table 5.6 Selected former presidents of KIST—note that all the presidents since 1989 are in-house Name

Employment history

Tenured years in KIST

Hyung Sup Choi

KAERI (Korea Atomic Energy Research Institute); Bureau of Mining of the Korea Chamber of Commerce & Industry KIST KIST KIST KIST, Ministry of Science and Technology KIST KIST KIST KIST KIST KIST KIST

1966–1971

Moon Taek Sim Sang Soo Lee Won Heui Bak Jung Uck Seo Un Young Kim Won Hoon Park Ho Koon Park You Seung Kim Dongwha Kum Kil Choo Moon Byung Gwon Lee

1971–1972 1989–1989 1989–1992 1992–1993 1993–1996 1996–1999 1999–2003 2003–2006 2006–2009 2010–2013 2014–

Source Authors’ compilation

scholars from abroad who assumed the role of President in the early years, but since 1989, none of the Presidents of KIST were recruited from outside (Table 5.6). This “in-house priority” very much resembles the phenomena observed in many Korean universities in how their chancellors are elected. As mentioned earlier, KIST spun off 18 PRIs and some senior scientists and engineers moved to these new institutes to become their Presidents. On the other hand, managers of KIST moved to spin-off think tanks or agencies to become policy researchers or project managers. The dynamic views of KIST competencies are elucidated in Table 5.7.

ITRI and KIST Compared The dynamics of the two PRIs in governing science and technology activities and orchestrating spin-offs for technological businesses are somewhat different (Table 5.8). They are attributable to the roots, which defined their routines and organizational structures that moderate their contributions to respective national innovation systems. Our observations are detailed in Table 5.8 with the self-explanatory captions. With its rich endowment of industrial networks and funding bodies, ITRI established itself as an incubation hub for those who wish to

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Table 5.7 Dynamic views of KIST’s competencies Criteria

Findings

Given roles and mission

Advancing applied science Supporting industrial upgrading via technology transfer Senior researchers and engineers are required to search for competitive research funding to support their laboratory expenditures Invited Korean scientists from abroad, who preferred to work in an unstructured organization Government R&D programs that assigned KIST as both the centre of research activities and administrative headquarters for R&D planning Government and universities Other PRIs KAIST KISTEP, STEPI An applied science research institute; tech-university model

Design principle as an initial condition that shaped the evolutionary path

Key environmental factors that influenced the evolutionary pathway

Network orientation Spin-off organization

Renewed PRI model Source Authors’ observations

commercialise their research activities. ITRI hosted many engineers and scientists who once worked for established high-tech firms, as well as university academics and students. They saw ITRI as a launch pad to scale up and commercialise their technological inventions. ITRI was also commissioned to help academics, who are jointly funded by the government and private firms, to expedite their scientific research that is useful for industrial applications and to turn their university’s labs into organizations functional for business operations. ITRI is acknowledged as a place for scientists and engineers to gain apprenticeship and support for business ventures. ITRI cultivated a routine7 of spinning-off, and its organization structure gives high regard

7 It is of note that the R&D staff in ITRI have relatively less service seniority when compared to that of Korea’s Electronics and Telecommunications Research Institute (ETRI). Shiu et al. (2014, p. 2058) observed that many of those who resigned were devoted to spin-off and start-up ventures.

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Table 5.8 The roles of the selected PRIs in innovation systems and their unique characteristics and capabilities

Modelled after

Role in the national innovation system

Capabilities and resources

ITRI

KIST

KIST and the Japan Science and Technology Agency; evolved towards a unit for spin-offs and start-ups – Assimilating foreign technologies and disseminating them to local firms – Identifying niches in the global production value chain – Tasked to perform applied research – Incubator for start-up entrepreneurs – Seeding for new industry via spin-offs – Ability to devise industrial applications from licensed technologies – Ability to mobilise joint public–private funds for spin-offs – High technological project revenue (55% of total revenue from technological services)

United States’s Battelle Memorial Institute (with UN assistance)

Specialization

Short cycle ICT-related technologies

Industrial network

– An entity to propagate new technologies to SMEs – Network to devise new ventures

Source: Authors’ observations

– Assimilating foreign technologies and disseminating them to local firms – Tasked to perform various types of research (academic, basic and applied) – Spinning-off full-fledged specialised PRIs to build sectoral specialization

– Ability to devise industrial applications from licensed technologies – Endowed with patient capital and thus possessing the ability to define state-of-the-art long cycle technologies – Revenue dependent on various sources (only 4% of total revenue from technological royalty income) Diverse; capable to commit in long cycle (science-based) technologies – An entity to grow, experiment and lead the use of advanced (state-of-the-art) technologies

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to the commercial success of research activities within ITRI and its affiliated research entities. The downside of such organizational structure is that it (relatively) lacks capability in performing science-based long cycle research. The structure is conducive to applied research activities on ICT and is effective in translating them into industrial applications or commercial uses. However, the structure lacks the patient capital to endure the long development process of science-based technologies (e.g. preclinical and clinical testing for pharmaceutical or biotech products) and high-risk science-based business ventures. ITRI (and other PRIs in Taiwan such as Academia Sinica) did try to adopt a similar approach that was once effective in spinning out ICT-related firms (e.g. TSMC) to commercialize their science-based technologies. ITRI understood its strength in preclinical research and development, and sought to specialise in them while allowing advanced firms in the developed world to focus on clinical development. The measure and outlook of developing niches in the global production value chain of biotech does not seem to pan out well when compared to that of the fabless plant in the semiconductor value chain. Unlike semiconductors, pharmaceutical or biotech industries do not need a strategic or global endeavour for production cost reduction or mobility of products and services. Hence, such industries do not need that sophisticated global production value chain to scale up their businesses. KIST, on the other hand, devised a different system of governance in orchestrating spin-offs. KIST has historically spun off many research divisions and developed them into full-fledged PRIs specialising in particular fields of technology or specific industrial sectors. KIST was also instrumental in spinning-off agencies from the managerial divisions. KIST follows a typical organizational career ladder in promoting engineers and scientists. Those devotedly working for many years and in different research departments would have an advantage in moving up the ladder. The appointed President is generally someone who has dedicatedly worked in KIST for years and has faithfully led and (successfully) delivered research agendas in accordance with government goals and KIST’s policy program. There are academics and engineers seeking support from KIST to nurture their ideas and to expedite industrial applications. Some found their niches and managed start-up businesses. Nevertheless, many labs in KIST are (well) funded by the joint public-chaebol ventures for long-term

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research projects and are functioned to deliver solutions to specific industrial problems. As KIST was bestowed to offer postgraduate education, there are also labs that are endowed by the government to function as research training workshops. Scientists and engineers working for the labs are well-funded and many of them hold academic advisor positions, being tasked to lead different academically oriented research activities. Scientists and engineers in KIST can play dual roles in their research career. On the one hand, they are tasked to deliver industrial solutions for firms within KIST’s networks. On the other hand, they mentor research students and deliver academically oriented research activities. As they are well-funded but overwhelmed with many research activities, not many are interested to venture into start-ups or spin-offs. Without taking on the risks associated with start-ups, KIST scientists and engineers can claim generous remunerations from their patents when technology transfer contracts are established with outside private firms. Benchmarking the Bayh-Dole act in the United States, the government of Korea legislated a similar scheme for employees’ inventions, which applies not only to university academics but also to scientists and engineers in PRIs. With tenured research and teaching positions as well as the opportunity for economic benefits, there is no strong motivation for KIST’s scientists and engineers to venture out. Another characteristic that influenced scientists and engineers of KIST to shy away from being venturous was Korea’s national innovation system and the nature of government R&D programs. Major large firms (e.g. Samsung, LG, Hyundai) and SMEs in value chains were rigorously guided to join R&D consortia with PRIs and universities for large government R&D programs, so-called industry-academia-PRI collaborative R&D in Korea. This means that every developed technological achievement was already matched to whom would utilize (commercialize) them. KIST’s scientists and engineers did not have any reason to venture a spin-off or start-up. The rise of biotech research8 in KIST may reflect the fact that as Korea becomes a developed country, it is experiencing a post-catching phenomenon. As KIST’s biomedical sector grows bigger and bigger, so does its academic community. Nonetheless, such a role is seen by many as 8 It is interesting that biotech was not considered to fit KIST from its beginning. Even in the 1970s, biotech was thought as an extravagance in Korea (Sin, 2009), which lacked the urgent need to meet Korea’s industrialization, not to mention underdeveloped basic science capabilities in universities.

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the duplication of a function that was traditionally performed by public research universities in Korea. Many questioned if such a mandate for KIST would downplay the role of universities in performing academic and basic research and supplying trained scientists to industries. The downside of KIST’s structure is that it lacks the dynamics of incubating start-ups and the motivation to spin-off businesses. Many scientists and engineers in KIST are seeking a long-term research career instead of seeking an apprenticeship towards starting their own entrepreneurial careers. As the government of Korea is pushing to realise an entrepreneurial society and hopes to have a critical mass of scientists and engineers pursuing entrepreneurial careers (instead of seeking jobs in the public sector), KIST finds its structure untenable to accommodate such demand, just like universities generally do.

Remark As two of the so-called four Asian Tigers, having similar industrial structures and economic achievements, Taiwan and Korea are often regarded as alike. Indeed, these two countries share many things in common, such as Japanese colonial rule, civil wars against communism and the cold war. Regarding the East Asian context, the capitalism in both Taiwan and Korea resembles that of Japan, which has long been the benchmark to follow. This is one of the reasons scholars of neo-Schumpeterian economics, who focus on catching-up phenomena between nations, have paid much attention to the two countries. Someone might easily place Taiwan and Korea in the same boat, assuming these countries would have similar national systems of innovation. However, our assessment on organizational and structural changes of the two PRIs reveals the existence of significant differences. What we stress here is the difference in the role of public research institutes. Hence, our comparative case study focuses on ITRI of Taiwan and KIST of Korea, which are inarguably the cited pillars of their respective country’s PRIs (not to mention the very first example for each of them). We followed their paths of evolution and analysed their organizational dynamics with the respective career ladders and spin-offs of their scientists, engineers and managers. The study of the chapter tried to provide a review of the similar roots and postulated the paths taken as the two PRIs parted ways to define their own roles and functions in

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developing their national economies. We observed that the organizational structure moulded in ITRI is conducive to populating spin-offs and start-ups, while that of KIST is configured to build academic and sciencebased technological research activities. Their success in spawning desired outcomes stimulated the interest of other PRIs with different endowments and mandates within their countries to adopt a similar structure and route. Our preliminary observation of Taiwan’s Academia Sinica in its course of pursuing science-based technological ventures seems to construe some similar measures to that of ITRI. Meanwhile, Korea’s Electronics and Telecommunication Research Institute (ETRI), being mandated to spawn niches and new industries, bears some similarities to KIST. There are considerable differences in terms of supporting ecosystems between Taiwan and Korea. ITRI hoped to gain from science-based research, while KIST was eyeing business spin-offs. However, each has yet to attain their desired results. We highlighted the limitations of the two structures in using them for different R&D agendas. Generally, we see that ITRI and KIST represent very different types of PRI in the post catching-up phase of development. ITRI can be regarded as an institute directly serving the economy, as it has been producing a number of tech start-ups. Scientists and engineers in ITRI are like pre-venture entrepreneurs, and it seems that “graduation” from being PRI researchers is destined. By contrast, KIST has served typically in the public research sector, as a mothership for a number of public science and technology-oriented PRIs, a university and some agencies. KIST was one of the building blocks of the public part of Korea’s national innovation system. However, as Korea developed, KIST evolved to become a university-model PRI, with tenured scientists and engineers who carry out publicly funded research with a high degree of academic freedom and independence. The two institutions each lack what the other has. ITRI is a good performer in terms of economic outcomes especially in the ICT sector, while KIST successfully extended its research areas to biotech, which is more future-oriented. Research commercialization and science-based technology advancement are among the most common agendas in both public and private R&D entities. Hence, our depictions of organizational career ladders and spin-off mechanisms would provide useful references for R&D managers aspiring to attain similar structures and routines to achieve certain outcomes in their organizations. This chapter suggests useful comparative research. We believe our analysis can be extended in future studies to

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assess PRIs of different kinds, as well as different mandates and endowments. The findings of this chapter may also be useful for developing countries that are keen to start their own public research sectors (Lee et al., 2017). For instance, Vietnam is building its first modern and comprehensive public research institute, V-KIST. As its name implies, VKIST is a daughter institute of KIST. It will be interesting to observe which way V-KIST will evolve, in spite of the differences in national context.

References Amsden, A. (1989). Asia’s next giant: South Korea and late industrialization. Oxford University Press. Amsden, A., & Chu, W.-W. (2003). Beyond late development: Taiwan’s upgrading policies. MIT Press. Balaguer, A., Luo, Y.-L., Tsai, M.-H., Hung, S.-C., Chu, Y.-Y., Wu, F.-S., Hsu, M.-Y., & Wang, K. (2008). The rise and growth of a policy-driven economy: Taiwan. In E. Charles & L. Hommen (Eds.), Small country innovation systems: Globalization, change and policy in Asia and Europe (pp. 31–70). Edward Elgar Publishing. Berger, S., & Lester, R. K. (Eds.). (2005). Global Taiwan: Building competitive strengths in a new international economy. Routledge. Bessant, J., & Tidd, J. (2015). Innovation and entrepreneurship. Wiley. Chen, J.-H., & Chen, Y. (2016). The evolution of public industry R&D institute—The case of ITRI. R&D Management, 46(1), 49–61. Chu, P. Y., Ling, L. Y., Hsiung, H. H., & Liu, T. Y. (2006). Intellectual capital: An empirical study of ITRI. Technological Forecasting and Social Change, 73(7), 886–902. Coccia, M. (2004). New models for measuring the R&D performance and identifying the productivity of public research institutes. R&D Management, 34(3), 267–280. Dodgson, M., & Bessant, J. (1996). Effective innovation policy: A new approach. International Thomson Business Press. Eum, S. (2016). The formation of government-funded research institutes management system, 1989–1999: Focusing on government control issues (M. S. Thesis). Seoul National University. Hentges, H. A. (1975). The repatriation and utilization of high-level manpower: A case of the Korea Institute of Science and Technology. Johns Hopkins University. Intarakumnerd, P. (2011). Two models of research technology organisations in Asia. Science, Technology and Society, 16(1), 11–28.

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Intarakumnerd, P., & Goto, A. (2018). Role of public research institutes in national innovation systems in industrialized countries: The cases of Fraunhofer, NIST, CSIRO, AIST, and ITRI. Research Policy, 47 (7), 1309–1320. ITRI. (2018). ITRI 2018 annual report. ITRI: Hsinchu. Available at https://www.itri.org.tw/english/ListStyle.aspx?DisplayStyle=18&SiteID= 1&MmmID=1037333564136616055. Accessed on February 13, 2020. Kim, G. B. (1990). A study on the process of establishing KIST: Focusing on U.S. assistance and its influence. Journal of the Korean History of Science Society, 12(1), 44–69 (in Korean). Kim, G. B. (2011). Beyond the colonial science and technology: Korean evolution of modern science and technology. Journal of Korean Modern and Contemporary History, 58, 252–283 (in Korean). Kim, G. B. (2017). The structure of scientific and technological revolution in Korea. Deulnyeok (in Korean). Korea Institute of Science and Technology. (2016). KIST 50th anniversary: 1966–2016. Korea Institute of Science and Technology (in Korean). Lee, C. G., Kim, J. J., & Chung, S. Y. (2017). Transferring innovation capacities to developing countries: A KIST-based strategy. Journal of Korea Technology Innovation Society, 20(3), 709–731 (in Korean). Lee, D. H., Bae, Z.-T., & Lee, J. (1991). Performance and adaptive roles of the government-supported research institute in South Korea. World Development, 19(10), 1421–1440. Lee, K. (2013). Schumpeterian analysis of economic catch-up: Knowledge, pathcreation, and the middle-income trap. Cambridge University Press. Lee, K. (2016). Economic catch-up and technological leapfrogging: The path to development and macroeconomic stability in Korea. Edward Elgar Publishing. Mathews, J., & Cho, D.-S. (2000). Tiger technology: The creation of a semiconductor industry in East Asia. Cambridge University Press. Mitsutaka, M., Yokota, S., Naito, K., & Itoh, J. (2010). Development of a model to estimate the economic impacts of R&D output of public research institutes. R&D Management, 40(1), 91–100. Mazzoleni, R., & Nelson, R. R. (2007). Public research institutions and economic catch-up. Research Policy, 36(10), 1512–1528. Moon, M. Y. (2006). Early history of KIST, 1966–1980: From contract research to national project research (PhD dissertation). Seoul National University (in Korean). Moon, M. Y. (2010). The formation of the modern research system in South Korea: The foundation and development, 1966~1980. Sunin (in Korean). Moon, M. Y. (2017). The evolution of the science and technology research system in South Korea: The foundation. Deulnyeok (in Korean).

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Narin, F. (2012). Assessing technological competencies. In From knowledge management to strategic competence: Assessing technological, market and organisational innovation (pp. 161–196). Imperial College Press. Nelson, R., & Winter, S. (1982). An evolutionary theory of economic change. The Belknap Press. NST. (2018). National research council of science and technology—Annual report 2018. NST: Sejong. Available at https://www.nst.re.kr/nst_en/pr/01_03. jsp. Accessed on February 13, 2020. Shiu, J.-W., Wong, C.-Y., & Hu, M.-C. (2014). The dynamic effect of knowledge capitals in the public research institute: Insights from patenting analysis of ITRI (Taiwan) and ETRI (Korea). Scientometrics, 98(3), 2051–2068. Sin, H. S. (2009). The advent of gene engineering promotion act in Korea the 1980s: A feedback between scientific politician and various actors. The Korean Journal for the History of Science, 31(2), 475–504. Ter Wal, A., Criscuolo, P., McEvily, B., & Salter, A. (2020). Dual networking: How collaborators network in their quest for innovation. Administrative Science Quarterly. Wong, C.-Y., & Lee, K. (2018). Projecting the Arena of inclusion: The case of South Korea in pursuing a phased inclusive growth process. Review of Policy Research, 35(4), 590–616. Wong, C.-Y., Hu, M.-C., & Shiu, J.-W. (2015a). Governing the economic transition: How Taiwan strategically transformed its industrial system to attain virtuous cycle development. Review of Policy Research, 32(3), 365–387. Wong, C.-Y., Hu, M.-C., & Shiu, J.-W. (2015b). Collaboration between public research institutes and universities: A study of industrial technology research institute, Taiwan. Science, Technology and Society, 20(2), 161–181.

PART II

Meso-Micro Level of Analysis

CHAPTER 6

Evolution of Two Industrial Districts: The Cases of Hsinchu of Taiwan and Suwon of Korea

Background The sufficient number of studies on industrial districts and assessments of their dynamics using diverse methodologies reflect the long-standing interest in why innovation activities and economic development are unevenly distributed over space (Asheim et al., 2019: 1). Some critical works that conceptualize and illustrate industrial districts and regional innovation systems (RIS) include those of Saxenian (1994), Markusen (1996), Cooke (1992), Asheim (1998), Porter (2000), Menzel and Fornahl (2010) and Clark et al. (2010). They focus on cases in Western Europe or Northern America, such as Silicon Valley (Markusen, 2003). However, the interest in cases in Asia (Park, 2015: 220–222; Yeung, 2016: 133–138) is growing because of its rapid economic growth.1 This chapter examines the dynamic evolution of the innovation systems of two prominent industrial districts in Asia, namely, Hsinchu in Taiwan and Suwon in Korea, and their respective core firms. They are selected as case studies because of several reasons. First, both regions emerged as aggressive high-technology clusters (Mathew & Cho, 2000) and have evolved to attain networks that can mobilize capitals (e.g. knowledge and financial capitals) to define the desired industrial structure for 1 RIS-related studies in Asia include Hassink (2001), Wong et al. (2018), Yang (2016) and Yoon et al. (2015).

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 C.-Y. Wong, Experimental Learning, Inclusive Growth and Industrialised Economies in Asia, https://doi.org/10.1007/978-981-19-3436-0_6

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niches and new businesses since the 2000s. Second, each region hosts a global semiconductor firm that conducts state-of-the-art semiconductor manufacturing, such as Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung Electronics Company (SEC) (Yeung, 2016).2 TSMC and SEC are considered two of the top global suppliers and formidable players in the global semiconductor value chain. Third, several RIS actors (e.g. government agencies, private and public R&D centres, and universities) actively support the upgrading process and are often highlighted by related literature as intermediaries/bridging institutions (Kim, 1997: 149–170; Wong et al., 2015). These two regions and the core firm in each region have rarely been deliberately studied (particularly in comparative point of view) nor accredited correctly in the academic discourse. Some studies are doing the aggregate-level comparison of Korea and Taiwan, such as Wang and Tsai (2010) and Wang (2007), in which Korea is considered a Neoliberal and Taiwan is considered a neo-Marshallian regime or innovation system. Given the heavy role of the core firms in the two Asian regions, the concept of industrial districts in Markusen (1996) is considered a practical starting framework because of its focus on the interfirm network in the governing productive activities in a region, such as a Marshallian or Huband-Spoke (HaS) type. Furthermore, we develop a specific framework, called “Persistence, Transformation, and Upgrading” of RIS, tailored to the following three research questions. Thus, the first and beginning question (persistence) is the main characteristics of the RIS of the two regions and the issue of possible persistence of the RIS type over time. We investigate whether each of the two regions can be classified into a different industrial district, such as Hsinchu as Marshallian and Suwon as HaS. Then, the second question is whether Hsinchu tends to realize a gradual convergence to HaS type, where a core firms acts as anchors to the regional economy and whether it is associated with increasing or high levels of innovator distribution concentration. This second question is the dynamic transformation of RIS and the related role of the core firms (TSMC) in this transformation. The core firms continue to grow to reach the technological frontier. They tend to become responsible for a dominant share of innovative activities while 2 Intel, Samsung and TSMC are the top three companies in the broadly defined semiconductor industry in terms of sales in early 2010 (Tables 5.3 and 5.4 of Yeung, 2016).

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commanding appropriability of their in-house R&D activities, which is associated with increased self-citation patenting, and strengthening linkages with outside actors (e.g. universities or scientists). The final but most focal research question in this chapter is whether Suwon and Hsinchu have been upgrading themselves from a peripheral or immature RIS that relies heavily on external knowledge (Rodriguez et al., 2014; Asheim et al. 2019: 73) or the dirigiste systems with the lowest level of regional embeddedness (Hassink, 2001; Park & Markusen, 1995) to a catching-up RIS in terms of local knowledge sourcing, learning and linking. The above questions are important because answering them can lead to policy implications for emerging economies and their regions searching for an effective mode of upgrading. This chapter answers these questions by conducting a detailed and dynamic analysis of their RIS using the extracted US patents and citation data. The focus is on knowledge creation and diffusion patterns and the concentration and diversification of innovation among firms in the regions. In this light, this chapter differs from Lee and Saxenian (2008) or Yoon et al. (2015), which investigated the roles of networking institutions and social capital in the information industry in Taiwan or RIS in Korea and Taiwan. An additional aspect of our contribution is developing and utilizing a method that enables a systematic quantification of RIS, compared with most of the RIS literature doing qualitative and theoretical analyses. Our quantitative method can be considered as reflecting three core elements of RIS (Asheim et al., 2019: 2): actors, network and institution. Specifically, the patent citation-based variables in this chapter measure the degree of concentration among “actors” in the region, the “network” by the variables of localization and intra- and inter-regional collaboration, and the “institution” by the variables of university-industry linkages and science-linked innovation. Furthermore, the sectoral specialization and distribution are measured by the variables of the cycle time of technologies, technological diversification and originality.

Narrative Framework Centred around the central question of why innovation activities and economic development are unevenly distributed over space (Asheim et al., 2019: 1), many studies have investigated industrial districts and regional innovation systems (RIS), such as Saxenian (1994), Markusen (1996), Cooke (1992), Asheim (1998), Porter (2000), Uyarra (2010),

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and Werker and Athreye (2004). Following the propositions of these works, which are mostly either theoretical or qualitative, quantitative approaches have also appeared to study the efficiency of different kinds of regional innovation systems, such as Zabala-Iturriagagoitia et al. (2007) and Fritsch and Slavtchev (2011). Markusen (1996) and Park (1996) are two noteworthy classical works on the typologies of the industrial district. They focus on the interfirm network in the governing productive activities in a region. Markusen (1996) presented several industrial network structures, such as Marshallian, HaS and satellite platform districts. The Marshallian district demonstrates high resiliency in sustaining the dynamics of productive activities because it mainly consists of small firms that often engage in cooperative competition (Markusen, 2003). By contrast, HaS districts, such as the Toyota city in Japan, are led by a small number of large firms as the magnet for smaller firms that want to utilize the proximity to resourceful anchored tenants. The satellite platform district consists of SMEs that supply diverse multinational firms (MNCs) clustered in a region. The key players of the three structures comprise “many firms, a few large firms, and firms supplying to MNCs”. The topics on resiliency and adaptive capacity are among the most engaging ones in urban and regional studies (e.g. Balland et al., 2015; Xiao et al., 2018). Markusen’s (1996) view on industrial clusters and derived typology is instrumental in examining a region’s technological resiliency/vulnerability (Clark et al., 2010). Given our interests in the characteristics of the RIS of the rapidly emerging regions in Asia and the heavy roles of the core firms in the two regions, we consider the above typology a helpful starting framework, compared with other alternatives that have different foci, such as the three RIS types proposed by Asheim (1998) (i.e. territorially embedded RIS, territorially networked RIS and regionalized national innovation system), the two classifications introduced by Cooke (2001) (e.g. entrepreneurial and institutional), and the place-based leadership approach (Beer & Clower, 2014; Benneworth et al., 2017).3 This chapter combines the district typologies with the analyses of the innovation systems to identify the innovation-related counterparts that 3 Place-based leadership approach may be applicable given that the core firm in each region has eventually become dominant. However, in the case of Hsinchu, such dominance by TSMC was not evident during the early stage but has emerged over time, which requires a dynamic and comparative analysis as in this chapter.

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differentiate the dynamics of the industrial districts. In this sense, this chapter is not just analysing the features of a Marshallian or HaS industrial district but rather that of a Marshallian or HaS innovation system, specifically the patterns of knowledge creation and diffusion among firms and their concentration or decentralization. Such focus is justifiable because the firms in both regions have emerged not just as producers or suppliers but also as innovators that offer state-of-the-art technologies. Combining the industrial district typology with the RIS framework, this chapter proposes a specific theoretical framework, called “persistence, transformation, and upgrading” of RIS, focusing on the interaction or co-evolution of the region and the core firms inside the region. This framework is designed to address the central questions: what are the driving forces of dynamic transformation of the RIS in the two regions, and what is the relative role between the core firms vs. the surrounding regions. Within this framework, the study of this chapter addresses the following three questions and hypotheses. The first question is the identification of Hsinchu and Suwon in terms of the existing typology of the industrial districts, such as the Marshallian, HaS and satellite districts, and its possible persistence over time. Given that Hsinchu is populated by SMEs and Suwon is dominated by a large firm, as explained in the next section, an initial hypothesis for the chapter is that the former resembles a Marshallian network more than the latter. Hsinchu shows a high degree of cooperation/linkages among local firms. By contrast, the HaS network of Suwon indicates a relatively low degree of localization because of a network structure that is dominated by nucleus and (intragroup) linkage firms. Given that this aspect of the difference between the two regions is related to the difference in NIS of Taiwan vs. Korea (Wang, 2007; Wang & Tsai, 2010), such difference may be expected to persist to a certain degree. It is also related to the issue of the organic and planned modes of RIS proposed by Isaksen et al. (2018). The two regions share a common but differentiated origin of planned establishment, with Suwon and Hsinchu being planned by a firm (Samsung) and the government, respectively. Seeing the extent to such subtle difference of the two regions has led to a similar or different evolution as it interacts with the growth of core firms would be interesting. Thus, the second question is regarding the dynamic transformation and possibility of convergence, namely, whether there is a tendency towards a gradual convergence to an HaS-type RIS, and to what extent it is associated with an increasing dominance by the core firm (TSMC) and the

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ever-higher levels of innovator distribution concentration. As the core firms continue to grow to reach the technological frontier, they tend to become a responsible dominant share of innovation activities while increasing the degree of self-citations and strengthening the linkages with non-firm actors (e.g. universities or scientists). Such possibility of changing types of industrial districts over time is consistent with the early observation by Park (1996) about the emergence of the “advanced HaS” type from the Marshallian type. The third issue is that of the dynamic upgrading of RIS from a peripheral to catching-up RIS, which determines whether or not Suwon and Hsinchu are upgrading by absorbing and learning knowledge from outside and thereby building up local knowledge bases and how much of the upgrading is caused by the core firms versus the residual region, including other firms but excluding the core firm. This chapter will present the dynamic pattern of RIS upgrading in the two regions regarding the increasing degree of local knowledge sourcing, the decreasing degree of reliance on MNCs or outsider knowledge, and the growing tendency of technological diversification. The sources of learning of latecomer regions have been the focus of early studies on East Asia. For instance, Hu and Jaffe (2003) stated that knowledge flows are diffused from technological leaders (the United States and Japan) to latecomers (Korea and Taiwan). Hu (2011) analysed the long-term evolution of Hsinchu on the basis of backward and forward patent citations to identify the countries from which Hsinchu has been learning and the countries to which Hsinchu’s knowledge has flown. Lee and Yoon (2010) compared the sectoral innovation systems (SSI) of semiconductor industries of Korea and Taiwan using some of variables used in this chapter, such as self and interfirm citations and knowledge localization in innovation (i.e. the degree to which a patent cites other patents from the same localities). However, their analysis is at the industrial level. Furthermore, their chapter lags the recent development after the 2010s. This chapter uses the detailed analysis of patent citation data to identify the determinants of changes in regional learning processes and thus complement the chapter by Capello and Lenzi (2018) on a similar topic. In sum, the analysis of this chapter will deal with the following: (1) the possibility of a persistent difference between Suwon (HaS type) and Hsinchu (Marshallian type), (2) the dynamic transformation of Hsinchu from a Marshallian towards HaS type and (3) the upgrading of both regions from the peripheral to catching-up RIS.

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The answers from the results of the analysis are that some degree of the persistent difference between the two regions reflects the pathdependent heterogeneity of NIS of the two economies and of the SSI of the regions’ semiconductor industry, that the common force for convergence towards the HaS type is the ever-stronger rise of the core firm, and that not only the core firm but also the surrounding region (non-core firms) have experienced upgrades of their innovation system. In terms of methodology to verify the above questions and hypotheses, this chapter adopts a patent citation analysis to reveal the detailed nature of knowledge creation and diffusion mechanism in each RIS. Such an approach is complementary to other approaches focusing on the performance of RIS as a whole, such as the DEA analysis adopted in Zabala-Iturriagagoitia et al. (2007) or the production function approach adopted in Fritsch and Slavtchev (2011). While Fritsch and Slavtchev (2011) focus on the impact of spillovers from within the private sector as well as from universities and other public research institutions on the efficiency of private sector R&D, patent citations used in this chapter are an alternative or more direct measure of knowledge spillovers. Specifically, our analysis of RIS will calculate and look at the value of the key RIS variables measured at the level of the core firm and that of the region, excluding the core firm.

Basic Profile and Origins of the Two Regions Overview Hsinchu and Suwon are similar in several aspects, including size of the population, and thus comparable each other. Suwon is not the capital city of South Korea, and it is not directly neighbouring city of Seoul (capital of South Korea) but is not far from Seoul, within one hour driving distance. Hsinchu is not a capital city and is not a directly neighbouring city of Taipei but is still not far from Taipei either, within one hour driving distance. Both areas are cities, but we will refer to them as regions, which is a term that is generally used to represent subnational territories. Table 6.1 shows the basic profile numbers for Hsinchu and Suwon. The basic information on the two regions is similar or comparable in terms of population size (approximately 1 million), per capita gross domestic product (GDP) (approximately $40,000 in purchasing power

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Table 6.1 Basic profile of Hsinchu and Suwon

Population Area GDP per capita USD (PPP) Major firm Number of companies Share of US-granted patents assigned to private firms Government program/coordination for regional innovation upgrading Nearby public/research university Nearby public research institution

Hsinchu

Suwon

984,155 (2016) for city and county 104.15 km2 (city) approx. 42,783 (average of the county and city) (2017) TSMC 512 (2018) in HSP 91%

1,201,564 (2014)

R&D consortium coordinated by the Industrial Technology Research Institute (ITRI) National Tsing Hua University and National Chiao Tung University ITRI

121.04 km2 37,800 (2017) (Gyeonggi) SEC(Samsung Electronics) approx. 584 (2018) 98% Gyeonggi Institute of Science & Technology Promotion (GBSA) Sungkyunkwan University and Hankyong National University (HNU) Korea Institute of Science and Technology (KIST) in Seoul

Sources Hsinchu Science Park Bureau; Statistics Ministry of Labor, Taiwan; National Statistics Republic of China (Taiwan); Governments’ Statistics of Hsinchu City and Country; Info-clipper.com; Statistics Korea (KOSTAT); and Suwon website

parity terms), number of companies (approximately 500–600 firms), and the total number of the US patent per year (about 3,500 in the mid2010s), the number and share of US-granted patents assigned to private firms (higher than 90%). Figure 6.1 shows the number of patents in the two regions from 1976 to 2018. Hsinchu and Suwon have been recently registering approximately 4,000 US patents annually, indicating that both regions increase the number of patents in almost a parallel manner. The similar quantity and trends of the US patent count validates the comparison of the two regions using the US patent data and several other variables derived from patent citations. The figures also indicate that Hsinchu used to file much more patents than Suwon until the mid-2000s, whereas Suwon became more active in patenting activities only since in mid-2000s, thereby reaching the patent activity status of the former.

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5000 4500 4000

Patent Counts

3500 3000 2500 2000 1500 1000 500 0

Hsinchu

Suwon

Fig. 6.1 Patent counts for Hsinchu and Suwon in 1976–2018

Hsinchu The establishment of Hsinchu as a high-tech region originated from the plan of the National Science Council of Taiwan to construct the Hsinchu Science and Industrial Park (HSP) in 1980, which envisions the tripartite collaboration among the industry, academia and government research institutes, such as the Industrial Technology Research Institute (ITRI) (Wong et al., 2015). Since its construction in 1980, HSP has witnessed how six industrial sectors, namely, ICs, personal computers (PCs) and peripherals, telecommunications, optoelectronics, precision machinery and biotechnology, formed a self-sufficient and closely integrated value chain from R&D to mass production (Hu, 2011). HSP is located between Hsinchu City and Hsinchu County and has been benefiting from the talented engineers who migrated from Taichung, which is a region with advanced machinery industries, and from the financial resources from Taipei. This origin can serve as a basis to hypothesize initially that Hsinchu resembles the Marshallian district more than the HaS one. However, the semiconductor sector (IC chips) has replaced the PC and peripheral sectors since the 1990s as the core sectors (see Fig. 6.10). The former has eventually become the focal sector of HSP, dominating in

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terms of the number of employees and sales since the 2000s (Hu, 2011). Given such development of the IC sector, which is led by TSMC, we may hypothesize that Hsinchu has been shifting towards a HaS structure. The rise of the semiconductor sector in Hsinchu is not simply a natural progress but was rather caused by the targeted promotion of this industry at the national level in the early 2000s under the “Two Trillion and Twin Star Project”. In 1970, the government and pragmatic technocrats and entrepreneurs envisioned that the established semiconductor companies abroad would promote a fabless business structure because globalization and offshoring movement were then gaining momentum. Therefore, they aspired to make Hsinchu the foundry hub for global fabless firms in the semiconductor production value chain. The government allocated ample resources to ITRI and two other research universities in Hsinchu to develop such capabilities and niches. In the 1980s, the segmentation detaching foundries from integrated device manufacturers were realized, and the firms that invested in foundry businesses in HSP were then contracted to supply fabrication services. Taiwan used its networking assets and mobilized the social capital to commit in specialized assets (i.e. source of finances and technical skill) to develop a “pure-play” foundry (Yeung, 2016: 138) and encouraged associated industries to realize an active ecosystem. These efforts led to the founding of TSMC as a spin-off in 1986 from ITRI as a joint venture with Philips, as well as other fabless firms that provide designs and chips for telecommunication and multimedia products. As the firms gained sufficient capabilities to upgrade and mature, ITRI evolved as a platform that coordinates collaborative research and establishes R&D consortium for new industries. However, the rise of TSMC to global prominence occurred 10 or 15 years after its spin-off from the ITRI, which could be attributed to the firm-specific innovation effort beyond the initial government promotion in the 1980s (Yeung, 2016: 140). Suwon Suwon became a high-technology industrial district in 1969 when the Samsung Group entered the electronics industry in 1969 and diversified from its original businesses of textiles and sugar refinery (Park, 2015: 217). The company established its first electronics factory in Suwon. Suwon is the capital city of Gyeonggi Province, which surrounds Seoul and is the second most populous province in South Korea. Given its

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proximity to Seoul and the low costs of living and manpower, Gyeonggi has become the favourite location of many chaebols (big corporations in Korea) for high-technology manufacturing industries and, eventually, R&D centres (Hassink, 2001). To take advantage of vertical integration, Samsung established several subsidiaries in the electronics sector in Suwon, such as SEC (1969); Samsung-NEC (1970), which later became Samsung SDI; and Samsung-Sanyo Parts (1973), which became Samsung Electro-Mechanics (SEM). It is to be noted that Samsung group wanted to learn from Japanese firms about electronic technology by setting up joint ventures with them, such as NEC and Sanyo, although it took over the Japanese equity for a full control of the affiliates. Suwon eventually became the R&D hub when Samsung relocated its factories abroad (Samsung Newsroom, 2014; Song & Lee, 2014: 169). The dominance of Samsung in Suwon is evident considering that the region does not merely host a single firm under the Samsung Group but multiple ones. In this chapter, we consider the Samsung subsidiaries (SEC, SEM, Samsung SDI and Samsung Display), which act in a vertically integrated manner. Put together, these four major Samsung companies will be referred hereafter as Samsung Group or just Samsung. Given their dominance in Suwon from 1990 to 2018, hypothesizing that Suwon exhibits the HaS structure rather than the Marshallian one is logical. Since the 1990s, Suwon has been receiving support from the central government for upgrading its local SMEs and has therefore gained new business networks that is to reduce the overdependence on Samsung (Hassink, 2004; Lee, 2009). The Small and Medium Business Administration (SMBA), which was initiated in 1996 to support the regional SMEs to upgrade, established an office in Suwon. The Small and Medium Industry Promotion Corporation is placed under SMBA to provide SMEs technical assistance and training for skill transfer. The Gyeonggido Business and Science Accelerator (GBSA) is located in Suwon to facilitate start-ups or spin-off firms to search and build niches. Provincial governments play a central role in developing science and technological parks. In addition, two nearby research universities, namely, Sungkyunkwan University and HNU, regularly engage with SEC and its related SMEs to perform joint research activities. These universities are mobilized to perform joint R&D activities under various programs coordinated by the Engineering Research Centers and Regional Research Centers.

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Summary In summary, Hsinchu has been established because of the plan of the Taiwanese government to build an industrial hub on the basis of the tripartite collaboration of the industry, university and public institute, whereas Suwon has been developed on the basis of a decision of a private firm. Despite the difference in the establishment origins, both regions evolve from an industrial (manufacturing) district to an innovative one owing to the emergence of core firms. Methodology: Investigating the RIS Using Patent Data In this chapter, we analyse the two regions using patent-based indicators, which represent their respective RIS. The patent data extraction format is patterned on the basis of a developed search string that focuses on the addresses of the first inventor (i.e. inventor’s residence city). Only the patents with the address of the first inventor located in Suwon or Hsinchu are classified as Suwon or Hsinchu patents. In identifying the patents of two core firms, the criterion is that the assignee (legal owner) of the patents should be the core firms and the address of the first inventor should be in the region. The variables we used to measure RIS are made up using the patent citation data collected from the utility patent registered in the United States. Several variables have been previously introduced in early studies (Cantner et al., 2010; Hall et al., 2001; Jaffe et al., 1993; Trajtenberg et al., 1997) and used for the analysis of NIS (Lee, 2013; Lee & Lee, 2019; Wong, 2013), whereas the others are generated for this chapter. Regardless of the generation method, these variables are sufficiently comprehensive to cover the rich dynamics of the knowledge flows and networks in driving regional innovative activities. Despite the doubt on whether patent citations can reflect actual knowledge flows, a study using the survey of inventors confirm this inference and indicates that such flows leave a paper trail in the form of patent citations (Jaffe et al., 1993). The variables are explained below, with more details provided in Appendix. The first five variables are similar to those used for the analysis of NIS, which include the localization of knowledge creation and diffusion, degree of concentration among the assignees, technological diversification, originality and average cycle time of technologies (CTT).

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a. The localization of knowledge creation and diffusion is about the degree of localization representing intra-regional creation and diffusion of knowledge (Jaffe et al., 1993). This variable measures how much knowledge is domestically created by citing the patents from the same region. It refers to the degree of regional-level self-citation after normalization and is thus designed to be free from the size effect (namely a big region has a high localization ratio). b. Concentralization (i.e. Herfindahl–Hirschman index = HHI) assesses the degree of concentration among the innovators (assignees), which is measured by the HHI index. c. The technological diversification evaluates the tendency of each region to diversify in their patent portfolios and is measured by the number of technological fields a region register its patents divided by the maximum number of the three-digit US patent classifications. d. Originality reflects the degree of combining knowledge from diverse fields. This variable reviews the novelty of an invention by assessing how wide the range of knowledge cited by the patent as its source pool is. e. The cycle time of technologies (i.e. patent) reflects the degree to which a new innovation (a new patent) relies on recent or old technologies. At the regional level, this variable represents the direction of specialization that a region invests in for long (or short)-cycle technologies. Lee et al. (2021) and Lee (2013) confirm that high-income countries display high values in all of these five variables. Thus, by applying this approach at the subnational or regional level, the present chapter aims to verify whether the values of these variables exhibit an increasing or catching-up trend in Suwon and Hsinchu as the corresponding income levels increase over time. This approach is to evaluate the degree of catching-up of the RIS of the two regions. As previously mentioned, a highly developed region demonstrates a high localization level. Given the important role of the core firms in each region, we also investigate the firm-level localization, which is the degree of the self-citations of Samsung and TSMC. In general, the higher value of self-citations corresponds to the higher level of technological capabilities of the firm, which is confirmed by several studies including Joo and Lee (2010) for the case of Samsung’s catching-up with Sony.

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In addition to the abovementioned five variables, we develop three measures of inventor collaboration, namely, intra-regional, inter-regional and international collaborations, to reflect the degree to which the inventors of a region collaborate with those in the same or other regions or those abroad, respectively. These variables can be generated by reading the address of the first two inventors. If the second inventor is from the same region, it is then regarded as intra-regional collaboration, and if, from the other regions, inter-regional collaboration. If he/she is from abroad, it is considered international collaboration. Despite some limitations, one advantage of these variables is that they are more direct indicators of knowledge combination in a region than patent citation-based variables introduced above, in that inventors are those who are directly involved in innovation activities.4 To assess the linkages of the firms to other actors, we use the two measures proposed by Wong (2013) to reflect the scientific knowledge flow in the regional patent data: U–I (university-Industry) linkage and non-patent (science article) backward citations (or science-based citations). Our measure of U-I linkage is also direct one in that it reflects the degree that a single patent is co-assigned to both university and industry (firms). In the meantime, the non-patent backward citations represent the degree to which innovations rely on scientific knowledge. These measures are extracted from PatSeer Analytics, which allows the extraction of information on the patents under the shared ownership of universities and industries (i.e. private firms). This database also authorizes the extraction of non-patent references to derive a science-based citation index.

Empirical Analysis Persistent Difference: Concentration Figure 6.2 shows the comparison of the share of patents owned by TSMC and Samsung in their respective regions. Except in the early years, the share of TSMC was flat at 7% for most of the 2000s, when it faced regional competitors, such as the United Microelectronics Corporation

4 One limitation of these variables is that they do not consider the third, fourth or other inventors. However, that involved too many possible combinations and much data work, and thus we have decided to look at the first two inventors who are usually the biggest contributors.

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100% 90%

Share of Patents

80% 70% 60% 50% 40% 30% 20% 10% 0% 2000200120022003200420052006200720082009201020112012201320142015201620172018 Share of TSMC's Patents in Hsinchu

Share of Samsung's Patents in Suwon

Fig. 6.2 Share of TSMC’s and Samsung’s patents in Respective Regions, 2000– 2018 (Notes Patent counts for Samsung between 2014 and 2018 are extracted from PatSeer Analytics)

(UMC). TSMC emerged as the frontrunner after the global financial crisis in 2008 and dominated the region, owning approximately 30% of the total patents in Hsinchu in 2017. In comparison, Samsung has remained as the dominant player in Suwon, with its share of 92% in 2000 and a slightly lower share of 80% in 2010–2018. The results shown in the figures are consistent with the hypothesis that Suwon resembles a HaS district and that Hsinchu is shifting towards the same structure despite being a close Marshallian-type prior to the 2000s or before the rise of the semiconductor sector as the main industry in the region (Hu, 2011). Table 6.2 provides the top assignees of the patents of Hsinchu and Suwon in 2014–2018. The four pillar affiliates of Samsung are dominating the latter in terms of patent holdings (the patent names are highlighted in the table). Other assignees are not SMEs but other chaebols, such as firms under Hyundai, SK, or LG groups. The dominance of business group firms in Suwon is contrary to the case of Hsinchu, where the share of TSMC is less dominant and diverse independent companies are among the top 10 assignees.

2065 293 28 82 0 94 0 18 26 1

SAMSUNG ELECTRONIC CO LTD (KR) SAMSUNG DISPLAY CO LTD (KR) SAMSUNG ELECTRO MECHANICS CO LTD (KR) HYUNDAI MOTOR CO (KR) S PRINTING SOLUTION CO LTD (KR) SAMSUNG SDI CO LTD (KR) RESEARCH & BUSINESS FOUND SUNGKYUNKWAN UNIV (KR) SK HYNIX INC (KR) LG DISPLAY CO LTD (KR) SK TELECOM CO LTD (KR)

1012 148 284 258 123 80 71 0 174 80 2487 4303 58% 41% 2014

901 127 287 328 129 78 65 0 138 64 2259 3894 58% 40%

TAIWAN SEMICONDUCTOR MFG CO LTD (TW) MEDIATEK INC (TW) IND TECH RES INST (TW) AU OPTRONICS CORP (TW) UNITED MICROELECTRONICS CORP (TW) PIXART IMAGING INC (TW) EPISTAR CORP (TW) UNIV NAT TSING HUA (TW) MACRONIX INTERNATIONAL CO LTD (TW) NOVATEK MICROELECTRONICS CORP (TW) TOTAL OF TOP 10 ASSIGNEES TOTAL PATENTS IN HSINCHU SHARE OF TOP 10 ASSIGNEES IN HSINCHU SHARE OF TSMC OVER TOTAL OF TOP 10 ASSIGNEES

2015

TOP 10 ASSIGNEES OF SUWON’S PATENTS

2014

Top 10 assignees of the patents of Hsinchu and Suwon in 2014–2018

TOP 10 ASSIGNEES OF HSINCHU’S PATENTS

Table 6.2

1920 344 79 74 0 60 0 25 13 5

2015

1317 177 248 190 132 107 100 0 187 59 2860 4513 63% 46%

2016

2050 390 180 105 0 30 0 30 23 12

2016

2195 532 226 182 8 33 4 31 14 9

2017

1282 255 175 132 137 74 75 10 110 60 2851 4301 66% 45%

2017

2194 444 302 227 71 53 46 20 16 9

2018

1239 260 171 118 102 78 77 75 73 67 2974 4472 67% 42%

2018

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2014 2607 3285 79% 95%

TOP 10 ASSIGNEES OF SUWON’S PATENTS

TOTAL OF TOP 10 ASSIGNEES TOTAL PATENTS IN SUWON SHARE OF TOP 10 ASSIGNEES IN SUWON SHARE OF SAMSUNG GROUP OVER TOTAL OF TOP 10 ASSIGNEES

2520 3238 78% 95%

2015 2820 3511 80% 94%

2016 3234 3921 82% 92%

2017 3382 4033 84% 88%

2018

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1 0.9

Concentration (HHI)

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0

Hsinchu

Suwon

Fig. 6.3 Concentration (HHI) index of Hsinchu and Suwon from 1990 to 2018 (Note The four affiliates of Samsung are analysed as different companies)

Figure 6.3 shows the values of HHI, which is a conventional measure of concentration used in analysing NIS. The finding confirms the difference between Hsinchu and Suwon, in which the former has a much lower level of concentration (about 0.16 in 2018) than the latter (about 0.67 in 2018). The level of Hsinchu is comparable to San Jose in Silicon Valley area (0.02) in 2018 (Wong et al., 2021). The HHI in Suwon considers the four Samsung affiliates as separate entities to show its low bound because otherwise, the HHI would be even higher in the region. This phenomenon can be ascribed to the dominant position of SEC compared with the other affiliates. Although Suwon shows some short-term fluctuations, the long-term trend indicates a persistence of concentration of innovation in the region. Table 6.3 shows the comparison of the concentration indexes of Hsinchu and Suwon in terms of mean, median and standard deviation (SD), in which a significant difference is indicated by a simple t-test. This result shows that Suwon corresponds to an un-even innovative capability among firms. It is also interesting to note that Hsinchu exhibits a trend of increasing concentration, which seems to reflect the increasing dominance of the core firms in recent years or since the 2010s. For instance, the value of HHI hits the bottom of less than 0.05 in the late 2000s to keep increasing in the 2010s to get close to 0.20, which is a big jump. Tables 6.3 and 6.4

9. Originality (%)

8. Diversification (%)

6.Science-based citations (%) 7. Cycle time

3. Concentration (HHI) 4.Intra-regional collaboration (%) 5. U–I Linkage (%)

2. Localization (%)

1685.5 t-value (Hsinchu-Suwon): 4.61 t-value (Hsinchu-Suwon): 0.055 t-value (Hsinchu-Suwon): 75.25 t-value (Hsinchu-Suwon): 0.24 t-value (Hsinchu-Suwon): 20.24 t-value (Hsinchu-Suwon): 6.62 t-value (Hsinchu-Suwon): 29.21 t-value (Hsinchu-Suwon): 75.30 t-value (Hsinchu-Suwon):

1615.5 0.523 4.62 14.05*** 0.055 −95.76*** 75.50 6.31*** 0.071 −0.33 21.28 −1.71 6.47 −1.13 29.96 0.75 75.02 1.05 3.18

2.77

74.16

27.99

7.00

0.83

0.31

0.31

28.29

67.85

1.28

5.70

0.81

0.51

1526.3

0.01

0.66

288.3

Suwon SD

Mean

Median

Hsinchu

Mean

2003–2010

74.91

27.33

7.10

40.33

0.74

67.50

0.82

0.30

1368

Median

Means, medians and SD of the indexes of Hsinchu and Suwon in 2003–2010 and 2011–2018

1. Patent Counts

Table 6.3

(continued)

6.27

3.67

0.44

11.97

0.46

3.04

0.021

0.48

809.7

SD

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(continued)

3804.1 4097.5 745.2 3455.5 t-value (Hsinchu-Suwon): 1.202 4.96 4.81 1.16 2.46 t-value (Hsinchu-Suwon): 5.13*** 0.076 0.055 0.048 0.75 t-value (Hsinchu-Suwon): −21.66*** 73 73.00 1.69 44.37 t-value (Hsinchu-Suwon): 11.54*** 0.88 0.00 0.39 1.92 t value (Hsinchu-Suwon): −5.26*** 39.89 27.55 1.66 48.11 t-value (Hsinchu-Suwon): −8.34*** 7.95 7.94 0.13 7.95 t-value (Hsinchu-Suwon): 0.522 36.59 37.57 2.95 40.34 t-value (Hsinchu-Suwon): −1.78 67.05 66.26 3.04 65.16 t-value (Hsinchu-Suwon): 1.55

Mean

SD

Suwon Median

Hsinchu

Mean

2011–2018

Notes **significant level p < 0.05; *** significant level p< 0.01

9. Originality (%)

8. Diversification (%)

6.Science-based citations (%) 7. Cycle time

3. Concentration (HHI) 4.Intra-regional collaboration (%) 5. U–I Linkage (%)

2. Localization (%)

1. Patent Counts

Table 6.3

64.65

39.60

1.59

5.14

7.91

7.96

0.39

1.90

2.23

4.17

54.62

48.34

0.074

0.73

341.6

SD

0.77

2.25

3287

Median

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also show the concrete figure of HHI in terms of the average values for the 2000s and the 2010s. In conclusion, Hsinchu possesses a higher degree of decentralization than Suwon, and Hsinchu shows a trend of increasing concentration. Similar Trend but Different Degree 1: Localization and Intra-Regional Collaboration In terms of the localization of knowledge, which is also referred to as region-level self-citation (i.e. the degree to which the patents of a region tend to cite other patents in the same region), Suwon (low) and Hsinchu (high) exhibit significant difference (Fig. 6.4 and Table 6.3). Hsinchu corresponds to a substantially high degree of knowledge (4 to 8% range since the 2000s, compared to less than 2% in the early 1990s) localization than Suwon (less than 3% or even less than 2% before the 2010s), which is consistent with the findings of Lee and Yoon (2009), who compared the degree of localization in the semiconductor industries in Taiwan and Korea. Specifically, Hsinchu exhibits a steady rise in localization and maintains its local knowledge generation in 2006–2015 within 3%–5% before witnessing another wave of rising local knowledge after 2015 and 0.09 0.08

Localization

0.07 0.06 0.05 0.04 0.03 0.02 0.01 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0

Hsinchu

Suwon

Fig. 6.4 Localization index of Hsinchu and Suwon in 1988–2018

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reaching 7% in 2018.5 In general, the level of localization in Hsinchu is comparable to that of San Jose city in Silicon Valley area with an average value of 7.3% between 2008 and 2018 (Wong et al., 2021). At the same time, both regions show an increasing trend over time. Whereas some oscillations are observed in Hsinchu, a steady rise is displayed by Suwon. This increasing pattern of localization is consistent with the hypothesis regarding the upgrade of RIS.6 The above indicates again the pattern of “similar trend with different degree” between Hsinchu and Suwon. The localization measures in Fig. 6.4 are calculated including the selfcitations of the TSMC and Samsung. Thus, we need to break down the gross localization to obtain detailed measurements, such as firm-level self-citations, total non-self-citations of the core firm and local non-selfcitations (e.g. TSMC patents citing non-TSMC local patents). The rapid increase in the firm-level self-citations and the decrease in the citations of foreign patents are consistent with the hypothesis regarding the upgrade of the technological capabilities of firms and the surrounding RIS. Figures 6.5a and b show the three measures of the backward citation trends of TSMC and Samsung, respectively. Figure 6.5a shows that the share of non-local (mostly foreign) non-self-citation of TSMC is high (approximately 90%) in 2001 but then gradually declined to 50% in 2018. This pattern matches the increasing trend of self-citations from 10 to 50% during the same period. Although these measures seem to be the other side of the same phenomenon, no increase is observed in the number of local non-self-citations, indicating that TSMC does not enhance its knowledge sourcing from other local firms in the same region. Figure 6.5b shows the same results for Samsung but with a different extent. For instance, the increases in the number of self-citations are steep, from lower than 20% in 2001 to more than 40% in 2011, which then slowly matured to 50%. Moreover, Samsung shows a steady increase in the number of local non-self-citations from almost 0% to 15% in 2018.7 5 The detailed annual values are available upon request. 6 We extracted data from some non-TSMC/non-Samsung productive firms in Hsinchu

and Suwon. For Hsinchu, we assessed the backward citation trends of Mediatek, ITRI, UMC, AUO and Macronix. For Suwon, we evaluated 11 SMEs (iSeoyon Electronics, Viatron Tech, Duksung Co., Vessel Co., Pixelplus Co., Park Systems, Kokam Co., Celluon, Optomind, Asta Co. and Mtek Vision). We observed a common increasing trend of selfcitations in the evaluated firms. We also noticed that the number of citations from the selected companies in Hsinchu that are linked to TSMC increases, which supports our inference that Hsinchu is evolving toward a HaS network. 7 Local non-self-citations include the citations of the patents owned by LG companies and Hynix Semiconductor.

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(a) 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Share of Self-citations Share of Non-local (Mostly Foreign) Nonself-Citations Share of Local Nonself-citations

(b) 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Share of Self-citations Share of Non-Local (Mostly Foreign) Nonself-Citations Share of Local Nonself-citations

Fig. 6.5 Self-citations, local non-self-citations and non-local non-self-citations indexes of the two core firms (a) TSMC, 2001–2018 (b) Samsung Group, 2001– 2017 (Note Local non-self-citations refer to the TSMC citations of other patents invented in the region (Hsinchu); non-local non-self-citations include all citations of patents invented outside the region, mostly those invented abroad because the patents invented in other (non-Hsinchu) regions in Taiwan have almost zero citations)

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The similar trend with different degrees of Hsinchu and Suwon is also observed in the behaviour of the three indicators of inventor-level collaborations. Figure 6.6 shows that the inter-regional collaboration measured as the number of patents with the second inventors from other

(a) 1 0.9 0.8

Collaboration

0.7 0.6 0.5 0.4 0.3 0.2 0.1 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0

(b)

Intra

Inter

International

1

0.9 0.8

Collaboration

0.7 0.6 0.5 0.4 0.3 0.2 0.1 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0

Intra

Inter

International

Fig. 6.6 Intra-regional, inter-regional and international collaborations indexes (a) Hsinchu, 1987–2018 (b) Suwon, 1992–2018 (Note The data for the interregional and international collaborations in 2002–2004 are not available)

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regions steadily increases, which is consistent with the equally steady decline in the intra-regional collaboration of the first two inventors from the same region.8 Both regions are equally low in terms of the share of international collaboration, which has remained flat in the last two decades. Despite the similar trends of the two regions, the degree of the absolute level of intra- or inter-regional collaboration differs. Since the 2000s, Hsinchu has remained higher than Suwon in terms of the intraregional collaboration with a statistically significant difference (Table 6.3). For instance, the level of the intra-regional collaboration in Hsinchu is approximately 71% from the mid- to late 2010s, whereas that of Suwon is approximately 51%. The gap between the two regions has remained at approximately 20% during the entire period. The abovementioned pattern demonstrating no increase in the domestic or local non-self-citation, along with the increase in the interregional R&D collaboration might sound confusing. It indicates that the core firms are enhancing their technological capabilities (which can be measured by self-citations) not by citing the patents registered by other local firms but by hiring inventors from other regions for their in-house R&D activities. Similar Trend but Different Degree 2: Science-Based Innovation and U–I Linkages The pattern displaying a similar trend with different extent is also observed in the results of the degrees of science-linked innovation and U–I linkages. Figure 6.7 exhibits the share of science-linked patents (i.e. patents citing at least one scientific article) in the total patents in each region. Suwon started its bridging commitment in linking scientific knowledge to industrial inventive activities in the late 1990s, whereas Hsinchu had initiated such commitment approximately two decades earlier (1981). Hsinchu experienced a fluctuating share of science-based patents from 12 to 27% between 1987 and 2004 before gradually advancing towards a 40% share between 2013 and 2018. Meanwhile, 8 This is somewhat similar to the situation in the research collaboration in Germany biotech network (Mitze and Strotebeck, 2019). Advanced industrial cluster aspiring to routinize science-based technological production such as Suwon would spawn interregional innovation networks.

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0.6

Science-based index

0.5 0.4 0.3 0.2 0.1

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0

Hsinchu

Suwon

Fig. 6.7 Science-based linkage index in Hsinchu and Suwon, 1987–2018

Suwon discarded non-science patenting routines and ventured into science starting in 1998, committing to science-related patenting and obtaining a 50% share per cent between 2015 and 2018. In 2003–2005, Suwon exhibited a short declining trend because many high-technology Korean firms encountered market challenges as a result of the world IT bubble burst in the early 2000s. Half of the annual patents in Suwon are now linked to scientific knowledge. In recent periods, (since the mid-2000s) which demonstrate stable patterns, both regions have rapidly increased the share of science-linked patents from approximately 20% to more than 40% in the late 2010s. The graph clearly shows that Suwon has a significantly higher share of science-linked patents than Hsinchu (Table 6.3). Both regions realize that they need science to develop a resilient technological business in the advanced development stage. Therefore, Hsinchu and Suwon calibrate their industrial networks to amplify their science-based patenting capabilities. Figure 6.8 shows the share of co-assigned patents or those involved in a shared ownership between the universities and industries in the two regions, which reflects the degree of university–industry cooperation. The share in both regions increased in 2008, while the co-patenting

6

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0.025

U−I linkage

0.02 0.015 0.01 0.005

Hsinchu

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0

Suwon

Fig. 6.8 University-Industry (U–I) linkage index of Hsinchu and Suwon, 1995–2019

between university and firms were insignificant (almost virtually nonexistent) before 2008. Suwon advanced to 2.4% in 2018, whereas Hsinchu matured at 1.7% in 2011 and regressed to 0.7% in 2018. The gap between the regions during the mid-2010s is significant (Table 6.3). Although universities serve as the beacon for scientific ventures, they are not the key ally for the firms in Hsinchu. Despite the high degree of science-based patenting in the two regions, the U–I co-patenting share in Hsinchu is low. Data on other high-tech regions/cities, which are derived from PatSeer Analytics, are analysed to verify whether a low U–I link in patenting activities is common. In 2018, Seoul (Korea) attained 2.6%, Taipei (Taiwan) achieved 0.8%, Munich (Germany) achieved 0.4%, Tel Aviv (Israel) obtained 0.8%, Silicon Valley (United States) achieved 1.4% and Shenzhen (Guangdong Province, China) attained 0.3%. Seoul outperforms many cities, and the U–I linkage performance of Suwon (2.4%) is commendable despite the fact that such advancement may have been dominated by Samsung firms.

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0.5 0.45

Diversification

0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

Hsinchu

Suwon

Fig. 6.9 Technological Diversification of Hsinchu and Suwon, 1979–2018

Similarity of Suwon and Hsinchu: Technological Diversification Figure 6.9 shows the trend of the technological diversification that reflects the tendency of a region to file patents in many diverse fields, measured by the ratio of the number of classes that patents are filed by a region to the maximum number of patent classes in the US three-digit classifications. Hsinchu and Suwon show consistently increasing patterns of diversification, which reflect their technological advances, and confirm the hypothesis presented in sub-section Basic Profile and Origins of the Two Regions. Last, we investigate the originality in patenting activities, which represents the degree to which innovation is based on the combination of knowledge from a wide variety of fields given that the patents cite other patents in diverse fields. Both regions exhibited high values (0.75) in 1990 and mid-2000s and experienced a steady decline (0.65) during the late 2010s. Given that the average originality of the 45 countries around the world is approximately 0.4, in which that of the United States is 0.5 (Lee & Lee, 2019), the obtained values (0.65 or 0.75) can be regarded as extremely high ones that reflect the level of the technological capabilities of these high-technology regions.

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Persistence, Transformation and Upgrading: Core Firm vs. Region This section asks the vital question of what factors between the core firm and the region on excluding the core firm drive the transformation (or persistence) of RIS types and upgrade RIS from peripheral to catchingup RIS. A method of answering this question is by looking at the value of the key RIS variables measured at the level of the core firm and that of the region excluding the core firm, which are shown in Table 6.4. In what follows, we will deal with the following: (1) the persisting difference between Suwon and Hsinchu, (2) the dynamic transformation of Hsinchu from a Marshallian towards HaS type and (3) upgrading from the peripheral to catching-up RIS. The first question is the source of the persistent difference. One of the key findings of the preceding section is that Hsinchu is relatively close to the Marshallian district type than Suwon, which has remained close to the HaS type. This finding is supported by the higher mean values of Hsinchu in the localization, decentralization (1-concentration) and intra-regional collaboration variables in contrast with the higher values of Suwon in terms of the U–I linkages and science-based innovation. Table 6.3 summarizes these findings using a t-test to verify the significance of the difference in the means of the relevant variables in the two regions in a two-period range (i.e. 2003–2010 and 2011–2018). However, given that Markusen (1996; Table 1) states that the core firms in the HaS district type are non-locally embedded with substantial links to suppliers and competitors outside the region, we must look at the key variables measured at the levels of the core firm and the region excluding the core firm. Thus, Table 6.4 presents the information about the difference between the core firms and the region without the core firms (e.g. Samsung vs. Suwon without Samsung) in terms of the same variables. The result confirms again that “Hsinchu excluding TSMC” has higher values of localization, decentralization (1-concentration) and intra-regional collaboration than “Suwon excluding Samsung”. By contrast, “Suwon excluding Samsung” has higher values than “Hsinchu excluding TSMC” in terms of U–I linkages and science-based innovation. These findings are consistent with those presented in Table 6.3 for the whole region, including the core firms. This persistent difference between Hsinchu and Suwon can be understood in terms of the different NIS of Korea and Taiwan and the different sectoral systems of innovation in the semiconductor industry in these two

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economies. As known widely, Taiwan’s economy has been characterized as a SME-prone economy, compared with big business dominance in Korea, which leads to a higher degree of localization of knowledge and decentralization in Taiwan versus Korea (Lee et al., 2021; Wang & Tsai, 2010). In particular, a high degree of knowledge localization has to do with the fact that key firms, TSMC and UMC, in Taiwan’s semiconductor industry are spin-offs from a common public research institute, ITRI. Thus, they tend to collaborate in innovation and cite each other’s patents (Hu, 2011; Lee & Yoon, 2010). The origin of Hsinchu planned by the government to specialize in six industries, compared with Suwon picked by one giant firm as a production site initially, is one factor for the persistent difference in the degree of centralization. Public research labs led by ITRI have played the role of supplying knowledge, sharing patents and generating more than 100 spin-offs to the region (Hu, 2011; Wong et al., 2015), which has been the basis for a high degree of knowledge localization. The second question is what factors have been driving the transformation of RIS in two regions. A particular interest is concerning the gradual and steady transformation of Hsinchu from a Marshallian to a HaS type. To answer this question, we must look at not the level but the changes in the degree of non-local embedment of the core firms and regions, following the definition of Markusen (1996). Table 6.4 shows that the pattern of the decrease in the degree of intra-regional collaboration of TSMC and no change in the intra-regional collaboration of the region excluding TSMC suggest that the core firm has driven the increase of non-local embedment in Hsinchu. The second and further evidence is the degree of inter-regional collaboration, which showed the almost doubling in TSMC but no change at the level of the Hsinchu region without the core firm. In particular, the increasing trend of concentration, as shown in Figs.6.2 and 6.3 in Hsinchu, has been tightly matched by the semiconductor industry’s dominant rise in terms of the share in sales among the original six industries since the 1990s, as shown in Fig. 6.10. In other words, as mentioned in Sect. 6.3, the semiconductor sector (IC chips) has replaced the PC and peripheral sectors since the 1990s as the core sector to become the dominant sector of Hsinchu in terms of the number of employees and sales since the 2000s (Hu, 2011). Further, between the two dominant firms, TSMC and United Microelectronics Corporation (UMC), TSMC eventually outperformed UMC significantly

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in revenue and technology capabilities since the mid-2000s. Such performance is attributable to the technological breakthrough TSMC made in 2005, unveiling its manufacturing capability in commanding 90-nm node process technology in 12-inch semiconductor wafer production. In contrast, other competing firms in Taiwan and abroad were operating via 0.5-µm to 110 nm process technology.9 In comparison, Suwon has been an HaS type, although Samsung’s share has decreased from 90 to 80% in the 2010s. Despite this persistence, the degree of intra-regional collaboration has reduced in the core firm and the region excluding the core firm (Table 6.4) and that the degree of inter-regional collaboration has increased in the core firm and the region excluding the core firm. This pattern in Suwon may imply that other firms than Samsung affiliates may also be relatively large-sized firms, as shown by the much higher degree of concentration in Suwon (Table 6.4 and Fig. 6.3). The final or third question is what or who has been driving the upgrade from the peripheral to catching-up RIS in both regions, and how much the upgrade has to do with the core firm or the region excluding the core firm. An immediate answer for both regions from Table 6.4 is that such upgrading has been observed both in the core firm and the region excluding the core firm. In terms of upgrading in knowledge sourcing, Suwon and Hsinchu share the common pattern that the core firm and the region excluding the core firm has realized the increases in all the three dimensions of localization (over the 1990s to the 2000s period), U-I linkages and science-based-ness.10 Technological diversification has also increased at both levels of the core firm and the region excluding the core firm. The number of patents increased a couple of times from 2000 to 2018 in both regions excluding the core firms. Upgrading that happens only at the core firms may not be called a proper upgrading. However, the above discussion implies that the surrounding regions and the SMEs have also experienced upgrading. Table 6.4 also shows that Hsinchu and Suwon without their respective core firms display higher specializations in long-cycle technologies (associated with parts and components), different from the core firm specializing 9 The announcement is available at https://pr.tsmc.com/japanese/news/1324. 10 Hsinchu experienced a slight decrease in localization between 2000 and 2002 and

2016 and 2018. Nevertheless, such decrease can be considered as an increase when compared with that in the mid-1990s.

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in short cycle technologies (developing, assembling and producing IC chips). Such growth of SMEs with different technological specialization from the core firm seemed to have been possible because ITRI provided them with various technical services, consultancy, licensing and workforce training; it also played an important role in fostering domestic industrial competencies by linking SMEs with large foreign corporations (Fuller, 2005; Wong et al., 2015; Mathews and Cho, 2000: 258–259). Such differences in the technological bases of the core vs. noncore firms are subject to an interpretation that the core firms may not tend to collaborate with other firms for their R&D activities in the same regions although they may be networked in supplier-client relation in their outputs. Such interpretation is consistent with the pattern in Fig. 6.6 of the decrease of intra-regional collaboration and the increase of inter-regional collaboration measured by the addresses of the first two inventors of the patents. Therefore, the enhancement of technological capabilities of the core firm has happened not by relying on (citing patents by) other firms in the same or other regions. It happened by hiring and inviting inventors from other regions for its in-house innovations (measured by the variable of inter-regional collaboration), thereby increasing local self-citations. This pattern of increasing self-citation but decreasing in intra-regional collaboration is consistent with the existing argument; Yeung (2016: 200) stated that the growth of the core firms in the semiconductor sector in Taiwan and Korea is more related to the firm-level in-house innovation efforts than in the strategic partnership with outsiders. Hu (2011) observed that geographical proximity did not matter much. Such a pattern can be called “knowledge insourcing”, not “knowledge outsourcing”. Further, the sharp decline of non-local (primarily foreign) non-self-citations in both regions (Fig. 6.5) implies that this process of double upgrading is a process of nationalization than inter-nationalization. Given the above discussion, the common aspects in both regions can be characterized as not “international knowledge outsourcing” but “intra-national knowledge insourcing”. The above answers to the three questions can be summarized as follows. The persistent difference between the two regions reflects the path-dependent heterogeneity of the NIS of the two economies and each SSI of the region. Second, the common forces for convergence towards the HaS type are the core firm’s ever-stronger growth and dominance. Third, both the core firm and the surrounding region (non-core firms)

2431 5063 0.053 0.093 0.083 0.096 0.02 0.78 0.79 0.20 0.20 0.00 0.003 0.136 0.39 5.92 10.04

0.036 0.075 0.060 0.09 0.13 0.78 0.71 0.205 0.27 0.00 0.007 0.147 0.405 5.15 7.98

Hsinchu without TSMC

4846 13,286

Hsinchu

4.77 7.19

0.148 0.406

0.00 0.003

0.275 0.43

0.73 0.54

– –

0.036 0.078 0.064

901 3838

TSMC

6.52 7.94

0.126 0.493

0.00 0.022

0.21 0.48

0.77 0.51

0.826 0.67

0.00 0.001 0.032

1772 11,465

Suwon

8.16 11.963

0.16 0.453

0.00 0.006

0.25 0.50

0.76 0.49

0.336 0.15

0.00 0.003 0.046

116 1036

Suwon without Samsung

EVOLUTION OF TWO INDUSTRIAL DISTRICTS …

(continued)

5.65 6.51

0.127 0.500

0.00 0.016

0.21 0.47

0.766 0.51

– –

0.01 0.032 0.042

1581 9260

Samsung

Comparison of the core firms and the regions without the core firms (2000–2002 and 2016–2018)

1. Patent counts Total count 2000–2002 Total count 2016–2018 2. Localization Average of 1995–1997 Average of 2000–2002 Average of 2016–2018 3. Concentration Average of 2000–2002 Average of 2016–2018 4. Intra-regional collaboration Average of 2000–2002 Average of 2016–2018 5. Inter-regional collaboration Average of 2000–2002 Average of 2016–2018 6. U–I linkage Average of 2000–2002 Average of 2016–2018 7. Science-based citations Average of 2000–2002 Average of 2016–2018 8. Cycle time of Technologies Average of 2000–2002 Average of 2016–2018

Table 6.4

6

173

(continued)

Hsinchu

0.07 0.073 0.791 0.676

0.356 0.31

TSMC

0.256 0.32

Hsinchu without TSMC

0.764 0.638

0.22 0.316

Suwon

0.36 0.0286

0.056 0.153

Suwon without Samsung

0.764 0.651

0.186 0.246

Samsung

Notes The data for intra-/inter-regional collaboration are collected separately from the data that have been initially extracted for the other indexes. To obtain the data for Hsinchu without TSMC and Suwon without Samsung, the regional patents with TSMC and Samsung Group as the first assignee are removed. The diversification indexes are derived from US classes. The concentration (HHI) for Suwon considers Samsung Group as one of the top five assignees Source The authors

9. Technological Diversification Average of 2000–2002 0.316 Average of 2012–2014 0.343 10. Originality Average of 2000–2002 0.775 Average of 2016–2018 0.647

Table 6.4

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have experienced upgrades of their innovation system regarding local creation and diffusion of knowledge and diversification.

Remark This chapter investigates the innovation systems of Hsinchu and Suwon, including their respective core firms, TSMC and Samsung, by conducting a detailed and dynamic analysis of their RIS using the US patents and patent citation data. The analysis has relied upon the framework of “Persistence, Transformation, and Upgrading” of RIS to deal with the three questions of (1) a possibility of a persistent difference between Suwon (HaS type) and Hsinchu (Marshallian type), (2) dynamic transformation of Hsinchu from a Marshallian towards HaS type and (3) upgrading of both regions from the peripheral to catching-up RIS. One of the findings of this chapter is the pattern of “a similar trend with a different degree”, which underscores the convergence process of Hsinchu to a HaS-type structure with the path-dependent persistence of the initial difference between HaS (Suwon) and Marshallian (Hsinchu) types. Some degree of the persistent disparity between the two regions reflects the path-dependent heterogeneity of NIS of two economies and the SSI of the semiconductor industry of the regions. In contrast, the common forces for convergence towards the HaS type are the core firm’s ever-stronger rise. The difference also suggests a double upgrading, such that the core firm and the surrounding region (non-core firms) experiences upgrade of their innovation system. Some interpretive remarks on these three key findings are as follows. First, Hsinchu resembles a Marshallian-type district more than Suwon because of its higher degree of de-concentration, localization and intraregional collaboration than the latter. Such difference between the two regions has persisted to a certain degree. This persistence can be first understood in terms of the persistent disparity in NIS between Korea and Taiwan. The latter is more known for high dominance of SMEs with stronger network among them. The former is famous for few big business-dominant economies with little networking among them. Such difference has also to do with the common but differentiated origins of the two regions. Hsinchu is established by the government plan to promote six industries. Thus, the role of public research labs, such as ITRI, has been heavy as the sources of knowledge and many spin-offs, leading to a high degree of mutual interaction and local creation and diffusion of knowledge. In contrast, each chaebol in Korea is known for

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its self-contained knowledge creation and diffusion system only among the affiliates (Lee et al., 2016). Second, over time, the RIS of Hsinchu has transformed itself from a Marshallian a bit closer to a HaS type, as evidenced by the increasing concentration and the increase in the degree of non-local embeddedness. The analysis has identified the increasing dominance by TSMC in the region as the driving force of this transformation, as evidenced by its relative sizes getting ever bigger, the pattern of the decrease in the degree of intra-regional collaboration of TSMC, and no change in the intraregional collaboration of the region excluding TSMC, combined with the two times increase of the inter-regional collaboration of TSMC. Third, the analysis confirms the common upgrading of the RIS of the two regions as evidenced by the steady and substantial increase of knowledge localization, science-based-ness and technological diversification. An important finding is that such upgrading has happened at the level of the core firm as well as at the level of the region excluding the core firm, which may be called a double upgrading; that is, the core firms and the residual region except the core firm have driven the upgrading process. As shown in the preceding section, this double upgrading does not necessarily mean that the core firms collaborate with local firms in the region for innovation activities. They play in different technological domains, and the core firm tends to focus on in-house R&D hiring of engineers broadly across the regions and within the nation. Thus, the double upgrading is characterized as not “international knowledge outsourcing” but “intra-national knowledge insourcing”. Compared with the former, the latter may be more effective in absorbing and amplifying sticky or tacit knowledge. Given the literature on the peripheral RIS with a low level of regional embeddedness, one of the contributions in the chapter is a quantitative verification of the upgrading or catching-up of RIS in terms of the increasing level of localization of knowledge creation and diffusion and technological diversification into more fields. Further, the reduction of reliance on external knowledge or increasing localization is accompanied by increasing reliance on new sources of knowledge, such as scientific articles and universities. These stylized facts may be generalized as the key element of upgrading RIS in emerging economies. This region-level confirmation of some stylized facts of upgrading was also observed at the nation-level in a study by Lee et al. (2021). An additional aspect of distinction of this chapter is the finding that increasing localization has

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happened not by relying on (citing patents by) other firms in the same or other regions but hiring inventors from other regions for its innovations in the form of “knowledge insourcing”. However, such upgrading has happened at the expense of increasing the region’s concentration over the distribution of innovators. In this sense, this mode of the RIS may not be called a mature RIS with more even or dispersed distribution of innovation but can be called a catchingup RIS along an imbalanced development path; according to Lee et al. (2021), mature NIS tends to show more even distribution of innovators, which has not been the case in Korea or Taiwan during their catching-up stage. Such conceptualization of imbalanced mode of catching-up RIS is consistent with the idea of the two alternatives, balanced and imbalanced, modes of catching-up NIS discussed in Lee et al. (2021), which revived the classic debate on imbalanced development (Hirschman, 1958), in contrast to the balanced development of Nurkse (1953). In this sense, this chapter has identified at least one viable path of upgrading RIS in emerging economies. In such a mode of imbalanced RIS, upgrading may realize not necessarily through globalization associated with foreign direct investments or MNCs but through the emergence of large indigenous firms, although they have learned from MNCs at their early stage. The study of this chapter is limited in terms of the scope of the analysis. The results are indicative of the usefulness of quantitative methodologies in the analysis of a RIS. The propositions and unveiled dynamics in this chapter can serve as a reference for determining what characteristics and approaches are suitable for diverse types of RIS involving a larger number of cities worldwide, such as the satellite platform and state-anchored types of the industrial district (Markusen, 1996). For example, Penang in Malaysia may be classified as a satellite platform-type district given the persistent dominance of the MNCs. In contrast, Shenzhen in China seems to have transformed from a satellite platform type to a variation of HaS type or state-anchored types (Yang, 2016). A full investigation, including cluster analysis, of more regions around the world should be conducted in future studies. Then, one could identify an alternative or balanced mode of RIS catching-up probably at a slower speed with the continuing involvement of MNCs.

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Appendix See Fig. 6.10 and Table 6.5.

9000 Sale Value- NT$ Billion

8000 7000 6000 5000 4000 3000 2000 1000 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Integrated Circuit

Computer and Peripherals

Communication

Photoelectric

Precision Machinery

Biotechnology

Fig. 6.10 The trends in the sales of six industries in Hsinchu (Source Association of Industries in Science Parks; accessed at: https://www.sipa.gov.tw/home.jsp?serno=201006180001&mserno=201001 210113&menudata=ChineseMenu&contlink=ap/static.jsp)

Diversification

A is the probability of x region’s patents citing its own patents (a region-level self-citation) ncxt is the number of citations of region x’s patents by all patents, except for its patents filed in year t nct is the number of all citations made by all patents granted in year t, except for region x’s patents

A − B = nnxxtx − nncxt ct t xt

Ni is the number of technological classes that region x has filed for patents in year t Technology class is the total number of three-digit patent classes in the US patent classification system in that particular year t

i ( techclass )

N

To review the significance To assess how diverse a of local knowledge in region is in venturing in generating new knowledge different technological fields

Localization

Analytical variables and their definitions

Variable explanation

Equation

Definition/ Measures

Table 6.5

Nit is the number of patents granted to assignee i in year t Nxt is the total number of patents granted to region x in year t

xt

To assess whether the local patent production is led by few dominant firms or evenly distributed among many firms  N 2 HHI = i∈x ( N it )

Concentration (HHI)

(continued)

granted year of citing patent x − granted year of patent y cited by x

To review the age (on average) of the citations (knowledge source) that the region relied on to produce new patents

Cycle time (Backward)

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179

Equation

(1 −

N cited ik 2 k=1 ( N cited i ) )xt

N i

N x = I1,xc ∩ I2,xc G x = I1,xc ∩ I2,c

To review the extent of collaboration in terms of intra-regional, inter-regional, or international levels on the basis of inventor distribution

Originality

To review the degree of the different technological classes (in backward citation) that a region makes new patents for

Collaboration

Jaffe et al. (1993) and Lee (2013: 45–71)

References

Definition/ Measures

In 2019, 664 classified sectors are available in the Cooperative Patent Classification (CPC) The US patent classification did not provide the classification of patents for some years. Therefore, we used CPC for this exercise Lee (2013: 45–71)

Diversification

The equation above gives a conditional probability

Localization

(continued)

Additional Note

Table 6.5

Science-based linkage

Jaffe and Trajtenberg (2002)

The granted year of citing patent is derived from the average cycle time of the patent

Cycle time (Backward)

Nu+ f N xt

Nr e f sb N xt

To review the To review the co-patenting ratio of firms significance of science in and universities the patenting activities

U-I linkages

Lee (2013: 45–71)

The patents granted to the top five assignees are used in deriving the concentration index

Concentration (HHI)

180 C.-Y. WONG

k is the technological class Ncitedik is the number of citations made by patent i to the patents that belong to patent class k Ncitedi is the total number of citations made by patent i

The CPC classification is used for this computation

Trajtenberg et al. (1997) and Hall et al. (2001)

Variable explanation

Additional Note

References

Originality Nu + f is the number of co-patents (derived from co-assignee information) between the university and the company Nxt is the total number of patents granted to region x in year t

Nx = inter-regional collboration Gx = international collaboration Intra-regional = 1 – (Nx + Gx) Ixc – inventor from the region (1, 2) Ic – second inventor outside the region The affiliations of the first two inventors’ are used to derive the collaboration We normalize the ratio by dividing the total patents filed in year t Wong (2013)

U-I linkages

Collaboration

Wong (2013)

Nrefsb is the number of patents that cite (at least) a non-patent reference Nxt is the total number of patents granted to region x in year t

Science-based linkage

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CHAPTER 7

Detouring Route of SMEs in Post Catching-Up Conditions: Context and Dilemmas Behind the Quest for Science-Based Business Model Innovation

Background It is generally known that there is no lack of literature studying the macrodynamics of post catch-up economies in developing new growth agendas (e.g. Choung, et al., 2014; Kim et al., 2012). Most of these studies indicate the need for latecomers to shift1 their upgrading strategy and focus on: developing short cycle technologies (Lee, 2013, pp. 127–152); investing in and adopting state-of-the-art processing technologies (particularly during times of global business retrenchment); and preserving competitive market positions as creative duplicators. For innovators capable of adopting emerging technologies to produce for potentially new market demand, high entry barriers (via effective IPR system, monopoly rights, privilege to define industrial standards, etc.) can be built to fend off invasive measures by competitors/imitators. This can be achieved by branding and appropriating (investing in) scientific knowledge to venture into science-based technologies. The overview of post catch-up development seems to oversimplify the pursuit of business firms—particularly small and medium sized enterprises 1 This is when developing economies reach an advanced status (relatively wealthy but facing challenges such as increasing labour costs and an aging society).

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 C.-Y. Wong, Experimental Learning, Inclusive Growth and Industrialised Economies in Asia, https://doi.org/10.1007/978-981-19-3436-0_7

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(SMEs) in post catch-up circumstances—while overlooking the struggles they face in maintaining their business competitiveness. Creating a generalized picture of the strategies of firms in post catchup development where some contextual details are overlooked is not a problem—as long as it does not infer an ideal model of strategic business development (which would be a misconception). In our view, there are (at least) two crucial aspects of developmental circumstances that are overlooked in much of the literature, and this could lead to erroneous business model2 public policy implications. First is the context driving business model innovation. Most contexts written in the literature are based on (popular) illustrative cases (such as TSMC or MediaTek of Taiwan, and Hynix of South Korea) in which businesses are driven by short cycle, high-tech firms. The firms are usually rich in resources (both capital and networks) and capable of mobilizing assets for new businesses. However, in our view their capabilities generally do not represent the dynamics of SMEs, nor signify the general pursuit of business model innovation in post catch-up circumstances. Second, there might be a fallacy in construing the importance of science—leading to SMEs in post catch-up circumstances becoming preoccupied with coordinated joint R&D activities in their growth agendas. While we do believe in the importance of science and its potential for industrial applications, the dynamics mentioned in the literature (particularly, inferring the functions of universities and PRIs for SMEs) might be overrated. Science might not be an important resource for the growth agendas of some SMEs, nor does it need to be coordinated by public-owned research entities in order to witness a systemic process of knowledge accumulation (useful for SMEs to innovate in the process of creating new business models in a developed economic environment). Through case studies, this chapter seeks to elaborate the context behind the quest of SMEs to remain resilient amidst industrial value migration. It elucidates why desirable results might not be obtained from mobilizing resources to seed a routine for patenting and science-related business venturing.

2 Business model denotes “an architecture for how a firm creates and delivers value to customers and the mechanisms employed to capture a share of that value” (Teece, 2018, p. 40).

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Narrative Framework It is the general view that SMEs are productive entities in real economy sense which function as a means towards the inclusive development of an economy (Hobday et al., 2001, pp. 213–214; Mathews & Cho, 2007, pp. 157–202). Many of them hail from very humble backgrounds, rooted in low-cost traditional industries (such as agriculture, furniture and machining workshop). As the economy advanced and big firms (local or foreign) scaled up, SMEs would be contracted to support the collective upgrading schemes (Liu & Yang, 2019). Big firms during the scalingup phase were keen to establish a production system that commands backward integration. SMEs would be endowed with the knowledge and capital to take over lower level tasks in the supply chain (which big firms intended to cease overseeing). Meanwhile, the big firms would focus on higher technology investments and sophisticated tasks such as international marketing, R&D and advanced product/service development. The mid-skilled labour force in SMEs was tasked to perform dominated manufacturing, producing in scale and from scale to scope when needed.3 In the process of collective upgrading, SMEs would gain some complementary assets in terms of: knowledge in venturing businesses; diversification; scaling-up production; and marketing affairs in B2B businesses. Being latecomers in the technological value chain, SMEs would invest in process technologies (e.g. learning and producing in accordance with certain industrial standards) to gain business networks and trust from product-based (B2C) companies from the local market and abroad. As national competitive advantages moderate global value chains and advanced economic development of a country takes place, SMEs would evolve towards one of two forward integration trajectories (see Fig. 7.1). One path is via building design capabilities and supplying Original Design Manufacturing (ODM) solutions to firms subscribing to a value chain network. SMEs pursuing this path are generally not interested in investing in branding capabilities, but are keen to develop engineering design capabilities and become the sole “solution provider” position among B2C companies for processing technologies (Hobday et al., 2001, p. 215). Big companies such as Hon Hai Precision Industry Co. (commonly recognized as Foxconn) of Taiwan—which was positioning in the 1970s and early 1980s for smart phone manufacturing 3 Particularly when they are tasked to deliver parts for the auto industry.

Fig. 7.1 The evolution of industrial systems and the role of SMEs in Taiwan

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companies—are a typical example of a firm with higher scaling capabilities for this path. The government of that time invested in diffusing VLSI technologies, and many SMEs that it endowed in Taiwan were positioning themselves to provide similar manufacturing services. The 1980s saw UMC and TSMC positioning to disrupt integrated device manufacturing systems and provide semiconductor companies with wafermanufacturing services. This development populated north Taiwan with many small Integrated Circuit (IC) design houses. Since the 1990s, some design houses like MediaTek scaled up and in turn populated Taiwan with many small SMEs producing IT and software-based (smart) applications. The 1990s also witnessed significant market demand for software services and their derived technologies, as many businesses sought to digitalize their operations (Fig. 7.1). On the other path, SMEs pursued forward integration via developing branding capabilities (Chu, 2009; Wong, 1999, p. 17) and challenging the incumbents in the production value chain. They were keen learners in studying how incumbents pursued their business models—identifying demand gaps and owning competitive advantages, and constructing ventures to allow them to capture niche positions in the B2C market. Acer—which was once a SME in the 1970s—started to invest in lowcost micro computing products (Microprofessor II) that were capable of generating Chinese text on top of generating English text, in order to challenge Apple’s market position in the 1980s. This is acknowledged as a viable route in the path of upgrading for SMEs. A point of departure—differentiating the pursuit of latecomers in post catching-up from actual catching-up—is that the former are endowed with the ability to explore, create and innovate new business models, while the latter are driven to engage in duplicative innovations (reverse engineering). This is particularly telling in the “post catching-up” literature, pointing to how latecomer companies create growth avenues. Among others, venturing towards science-based businesses and building strength in intellectual capital are the most common strategies. Here, we wish to highlight two important essences for the business models of SMEs which we learned from the literature on science, technology and industrial development studies. This is not to imply that the two are exhaustive. However, the two we state here are useful in highlighting the possible flaws of those narrating the (overrated) elements of new business models for SMEs.

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It is of note that (measurable) intellectual capital is important in the developed market. Patents and Trademarks are useful tools for firms to fend off imitative measures of latecomers and to negotiate and gain proprietary rights for production and business. It is particularly advisable (Doh & Kim, 2014; Shiu et al., 2014) for a company to accumulate this capital when the host economy seeks a strong IP regime. When the host economy is developing a more sophisticated national production system for global production value chains, it phases out the use of dishonest, duplicative imitation practices in major business operations. As developed economies support the institution of IP, many established firms expect to see themselves benefiting from IP protection. This is attributable to their early investment in intellectual capital, as they sought to form high entry barriers for their businesses. It is not uncommon to see established firms engaged in building patent (and also trademark) portfolios globally to secure a high entry barrier in the global production value chain. For instance, TSMC of Taiwan spun off Global Unichip Corporation in the 1990s to manage IP and ensure that the intellectual capital of TSMC is well managed for future technological development—both in Taiwan and abroad. Similar measures were taken by Samsung Electronics of South Korea. It established an IP unit in Suwon in the 1990s to manage the accumulated intellectual capital and to mobilize when the company needed to gain proprietary rights for certain businesses. In an economy moving towards a knowledge-based model, SMEs which lack the ability to develop complementary assets are advised to collectively learn and accumulate intellectual capital. Industrial associations and PRIs are tasked to develop a network structure (patents bank) that enables SMEs to mobilize resources and accumulate intellectual capital in a collective manner (Shiu et al., 2014). As more players in the knowledge economy recognize the importance of intellectual capital and related indicators (e.g. patents) as a measure of success, many SMEs commit to patenting their inventions and designs.4 They recruit welltrained engineers to ensure inventing and patenting are routinized, and

4 Policy measures incentivizing SMEs to patent are not uncommon in Mainland China and South Korea (Doh & Kim, 2014; Guo et al., 2016). Many patents resulting from such measures are not commercially viable. They are instead used as defensive patents or portfolios to gain recognition. They are useful to gain (more) support from the government.

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engage IP lawyers to ensure that their businesses are coevolving with the collective accumulation of intellectual capital. As a nation develops and transitions towards the advanced phase of economy, many will be enticed to adopt meritocratic fundamentals in governing development (Major & Machin, 2018; Markovits, 2019). Those who excel academically and subsequently are mentored by superordinate entrepreneurs in privileged industries are empowered to champion the national economy towards the advanced phase of development.5 SMEs on the other hand are being informed about the risks of their inferior business models and are encouraged to mobilize their resources—bridging them to research activities that are derived from universities and PRIs. As meritocratic fundamentals are valued, academics and researchers in universities and PRIs are seen as the agents of change in the economy (Audretsch & Lehmann, 2006). The concepts of UniversityIndustry-Government (UIG) linkages (Etzkowitz & Leydesdorff, 2000) and R&D consortiums are understood by many countries as important policy guidance in assisting SMEs to find and build niches, thereby capturing the window of opportunity in the forthcoming 4th industry revolution (4IR) wave (Lee et al., 2020; Schwab, 2017). The guidance is not only used to encourage businesses (see Chung, 2013; Lubik & Garnsey, 2016) that invest in science-based ventures (e.g. biotech), but also those that invest in traditional ones (e.g. manufacturing SMEs). Traditional SMEs are deemed useful in R&D consortiums, as they are acquainted with different engineering knowledge (Raffaelli, 2019) and are accomplished in performing research on material engineering. The IT producing and software-based SMEs are invited to participate too, as they can provide valuable input on how to apply emerging technologies (e.g. IoT for healthcare equipment) and contribute to the knowledge stock of computing science. Meanwhile, universities and PRIs are believed to be useful in assisting SMEs to migrate from their old business models (which capitalize on modified old machines and mid-skilled labour) and invest in science-based/emerging technologies (e.g. biotech, IoT, AI, etc.). The participating SMEs gain from the process of collective efforts in realizing the desired development (from research to market development). The

5 As the labour market began to fetishize the skills that superior education produces, eventually superordinate entrepreneurs would come to dominate manufacturing (Markovits, 2019), instead of mid-skilled labour working for SMEs.

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UIG model is perceived to be harmonious, and co-venturing between SMEs and universities/PRIs helps SMEs to prosper in 4IR. (Blanket call) propositions for patenting and UIG agendas in searching for new SME business models are sound and promising. However, the narratives highlighting the roles of intellectual capital and universities and PRIs are—to us—overrated (to say the least), and lack relevancy on what the SMEs can deliver. The propositions (i.e. suggesting the need for networks to mobilize intellectual capital and UIG linkages for sciencebased niches creation) were derived from an oversimplification of dynamic industrial phenomena and thus lack applicability in the context of the industrial structure of SMEs. They make us doubt if the propositions are bankable and would really guide SMEs to innovate in the new business model creation process—as SMEs hope to remain resilient amidst industrial value migration (while their mid-skilled labour is replaced by emerging technologies). We will elaborate in detail in the Observations and Discussion sections. This chapter seeks to provide some important insights on why desirable results might not be obtained from narrating the importance of science and intellectual capital for SMEs in post catching-up development, as well as from mobilizing resources to seed a routine for patenting and sciencerelated business venturing. Such measures would not keep SMEs in a resilient market position during industrial value migration, and we wish to plot a (simple) typology explaining why. In this chapter, SME refers to a company that is comparatively smaller than a big business in terms of labour force (100–500 employees) and with annual revenue less than USD 50 million (per business line). SMEs are either family owned or professionally managed.6 Unlike software app developers or low-capital start-ups, they invested early and committed to (fixed) assets for the business model. This gained them a long(er)-term business life cycle and substantial wealth during the industrial catching-up period. Unlike spin-offs from PRIs or big corporations, they lack risksharing business support and networks from the parent firms. Generally, there is common understanding that struggling SMEs (at least in Taiwan) are inherent latecomer successes in the catching-up period. They were endowed with knowledge for manufacturing and exports that was derived during the industrial expansion period between the 1970s and 1990s; 6 It is noted that there are family firms owned by (or in partnership with) business groups. The business affairs of these firms are usually managed by trained professionals.

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inherited machines from (and were taught how to modify them by) firms migrating to other businesses during that time; were invited to be subcontractors and Original Equipment Manufacturing (OEM) suppliers; and upgraded towards becoming Original Design Manufacturing (ODM) suppliers. In our discussion with SME owners, we generally agree that the business dynamics of SMEs in post catching-up development are a poorly understood phenomenon. Thus, it is far from obvious what the necessary direction is that would keep their businesses in resilient market positions. Therefore, our inductive logic for this academic exercise was to first get acquainted with the context of SMEs that are in the process of searching/reconfiguring new niches (Isobe et al., 2008) while their industrial value is migrating away. In this chapter, we used two (locally acknowledged) authoritative cases to uncover the dynamics of SMEs and dilemma in the time of change. The two cases put forward discussion of two companies which share similar humble roots, before rising up as multinational firms producing for local and international markets. Both saw their business mature and sought to add value to it, as the current industrial values are migrating (Figs. 7.2 and 7.3) away from their existing business. The two companies have been used as teaching cases in two (E)MBA classrooms to trigger discussion and to get validation (and reflect) the dynamics of typical SMEs. The two classes were attended by 10 and 45 senior students, respectively. We 170,000 160,000 150,000

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collected feedback7 from the students who themselves are business owners and top managers of other SMEs. The dynamics and dilemmas of the two cases are found typical among the similar kinds of SMEs. They shared their perspectives and viewpoints about why formerly successful SMEs now struggle to stay resilient in the context of post catching-up environment, as well as the rationale behind certain measures taken by SMEs in searching for a niche in conditions of changing structure8 in the global value chain. Many have little confidence that patenting and UIG linking measures would help them to configure niche positions in an inevitable, defined global value chain. Our discussion (see Fig. 7.4) was further guided by the narrative framework on Business Model Innovation (BMI) in the context of industrial value migration (Hacklin et al., 2018, p. 94). BMI denotes “fundamental change in the relationship between business model elements” (p. 84) and that companies pursuing it remain competitive when they are facing issues of industrial value migration. There are two strategic measures on how BMIs are executed. The secondary BMI basically

7 Postgraduate courses for engineers and business practitioners in NTHU (which is in close proximity to Hsinchu Science and Industrial Park) enabled us to receive feedback from professionals who hold both technical knowledge and business experience. 8 This corresponds to the 4th Industrial Revolution that will change the global production system, industrial value and conduct of trading activities (Lee et al., 2020; Schwab, 2017).

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Business Model Innovation Primary Secondary

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Fig. 7.4 Business model innovation and industrial value migration (Source Adapted from Hacklin and et al. [2018, p. 94])

relates to those businesses that capture new market opportunities by running multiple/parallel business models. Such measures are taken to hedge the venturing risk. The parallel models can be complementary or totally conflicting with each other. It is basically a practice of leaving all the elements of the primary business intact, while venturing new businesses with different models to develop new income streams. For primary BMI, one would witness continuous transformation of elements in the primary business model in tandem with changes in the market and business environment. It is of the view that firms with primary BMI have the advantage in capturing industrial value during a time of migration. The process involves experiential searching, which is lengthy and cumbersome. Hacklin et al. (2018) maintained that parallel business models can be risky, as they are planned in advanced instead of transforming their elements in response to changes in the market and business environment. There are generally two kinds of SMEs that see their industrial value migrating away. One kind has inherent (traditional) knowledge in supplying processed materials/parts (e.g. moulded plastics, pressed foam, etc.) to key (B2C) industries. Those involved in this kind of business committed early and required networks to acquire technical knowledge and patient capital (for the purchase of machines and factories that supply to key industries) in order to succeed. They were founded by midskilled individuals (who have general knowledge about manufacturing

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and basic material engineering) who invested in this kind of business. During businesses expansion, they appreciated the knowledge of highly trained engineers and knew whom to recruit in order to develop more valuable products/services for supplying to more sophisticated industries. However, even as their industrial value is marginally migrating (as product life cycles are relatively longer) to firms in more competitive economies in terms of production labour cost, they lack the knowledge to innovate new business models—as the post catching-up economic market places value on consumer-driven technology with a high emphasis on software. The second kind emerged when market economies began demanding digital solutions for products and service industries. Many emerged during the 1990s and 2000s, founded by highly skilled individuals who hold hardware-software interface engineering knowledge. This kind of business is highly competitive, as the products life cycles are shorter (Teece, 1998, p. 70) due to intensely rapid change in information and communication technologies. Industrial value can be migrated (captured) by those who can (better) master the converging technologies in a constantly changing business environment. Organized big firms such as MediaTek and TSMC come out on top of such change, as they equipped themselves with change assets (e.g. flexible organization structure that empowers change agents, know-how to appropriate scientific research from universities or PRIs, etc.) and the ability to mobilize resources and multi-skilled workforces to reconfigure critical business models. Meanwhile, less endowed SMEs (collectively) innovated to enrich their business ecosystem and scale up the use of proven science and technologies, adding value to their occupied business models. Our two case studies prominently capture the dynamics of the abovementioned two kinds. Both were successful during the catching-up period and derived revenue from business models that were formerly effective. Each has a specific strategy to search for and innovative new business models, but both are not scaling towards (critically) changing their old business model to a novel one. Both lack change ability assets and are not equipped with capabilities to lead market forces towards demand for the products or services they produce. The following is a narrative elaborating the context of these two kinds of SMEs and their struggles in the searching process for new business models. The narrated elements (patenting and UIG linkages) to facilitate the searching process in the literature are (critically) discussed and reviewed. We will draw a typology

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based on BMI framework by Hacklin et al. (2018, p. 94) and hope to capture (and launch a starting point in generalizing) the challenges that SMEs are facing in the post catching-up phase of development.

The Two Cases Why do patenting and UIG linking (blanket call) narratives disregard the industrial dynamics context of SMEs? Why is it that (obsessive) pursuit of patenting assets and UIG networks driven by public policy programs might not lead SMEs to gain a competitive edge? We analysed the distinct contexts of two companies and their strategies for maintaining their business value. The Case of Chiao Fu Enterprise The first case is Chiao Fu Enterprise (among others shown in Fig. 7.1 which did not emerge in the favoured clusters). It was founded in 1976, a family-owned business, started by two brothers. The business was first initiated by the co-founder who was originally working for a trading company supplying raw materials to produce polyurethane foam. He learned that there was significant demand for foam in Central Taiwan as manufacturing industries producing shoes, suitcases, clothes and hats were expanding. Chiao Fu’s business was financed by the founders’ savings, thus operating under circumstances of having a low budget. It modified old machines for basic foam production processes to produce generalpurpose polyurethane foam. As Chiao Fu’s business expanded in the early 1980s, it invested in automated production via subscribing to a turnkey solution from Japan, thereby upgrading the old foaming processes. The co-founder purchased machines and engaged engineers from a Japanese company producing foam in order to learn how to maintain, modify and repurpose machines for particular production. The engineers guided Chiao Fu on what to invest in and who to connect to for developing its foam business. In the 1990s, Chiao Fu started to invest in mainland China (Guangdong and Shanghai) and Thailand. It used a similar business model via establishing foaming businesses in regions that were demanding generalpurpose polyurethane foam as a raw material for their production. It gained a share of 2% for each of the two mainland China regions and 10% for Thailand. These regions have been providing Chiao Fu with

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stable revenue for almost two decades. Meanwhile, the experience and tacit knowledge to produce general-purpose polyurethane foam were migrated to the business’ targeted regions. Chiao Fu in Taiwan pursued advanced product development and marketing agendas as it sought to supply to more sophisticated markets (aerospace, railway and medical care sectors). It pursued horizontal business expansion (multi-location scalable supply capability) abroad, while mandating an upstream route in order to accumulate and gain from complementary assets (market distribution channels). As Chiao Fu gained from expansion in its core business while the market competition to supply foam to targeted industries was falling off with respect to the pace of production, it diversified other (nonrelated) businesses to widen its business portfolio. In 1993, it started a compounding business in Taiwan supplying polyamide (PA) and polypropylene (PP) as materials for product manufacturers. In 1994, it started a cable tie manufacturing line to produce nylon cable ties of different qualities for different industrial applications. As of the 2000s, Chiao Fu accumulated sufficient applied research capability and capital for high-tech machines that allowed it to perform in-house research for its product development needs. Its research enabled it to produce recyclable PA and PP plastics, new biodegradable compound materials for smart farming and high-quality cable ties for heavy industrial applications. Chiao Fu is recognized as one of the three high-quality foam suppliers for the aerospace and medical care sectors in Taiwan, and an OEM cable tie supplier for the top industrial automation companies in the world. As Chiao Fu developed its research capability in Taiwan, it continued to expand its lower quality production horizontally abroad. It is now one of the top three biggest nylon cable tie manufacturers in the world. Nonetheless, it faces strong market competition from mainland Chinese manufacturers. As it grows, it wishes to both deepen and widen its product lines to specialty cable ties and other wiring accessory products. Like many other SMEs in the post catching-up phase of development, the 2000s period saw Chiao Fu being encouraged by the government to patent its inventions and participate in state-supported UIG projects and PRI-facilitated R&D consortiums. Chiao Fu was keen to do so, as it wished to accumulate complementary assets (gain recognition as an R&D and solution provider in the public–private partnership networks) and research capability. It hoped to learn some smart technologies in the

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Industrial Technology Research Institute (ITRI) to upgrade its foaming process for home bedding and health care, and exploit ITRI’s networks to deploy and commercialize its compound technologies. Chiao Fu committed its research resources to learn science in an R&D consortium founded by ITRI to provide the championing IT company (the company that commands market forces) with a renewable engineering solution that capitalizes on biodegradable materials and acrylonitrile butadiene styrene (ABS) plastics. Chiao Fu sees itself playing a leading role in providing a solution for the championing company in the R&D consortium, while ITRI plays the role of intermediary—bridging technology supply forces from SMEs to meet industrial market needs. As it committed more and more to patenting and publicly coordinated research activities (for almost a decade now), Chiao Fu realized that it lacks the ability to translate those things into revenue. The accumulated assets (patents) and research findings have yet to progressively transform its current business model that relies on producing general-purpose materials—something which is duplicable by latecomers. A significant share of Chiao Fu’s business revenue is still derived from its multi-location horizontal supply expansions. As the growth of revenue slowed down since 2014, it began to feel a sense of urgency to commercialize its collaborated research activities. On the one hand, many patents that Chiao Fu accumulated from in-house R&D fell short in terms of creating licensing interest from the market. On the other hand, Chiao Fu lacks the needed resources (i.e. huge finances and capable change agents) to develop the capability to commercialize research that is based on patenting, develop new product development routes and ultimately transform its business model that currently relies on horizontal expansion. Unlike organized big companies, SMEs remain far from securing sufficient capabilities (e.g. to appropriate IP systems, to lobby the government to impose protection/regulations that favour their business interests, branding, etc.) to build barriers and fend off competition from latecomers—despite their attempts to accumulate complementary assets. Although the conception is that publicly coordinated research agendas would develop a strong chain of technology supply and market demand forces, the case of Chiao Fu informs us that such agendas fall far from realizing such desired outcomes. Despite committing to co-researching activities, the championing firms in the consortium are not seeing their hoped-for outcomes as prioritized agendas in commercialization activities.

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This is partly due to their own (in-house) pre-occupation with commercialization agendas that overshadow the potential of co-researching results and budget constraints for expansion. The UIG model—however, it may sound in the literature—seems impractical in terms of facilitating the SMEs to innovate new business models. The Case of Argox Information Co., Ltd. The second case is Argox Information Co., Ltd. It was founded in 1996, like many other SMEs in the 1990s which were started by engineers who acquired knowledge from established firms in the favoured industrial clusters (see Fig. 7.1). The company was founded by five engineers who had previously worked for Acer—an established personal computer (PC) manufacturing company in New Taipei City of Taiwan. Working for Acer enabled them to gain PC development experience and thus the ability to sense market demand for particular ICT solutions. They realized the need of many companies to digitalize their business operations and their own ability to derive product identification technologies and systems to capture and process data. The founders started their venture using their humble savings to commercialize their range of printers (label, desktop and industrial), label scanners and portable data terminals as systems for capturing and processing data. In 1997, Argox launched its first micro printer with language emulation. It was a hit product, and Argox and its products made a strong footprint in the AIDC (automatic identification and data capture) market landscape in Taiwan. Argox’s products and solutions (including industrial printers, scanners and portable data terminals) in the 1990s and 2000s were produced for users who wished to introduce AIDC solutions for their business operations. It has an in-house R&D unit to develop new industrial functions in identifying and sensing tasks, and to provide IT solutions for particular industrial applications. The unit is also useful for devising new products and services. The company owned a few patents (in the USPTO), but these have not been appropriated for licensing endeavours—nor are they useful in fending off imitation by latecomers. This is because IT and software-related innovations are often “reinvented” from many prior technologies, and electronic-based patents are often limited in terms of patent strength and IP market protection (Teece, 1998). Argox engaged independent complementary asset holders to perform the market distribution tasks. In terms of UIG linkages, the company might (sometimes) benefit

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from being informed by PRI scientists about the latest and emerging technologies that are useful for upgrading its technologies. It is unusual to see joint research activities between scientists from universities and PRIs and engineers in the AIDC industry. Argox recruited many software and mechanical engineers who are capable of deriving IT solutions for different industrial and business operations. As it targeted less sophisticated users, the products and solutions it produced were well received by users in both Taiwan and other emerging countries from the late 1990s until end of the 2000s. Argox was once recognized as one of the top AIDC players in Taiwan. Argox found itself facing stiff market competition in the late 2000s, as its two major competitors TSC and GoDEX scaled up. As one of the aggressively competing firms in Taiwan, TSC had been building an ecosystem for compatible new products for trading firms to upgrade their old installed hardware9 from established brands (Zebra, SATO), while accumulating branding and industrial change assets to devise a possible path into healthcare tracking-related technologies and services. It has a full spectrum of products and solutions for all types of users (high-end, middle range and entry level). GoDEX, on the other hand, targeted mid-range products and services to avoid direct competition with the other two competitors. Although on the one hand the three companies compete, on the other hand they commit to learning by duplicating innovation routines within the circle of their peers. Both TSC and GoDEX overtook the revenue performance of Argox since 2009 and 2013, respectively. To compete, Argox was then pushed to reduce their cost and profit margin, as it wished to keep its business relevant in the AIDC market. On top of competition from TSC and GoDEX in Taiwan, there were also conglomerate firms abroad which possess superior market power (e.g. Honeywell, Zebra and SATO) that sought to expand their business portfolio via venturing into the AIDC business. Argox essentially found itself competing for entry level users on two levels, i.e. within Taiwan and abroad.

9 They sought to service firms with old systems that were once produced and guaranteed by big firms. Parts and solutions provided by them are compatible with old systems. Their innovation was in how to service firms which sought to maintain old systems in their production systems. The move is termed as “simple imitation” in Zhao et al. (2020, p. 11).

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SATO—being one of the top 2 AIDC players in the global market— approached Argox at the end of the 2000s for collaboration, as it wished to venture into entry level products and solutions. Argox essentially decided to be a company in the SATO group in 2011. It gained in terms of capital, new market exposure (in Japan) and upgrading opportunity from such integration. It now seeks to acquire some printing and sensorproducing companies in Mainland China in order to build a supply chain ecosystem and scale up to compete in both the local market and abroad.

Remark The two cases are narrated to reflect on the contexts of the catching-up periods in which the SMEs emerged and developed. They are trained to exploit proven technologies but have yet to prove capable of exploiting emerging (science-based) technologies and of innovating for new business models. Unlike organized firms, they cannot expand in backward or forward integration at will, nor integrate horizontally. Their background, existence and struggles are typical among SMEs (familiar to those who are managing SME businesses), if not generalizable (transcripted viewpoints from EMBA students will be presented upon request). For the first case, Chiao Fu founded its first business early and evolved while distributing foam and foam products to both the local market and abroad. It then diversified and set up new businesses in parallel to its original one. Its new ventures were more a less grouped in a sector where there was low risk of seeing their industrial value migrating away in the short term. The founders learned first by doing (being involved in foam trading) and then by investing to commit in fixed assets for long-term use and exploiting proven technologies. As they fell into a routine, they lost the appetite to aggressively transform their possibly regressing, old business models. This can be understood as an inherent characteristic of many traditional SMEs, as they believe in a slower (and more careful) pace of transforming their business model—enabling them to embark on a safer investment journey, while carefully sensing and devising useful technologies to define the success of their business. They rarely invest in high risk, short cycle types of technologies (such as IT production and software-related businesses). Chiao Fu has kept its primary business (foam) intact while venturing into unrelated businesses, i.e. recycled plastic polymer compounds and

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cable ties. As Chiao Fu diversified, it sought out experienced industrial managers to develop a corporate approach toward accumulating knowledge (in order to undergo cycles of learning and production), manage the newly acquired assets (machines and networks) and scale up. All three of its businesses gradually upgraded to supply for heavy and high-tech industrial applications. As Chiao Fu is not under immediate threat from competitors, it has the luxury of time in venturing into different businesses and experimenting with different processes for niche searching. They patented their inventions and subscribed to the government-coordinated R&D consortium for research and technological development. However, it seems the growth of its three businesses has matured since 2014, and there is the worry that one day their industrial value could be captured by others. Traditional SMEs may need a long learning period (as they commit to fixed assets) in order to see their investment return to scale during the early business development period. If their business succeeds, what they probably gain is industrial value that is long(er) lasting. They also gain the privilege of experimenting and venturing into different (unrelated) businesses—while keeping their existing business intact to provide stable returns. They do not need to (critically) change their firm’s asset base. Many traditional manufacturing SMEs historically received little from the government (in terms of direct handouts). Instead, they learned on their own and gained adaptive capabilities in mobilizing production facilities in different regions (of different countries) to gain proximity advantage in supplying parts and intermediate goods to local industries. SMEs are agile in expanding their businesses and highly capable in delivering duplicative imitation processes via repurposing available machines. However, traditional SMEs might accumulate more (redundant and immobilized) assets in the process of diversifying over time. Such conditions might disable them from developing a focus path to venture into envisioned science-based emerging technologies. The accumulated patents (carrying high hopes of co-venturing with established firms) and co-researching for R&D consortiums have yet to bear any meaningful results. As most SMEs do not have the means (in terms of complementary assets and marketing ability) to commercialize their patents, the inventions resulting from UIG collaborations remain unused on the shelf. As the hopes of SMEs in convincing big firms to commercialize the co-researched science-based results fade over time, they struggle in (re)configuring a worthwhile investment path for the future (due

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to the unnecessary baggage of organizational memory for science) and (re)orchestrating resources (capital, technical reserves and workforce) for different ventures. Argox is the case in point of SMEs which keep their primary business intact while seeing their high(er) industrial value migrating away in the short term. Argox focused on identification technologies and solutions for trading firms, and complemented this primary business with applications of proven technologies. It equipped itself with new tracking and printing technological knowledge via engaging scientists and researchers from PRIs and universities—stepping up efforts for possible change in delivering state-of-the-art tracking solutions in the near future. However, the market competition in AIDC is tight and cutthroat. Conglomerate firms with superior market power (e.g. Honeywell and Zebra) that dominate the supply of advanced tracking and printing hardware are accumulating supplementary assets, via establishing subsidiaries to deliver tracking solutions for trading firms around the world. They see AIDC businesses as useful supplementary assets to their core business, using them to gain advantages in commanding (proprietary) technologies to be circulated (or to substitute existing technologies) and dominate in high-tech sensing and tracking solutions. Meanwhile, aggressively competing firms in Taiwan have been building an ecosystem and accumulating industrial change assets to build new (possible) evolutionary paths for future business expansion. Argox is essentially being pushed to reduce their cost and profit margin in order to stay competitive in the market. Becoming a member company of SATO of Japan in 2011, Argox sought to raise capital to acquire some small printing and sensor-producing companies in Mainland China and build a supply chain ecosystem, in the hope that such assets would pay off in the near future. The competition phenomenon among the SMEs in AIDC mirrors many studies that observe how groups of firms move like a pack, and being a member of the pack is guided by a desire to not fall behind. Thus, learning by duplicating business model innovation within the circle of their peers is a common route in their upgrading process. A member may wish to move slightly ahead of their peers, but it is uncommon that any has the ambition to win a technological race and command a value chain. With the lack of complementary assets of SMEs (low resource

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slack) and networks to deploy technologies (lack of market sophistication), they know it is beyond their capability to manage risk in an uncharted competitive landscape (Wang et al., 2017). The question is: How can SMEs stay resilient in post catching-up development? Perhaps this is not answered by what science from research institutions or universities can do for them. SMEs in post catchingup development command the ability to perform research (particularly, research on materials) and are able to provide scientific solutions to their own problems. They might not need academics and scientists to solve their industrial problems. On the other hand, one should realize that big companies in R&D consortiums might not be that keen to orchestrate market forces for the SMEs. They are capable of churning out different in-house technological solutions, while being pre-occupied with their own commercialization agendas. Their co-investing research activities leading to co-prototyping and co-patenting with SMEs are rarely advanced towards the scaling-up phase. Perhaps a better guiding question would be: What led to the emergence of SMEs, and what they can become in the post catching-up phase? The typology (Table 7.1) that we derive from our cases may shed some light in configuring the characteristics of the SMEs, and what led them to pursue particular businesses. By knowing what they are, we can configure what they can become—via reviewing firms in the developed world that have already gone through the post catching-up phase. While we are keen to derive the essentials from those firms in the developed world, we note that it is important to be conscious in devising lessons to avoid possible framing biases. On hindsight (see Fig. 7.5), the traditional SMEs—those with technical reserves for different manufacturing activities and carrying knowledge in material engineering—can look to Japan’s SMEs which once supplied to the Keiretsu business groups. SMEs of Japan gained from the upstream of global production of certain materials, even though they lost competitiveness in downstream industries of the international standards for software (IT) industry (He, 2019). They capitalized on their traditional advantaged capability10 to strive for global upstream production 10 One might need to dwell further in order to understand how SMEs in Japan acquired their “reconfiguration capability” (denoted as the ability to restructure asset portfolio via an integration of new assets) that defines their strategic performance (Isobe et al., 2008).

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Table 7.1 Typology on SMEs’ inherent characteristics (derived from the two cases)

Perceived early success factors

Technical reserves

Inherent characteristics

Migration rate (business life cycle) View on patenting

View on UIG linkages

Traditional SMEs

IT Producing and Software-based SMEs

– Predominant emphasis on investment and production – Patient capital for long-term success – Cross cutting technical knowledge – Learning by doing routine – Knowledge in material engineering – Knowledge to lead research in R&D consortiums for technical solutions – Being conservative on investing in short cycle/software-related businesses – No urgency to innovate business model

– Riding on the wave of digitalization – Practical solutions from affordable price point – Knowledge in software and software-hardware integration – Learning by duplicating routine – Knowledge to apply proven technologies and scaling-up – Keeping business model intact while building ecosystem via populating different businesses – Engaged independent complementary asset holders to perform distribution tasks – Scale up to stay resilient in market position – High (short cycle due to convergence technologies) – Not important

– Low, able to experiment or diversify in (different) businesses – Subscribed to patenting but yet to gain from such investment – Committed (and led) to various projects with PRIs and universities but yet to gain substantially from such networks

– Universities and PRIs are keeping the industry informed about proven and emerging technologies – Rarely gain from joint research activities

excellence. SMEs in Japan now dominate the production of indispensable chemical and electronic materials, as well as crucial parts and equipment in the heavy machinery industry. They are in the position of deriving advanced materials to improve components level of production (this to Tidd and Bessant (2014, p. 35) is an example of radical innovation

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Business Model Innovation Secondary

Primary

Traditional industry Low

Value Migration

(scale up and venturing to maintain growth)

AIDC High

(ecosystem)

Cases of SMEs in Japan

Cases of SMEs capturing window of opportunity of Industry 4.0

Fig. 7.5 Aspiring cases to build new business models (Source Adapted from Hacklin et al. [2018 p. 94])

capabilities). It is important to learn how SMEs in Japan strategically targeted and invested in vital areas of different industries, and ultimately successfully reconfigured their business models. SMEs in businesses with high migration of value may need to emulate firms which have proven capable in learning and producing convergent (complex) technologies. It is crucial to equip their organizations to prepare for fundamental changes in their business models, as there is the risk of emerging technologies/solutions replacing their existing ones. As different technologies converge over time (e.g. computing and mobile technologies), one should expect that industrial value migrates towards smarter devices (Hacklin et al., 2018, p. 93). The migration rate will only increase, with different smart devices being introduced as cloud computing converges with IoT. Therefore, it is important to learn how some successful firms in the developed world (e.g. SMEs in Germany) lay out their plans to innovate their business model, and what they invest in to seize the window of opportunity in cyber-physical systems (termed as Industry 4.0)—as they aim to be on top of the game in perfecting manufacturing speed and excellence. It is of note that learning from successful firms abroad will require both the traditional and IT producing and software-based SMEs to gain some level of dynamic capabilities (Teece, 2018, p. 43). The term highlights the importance of capability to progressively change the existing business

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content and orchestrate resources and networks that would complement the adapted imitation (Zhao et al., 2020, p. 11). Firms with dynamic capabilities would focus on how to enter new markets and transition to business models that do not lean on past investments and existing organizational structure.11 Learning business models from abroad (instead of duplicating innovation within the circle of their peers) and adapting them to respond to the local environment can be seen as a possible detour out from being trapped in the cycle of duplicating the innovations of peers. The study of this chapter on the typology of the inherent characteristics of SMEs would like to encourage readers (particularly policy makers) to learn what SMEs are (whereby they may need to go deeper than this chapter has gone), and what they could become under environments with different migration rates—before making a blanket call for the adoption of patenting and UIG linking measures. It is our hope that future research seeks deeper understanding about what led to the emergence of SMEs (of a particular economy), and what they could become. This would lead to a taxonomy that enables policy makers to chart supporting policy agendas and aids SME owners to strategize their action plans for upgrading and resilience in the global production value chain.

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Index

A Argox, 196, 202–204, 206

B Business model, 119, 188, 191, 193, 194, 197–199, 201, 202, 204, 208–210 Business model innovation (BMI), 188, 196, 197, 199, 206

C capabilities, 94 Catch-up/catching-up, 1–4, 6, 13, 15–18, 21–23, 32–36, 41, 43, 45, 47, 49–52, 58–61, 70, 78, 81, 88, 90, 105, 109–111, 133, 143, 153, 191, 194, 198, 204 Chiao Fu, 195, 199–201, 204, 205 circuit, 92 Collaboration, 97, 104, 105, 143, 149, 152, 154, 159, 160, 164, 165, 169–176, 180, 181, 204, 205

Concentration, 28, 43, 56–59, 69, 142, 143, 145, 146, 152, 153, 158–161, 169–171, 173, 174, 176, 177, 180 Cycle time, 143, 153, 159, 160, 173, 179, 180

D Developing economies, 4, 7, 17, 19, 41, 43, 78, 83, 85, 105, 111, 120, 187 Dilemma, 3, 195, 196 Diversification, 5, 33, 59, 82, 98, 143, 146, 152, 153, 159, 160, 168, 171, 174–176, 179, 180, 189 Dynamic capabilities, 117, 123, 209, 210

E Emergence, 4, 6, 7, 47, 48, 63, 79, 81–83, 94, 97–102, 105, 119, 146, 152, 177, 207, 210

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022 C.-Y. Wong, Experimental Learning, Inclusive Growth and Industrialised Economies in Asia, https://doi.org/10.1007/978-981-19-3436-0

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INDEX

Evolution, 2–6, 17–19, 21, 27, 31, 32, 36, 41, 44, 77, 78, 82–85, 97, 103, 104, 109, 112–114, 118, 123, 124, 129, 133, 141, 145, 146, 206

146, 148, 150, 153, 154, 158, 165, 168–170, 172, 175–177, 202, 203, 208, 210 Innovation system, 3, 5–7, 27, 41, 45, 50, 77–79, 82, 83, 85, 105, 118, 130, 133, 141, 142, 144, 145, 147, 175

F Flying Geese, 16–20, 35

H Hsinchu, 2, 7, 94, 141–150, 152, 153, 155, 156, 158, 159, 161–171, 173–176, 178, 196

I Inclusive, 2, 3, 6, 7, 42–45, 47, 50–54, 58, 68, 70, 104, 189 Inclusive growth, 4–6, 41–45, 47, 49–51, 53, 63, 68–71, 84 Industrialization, 1–3, 6, 13–16, 18, 19, 21, 22, 24, 27–29, 43–47, 49–51, 53, 61, 62, 69, 70, 81, 85, 89, 90, 132 industrial system, 78 Industrial Technology Research Institute (ITRI), 7, 25, 26, 86, 92–96, 98, 102, 109–112, 115–123, 125, 126, 128–131, 133, 134, 148–150, 162, 170, 172, 175, 201 Industry, 31, 32, 36, 56, 64, 78, 83, 88, 90, 93, 94, 96, 101, 103, 104, 117, 120, 130, 142, 143, 147, 149, 150, 152, 154, 155, 169, 170, 175, 189, 203, 207, 208 Innovation, 3–5, 7, 19, 23, 24, 41, 44, 46, 48, 52, 66, 77, 80, 81, 83–86, 92, 95, 97, 103–105, 110, 113, 120, 141, 143, 144,

J Japan, 19, 20, 22, 24, 55, 62, 109, 118, 124, 130, 133, 144, 146, 199, 204, 206–209

K Korea, 2, 3, 14, 18, 22–24, 28, 33, 35, 36, 42, 46, 47, 49–53, 55, 58–63, 65–71, 109, 110, 113, 116, 118, 123–125, 128, 129, 132–134, 141–143, 145, 146, 151, 161, 166, 167, 169, 170, 172, 175, 177 Korea Institute of Science and Technology (KIST), 7, 52, 59, 109–112, 115–118, 123–135, 148

L LED, 95 Localization, 143, 145, 146, 152, 153, 159–162, 169–171, 173, 175, 176, 179, 180

M Malaysia, 1, 3, 13–17, 19, 20, 29–32, 34, 35, 177 multi-agent structure, 79

INDEX

N National innovation system (NIS), 3, 4, 112, 113, 124, 125, 128, 130, 132, 134, 144, 145, 147, 152, 158, 169, 172, 175, 177 Newly industrialized economics (NIEs), 13, 16, 19, 20, 28, 29

O Originality, 143, 152, 153, 159, 160, 168, 174, 180, 181

P Phase, 2, 3, 6, 7, 17, 18, 33, 35, 42, 45, 47, 48, 50–53, 58–61, 65, 68–70, 79, 81–83, 85, 88–91, 93, 96–104, 110, 111, 113, 134, 189, 192, 193, 199, 200, 207 Policy, 3–5, 7, 14–16, 20, 23, 24, 28–31, 33–36, 41, 43–45, 47, 49–51, 53–55, 59, 64, 67, 69–71, 78–86, 88–91, 93, 96–105, 113, 117, 124, 125, 128, 131, 143, 188, 192, 193, 199, 210 political, 77 Post catch-up, 1–3, 78, 187, 188 Pre-condition, 41, 43, 50, 51, 53 Public research institutions (PRI), 2, 46, 49, 59, 95, 98, 103, 109, 111–113, 123, 125, 126, 129, 134, 147, 148, 200, 203

R Regional innovation system (RIS), 7, 141–147, 152, 153, 162, 169–171, 175–177

215

S Samsung, 2, 17, 20, 52, 132, 142, 145, 148, 150, 151, 153–156, 158, 162, 163, 167, 169, 171, 173–175, 192 Science, 5, 14, 31, 48, 86, 88, 94, 101, 104, 109, 116, 125, 129, 132, 143, 151, 165, 166, 180, 188, 191, 193, 194, 198, 201, 206, 207 Science-based, 14, 25, 110–112, 115–117, 119, 120, 126, 130, 131, 134, 154, 159, 160, 165–167, 169, 171, 173, 176, 180, 181, 187, 191, 193, 194, 204, 205 semiconductor, 92, 94, 102, 119 Small and medium sized enterprise (SME), 3, 7, 23–27, 30, 32, 41, 43, 44, 46, 47, 51, 52, 56, 57, 59, 63–65, 67, 68, 70, 85, 91, 93–95, 105, 110, 111, 113, 117–119, 123, 130, 132, 144, 145, 151, 155, 162, 170–172, 175, 188–202, 204–210 socio-technical, 78 structural, 77 Suwon, 2, 7, 141–143, 145–153, 155, 156, 158–162, 164–171, 173–175, 192 Systematic, 16, 30, 42, 85, 101, 143 system failures, 78 T Taiwan, 1–3, 6, 7, 13–19, 22, 24–35, 45, 67, 70, 78, 81, 83–98, 101–105, 109, 113, 117–119, 123, 131, 133, 134, 141–143, 145, 146, 148–150, 152, 161, 163, 167, 169–172, 175, 177, 188–192, 194, 199, 200, 203, 206

216

INDEX

Taiwan Semiconductor Manufacturing Corporation (TSMC), 2, 15, 17, 26, 27, 87, 93, 94, 96, 98, 102, 118, 122, 123, 131, 142, 144, 145, 148, 150, 153–155, 162, 163, 169–171, 173–176, 188, 191, 192, 198 Technology, 5–7, 14, 17–27, 29–32, 41, 43, 44, 46, 48, 49, 62, 64, 65, 68, 70, 78–82, 85, 86, 88, 92–96, 98, 99, 102, 105, 110, 111, 113, 116–120, 122, 123, 125, 126, 129–132, 134, 141, 143, 145, 150–153, 166, 168, 171, 172, 179, 187, 189, 191, 193, 194, 198, 200–210

U University, 49, 52, 56, 68, 82, 87, 94, 98, 110, 116, 120, 126, 128, 129, 132–134, 142, 143, 146–148, 150–152, 154, 166, 167, 176, 180, 181, 188, 193, 194, 198, 203, 206–208 University-Industry-Government (UIG), 193, 194, 196, 198–200, 202, 205, 208, 210 University-Industry (U-I), 143, 154, 159, 160, 165–167, 169, 171, 173, 180, 181 V virtuous cycle development, 84 VLSI, 93, 118