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1CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
The Competitive Advantage of Taiwan
Professor Michael E. PorterHarvard Business School
Commonwealth Speech Taipei, TaiwanJuly 31, 2001
This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “The Microeconomic Foundations of Economic Development,” in The Global Competitiveness Report 1998, (World Economic Forum, 1998), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998) and ongoing statistical study of clusters, Competing for Prosperity: The Microeconomic Foundations of Development, forthcoming, and “What is Strategy?” (Harvard Business Review, Nov/Dec 1996). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter.
2CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
• Recent economic downturn
• Highest unemployment in decades
• Uncertainty of future relationship to China
Taiwan’s Current Malaise
3CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Performance
Note: Irish GNP per capita is about 20% lower than the reported GDP per capita figure due to large dividend outflows to foreign investors. We use GNP per capita for Ireland because it is more representative. For other countries GDP and GNP are very similar.
Source: WEO
15,000
17,000
19,000
21,000
23,000
25,000
27,000
29,000
31,000
33,000
35,000
0% 1% 2% 3% 4% 5% 6% 7%
Canada
Germany
Israel
South Korea
New Zealand
SingaporeSweden
TAIWAN
US
Compound annual growth rate of GDP per capita, 1990-2000
GDP per capita (PPP
adjusted) in US-$,
2000
Weighted average OECD
Weighted average OECD
AustraliaJapan
UK
Finland
Ireland*
4CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
-15%
-10%
-5%
0%
5%
10%
15%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Malaysia
SingaporeIndonesiaHong KongS KoreaThailandAustraliaNew Zealand
Asian Economic Performance By Country
Source: EIU
Annual Real GDP growth
rate,1990 - 2000
TAIWAN
5CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. PorterSource: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
Annual U.S. patents per 1 million
population, 2000
Compound annual growth rate of US-registered patents, 1990 - 2000
International Patenting Output
0
50
100
150
200
250
300
350
400
450
0% 5% 10% 15% 20% 25% 30% 35% 40%
Australia
Canada
Germany
Japan
South Korea
New Zealand
Singapore
Sweden
UK
Israel
= 10,000 patents granted in 2000
USA
TAIWAN
6CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. PorterSource: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
Increase in the annual number of
U.S. patents per 1 million population, 1990 to 2000
International Patenting Output
0
50
100
150
200
250
TAIWAN US
Sweden
Japa
nSing
apore Israe
lS Kore
aFinl
and
Canad
aGerm
any
Netherl
ands
New Zea
land
UKAus
tralia
France Ita
lySwitz
erlan
d
7CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
198
7
198
8
198
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1 Q1
200
1 Q2
IT Equipment and Software
Other Equipment
Business Structures
U.S. Information Technology Investment Share of Real Private Non-residential Investment by Type
Share of Real Private US Non-
Residential Investment
Note: Quarterly data seasonally adjusted at annual rates
Source: BEA, author’s calculations
8CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
0
100
200
300
400
500
600
700
198
7
198
8
198
9
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1 Q1
2001
Q2
IT Equipment and Software
Other Equipment
Business Structures
U.S. Information Technology Investment Level of Real Private Non-residential Investment by Type
Real Private US Non-Residential
Investment, Billions of 1996
US-$
Note: Quarterly data seasonally adjusted at annual rates
Source: BEA, author’s calculations
9CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
I. Addressing some chronic weaknessesII. Making the transition from an Investment-driven to a true
Innovation-driven economyIII. Defining Taiwan’s economic relationship to China
• These agendas are integrally connected
Taiwan’s Economic ChallengesThree Agendas
10CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Sources of Rising Prosperity• A nation’s standard of living (wealth) is determined by the productivity with which
it uses its human, capital, and natural resources. The appropriate definition of competitiveness is productivity.
– Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced.
– It is not what industries a nation competes in that matters for prosperity, buthow firms compete in those industries
– Productivity in a nation is a reflection of what both domestic and foreign firms choose to do in that location. The location of ownership is secondary for national prosperity.
– The productivity of “local” industries is of fundamental importance to competitiveness, not just that of traded industries
– Devaluation does not make a country more “competitive”, rather it reveals a lack of fundamental competitiveness
• Nations compete in offering the most productive environment for business
• The public and private sectors play different but interrelated roles in creating a productive economy
11CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Innovation and Prosperity
Competitiveness(Productivity)
Innovative Capacity
Prosperity
• For advanced economies innovation has the critical role supporting high levels of prosperity
12CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Microeconomic Foundations of DevelopmentMicroeconomic Foundations of Development
Quality of the Microeconomic
BusinessEnvironment
Quality of the Microeconomic
BusinessEnvironment
Sophisticationof Company
Operations andStrategy
Sophisticationof Company
Operations andStrategy
Determinants of Productivity and Productivity Growth
Macroeconomic, Political, and Legal Context for DevelopmentMacroeconomic, Political, and Legal Context for Development
• Sound macroeconomic policies and a stable political / legal context arenecessary to ensure a prosperous economy, but not sufficient
• Competitiveness ultimately depends on improving the microeconomic foundations of competition
13CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Context for Firm
Strategy and Rivalry
Context for Firm
Strategy and Rivalry
Related and Supporting Industries
Related and Supporting Industries
Factor(Input)
Conditions
Factor(Input)
Conditions
• Sophisticated and demanding local customer(s)
• Unusual local demand in specialized segments that can be served globally
• Customer needs that anticipate those elsewhere
• A local context that encourages efficiency,investment, and sustained upgrading
• Open and vigorous competition among locally based rivals
Demand ConditionsDemand
Conditions
• High quality, specialized inputs available to firms:
- human resources- capital resources- physical infrastructure- administrative infrastructure- information infrastructure- scientific and technological
infrastructure- natural resources
Productivity and the Microeconomic Business Environment
• Presence of capable, locally-based suppliers and firms inrelated fields
• Presence of clusters instead of isolated industries
14CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
The California Wine Cluster
Educational, Research, & Trade Organizations (e.g. Wine Institute,
UC Davis, Culinary Institutes)
Educational, Research, & Trade Organizations (e.g. Wine Institute,
UC Davis, Culinary Institutes)
Growers/VineyardsGrowers/Vineyards
Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA 1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda.
Wineries/ProcessingFacilities
Wineries/ProcessingFacilities
GrapestockGrapestock
Fertilizer, Pesticides, Herbicides
Fertilizer, Pesticides, Herbicides
Grape Harvesting Equipment
Grape Harvesting Equipment
Irrigation TechnologyIrrigation Technology
Winemaking EquipmentWinemaking Equipment
BarrelsBarrels
LabelsLabels
BottlesBottles
Caps and CorksCaps and Corks
Public Relations and Advertising
Public Relations and Advertising
Specialized Publications (e.g., Wine Spectator, Trade
Journal)
Specialized Publications (e.g., Wine Spectator, Trade
Journal)
Food ClusterFood Cluster
Tourism ClusterTourism ClusterCalifornia Agricultural Cluster
California Agricultural Cluster
State Government Agencies(e.g., Select Committee on Wine
Production and Economy)
15CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Finland
United States
GermanyNetherlands
SwitzerlandDenmark
SwedenUnited Kingdom
AustraliaCanada
BelgiumAustria
Japan
FranceHong Kong
Iceland
Israel
New Zealand
Norway
Ireland
Spain
Italy
South Africa
ChileKorea
Portugal
Turkey
Malaysia
Brazil
Hungary
Greece
Czech Republic
Jordan
Slovakia
India
Mauritius
EgyptThailand
PolandMexico
Costa Rica
China
Argentina
PhilippinesIndonesia
Colombia
Peru
ZimbabweEl Salvador
Russia
Vietnam
Venezuela
BulgariaUkraine
Ecuador
Bolivia
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Global Competitiveness Report 2000The Relationship Between Microeconomic Competitiveness
and GDP Per Capita, 1999 Data
Microeconomic Competitiveness Index
Source: Porter, Michael E. “The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity.” The Global Competitiveness Report 2000, New York: Oxford University Press, 2000
1999 GDP per Capita*
* Adjusted for Purchasing Power Parity
Singapore
TAIWAN
16CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Stages Of Economic Development
Resource-driven Economy
Resource-driven Economy
Investment-driven Economy
Investment-driven Economy
Innovation-driven Economy
Innovation-driven Economy
• Basic factor conditions (low cost labor, natural resources, geographic location) are the dominant sources of competitive advantage
• Technology is assimilated through imports, FDI, and imitation
• Companies compete on price and lack direct access to consumers
• Companies have limited roles in the value chain, focus on assembly, labor intensive manufacturing, and resource extraction
• The economy is highly sensitive to world economic cycles, commodity prices, and exchange rates
• Efficiency in producing standard products and services is the dominant source of competitive advantage
• Technology is accessed through licensing, joint ventures, FDI, and imitation
• The nation is not only assimilating foreign technology, but has the capacity to improve on it
• The national diamond supports heavy investment in efficient infrastructure and modern production processes
• Companies serve OEM customers and extend capabilities more widely in the value chain
• The economy is concentrated on manufacturing and outsourced service exports
• Innovative products and services at the global technology frontier are the dominant sources of competitive advantage
• The national diamond is characterized by strengths in all areas together with the presence of deep clusters
• Companies compete with unique strategies that are often global in scope
• The economy has a high service share, and is resilient to external shocks
Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990
17CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
• Primary focus on manufacturing• Compete on price and efficiency• Prevalent strategy of serving OEM customers• High rate of investment in modern production methods and
assimilating technology• Strong capabilities to improve and enhance foreign technology• Export-led growth• Substantial government role in steering the economy • Emerging innovative capacity
• Investment-driven stage
Taiwan’s Current Position
18CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
• Labor costs are now high relative to neighboring countries• Other domestic costs are rising• Taiwan is facing increasing pressure in export markets
• Taiwanese companies are investing heavily in lower wage-locations in the region to maintain current strategies
– The proximity of China offers an easily available alternative location with access to a huge domestic market
• Taiwanese exports are heavily dependent on a single clusterin which other Asian countries also compete
– The U.S. downturn in IT investment has a large impact on Taiwan
Limits Of The Current Strategy
19CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
I. Addressing some chronic weaknesses
II. Making the transition from an Investment-driven to a true Innovation-driven economy
III. Defining Taiwan’s economic relationship to China
Taiwan’s Economic Agenda in 2001
20CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
12345678910111213141516171819202122232425
12345678910111213141516171819202122232425
Global Competitiveness Report 2000Taiwan’s Ranking
FinlandUnited StatesGermanyNetherlandsSwitzerlandDenmarkSwedenUnited KingdomSingaporeAustraliaCanadaBelgiumAustriaJapanFranceHong KongIcelandIsraelNew ZealandNorwayTaiwanIrelandSpainItalySouth Africa
GermanyUnited StatesFinlandJapanSwitzerlandSwedenNetherlandsDenmarkFranceBelgiumUnited KingdomAustriaIsraelIcelandSingaporeCanadaItalyTaiwanIrelandAustraliaNorwayNew ZealandHong KongSpainKorea
FinlandUnited StatesNetherlandsDenmarkSingaporeGermanyAustraliaCanadaUnited KingdomSwitzerlandSwedenAustriaBelgiumHong KongFranceIcelandNew ZealandNorwayJapanIsraelTaiwanIrelandSpainChileSouth Africa
Rank Current Competitiveness Index
Company Strategy & Operations Index
National Business Environment IndexNational Business Environment Index
Taiwan
Taiwan
Taiwan
21CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure
22CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Physical InfrastructureTaiwan’s Relative Position
Factor(Input)
Conditions
Factor(Input)
Conditions
General Internet Use 6
Government Infrastructure Investment 12
Railroad Infrastructure Development 14
Availability of Cellular Phones 33
International Direct Dial 30Communication Costs
Overall Infrastructure Quality 25
Telephone / Fax Infrastructure Quality 25
Computer Utilization 24
Air Transport Infrastructure Quality 24
Port Infrastructure Quality 22
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)Source: Global Competitiveness Report 2000
Country RankingCountry Ranking
23CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure– Upgrade domestic financial markets
24CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Financial MarketsTaiwan’s Relative Position
Factor(Input)
Conditions
Factor(Input)
Conditions
Ability to Finance Start-ups 10
Ease of Access to Loans 14
Venture Capital Availability 18
Financial Market Sophistication 29
Financial Disclosure Requirements 28
Access to Local Equity Market 26
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)Source: Global Competitiveness Report 2000
Country RankingCountry Ranking
25CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure– Upgrade domestic financial markets– Increase transparency, openness and legal accountability
26CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Openness and AccountabilityTaiwan’s Relative Position
Factor(Input)
Conditions
Factor(Input)
Conditions
Judicial Independence 39
Adequacy of Private Sector Legal 37Recourse
Political Protection of Private 30Businesses
Extent of Required Financial 28 Disclosure
Bureaucratic ‘Red Tape’ 27
Business Information Availability 24
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)Source: Global Competitiveness Report 2000
Country RankingCountry Ranking
27CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure– Upgrade domestic financial markets– Increase transparency, openness and legal accountability– Boost the efficiency of domestic industries
28CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Competition and Local PricesRelative Prices for Local Goods and Services, 2000
Source: WEO
1234567891011121314151617181920212223242526
LuxembourgJapanUnited StatesNorwaySwitzerlandDenmarkIcelandSingaporeSwedenIrelandUnited KingdomFinlandHong KongNetherlandsAustriaGermanyBelgiumCanadaFranceAustraliaItalyIsraelSpainTaiwanNew ZealandPortugal
Rank GDP per capita (current exchange rate) Index rank
GDP per capita (PPP) Index rank
LuxembourgUnited StatesNorwayIcelandIrelandSwitzerlandCanadaDenmarkBelgiumAustriaJapanAustraliaNetherlandsGermanyFinlandHong KongFranceSwedenItalyUnited KingdomSingaporeNew ZealandIsraelSpainKoreaTaiwan
Taiwan
Taiwan
29CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure– Upgrade domestic financial markets– Increase transparency, openness and legal accountability– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy– Transform company strategies
30CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Determinants of Relative PerformanceTypes of Competitive Advantage
Differentiation(Non-Price Value)
Lower Cost
CompetitiveAdvantage
CompetitiveAdvantage
31CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Sources of Competitive Advantage
• Creating a unique and sustainable competitive position
• Assimilating, attaining, and extending best practice
OperationalEffectiveness
Do the same thing better Compete in a different way
StrategicPositioning
32CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Position: Variety/Needs/Access-BasedDell Computer
Set of Activities
• Prices 15% below rivals• Employees of institutional customers
get same discount on personal machines
• Direct sale via sales force, telephone, and the Internet
• Models include most up to date components
• Build to order from a menu of options• Assemble only, using just-in-time
relationships with nearby suppliers• Outsource maintenance and repair• Limited R&D
• Large corporate and institutional customers and their employees
Particular Product Variety
• Moderate range of standard, mid- and large capacity personal computers, PC servers, and PC workstations with low support requirements
ParticularCustomer Group
33CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Typical Company Strategies in Taiwan
• Concentrate on manufacturing versus services• Rapid adoption of new technologies• Compete on price and time-to-market• Serve OEM customers in the US and other Asian countries• Focus R&D on cost and process improvements• Seek low cost inputs• Invest modestly in human capital
• Concentrate on manufacturing versus services• Rapid adoption of new technologies• Compete on price and time-to-market• Serve OEM customers in the US and other Asian countries• Focus R&D on cost and process improvements• Seek low cost inputs• Invest modestly in human capital
Many Taiwanese companies face a strategic transition from competing on cost to competing on unique products and services
34CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Customer Orientation 3
Licensing of Foreign Technology 9
Note: Rank by countries; overall Taiwan ranks 21 (18 on Company Operations and Strategy)Source: Global Competitiveness Report 2000
Capacity for Innovation 24
Senior Management Recruitment 23
Extent of Branding 22
Marketing Expertise 21
Production Processes 20
Attention to Staff Training 20
Extent of Regional Sales 19
Product Designs 19
Control of International Distribution 15
Company Spending on R&D 15
Breadth of International Markets 15
Company Operations and StrategyTaiwan’s Relative Position
Country RankingCountry Ranking
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
35CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure– Upgrade domestic financial markets– Increase transparency, openness and legal accountability– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy– Transform company strategies– Upgrade Taiwan’s scientific and technological capacity
36CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
0% 5% 10% 15% 20% 25%
Change in R&D InvestmentsCompound Annual Growth Rate in R&D Expenditures, 1985-1998
Source: US Competitiveness 2001: Strengths, Vulnerabilities, and Innovation Priorities Report; Global Competitiveness Report 2000
USA
Germany
UK
Sweden
Canada
SingaporeAustralia
Japan
Ireland
Italy New Zealand
South Korea
FranceIsrael
R&D Spending as Share of GDP, 1998
R&D Expenditures, Compound Annual Growth Rate, 1985 - 1998
TAIWAN
37CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Science and Technology InfrastructureTaiwan’s Relative Position
Patents Per Capita (2000) 4
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)Source: Global Competitiveness Report 2000
Country RankingCountry Ranking
Capacity for Innovation 24
Computer Utilization 24
Quality of Scientific Research 22Institutions
Intellectual Property Protection 21
Company Spending on R&D 15
38CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
• Top 15 Taiwan-based companies by U.S. patents filed in 1999– TAIWAN SEMICONDUCTOR MANUFACTURING CO., LTD. (288 patents)– UNITED MICROELECTRONICS CORPORATION (285)– INDUSTRIAL TECHNOLOGY RESEARCH INSTITUTE, TAIWAN (203)– VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION (107)– WINBOND ELECTRONICS CORP. (102) – HON HAI PRECISION IND. CO., LTD.– NATIONAL SCIENCE COUNCIL– TEXAS INSTRUMENTS - ACER INCORPORATED– MOSEL VITELIC, INCORPORATED– MUSTEK SYSTEMS, INC.– UNITED SEMICONDUCTOR CORP.– MACRONIX INTERNATIONAL CO., LTD.– ACER PERIPHERALS, INC.– PRIMAX ELECTRONICS LTD.
• The top 15 Taiwan-based companies account for 23% of all patents filed by all Taiwanese entities
• Electronics cluster dominates patent filing with more than 80% of all filings
Composition of Taiwanese Patenting in the US Top Patenting Industries and Companies, 1999
Source: US Patent and Trademark Office (www.uspto.gov). Author’s analysis.
39CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure– Upgrade domestic financial markets– Increase transparency, openness and legal accountability– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy– Transform company strategies– Upgrade Taiwan’s scientific and technological capacity– Upgrade the quality of human capital
40CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Comparison of Expenditure on EducationGrowth and Level of Spending by Country
Source: UN
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0% 2% 4% 6% 8% 10% 12% 14%
Public expenditure on education, Share of
GDP 1996
Growth of public education spending, CAGR 1990 - 1996
Malaysia
Philippines
S Korea
Thailand
Singapore
Australia
New Zealand
Ireland
Finland
Sweden
UK
Canada
US
TAIWAN
41CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
0
20
40
60
80
100
120
Japa
nTAIW
AN*Swed
enU.S.A.
Singap
oreAus
tralia
France
German
yCan
ada
U.K.Ire
land
S. Kore
a
Italy
19851998
Number of researchers per 10’000 workers
Note: Taiwan data is for 1988 and 1998Source: US Competitiveness 2001: Strengths, Vulnerabilities, and Innovation Priorities Report; Taiwan National Statistics
Improvements in the Quality of the Workforce Researchers Per Ten Thousand Workers, 1998 and 1985
OECD 1998
42CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Education SystemTaiwan’s Relative Position
Factor(Input)
Conditions
Factor(Input)
Conditions
Quality of Public Schools 9 Quality of Business Schools 25
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)Source: Global Competitiveness Report 2000
Country RankingCountry Ranking
43CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure– Upgrade domestic financial markets– Increase transparency, openness and legal accountability– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy– Transform company strategies– Upgrade Taiwan’s scientific and technological capacity– Upgrade the quality of human capital– Create advanced demand conditions
44CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Demand ConditionsTaiwan’s Relative Position
Demand ConditionsDemand
Conditions
Consumer Adoption of Latest Products 8
Extent of Regulatory Distortion 12of Competition
Demanding Regulatory Standards 22
Stringency of Environmental 21Regulations
Competitive Disadvantages Relative to GDP per Capita
Competitive Advantages Relative to GDP per Capita
Country RankingCountry Ranking
Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment)Source: Global Competitiveness Report 2000
45CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Finnish Wireless Cluster
! Finland is home to Nokia, the world’s most competitive handset company
! There are approximately 3,000 Finnish firms in telecom and IT related products and services
Related and Supporting Industries
Related and Supporting Industries
Factor (Input)
Conditions
Factor (Input)
ConditionsDemand
ConditionsDemand
Conditions
! A history of competition in telecommunications services throughout the 20th century
! Early to deregulate in telecom related industries
! More than 100 local operators
! Active local rivalry in wireless communications
Context for Firm
Strategy and Rivalry
Context for Firm
Strategy and Rivalry
! World’s most sophisticated consumers
! 70 percent penetration of mobile phones (20 percent of households have abandoned wireline phones)
! First country to allocate licenses for 3rd generation wireless networks (3 competitive groups)
! Heavy usage of short message services
! Finland is a test market for WAP applications
! Substantial public investmentin telecommunications-related R&D, with a focus on wireless technology
! Significant local venture capital for mobile applications
! Finland is becoming an international center for WAPdevelopment (e.g., Hewlett Packard, Siemens)
Source: “The Economic Impact of Third-Growth Wireless Technology,” U.S. Council of Economic Advisors, October 2000Sou
46CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Environmental Regulation and Competitiveness
• Competing based on weak environmental standards perpetuates low incomes
• Corporate pollution is a sign of inefficient and unproductive use of resources
Firm• Inefficient extraction of resources• Incomplete material utilization• Unnecessary waste products• Unnecessary energy use• Unproductive land use
Customer• Usable materials in products that
are discarded • Products that use energy
inefficiently • Discarded or unnecessary
packaging• The need to control or treat pollution causes companies to perform activities
that add cost but create no customer value- e.g., handling, storage, processing, disposal
• Pollution is a reflection of unsophisticated technology and weak management
• Strict environmental regulation stimulates the upgrading necessary to achieve advanced economic development
47CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure– Upgrade domestic financial markets– Increase transparency, openness and legal accountability– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy– Transform company strategies– Upgrade Taiwan’s scientific and technological capacity– Upgrade the quality of human capital– Create advanced demand conditions– Encourage private sector-led cluster development– Widen the base of cluster in the economy
48CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Equipment Suppliers
(e.g. Oil Field Chemicals,
Drilling Rigs, Drill Tools)
Specialized Institutions (e.g. Academic Institutions, Training Centers, Industry Associations)
SpecializedTechnology
Services
(e.g. Drilling Consultants,
Reservoir Services, Laboratory Analysis)
Subcontractors
(e.g. Surveying,Mud Logging,Maintenance
Services)
BusinessServices
(e.g. MIS Services,Technology Licenses,
Risk Management)
Houston Oil and Gas Cluster
OilTrans-
portation
OilTrading
OilRefining
Oil Retail
Marketing
OilWholesaleMarketing
OilDistribution
GasGathering
GasProcessing
GasTrading
GasTransmis-
sion
GasDistribution
GasMarketing
Oil & Natural GasExploration & Development
Oil & Natural Gas Completion &
Production
Upstream Downstream
Oilfield Services/Engineering & Contracting Firms
49CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Established Clusters
• Electronics
• Plastics
• Textiles and apparel
Other Clusters
?
Taiwanese Clusters
50CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Public / Private Cooperation in Cluster UpgradingMinnesota’s Medical Device Cluster
Context for Firm
Strategy and Rivalry
Context for Firm
Strategy and Rivalry
Related and Supporting Industries
Related and Supporting Industries
Factor(Input)
Conditions
Factor(Input)
ConditionsDemand
ConditionsDemand
Conditions
• Joint development of vocational-technical college curricula with the medical device industry
• Minnesota Project Outreach exposes businesses to resources available at university and state government agencies
• Active medical technology licensing through University of Minnesota
• State-formed Greater Minnesota Corp. to finance applied research, invest in new products, and assist in technology transfer
• State sanctioned reimbursement policiesto enable easier adoption and reimbursement for innovative products
• Aggressive trade associations(Medical Alley Association, High Tech Council)
• Effective global marketing of the cluster and of Minnesota as the “The Great State of Health”
• Full-time “Health Care Industry Specialist” in the department of Trade and Economic Development
51CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
KnowledgeCreation
KnowledgeCreation
HealthcareHealthcare FinancialServices
FinancialServices
InformationTechnologyInformationTechnology
ApparelTextiles and
Footwear
ApparelTextiles and
Footwear
MarineMarineTourism andLeisure
Tourism andLeisure
PolymersPolymers
MetalworkingMetalworking
Specialty Paper
Specialty Paper
EnvironmentalProducts and
Services
EnvironmentalProducts and
Services
Massachusetts ClustersWidening the Cluster Base
52CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Organizing for CompetitivenessCommonwealth of Massachusetts
• Cost of Doing Business
• Financing of Emerging Companies
• Health Care Restructuring
• Revitalizing Western Massachusetts
• International Trade
• Marketing Massachusetts
• Tax Policy and Capital Formation
• Technology Policy and Defense Conversion
• Advanced Materials• Biotechnology and
Pharmaceuticals • Defense• Marine Science and
Technology• Medical Devices• Software• Telecommunications• Textiles
Issue GroupsIssue Groups Industry Cluster Working Groups
Industry Cluster Working Groups
Governor’s Council on Economic Growth and Technology
Governor’s Council on Economic Growth and Technology
Functional Task ForcesFunctional
Task Forces
53CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure– Upgrade domestic financial markets– Increase transparency, openness and legal accountability– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy– Transform company strategies– Upgrade Taiwan’s scientific and technological capacity– Upgrade the quality of human capital– Create advanced demand conditions– Encourage private sector-led cluster development– Widen the base of cluster in the economy– Shift the role of government
54CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
1. Establish a stable and predictable macroeconomic, political, and legal environment
2. Improve the availability, quality, and efficiency of general purpose inputs, infrastructure, and institutions
3. Set overall rules and incentives governing competition that encourage productivity growth
4. Facilitate cluster development and upgrading
5. Create an explicit, ongoing process of economic change and competitive upgrading which informs citizens and mobilizes the private sector, government at all levels, educational and other institutions, and civil society.
Appropriate Roles of Government in Economic Development
55CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
• Public sector investment to stimulate the economy• Direct loans, tax relief, and export processing zones• “Job creation program” to attempt to create 44,000 new regional
jobs • ‘Special’ measures of the Cabinet’s Financial and Economic Task
Force:− Guarantee to keep tax rates stable for 4 years− Rescind the 2% business tax on banks− Enlarge SME Credit Guarantee Fund and provide preferential loans− Encourage the entry of international asset management companies to
help speed up financial sector modernization− Assure reliable supplies of power and water− Allocate funds to ensure availability of land in industrial zones− Assist traditional industries and SMEs with upgrading and restructuring− Enhance local workforce skills and import foreign labor
Recent Taiwanese Economic Policies
Source: ROC Government Reports
56CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Government Policy Towards Employment
• There is no direct and easy answer to job creation; short-term solutions are costly and do not often succeed in the long run
Job Creation strategy
• Subsidies to create jobs- Wage subsidies- Foreign Direct Investment
subsidies
• Jobs are costly and often unsustainable
Job Creation strategy
• Subsidies to create jobs- Wage subsidies- Foreign Direct Investment
subsidies
• Jobs are costly and often unsustainable
Competitiveness strategy
• Creating the conditions for productivity and cluster development
- Improving the efficiency of infrastructure
- Cluster-based training- Improving the flexibility of labor
markets
• Healthy clusters generate competitive jobs that are sustainable
Competitiveness strategy
• Creating the conditions for productivity and cluster development
- Improving the efficiency of infrastructure
- Cluster-based training- Improving the flexibility of labor
markets
• Healthy clusters generate competitive jobs that are sustainable
57CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
-12
-8
-4
0
4
8
12
16
20
24
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Public Sector Balance / GDP
Tax Revenue / GNP
Taiwan’s Tax Revenues
Source: ROC Government National Statistics, May 2001.
Percent of GDP
58CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Finland Ireland US TAIWAN
Tax Revenues As Percentage Of GDPSelected Countries, 1998
Source: ROC Government National Statistics, OECD
Tax revenues share of GDP
59CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Cluster Policy versus Industrial Policy
Industrial Policy
Industrial Policy
Cluster-basedPolicy
Cluster-basedPolicy
• Target desirable industries / sectors
• Focus on domestic companies
• Intervene in competition (e.g., protection, industry promotion, subsidies)
• Centralizes decisions at the national level
• All clusters can contribute to prosperity
• Domestic and foreign companies both enhance productivity
• Relax impediments and constraints to productivity
• Emphasize cross-industry linkages / complementarities
• Encourage initiative at the state and local level
Distort competition Enhance competition
60CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Taiwan’s Economic Agenda in 2001
I. Addressing some chronic weaknesses– Improve physical infrastructure– Upgrade domestic financial markets– Increase transparency, openness and legal accountability– Boost the efficiency of domestic industries
II. Making the transition to a true Innovation-driven economy– Transform company strategies– Upgrade Taiwan’s scientific and technological capacity– Upgrade the quality of human capital– Create advanced demand conditions– Encourage private sector-led cluster development– Widen the base of cluster in the economy – Shift the role of government
III. Defining Taiwan’s economic relationship with China
61CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
0%
5%
10%
15%
20%
25%
30%
35%
-4% -2% 0% 2% 4% 6% 8% 10% 12%
Taiwan’s Export Destinations1995 to 2000
Share of Taiwan’s total
exports in 2000
Export growth CAGR,1995 - 2000
Taiwan average export growth 1995-2000: 6.1%
Note: Size of bubble is $ volume of exports to destination countrySource: Taiwan National Statistics
USA
Singapore
Hong Kong / China
Japan
ThailandMalaysia
S Korea
European Union
62CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Exports
Imports
Taiwan’s Trade With China $M
US
Source: Taiwan National Statistics
63CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
• The economic relationship with China will inevitably be important– Common language – Strong historical ties– Strong personal ties through family relationships and migration– Substantial economic presence of Taiwanese companies in China
• The key question is what kind of relationship it will be
• Taiwan’s goal should be to create a mutually beneficial relationship that supports Taiwan’s higher standard of living
• Taiwan needs to define a unique role vis-à-vis China that– Builds on its distinctive strengths – Offsets China’s weaknesses and rigidities
Taiwan’s Economic Relationship To China
64CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
• A unique position builds on specialization in areas where Taiwan can give China access to its competitive advantages
– In clusters where Taiwan will for the foreseeable future provide a more conducive environment than China
– In parts of the value chain where Taiwan has developed unique advantages that China will have difficulty replicating
Economic Relationship To ChinaCriteria for Mutually Beneficial Roles for Taiwan
65CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Role in the Value Chain• R&D and Design
– For the foreseeable future, Taiwan should offer a better R&D infrastructure and more conducive environment for innovation than China
– Taiwan can play this role combined with manufacturing activities located on the mainland and provide a competitive advantage to the region
• Sophisticated Services– Taiwan can develop its professional services for China’s export industries
Complementary Fields of Specialization
• Education and Training– Taiwan can improve its management education capabilities to educate the business
leaders of the region– Taiwan can build on its science and technology base to become the center of
science education in the region• Media/Entertainment
– Taiwan’s more liberal media environment gives it the potential to become a media/entertainment/publishing-hub for the region
Economic Relationship To ChinaIllustrative Roles for Taiwan
66CAON Taiwan Presentation 07-31-01 CK Copyright © 2001 Professor Michael E. Porter
Economic Transition And Relationship To ChinaReinforcing Agendas
Transition to an Innovation-driven
Economy
Economic relationship to
China
Proximity to China increases the pressure on Taiwan to move from the Investment-
driven to the Innovation-driven stage
Successful transition to the Innovation-driven stage makes a mutually beneficial relationship to
China more likely