SMEs have been the main carriers of Taiwan’s rapid development and remain
important today. In 1993, SMEs accounted for 96 percent of the
total number of
companies, 69 percent of total employment, and 55 percent of
Taiwan’s
manufactured exports (Chen et al. 1995). Taiwan today is home to
more than 4,
000 electronics firms that produce a broad mix of PC-related
products and
electronic components. With a few exceptions, such as the Tatung
group, almost
all of these companies started out as small enterprises.
The role of SMEs as engines of growth and industrial
transformation sets
Taiwan apart from South Korea, where huge and highly diversified
conglomerates (chaebol) have been the main carriers of the
development of the
electronics industry.10 Almost without exception, the chaebol have
targeted those
segments of the electronics industry that require huge investment
outlays and
sophisticated mass production techniques for fairly homogeneous
products such as
microwave ovens (MWOs), TV sets, VCRs, computer monitors, picture
tubes,
and computer memory, especially dynamic random access memory
(DRAM).
The result has been a heavy focus on assembly-type mass production
activities
related to lower end consumer products and standard electronic
components, and
weakness in more design-intensive sectors of the computer
industry.
Why have Taiwanese firms succeeded in the computer industry while
their
much larger and resource-rich Korean counterparts have largely
failed? The answer lies in the fundamental characteristics of an industry in
which high
volatility and uncertainty put a premium on flexibility and the
capacity to adjust
to abrupt and frequently unexpected changes in demand and
technology. Small
firm size is even an advantage.11 By combining incremental product
innovation
with incredibly fast speed-to-market, Taiwanese firms have been
able to establish
a strong international market position relatively early in the
product cycle.
The primary source of this flexibility appears to be the specific
organization of
the domestic supply base in Taiwan, especially for parts and
components. Two
main features of this domestic supply base have contributed to the
flexibility of
Taiwanese producers, the first being an extreme form of specialization.
By
engaging in single tasks and by producing, purchasing, and selling
in small lots,
subcontractors avoid heavy fixed capital costs. This, in turn,
makes it relatively
easy to shift production at relatively short notice, and with a
minimum of costs. The
second feature is a certain network structure of multiple,
volatile and short-term
links that involve only limited financial and technology
transfers. Spot-market
transactions play an important role, but so do “temporary spider
web”
arrangements that are assembled for the duration of a particular
job.12
The result of these characteristics is an extreme form of open and
volatile
production networks, arguably even more so than the highly
flexible production
networks that characterize California’s Silicon Valley.13 Firms
maximize the
number of jobs in order to compensate for the razor-thin profit
margins; as a
result, they avoid being locked into a particular production
network. Domestic
supplier networks thus have been highly flexible and capable of
rapid change but
are short-lived and foot-loose.
If flexibility constitutes one prerequisite for Taiwan’s
competitive success in
computers, economies of scale and scope and speed-to-market have
been of equal
importance.14 Entry barriers have increased for those stages of
the value-chain
that are of critical importance for competitive success, including
particularly
component manufacturing, where production-related scale economies
remain
important. But the epicenter of competition has shifted beyond manufacturing
to
R&D and other forms of intangible investment required to
complement price
competition with product differentiation and speed-to-market. Only
those
companies that are able to get the right product to the highest
volume segment of
the market at the right time can survive. Being late is a
disaster, and often forces
companies out of business.
In sum, what really matters for competitive success are
substantial investments
in the formation of a firm’s technological and organizational
capabilities. How
were Taiwanese computer companies able to successfully compete in
an industry
where size-related advantages are of critical importance? And,
more specifically,
what kind of organizational innovations have enabled Taiwanese
firms to
overcome their size-related disadvantages?
In order to answer these questions, we need to examine issues of
specialization
and coordination. Andersen (1996) has recently provided an
interesting theoretical
explanation why excessive specialization may involve substantial
trade-offs.15 He shows that as an economy becomes more specialized it increases
the pressure for
standardization. This, in turn, may constrain innovation.16 The
solution to this
dilemma is the establishment of tight linkages between firms along
the supply
chain that enhance the prospects for inter-firm learning, for
instance between end
product manufacturers and component suppliers.17
To understand how Taiwan avoided the dangers of excessive
specialization and
established tight inter-firm linkages, it is important to correct
some popular
misconceptions of the Taiwanese model. This is not an economy
characterized by
atomistic competition. SMEs do play an important role, yet they
survive as a
result of a combination of four forces: government policies that
facilitated market
entry and upgrading; strong linkages with large Taiwanese firms
and business
groups; the presence of foreign sales and manufacturing
affiliates; and early
participation in international production networks.
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