The Taiwanese model in the computer industry

It would seem self-evident that small companies would not be competitive in a

knowledge-intensive industry that is highly globalized.1 Small firms, by

definition, have limited resources and capabilities and thus are unlikely to possess

substantial ownership advantages. They also have a limited capacity to influence

and shape the development of markets, market structure, and technological

change. One would thus expect SMEs to be ill-equipped to compete in an

industry that requires a broad range of fairly demanding technological and

organizational capabilities.

The disadvantages of small size for firms are compounded if they come from small

countries. Small nations are confronted with four types of size-related

disadvantages:2 (1) the small domestic market places tight restrictions on the ability

to function as a buffer against heavy fluctuations in international demand; (2) it

constrains the development of sophisticated “lead users”3 that could stimulate

innovation; (3) it also limits the scope for technological spillovers;4 and (4) the

limited size of the national knowledge and capital base restricts the choice of

industries in which such small nations might successfully specialize.

Taiwan’s experience, however, tells a different story: SMEs have been the main

carriers of its rapid development. Despite the dominance of SMEs, Taiwan today

has the most broadly based computer industry in Asia outside of Japan. The

country has diversified beyond core PC-related products into a variety of related

high-growth market segments; it has improved its domestic production capabilities

for a number of high value-added components; and it has been able to move

beyond manufacturing into a range of higher end support services.

This article inquires into how this was possible. Its message can be

summarized by paraphrasing John Stopford (1996), “innovations in strategy and

organization can change the ‘rules of competition’ and overturn many scale

advantages to permit David to grow in the shadow of Goliath.” I argue that two

factors have been critical for this outcome: active, yet selective and continuously

adjusted industrial development policies; and a variety of networking linkages

with large firms, both domestic and foreign. I show how government policies

facilitated the initial market entry of SMEs and were adjusted over time to

promote continual upgrading and adjustment. Industrial development policies on

their own, however, are insufficient to explain Taiwan’s success.

Taiwanese computer companies also benefited from the specific form of the

production networks they created. These offer a variety of linkages that facilitate

learning and capability formation. Such linkages include strong ties with large

Taiwanese business groups, foreign sales and manufacturing affiliates and an early

participation in international production networks (IPNs) established by foreign

electronics companies. By and large, these features that sustain Taiwanese leadership

in many segments of industrial electronics have been little altered by the Asia

crisis. If anything, the crisis has reinforced Taiwanese advantage: benefiting from a

domestic economy least affected by the region’s economic problems, Taiwanese

firms have invested aggressively to enhance their regional position and expand the

scope and capability of their production networks.