The Sunday Review

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How Taiwan became a smart island

Intelligent Economy

TAIWAN escaped relatively unscathed when the Asian miracle turned into the Asian debacle. Last year, it maintained a 5 per cent economic growth rate despite a 20 per cent dive in its stock market.

A key factor behind this resilience is said to be the strength of its knowledge-based economy.

That is a view that should sit very well with Professor Sun Chen, chairman of Taiwan's Industrial Technology Research Institute (ITRI). After all, it has been credited for helping to transform the country from a labour-intensive economy of cheap garments and athletes' shoes to a knowledge economy of computers and semiconductor chips.

But the 64-year-old American-educated economist, who was here at the invitation of the National University of Singapore last month, is careful to add that a prudently-managed foreign-exchange system and a well-supervised financial sector helped too.

"The first had curbed speculative capital flow in and out of Taiwan," he says in Mandarin in an interview with the Sunday Review, "and the second weeded out the unproductive projects."

Still, he contends, it is Taiwan's strong science and technology-based industries -- which surged from 26.3 per cent of the manufacturing sector a decade ago to the current 38.8 per cent -- that made the biggest difference.

So, how did Taiwan make the technological leap so quickly?

This was the theme of Prof Sun's recent public lecture at NUS, attended by about 200 academics and policy-makers. It was organised by the Faculty of Business Administration.

The veteran economist, who received his doctorate from Oklahoma University in the United States in 1970, has had a ringside view of his country's transformation by virtue of his long and distinguished career in government and academia before joining ITRI in 1995.

Key posts included being Minister of Defence (1993-94), president of National Taiwan University (1984-93) and vice-chairman of the Council for Economic Planning, the ministry-level policy-setting organ, when ITRI was founded in 1973.

Recalling those early days, he says: "Taiwan's firms -- then as now -- were too small to have the economy of scale to fund technological research, so an institute like ITRI was, and is, necessary."

Caught in the throes of the first energy crisis in the '70s, the country's economy was in a slump.

Desperate for new industries that could sustain economic growth, ITRI chose electronics as its first target industry, forming its electronics institute in 1974 with a staff of just 40.

Operating as a non-profit foundation, ITRI has since expanded to include 10 research institutes with a staff of more than 6,000 and an annual budget of US$500 million (S$842 million). Half of this budget comes from government funding, and the other half from contract research and service projects.

And it has chalked up a track record of successful industrial-technology development and transfer to businesses.

Many of Taiwan's world-class integrated circuit (IC) and IT companies were ITRI spinoffs, notes Prof Sun.

IC spin-offs like United Microelectronics, Taiwan Semiconductor Manufacturing and Vanguard International Semiconductor have put the nation on the map as the world's fourth-largest integrated-circuits producer.

What is more, the outflow of ITRI personnel into academia and industry, said to exceed 10,000 to date, had contributed much in the form of informal technology transfer.

But Prof Sun makes clear that ITRI is but one of the success factors in Taiwan's transformation.

Another was the establishment of the Science Park in Hsin Chu, a short drive from Taipei, in the late '70s.

The idea was to provide an incubator-like environment for start-up technology companies, with facilities that provide all the necessary infrastructure and public service at reduced cost.

Located in Hsin Chu county, it is close to ITRI and two top universities renowned for their science-and-technology programmes -- Tsing Hua and Chiao Tung.

"It is modelled after the Silicon Valley," says Prof Sun, "which is close to Stanford University and the University of California at Berkeley."

The idea worked, he says, as many start-ups became household names. One example is Acer, the computer and information company.

The introduction of venture capital into Taiwan in the early '80s is another factor that played an important role. Helped by tax incentives that favour equity investment in technology-oriented venture-capital firms, Taiwan now boasts more than 100 such companies with a combined capital of over US$2 billion, the professor points out.

A coordinated education-system policy also helped, by meeting the fast growing requirement for a better educated workforce.

In 1987, graduates of junior colleges and universities made up 14 per cent of Taiwan's workforce. By 1997, the figure rose to 24 per cent.

The result was an 80-per cent increase of undergraduate students in Taiwan in the last decade (340,000 now), and a quadrupling of doctoral students (about 9,000 now).

Many have argued that the most decisive success factor was the steady stream of returning graduates from overseas who became business and government leaders in Taiwan's transformation. But they say that it was more the result of serendipity rather than good planning.

In the '60s and '70s, Taipei fretted about its "brain drain" because its best and brightest graduates were heading to the West for advanced studies, where most of them remained.

No one had anticipated the "reverse brain drain" in the '80s and early '90s when overseas-trained Taiwanese began heading back, bringing with them industrial experience from the top companies in the West, state-ofthe-art technology as well as connections to a network of the world's experts.

As Prof Sun observes, about 40 per cent of the start-up companies in Hsin Chu Science Park are founded by these returning Taiwanese.

But this stream is now drying up, he admits.

The reason? As Taiwan prospers, fewer students go for overseas study, and a smaller portion of those who do are staying on in the West after they complete their courses.

So the "talent pool reserve" abroad has dwindled.

To a question from the audience during the lecture, Prof Sun says the problem this will pose is not so much one of research creativity but of maintaining access to the international network.

In the past, Taiwan has overcome the challenge of being "small and backward", both of which he says are "advantages in disguise".

The world offers lots of opportunities for small economies to grow, he explains. And being backward means you can learn from others.

But after catching up, Taiwan finds itself in a new ball game because now "you have to do your own research -- which is not only more expensive but also goes at a slower pace".

Now the nation spends about 2 per cent of its GDP -- about US$6 billion last year -- on research and development. The plan, he says, is to raise that to 2.5 per cent -- the level of advanced countries -- by the year 2000, and further up to 3 per cent by 2010.

"We are gearing up for the new challenge," he says.

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