Learning National Innovation Systems from Taiwan 204.0

Much can still be learned but for Post-industrial Philippines.
Professor Chu Wan-wen was one of the speakers at the 7th Asialics Roundtable session in Taipei. Her talk on Taiwan and “second-mover advantage” made me look up and buy her book, Beyond Late Development, (with Alice Amsden).

Today, I just finished reading the book. I am writing this as an addendum to my SYNTHESiST post on February 21, Learning Innovation Systems from Small Developed Nations.

The best time to have applied these lessons from Taiwan would have been in the early 1980s when we had a strong leader in President Marcos though, with weak formal institutions that are needed to support a meritocratic and competitive internal market that remain until today, success is still not assured.

My story. My first trip overseas was in 1983 to Taiwan just a short two months after Ninoy Aquino was assassinated on August 21. I trained in Methods-Time Measure (MTM) at TMX Taiwan in Chungli.

(Note: This was the same period when I discovered Du Fu through a special friend.)

During that three-week training visit, in the aftermath of Ninoy’s assassination, the peso conversion rate moved down from P1 per NT$5 to P1 per NT$2. Today, the exchange rate is roughly P1 to NT$0.67 reflecting a retrogession in the Philippine economy relative to Taiwan.

Since then, I have traveled to Taiwan regularly including a stint in the late 1980s to transfer a PCB factory to the Philippines even as most others subsequently moved to Mainland China.

In the 1990s, Taiwan was also a regular destination for sourcing bakery equipment that I once traded.

In the early 2000, my roles reversed and became that of sales and marketing of processed fruit ingredients to Taiwanese dairy companies from New Zealand.

Over the years, I saw some of the evolution of Taiwan industry as they are starting to produce branded products from OEM and ODM (Original Design Manufacturing).

From these visits over twenty five years and after reading Professor Chu’s books, I discern three lessons for the Philippines from Taiwan’s national innovation system that was designed to support second-mover advantages.

First Lesson from Taiwan in Second-Mover Advantage. Like the Japanese before them in their China and Korea investments, the Taiwanese used the flying geese transition from mid-1980, when foreign investors left Taiwan for cheaper production bases like China, to take over the industrial firms left behind and, this time with cheaper – but just as good management and engineering teams – created the platforms for future global businesses.

Though given only a footnote reference, K Akamatsu’s flying geese theory that I wrote about in a post on ASEAN as a cluster on March 16, 2009, The co-authors started their book as in the paragraph below.

The Taiwanese were able to take over the multinationals’ business because – unlike the Philippines with a dual economy as I noted in the post on Total Factor Productivity and Cororaton first on March 8, 2009 – they had creating a working cluster or a network of cost efficient suppliers to the departing investors.

For the Philippines, the islands of productivity in multinational-owned firms, the dual economy created by wrong policies to preserve the hegemony of perpetually infant local industries, the few experienced engineers and manufacturing managers instead part of export labor services, OFWs, in fact the pioneers in re-establishing the transferred businesses for the peripatetic multinationals.

Unlike the Taiwanese entrepreneurs who studied in Taiwan and learned their nuts and bolts of management locally, our top business managers and entrepreneurs who probably got their top notch educational training from the USA, I am almost sure, have never heard of Akamatsu Kaname.

(Note: I am also sure many do not know of Genichi Taguchi whom I heard about from my Taiwanese boss in 1983.)

Professor Akamatsu first wrote about flying geese before World War II. Flying geese is the trade-oriented pattern of Foreign Direct Investments (FDI) where Japanese firms keep to technology in mature industries while lowering cost by moving industry to locations with progressively lower labor price. After Japan, came Taiwan and Korea then Thailand, Malaysia and the Philippines before China. His writings were translated from Japanese to German in 1962.

We cannot apply this first lesson to Philippine industry as those are mostly hollowed out; the best time to emulate exactly as Taiwan with industry was in the 1980s.

We can probably use the detail lesson in post-industry sectors but only if we go through the disciple of economic re-structuring to produce more local value-added instead of relying mainly on the weak strategy of peso price arbitrage via export labor services.

Second Lesson from Taiwan in Second-Mover Advantage. The second lesson is Taiwan’s choice to be a technology follower and focus on being an efficient production base before going into the production and marketing of branded products – in a guided-process of DUI-Learning as per NIS model by Bengt Ake Lundvall.

They acquired learning via linkages with foreign suppliers and, more importantly, in the processing front, where they set up policies that resulted into learning by doing , using and interacting (DUI).

In the Philippines, bad domestic policies, as researched by Dr. Caesar Cororaton that we posted about under total factor productivity, is the internal push away factor. These policy factors created a dual economy for the Philippines avoided the development of clusters and networks – separating the local from the export economy – that was the second lesson of Taiwan NIS.

Lundvall’s DUI-Learning had a very strong cradle of nurturing in the industrial clusters of networked suppliers; the same strategy that mainland China has applied in the past few decades at the same time we hollowed our industry out in the Philippines.

This is still a lesson we can learn but, maybe again, in post-industry. We can do original research in non-traded segments like mobile phone banking for microfinance as our large markets and natural borders make product development feasible and protect our new knowledge.

Final Lesson from Taiwan in Second-Mover advantage. Unlike local business who ask for ‘competitive’ exchange rates at any sign of currency strengthening, the Taiwanese managed process rather than political connections to lower production costs.

I do not think that this is because they were more valiant – though they may be patriotic given the war footing against China – than their local counterparts. I think they were locked in as original equipment manufacturers (OEM) and component suppliers to a trading situation between Japan and the United States to compete – and subsequently follow the flying geese – in process instead of the price of inputs like labor, as is wont in the Philippines.

Note: Competing in this manner, i.e. by managing process to create value, the Taiwanese were able to compete for talent even to the point of reverse brain drain when local value added raised local incomes close to first world status. Our strategy of managing exchange rates – that Calixto Chikiamco demands in a Businessworld column to be ‘competitive,’ a code for cheap for various reasons – to lower the cost of labor was ultimately proven to be weak as we ultimately could not afford the talent that we trained ourselves.

In effect, Taiwan focused their science and technology or STI-learning efforts, from Lundvall’s classic model, in targeted industries that Taiwan had a chance of attaining global leadership. For Taiwan, this was initially semiconductors and is now migrated to locally designed and marketed consumer electronic products.

Taiwan, like New Zealand, Israel, and Denmark, do not focus on competitive exchange rates but support industry by such direct activities as subsidized R&D, capital equipment and even raw material or ingredient purchases. This way the leakage cost, if any, of regulatory or state capture is minimal and mainly by the supported industry rather than financial speculators.

Instead of helping local industry via infant industry protection as we did in the Philippines with tariff barriers, customs-bonded warehouses and export processing zones, Taiwan assisted their industry primarily with:

• direct R&D interventions like the famous ITRI (Industrial Technology Research Institute) that did mostly applied or adaptive research; and,
• procurement assistance for expensive turnkey equipment and even of components.

A spin-off from ITRI, for example, became the kernel for TSMC, today the world’s biggest independent semiconductor foundry.

As a final lesson, like ITRI in Taiwan, we need to have directed support to targeted industries in needed technology instead of the usual practice of providing what science and technology bureaucrats decide to study or have available to the wide market.

Conclusions. In 1979, America’s abandonment of Taiwan in favor of diplomatic relations with mainland China created a crisis mindset that led to the set up in 1981 of the Chung-Hua Institution for Economic Research (CIER), the host of the 7th Asialics in Taiwan this April 2010, as an international policy think tank for economic and industry-related research.

The threat of war against a giant neighbor, like Israel, goes a long way to focus the mind of a nation.

For all four countries, including New Zealand and Denmark, surviving as a small nation in a trading milieu of giants likewise focuses the mind.

For the Philippines, I hope that patriotism on the part of the national elite and the fear of the 12th nation by population becoming irrelevant because poor at the edge of Asia has the same purpose in focusing the mind. The surfeit of talent and energy among individual Filipinos, especially visible among OFWs, tell us that we do not deserve the fate allowed for us by our chosen leaders thus far.

Let us vote wisely for leaders who will have the will for the needed structural change to raise the Philippines from its unwarranted place among nations.