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The East Asian Technological Miracle Invited Paper dti/UNIDO Conference on Competitiveness Midrand, South Africa June 2004  Professor John A. Mathews Macquarie Graduate School of Management Sydney Your presenter

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The east asian technological miracle l.jpg

The East Asian Technological Miracle

Invited Paper

dti/UNIDO Conference on Competitiveness

Midrand, South Africa

June 2004 

Professor John A. Mathews

Macquarie Graduate School of ManagementSydney


Your presenter l.jpg

Your presenter

Professor of management at MGSMTeaches courses in international business and international management, with focus on Asia-Pacific

Researches competition and strategy in Asia-Pacific

Most recent books: Tiger Technology: The creation of a semiconductor industry in East Asia;

Dragon Multinational: A New Model of Global Growth


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Your presenter (cont)

Worldwide editor: Industry and Innovation

Invited presentations to:

World Bank development forums;

OECD Knowledge Economy conference;

ILO Asia-Pacific: comp & strategyUNCTAD: World Investment Report

UNIDO: Industrial Development Report 2002


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The starting point: a world rich in resources

Global economy rapidly changing 64,000 MNEs/TNCs

Control 870,000 subsidiariesPlethora of inter-firm arrangements UNCTAD WIR 2003

Unprecedented scale of technology transfers, licensing, subcontractingUNIDO WIDR 2001Capital transfers: World FDI ($651 b in 2002) now 10% of global gross domestic capital formation (cf 2% in 1980)

UNCTAD: World Investment Report 2003


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East Asian Miracle: A case of resource leverage

Creation of new high technology industrieseg electronics, semiconductorsUsed latecomer status to overcome incumbent advantagesLatecomer firms fashioned complementary strategies,eg OEM contracting, second-sourcing, licensingBuilt new knowledge-intensive industries very fastRepeated the process over and over again,eg Taiwan DRAMs in 1990sKorea CDMA cellular telephony Taiwan Optoelectronics in 1990s

Best described as managing the process of resource leverage-- But calls for comprehension of latecomer industrial dynamics


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The Growth and Development of Taiwan, 1951-2000 (1950s)

Source: Industrial Development Bureau, Ministry of Economic Affairs, Taiwan


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The Growth and Development of Taiwan, 1951-2000 (1980s)

Source: Industrial Development Bureau, Ministry of Economic Affairs, Taiwan


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The Growth and Development of Taiwan, 1951-2000 (1990s)

Source: Industrial Development Bureau, Ministry of Economic Affairs, Taiwan


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Latecomer industrial dynamics


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Flying geese


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Latecomer industrial dynamics: The flying geese paradigm


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The flying geese paradigm lives on: Revealed Comparative Advantage data for East Asia

Source: World Bank


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RCAs in East Asia: Consumer Electronics

Source: World Bank


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RCAs in East Asia: IT

Source: World Bank


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RCAs in East Asia: Electronic Parts and Components

Source: World Bank


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RCAs in East Asia: Telecommunications products

Source: World Bank


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RCAs in East Asia: Semiconductor products

Source: World Bank


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Share of Export

1976-1988

1989-2001

Taiwan

World

Taiwan

World

Consumer Electronics

2.5%

1.2%

1.8%

1.1%

IT Products

2.9%

1.4%

8.5%

2.8%

Parts and Components

2.1%

1.9%

9.6%

3.4%

Telecommunications

6.2%

1.5%

3.7%

2.6%

Semiconductors

2.4%

1.3%

8.6%

3.4%

Total Electronics

16.1%

7.3%

32.2%

13.3%

Taiwan’s Export Performance in Electronics, 1976-2001

Source: World Bank


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Manufacturing the Engine of Growth in Taiwan

  • Source: Industrial Development Bureau, Ministry of Economic Affairs, Taiwan

  • Note:

  • Industry includes Manufacturing, Construction, and Electricity, Gas and Water sectors.

  • Services include Trade & Eating-Drinking Places, Transport, Storages and Communications, Government Services,

  • and Finance, Insurance & Business Services.


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Electronics the Engine of Manufacturing in Taiwan

Source: Industrial Development Bureau, Ministry of Economic Affairs, Taiwan


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One way forward: Latecomer MNEs

Examples: Ispat, Cemex, Acer, Li & Fung

Overcome initial disadvantages

eg accelerated global coverage through

linkage and leverage

OEM contracts

Second sourcing

Global scope -- bypass earlier ethnocentric and

polycentric phases


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Ispat International

World Top 5: steel industry

Small company, origins in India

Rapid expansion in NICs

Late 1990s: penetration into US, Europe


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Cemex

World’s 3rd largest cement company

World’s largest cement trader

Rapid expansion following opening of

Mexican economy

Advanced management and technology, e.g. GPS


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Acer

Now a worldwide IT company

Founded 1976; began international expansion in 1986


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Acer’s cellular structure

Acer consists of 40-50 business “cells”

Each business autonomous

Seeks own customers, growth

Each business internationalizes

eg AIPG, API


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Acer’s global organization“Circle dragon no head”


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Another way forward: Insertion in Global Value Chains An interconnected global economy


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How a GVC worksMultiple value-adding steps: multiple points of insertion


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How a GVC works (2): Three strategies of industrial upgrading


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Emergence of GVCs

Global value chains constitute a new form of integration in the global economy

Traditional GVCs: producer networks

Examples: Japanese supplier pyramids (Toyota, Nissan, Mitsubishi)

Generated enormous advantages for Japanese automotive companies over western rivals (vertically integrated)

New GVCs: buyer networks

Examples: US garments retail chains (The Gap, Tommy Hilfiger)

Opportunities for local firms? Case: Torreon, Mexico (Gereffi & Martinez)


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Creation of GVCs

  • New GVCs being created all the time – as source of global competitive advantage

  • Example: EMS

  • Driven by outsourcing trends by leading MNEs Ericsson, Sony, Nokia, IBM, Motorola et al

  • Main arguments for outsourcing:

  • Focus on brand and core activities

  • Getting to market faster

  • Leaner and more agile

  • Better supply chain management (global logistics)

  • Lower levels of tied-up capital


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Flextronics: Global Manufacturing Operations


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General features of GVCs

What drives the location decisions of instigators?What drives the competitiveness of the GVC?

What issues govern investment decisions?

How does the GVC develop competitive advantages over:

Integrated MNEs

Local firms

What do local firms need to do to become integrated within (linked to) GVCs?

How can local firms leverage advantages

(e.g. knowledge, technology) from their linkage to GVCs?

Can these processes be repeated, with local firms learning

from the process?

How does the GVC as a whole learn?


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GVCs and clusters

  • Latecomer firms practising LL&L can operate within GVCs and local clusters simultaneously

  • vertically integrated in GVC

  • horizontally integrated in local cluster

  • The two kinds of network/cluster can operate synergistically

  • Example: Ammar and Sarah in Pakistan (successful knitwear group)

  • member of GVCs created by US buyers, such as The Gap

  • member of local Pakistan cluster of knitwear firms, with complementary skills

  • operates itself as a group, rather than as discrete firm i.e. cellular organization


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The latecomer strategy

Formulate a strategic goal: industrial development through catchup

Strategize as a latecomer: overcome barriers through utilizing

knowledge available

Harness latecomer industrial dynamics: The flying geese paradigm

Utilize the connections available in the global economy –

Linkage, leverage, learning

Think globally; use global tools and institutions (e.g MNCs; GVCs)

Build domestic institutions to support linkage, leverage and learning

Taiwan’s NSEL as exemplar

Innovation as management of technology diffusion

to

Management of knowledge generation and diffusion (IPR, patents)

A never-ending process – of capability enhancement


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Ingredients of success

Linkage

Links with global players --> drawn into

collaborative networks

Acer: links with TI (DRAMs), IBM

Leverage

Technology leverage from links with advanced firms

Long-term focus: Capabilities enhancement

Securing more from contractual link than revenues

Learning

Repeated application of linkage and leverage

Enhancement of capabilities

Rapid catchup as goal


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Product innovation

Process innovation

Diffusion management

Competitive focus

Product

Process

Access to technologies; diffusion

Competitive tools

Intellectual property rights; first mover advantages

costs; quality

Resource leverage

Competitive vehicles

firms

firms

firms; government research institutes; consortia

Dynamic capabilities

Product enhancement: R&D

Process enhancement: quality/time improvement

Combinative capabilities; learning

Strategic goals

Sustainable competitive advantage

Temporary competitive advantage

Transient competitive parity

Sources of competitive advantage

First mover advantages

Quality/time enhancement

Fast followership

Institutional framework

Atomistic competition

Limited competition

Accelerated diffusion within consortia; MNCs

Lead countries

USA

Japan

Korea, Taiwan, Singapore

Propagation of innovations: competitive postures


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Innovation vs. diffusion management

Diffusion management calls for organizational

and institutional innovationIdentification of technological possibilities

Linkage to frontiers of technology

Leverage of knowledge, e.g. from MNCs

Examples: EDB (Singapore); ITRI (Taiwan)

Such public institutions overcome diseconomies of scale

and promote organizational and economic learning

Cases of latecomer industry creation strategies: Electronics in East Asia – semiconductors; flat panel displays


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Taiwan electronics production, 1986-1998

Source: Tung (2001).


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Semiconductor capital spending: By regionArrival of East Asians


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World semiconductor investment, 2003


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DRAM Generations

Source: IC Insights


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How did Korea do it?

Large firms (chaebol) as vehicles of

Developmental Resource Leverage

Prior experience in mass manufacturing (eg electronics)

Prior market entry contacts

Prior OEM contractual links

Leveraged access to product technology

eg circuit designs from Silicon Valley

Leveraged access to process technology

eg US suppliers and Japanese engineers

Leveraged access to strategic alliances

Needed: strategic goals and combinative capabilities


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The key to Korean success: A national system of economic learning


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Korea Closes the Technology Gap in Memory Chips


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How did Taiwan do it?

Taiwan -- started with smaller firms

Utilized public sector research institutes

eg ITRI Industrial Technology Research Institute

Strategy of managed diffusion of technologies

Foreign partners -> ITRI -> small Taiwan firms

Use of innovative institutions, R&D alliances


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The key to Taiwan success: A system of strategic alliances


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Taiwan Closes the Technology Gap in Semiconductors

Source: ERSO


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Value Chain in Semiconductor Sector


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Taiwan: IC related revenues: 1989-1998

Starts at back-end of value chain, and moves forward

Source: ERSO/ITRIS


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How did Singapore do it?

Singapore had neither large firms nor small firms

Started with nothing in 1965

banished from Malaysian federation

a free port (19thC innovation)

no industry

Took gamble: invited in MNCs

1960s: first arrivals

1970s: unemployment solved

1980s: technological upgrading

promotion of local enterprises as suppliers to MNCs

1990s: build up of public sector research institutes, eg IME

2000s: Cluster-driven strategy, MNCs upgrading, plus

local technopreneurship

A remarkable success story


How is china doing it l.jpg

How is China doing it?

Can make the case that China is utilizing all three models:

Model 1 Large firms as vehicles

China: State-owned enterprises

Model 2 Smaller firms plus public sector RIs

China: Township enterprises; scientific research institutes

Model 3 MNC-linkage

China: Open door policy since 1978

Results: Developmental resource leverage through three avenues

simultaneously “Walking on three legs”


Repetition of the three approaches flat panel displays l.jpg

Global large-size TFT LCD shipment share by major producing countries (%)

2002

2003

1Q

2Q

3Q

4Q

1Q

2Q

South Korea

33.1

34.5

36.8

40.0

38.3

42.1

Taiwan

33.9

36.0

34.7

34.9

38.3

36.9

Japan

33.0

29.5

28.5

25.1

23.4

21.0

Total

100.0

100.0

100.0

100.0

100.0

100.0

Repetition of the three approaches: Flat panel displays

Source: PIDA, compiled by DigiTimes, August 2003.


Flat panel displays in 2003 l.jpg

Flat panel displays in 2003

FPDs now dominated by firms from East Asia: Japan, Korea, Taiwan

and Singapore, with China just entering in 2003

Model 1 Large firms as vehicles

Korea: Samsung and LG-Philips

Model 2 Smaller firms plus public sector RIs

Taiwan: Six startups plus ITRI laboratories

New TFT-LCD consortium: Pooling of TFT-LCD patents transferred from ITRI

Model 3 MNC-linkage

Singapore: New FPD fab, Advanced Flat Panel Display (AFPD) opened 2003 (JV Matsushita-Toshiba)

Results: A strong pattern of national innovation systems

Again – expect China to utilize all three models


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FPDs market growth, 1990-2003, and TFT-LCD share

Source: DisplaySearch; CIBC World Markets


Slide56 l.jpg

The crystal cycle – and strategic initiatives


Slide57 l.jpg

FPD Revenues 2003, by firm

Source: CIBC World Markets


Slide58 l.jpg

Static competitive forces analysis of the Taiwan TFT-LCD


Slide59 l.jpg

Product innovation

Process innovation

Diffusion management

Competitive focus

Product

Process

Access to technologies; diffusion

Competitive tools

Intellectual property rights; first mover advantages

costs; quality

Resource leverage

Competitive vehicles

firms

firms

firms; government research institutes; consortia

Dynamic capabilities

Product enhancement: R&D

Process enhancement: quality/time improvement

Combinative capabilities; learning

Strategic goals

Sustainable competitive advantage

Temporary competitive advantage

Transient competitive parity

Sources of competitive advantage

First mover advantages

Quality/time enhancement

Fast followership

Institutional framework

Atomistic competition

Limited competition

Accelerated diffusion within consortia; MNCs

Lead countries

USA

Japan

Korea, Taiwan, Singapore

Propagation of innovations: competitive postures


A national system of economic learning l.jpg

A national system of economic learning

Vehicles for financial leverage e.g. CDC, SDB, BIM

Agencies for nurturing knowledge intensive firms, e.g. ITRI incubator

Vehicles for technology leverage e.g. ITRI, KIET, IME

Industry self-organization bodies e.g. KSIA, TSIA

Investment-attracting vehicles e.g. EDB, PDC

Agencies for industrial upgrading and technical training e.g. Penang Skills Centre

Agencies for market shaping and creation, e.g. III, NCB (domestic) KOTRA (exports)

Agencies for industrial promotion and discipline e.g. IDB


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Silicon Glen, Scotland: The Alba Centre

The Alba Centre grew out of an initiative by Scottish Enterprise, Scotland's leading economic development agency, to develop Scotland as a leading world location for System Level Integration technology. Working in partnership with four of Scotland's top Universities in this field (Edinburgh, Heriot-Watt, Strathclyde and Glasgow) and a range of private sector partners (e.g. Cadence) both inside and outside Scotland, the vision has become reality. The initiative consists of :The Institute for System Level IntegrationThe Virtual Component ExchangeThe Alba Campus


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Going beyond competitive imitation

Maintain emphasis on LL&L, but in new context

Linkage

Between public sector institutions and startup firms

e.g. HKUST Incubator; R&D collaborative alliances

Venture Capital; specialized services; new industries,

e.g. biotech; aquaculture

Leverage

Spinoffs leverage knowledge, contacts from PRI

e.g. new aquaculture technologies for Tropical countriesLearning

Repeated application of linkage and leverage

Template for knowledge transfer and “spinoff”

The goal: to move beyond imitation to innovation


Imitation to innovation east asia l.jpg

Imitation to innovation: East Asia

From management of technology diffusion

to

Management of knowledge generation

Example of Singapore:

A regional centre for finance (HK), logistics (HK), IT and

semiconductors and biotech

Investment in “absorptive capacity” – PRIs that maintain links to

technology vanguard (e.g. Inst of Molecular Cell Biology)

Investment in “economic learning: e.g. policies and institutions to

drive high-tech spinoffs and sustain them

Investment in attraction of FDI – e.g. for R&D

Example: East Asian patenting experience


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Patenting in USPTO

Top 12 patenting organizations, 1997-2001

19972001CAGR 97-01

IBM1,7243,41118.6%

Canon1,3771,877 8.1

NEC1,0951,95315.6

Sony 8611,36312.2

Samsung 5841,45025.5

Motorola1,058 778-0.7

Toshiba 8621,149 7.5

Fujitsu 9031,166 6.6

Matsushita 7461,44017.9

Lucent 7681,109 9.6

Hitachi 9031,271 8.9

Mitsubishi 8921,184 7.3

Source: USPTO


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Patents per year

Patents per capita

Success rate

Annual growth rate

Country

1968-97

1992-97

1997-2001

1968-97

1992-97

1997-2001

1968-97

1992-97

1997-2001

1968-97

1992-97

1997-2001

G7

USA

44850

56683

79717

15.5

21.5

28.6

58.9

52.2

53.2

4.9%

7.9%

9.7%

Japan

11216

22433

29949

10.3

17.9

23.7

55.5

57.9

61.5

8.6%

6.5%

10.2%

Germany

5806

6895

9387

9.2

8.4

11.4

59.5

59.8

59.3

2.7%

4.3%

13.0%

France

2432

2881

3662

4.3

5.0

6.2

66.5

61.9

60.4

16.4%

3.7%

8.5%

UK

2492

2427

3469

4

4.2

5.9

53.5

50.2

50.6

2.7%

6.7%

10.8%

Canada

1380

2119

3121

4.9

7.2

10.2

50.7

49.3

48.6

6.5%

7.5%

11.2%

Italy

855

1215

1548

1.7

2.1

2.7

54.1

58.3

61.5

4.4%

4.5%

9.2%

Reference group

Israel

183

400

757

4.2

7.2

12.4

42.2

40.5

37.1

12.5%

15.4%

17.3%

Finland

181

370

609

4.2

7.2

11.8

48.6

51.3

47.0

11.4%

10.0%

13.6%

Ireland

31

60

101

1

1.7

2.7

43.0

48.8

36.1

11.9%

7.1%

18.9%

Spain

92

152

237

0.3

0.4

0.6

42.8

46.0

49.3

10.0%

12.0%

12.7%

East Asian 5

Taiwan

437

1535

3778

2.3

7.3

17.2

35.5

39.3

45.7

26.2%

21.4%

27.8%

Korea

267

1134

3113

0.7

2.5

6.6

37.3

39.0

56.1

39.1%

36.1%

20.4%

Hong Kong

31

72

162

0.6

1.2

2.3

40.3

38.7

42.6

14.2%

23.0%

35.6%

Singapore

16

59

174

0.6

1.7

4.4

40.2

41.5

33.3

44.9%

26.2%

33.7%

China

19

52

108

0

0

0

36.5

40.6

32.8

-

12.4%

34.3%

Country statistics: Averages for 5- and 30-year periods (Utility Patents Only)


Patenting in uspto east asians l.jpg

Patenting in USPTO: East Asians

Top patenting firms and institutions: Taiwan, Korea, Singapore, 19972001Total 97-01

Taiwan

UMC1495841,603

TSMC1305291,552

ITRI153221 998

VISC 53112 528

Korea

Samsung Elect.5841,4506,325

Hyundai Elect.154 5331,435

LG Elect. 113 2841,025

ETRI 58 72 504

KIST 29 35 184

Singapore

Chartered 30 135 327

Source: USPTO


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South Africa and LLL:Where does a country start on this journey?

South African government agencies can promote linkage

e.g. backward linkage with MNEs as suppliers

e.g. promoting GVCs

It could start by mixing and matching local suppliers and global buyers or producers

Can promote leverage

e.g. by making leverage a goal, as in an outcome of training programs

e.g. by providing technical training as prerequisite for leverage (and not as end in itself)


South africa and lll 2 l.jpg

South Africa and LLL (2)

Can promote learning

e.g. by developing a model of national systems of economic learning, and promoting this

e.g. by promoting institutional interaction

e.g. by promoting technical upgrading for suppliers

Learning is at a collective level; it is distinct from training


Development and gvcs l.jpg

Development and GVCs

An optimal strategy: place focus on GVCs

GVCs are constantly being created

By whom? Usually, lead firms act to establish a train of suppliers

But actually GVCs can be created by brokers, acting to bring the various parties together

Can be private sector brokers, e.g. merchant banks, “impannatori” in Italian industrial districts

Can be public sector brokers, e.g. Singapore EDB actively seeks to plug “gaps” in value chains located in and around Singapore

What about working with agencies like UNIDO to create new GVCs?


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UNIDO and creation of GVCs

UNIDO could play a role as broker of new GVCs

Bring potential partners together

GVC needs to have a strategic purpose – serving strategic needs of buyer firms, and of supplier firms

New GVCs can provide an ample field of application of LLL interventions by UNIDO

  • After all, private firm strategies already do this – e.g. Li & Fung based in Hong Kong


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Summary

Nothing new in the notion of promoting national competitive advantage – USA and Germany best in 19thC, Japan in first half of 20thC, East Asian ‘tigers” in second half

In global era with WTO, simple measures no longer possible, e.g. tariffs

But sophisticated knowledge enhancing measures (LLL) are certainly possible, and indeed necessary

Frameworks like Porter useful, especially for large countries (need to adapt for small countries)

Building NCA is essentially a strategic issue – nothing is guaranteed


The latecomer strategy72 l.jpg

The latecomer strategy

Formulate a strategic goal: industrial development through catchup

Strategize as a latecomer: overcome barriers through utilizing

knowledge available

Harness latecomer industrial dynamics: The flying geese paradigm

Utilize the connections available in the global economy –

Linkage, leverage, learning

Think globally; use global tools and institutions (e.g MNCs; GVCs)

Build domestic institutions to support linkage, leverage and learning

Taiwan’s NSEL as exemplar

Innovation as management of technology diffusion

to

Management of knowledge generation and diffusion (IPR, patents)

A never-ending process – of capability enhancement


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