Taiwan:
Policy Drive for Innovation
Highlights from GRIPS Development Forum Policy Mission

Kenichi Ohno (GRIPS)
May 2011

Topics
The GRIPS Development Forum Team, with Japanese,
Ethiopian and Vietnamese members, visited theRepublic of China (Taiwan) during March 21-25, 2011.
The following issues were studied: Evolution of policy and key industries
 Policy making process Research institutes
 Hsinchu Science Park Export processing zones
 SME Policy

Profile of Taiwan
Area – 36,191 km2
 Population – 23 million
 Per capita income – US$19,046 (2010)
 Industry policy focus (key industry)
1950s – Import substitution (food)
1960s – Export expansion (textile)1970s – Infrastructure (petrochemical)
1980s – Economic liberalization (IT)
1990s – Industrial upgrading (integrated circuits)
2000s – Global deployment (liquid crystal display)Policy Evolution
1950s to mid 1980s— “Governing the Market” modelwith strong state and powerful bureaucracy; SMEs asmain producers and exporters
After mid 1980s—(i) growth of private sector; (ii) rise oflarge domestic firms, relative decline of SMEs & FDI;(iii) trade liberalization; (iv) economic interaction withMainland China
Current issues:- Innovation, R&D, soft power, national brands- Foster larger firms to compete globally- Cope effectively with Mainland China

Silicon Island
Taiwan has transformed itself from agro exporter (rice, sugar,bananas) to top ICT manufacturer with global shares as below:
MADE IN TAIWAN:

MADE BY TAIWAN:

Direct export from Taiwan

Including overseas production

Mask ROM

93.8% Motherboard

95.5%

IC foundry

66.4% Notebook PC

95.0%

Blank optical disk

63.0% Server

88.9%IC package

44.4% WLAN CPE

81.0%Electronic glass fabric

39.0% Cable Modem

78.6%

IC design

27.0% Car navigation device

76.9%DRAM

21.8% LCD monitor

71.8%

Note: global market share in 2009 reported by the Ministry of Economic Affairs, ROC.

Selected List of
Taiwan’s Large Firms
TSMC (semi-conductor, offshoot from ITRI)
 UMC (semi-conductor, offshoot from ITRI) AU Optronics (liquid crystal display) Foxconn (electronics manufacturing service) Acer (computer) Asus (computer) Yulon Motor (automobile) San Yang Motors (motorcycle)
 Kwang Yang Motor (motorcycle)
 Formosa Plastic (diversifying into artificial fiber, etc)
 China Steel (state-owned)Industrial Policy Making
The Ministry of Economic Affairs (MoEA) is thepowerful one-stop ministry for industrial policy.
 The industrial statute, a law approved by parliament,is the key document. It guides industrial policy for 23 decades:

Statute for Encouragement of Investment (1960-1990)
Statute for Upgrading Industries (1991-2010)
Statute for Industrial Innovation (2010- )Taiwan does not produce five-year plans.

Ministry of Economic Affairs (MoEA)
Minister Dr. Yen-Shiang Shih
Vice Minister
Mr. Jung-Chiou Huang

Vice Minister Mr.
Francis Kuo-Hsin Liang

Deputy Minister
Mr. Sheng-Chung Lin6 NationalCorporations

14 AdministrativeAgencies

16 Staff Units

Taiwan Power

Industrial Dev. Bureau

Dept. of Commerce

Chinese Petroleum

Bureau of Foreign Trade

Dept. of Industrial
Technology

Taiwan Sugar

Small & Medium Business Adm.

Dept. of Investment
Services

Aerospace Ind.
Development

Water Resource Agency

Office of Econ. Research& Development

China Shipbuilding

Energy Bureau

China SteelIntellectual Property OfficeInternational
Cooperation Dept.
+ others

Export Processing Zone Adm.
+ others

64 Overseas
Economic Offices

Industrial Development Bureau of MoEA
Director General Dr. Woody T.J. Duh

Deputy Director General
Mr. Neng-Chuan Chou

Deputy Director General
Mr. Ching-Chung Lien
Secretary General
Ms. Wei-Ji Can

Center Coordination Office forInvestment Promotion

Seven Divisions
Industrial Policy Division

Industries Assistance CenterIndustrial Promotion Task
Forces & Offices
1. Committee for Industrial
Cooperation Program
2. Committee for Aviation &Space Industry Development
3. Semiconductor Industry
Promotion Office
4. Biotech. & PharmaceuticalIndustries Program Office
5. Committee for Precision
Machinery Industry Dev.
6. Railway Industry Dev.
Committee+ others

Metal & Mechanical Industries Division
Information Technology Industries Division
Consumer Goods & Chemical Industries Div.
Knowledge Services Division
Sustainable Development Division
Central ServiceCenter
Southern ServiceCenterIndustrial Parks Division
61 industrial parks
37 waste water treatment centers
2 industrial harbors

Current Industrial Policy Tools
“Industrial projects” commissioned by MoEA andexecuted by research institutes for innovation andcommercialization of R&D
Ex. Hydro forming process project for bicycle industry(undertaken by MIRDC): industry needs survey (2 years);
project proposal & approval by MoEA (>1 year);
implementation & review (3-4 years)

Industrial estates—science parks, export processing
zones, industrial parks
 No incentives (except for R&D)
 Low and uniform corporate income tax of 17%
Policy Making of MoEA
MoEA minister (Dr. Shih) strongly leads content andcoordination.
 Outsourcing of many policy making functions toTIER and CIER (think tanks created by MoEA)—
studies, committees, seminars, etc.
 “Committees” are organized for consensus building
among ministries and experts.
 “Seminars” are actively used for interacting withprivate sector.
 National Assembly is powerful and may intervene inpolicy content in the approval process.
Drafting ofIndustrial Statute of 2010
Task force
formedby
IDB/MoEA

Brainstorming
led byMinister

Publichearing
meetings

Interministerial
meetings

Draftingby
IDB/MoEA

Officials
Experts

6 businessassociations

Relatedministries

National Assembly
Revisions:- Corp. inc. tax 25→→17%- 3 incentives eliminatedApproved: Nov. 2010


The whole process takes about three years.
CIER (think tank) manages the process under MoEA’s leadership.
This process was adopted in the late 1980s. Before that, a few elitetechnocrats drafted policies without deep prior consultation withstakeholders.

Policy and TechnologyResearch Institutes
Taiwan has 19 state-created research institutes
playing key roles in designing and implementing
industrial policy:
8 policy institutes for designing policy
11 technology institutes for implementation
 Some initially received seed money from the state,
but they now operate as self-funding NPOs.
 About half of current funding comes from MoEAsponsored “industrial projects” and other fromprojects and services for private sector.
Policy Institutes(visited by our mission)
Taiwan Institute of Economic Research (TIER)- Maintain industrial databank- Domestic and global economic forecasts- Secretariat to Ind. Dev. Advisory Council (MoEA)- Cross-strait economic cooperation projects
 Chung-Hua Institute for Econ. Research (CIER)- Economic forecasts- Studies on China, global & domestic economies- Secretariat to Industrial Statute drafting process- Supported WTO entry & operates WTO CenterTechnology Institutes(visited by our mission)
Industrial Technology Research Institute (ITRI)- Taiwan’s largest institute for commercialization of R&D(through licensing, spin-off & joint venture)- 5,800 staff (young, 80% in R&D; 1,200 with PhD);
frequent migration between industry and ITRI
- Open labs for joint R&D with foreign & local firms- Close cooperation with Hsinchu Science Park anduniversities- ITRI College for internal training & training for industry;
customized programs for foreign governments(Vietnam, Philippines, India, Poland)Organizational Structure of Industrial Technology Research Institute
ITRI

Office of Strategy and
R&D Planning

Board of Directors & Supervisors

International BusinessCenter
Technology TransferCenter
Commercialization andIndustry Service Center

Business DevelopmentAdministrative Support

ITRI College

ITRI South

Office of Marketing
Communications

Linkage Centers

Core Labs

Creativity Lab

Electronics & Optoelectronics

Nano Technology

Mechanical & Systems

Focus Centers
Display Technology

Cloud Computing
Industrial Economics

Material & Chemical

Measurement
Standards

Biomedical Tech. & Device

Service Industries

Green Energy & Environment
Information & Communications

Identification & Security
Technology

Technology Institutes(cont.)



Metal Industries R&D Center (MIRDC)- HQ in Kaohsiung with 8 regional branches- 612 staff (51 with PhD, 325 with MA)- Focus areas: (i) metal materials & products, (ii) mold &die, micro parts, (iii) automotive; (iv) opto-electronics& energy equipment; (v) medical devices- A team is formed for 4-5 years for big project and 3-6
months for small projectOther sectoral institutes – food, plastic, automobile,bicycle, precision machinery, information industry

Hsinchu Science Park
There are 13 science parks under Science Park
Administration of the National Science Council.
 Hsinchu Science Park (HSP), established in 1980, isthe first and most successful. It is Taiwan’s central
production site for ICT industry.
 As of 2010, HSP had 449 tenant firms with combined
sales of $41 billion/year. Most firms are local; 44 firms
are foreign (Japan, US, etc.)
 HSP hires 139,416 employees (including 4,134
foreigners).
Science Parks in Taiwan(Hectares)

HSP(1342)
Yilan (71)Longtan (107) (2004)(under construction)
Hsinchu Biomedical (38) (under construction )North
Hsinchu (653) (1980)
Jhunan (123) (1999)
Tongluo (350) (under construction)

Mission visits HSP

HSP Adm. Building

CTSP(1658)
Holi (255) (2006)
Taichung (413) (2003)
Erlin (635) (under construction)
Huwei (97) (2006)
STSP(1613)
Tainan (1,043) (1996)
Kaoshiung (570) (2001)

Total: 4,613 Hectares

Chung Hsing (261)(under construction)

CentralSouthHSP at PresentPark
Residential
AreaPark
Life
HubPark
Housing
Units

Synchrotron
Radiation
Science ResearchPark
CenterMuseumSciencePark
Administration

National
Chiao TungUniversity

National
Tsing HuaUniversity

HSP

Industry classification by revenue size
IC (67.5%), opto-electronics (20.7%), computer(6.4%), telecom (2.7%), precision machinery(1.8%), biotech (0.4%), other (0.2%)

Some prominent tenants:
TSMC, UMC, AUO, Acer, ULVAC, Wistron, BENQ,Foxconn, MITAC, Optotec, Logitech, Gintech,Realtech, D-Link, Du Pont, ShinEtsu, Hoya, DNP…

Hsinchu Science Park (cont.)
State-owned land and standard factories are leasedon 20-year contract with subsidized rent.
 HSP (653 ha) is full but there are entries and exits
every year. Firms with small R&D (< 2.28% of sales)
are asked to leave.
 About 60 firms are waiting to enter HSP. Applicant
firms must take exam in R&D, capital, environment…
 HSP received state money but it now makes profit
from management fee, rental & operational revenues.
 HSP supports and monitors other science parks.
 HSP receives about 1,000 study missions annually.
Success Factors(As explained by HSP & summarized by GRIPS)

Formation of industry structure, entrepreneurship,
R&D mechanism and venture systems throughinteraction with Silicon Valley.
 No intervention in companies’ activities as long as
they maintain high R&D.
 One-stop services from government.
 Excellent infrastructure – water, power, telecom, road,housing, 24-hour customs clearance, banks, clinics,bilingual school, recreation facilities.
 R&D tax deduction & subsidies, no import duties forequipment and materials.
Export Processing Zones
In 1966, first EPZ was established in Kaohsiung as
combined free trade zone and industrial zone.
 EPZ Administration under MoEA oversees 8 EPZs
with total area of 532 ha, 456 tenant firms, andexports of $10 billion/year.
 Industrial activities in EPZs shifted over time:Low-end OEM in garment & other L-intensive (1966-76)
Mid-end OEM in garment & other L-intensive (1977-86)
High-end OEM in capital & tech. intensive ind. (1987-96)
High-end OEM and R&D (1997-2007)
High value-adding industries (2008-)
OEM: Original Equipment Manufacturing (=contract manufacturing of foreign brand products).

EPZs: Status and Trends
EPZs’ total investment, revenues and trade haveincreased significantly over the long run.
 EPZs’ dominant sector is electronic components(64.2% of total revenue of tenant firms, 2009).
 Compared with science parks, EPZs produce lesshigh-tech and more downstream products.
 About five years ago, EPZ Administration began topromote interaction between industry and academics
through student internship, visiting professors, joint
R&D, and matching services.
EPZs:Institutional Transformation
Original EPZ rules were revised over time as follows: Manufacturing only  Plus trade, logistics, etc.
 100% export required  Domestic sale permitted
 Cargo management at door  Account management
system Two-step customs clearance  Automated Trading permit required  Permit free (in accordancewith WTO rules)

Success Factors(As explained by EPZ Administration)

1. Right timing for domestic and global economy
2. Good location close to port, airport, freeway, metro.
3. Effective macroeconomic and land policies
4. Perfect legal system for investing in EPZs
5. Single contact window (all applications processed
within 2 weeks, 24-hour rapid customs clearance)
6. Excellent infrastructure, connectivity, incentives,working & living conditions, etc.
7. Skilled workers
8. Adoption of foreign technology
9. Entry of qualified tenant companies

Small and Medium Enterprise
PolicyDefinition of manufacturing SME:
Paid-in capital < NT$80 million ($2.5 million) oremployees < 200.
 Micro businesses: employees < 5.
 SMEs’ share in national economy (2010):
97.77% of total enterprises, 76.7% of employment,
29.8% of sales, 17.9% of export.
 High start-up ratio: 7.1% of total SMEs per year.
 Support is provided by SME Administration (SMEA)
under MoEA. HQ in Taipei, 2 regional offices, and24 local service centers.
SME Promotion
Three levels of support
Award strategy – excellent SMEs (1-3%)
Guidance strategy – middle layer of SMEs (27-34%)
Grouping strategy – other SMEs (65-70%)
 Task areas (corresponding to 5 divisions of SMEA)(i) Policy planning(ii) Management consulting(iii) Business start-up & incubation(iv) IT(v) FinanceSME Promotion (cont.)
HQ office operates one-stop service center.
 SME Development Fund and National Development
Fund provide financing. These funds are lent bycommercial banks or invested by SME investmentcompanies. SME Credit Guarantee Fund also exists.
 Support for management, technology and linkage
are provided free of charge to SMEs. These areconducted by private consultants and firms throughopen bidding. 5S and QCC are standard tools.
 Following the Japanese model, the One Town One
Product (OTOP) program develops local specialty
industries with city and township as units.
General Lessons
Despite different income and industrial levels, Taiwan
can offer the following general lessons for all countries:
Powerful and centralized policy authority of MoEA
covering all industry-related issues.
 Effective use of government-created institutes indesigning and implementing industrial policy.
 Well-designed and executed models of industrial
estates as receivers of good investors.
 Gradual evolution and leveling-up of industrial policy
based on sufficient preparation and consultation.