ECONOMIC RESEARCH CENTERDISCUSSION PAPER

No.173

The Development of Industrial Cluster andFirm-Level Strategy: A Case Study of
the Taiwanese IC IndustrybyChikashi KISHIMOTO

March 2009

ECONOMIC RESEARCH CENTERGRADUATE SCHOOL OF ECONOMICSNAGOYA UNIVERSITYThe Development of Industrial Cluster and Firm-Level Strategy:
A Case Study of the Taiwanese IC Industry
Chikashi KISHIMOTO1

Abstract
The main purpose of this paper is to shed light on interaction between inter-firm
relationship in an industrial cluster and firm-level strategy. Existing cluster studies
mention various merits of clustering and try to examine the existence and impact ofthese merits through case studies of various industries in various regions. However,they rarely pay attention to firm-level strategic intents. Although some of cluster
merits may be realized passively, the principal suggestion of this paper is that the fullpotential of clustering is brought out only when many of local firms intentionally adopt
an appropriate strategy to enhance and mobilize local business resources for their
growth. Conversely, a specific set of local resources may promote a particular type offirm-level strategy which is advantageous in a certain industrial sector. The mere
presence of a cluster and the textbook-like examination of cluster merits do not fully
explain why firms of a specific region are especially competitive in a certain industry.
Local business resources consist of relational as well as physical ones, and the former iscritical for continuous regional development. Therefore, in this paper, based on adetailed analysis of the Taiwanese IC industry which is one of the most successful casesof the latecomer development relying on a cluster, I will examine how inter-firm
relationship (including both cooperative and competitive aspects) in the cluster
facilitates firm-level strategic efforts and vice versa, and how a favorable interaction
between these two elements brings the growth of Taiwanese firms and the regional
development dynamism.

1

Research Assistant Professor in The Centre for the Study of East Asian Development (ICSEAD),
Kitakyushu, Japan (E-mail: kishimoto@icsead.or.jp)1

Introduction
The beginning of the Taiwanese integrated circuit (IC) industry2 goes back to themid-1970s when the first IC pilot plant project in Taiwan started following the
instruction from the chief of Executive Yuan (equivalent to the Prime Minister), Jiang
Jing-Guo, as a part of the upgrading of industrial structure in Taiwan. Although thegovernment and public research institutes played the leading role in the beginning, theestablishment of TSMC as the first pure-play foundry manufacturer in the world marked
a new epoch. Since then, local enterprises including small-scale fabless design firms
have actively entered into the IC business and it has promoted the unique industrial
structure of vertical disintegration in which each of the production stages and related
sectors is shouldered by independent specialized firms. Despite starting as a latecomerin the IC industry, recently, Taiwan has become a world top class player in many of
IC-related sectors and has shown a strong presence as the “Silicon Island” of the world.
It is also often mentioned that the substantial agglomeration of local specialized firms
in/around Hsinchu Science Park has generated cluster merits. This paper tries toinvestigate the key to success of Taiwan through examining interaction between
inter-firm relationship in the cluster and firm-level strategic efforts.
This paper consists of five sections. Section 1 shows the analytical approach andpurposes of this paper. Section 2 introduces the overview of the Taiwanese IC industry
as the background knowledge of the following sections. Section 3 is devoted to theanalysis of some important features of firm-level strategy in the Taiwanese IC industry.
Section 4 aims to clarify the details of inter-firm relationship in the IC cluster. Section
5 provides the summary and concluding remarks.
1. Approach and Purposes
Many scholars and experts have examined the economic advantages derived fromindustrial clusters from various viewpoints. Among them, Porter’s work is seen as arepresentative one, in which he mentions the enhancement of productivity, thestimulation of innovation and the promotion of new business as the main effects ofclusters (Porter, 1998). Similarly, according to Schmitz (1995, 1999) who tries to
2

The IC is nearly the same meaning as the semiconductor. Strictly speaking, the IC is one segment of
the semiconductor. The semiconductor also includes discrete semiconductors (diodes, transistors, etc.),
optoelectronic devices (LEDs, etc.), and sensors/actuators. But, nowadays, the IC occupies the majorityof the total output of the semiconductor industry. For example, the total output of the Taiwanese
semiconductor industry was US$ 42.4 billion in 2006, in which the share of ICs was 93% (Electronic
Journal, 2007).

2

apply the cluster approach to developing economies as well as developed ones,
clustering may (or may not) lead to efficiency and flexibility gains which individual
producers can rarely attain, as is captured in the concept of “collective efficiency”.
Collective efficiency consists of local external economies and joint action. Local
external economies include the emergence of a pool of sector-specific skilledlabor/experts, the easy and rapid availability of local suppliers of specialized machineryand inputs, the emergence of traders and other ancillary agents, technological andmarket knowledge flows, technology diffusion and human capital formation via labormobility, and technology diffusion and innovation through user-producer interaction.
Joint action involves more active and consciously pursued inter-firm relations that go
beyond anonymous market driven contracts such as sharing equipment, joint researchand development (R&D), collective actions by way of business associations and othercluster-wide institutions. Based on these or similar definitions, substantial amounts ofcase studies have been produced (e.g. Bersnahan and Gambardella eds., 2004; Yusuf et
al. eds., 2008), which shed light on some of these cluster advantages.
Although we can get many insights from these existing studies, especially on linkages
and synergy among local actors, one important problem should be pointed out. That is
to say, in many of the previous case studies, the analysis is often conducted from ageneral and statistical viewpoint without making a vivid picture of dealings andinteractions among local actors and of their strategies and peculiar behavioral patterns,
through which an analyst can bring the feature of a specific industry in a specific region
into sharp relief and can enable us to understand how the potential advantages ofclustering are realized. In connection with it, in a cluster, various actors play the roleof supplies and customers/users at the same time, and you can get quite different
pictures about the reality of partnership and knowledge exchange depending on whichpart of such multiple levels of supplier-customer interactions you focus. In regard to
the Taiwanese IC industry (or the information technology (IT) industry in a broad sense)
which I see as one of the most successful cases of latecomer development, existingstudies have already made some mentions on the development of vertical division oflabor among local IC/IT-related firms mainly located in/around Hsinchu Science-based
Industrial Park (HSIP) and on the important role of government policy and publicresearch institutes such as Industrial Technology Research Institute (ITRI) (see Chen,
2008; Shih et al., 2007). However, more detailed examination must be conducted on
the dynamism of local inter-firm relationship, firm-level strategic efforts peculiar to the
Taiwanese IC industry, and on interaction between these two factors in order to clarify
how clustering facilitates the competitiveness of Taiwanese firms in the global IC
3

industry. The main purpose of this paper is to make some contributions on this matter.
In regard to this, although clustering has possibility to bring various kinds of
economic efficiency, the realization of the possibility depends on how firms locatedthere adopt and carry out an adequate strategy in order to make good use of thepotentially advantageous environment and to construct effective linkages with otherlocal actors (Ishikura, 2003). The mere presence of a cluster and the general mentionof cluster advantages do not explain fully why firms in a specific region are competitivein the real business world. In this paper, substantial attention will be paid to firm-levelstrategy 3 including various issues of marketing, technology development, corecompetence, alliances and so on. However, the main concern of the cluster study is therelationship among local firms/organizations and the generation of efficiency andflexibility in a region as a whole which goes beyond the simple sum of individual
efforts. Therefore, I will restrict my task to showing some important common strategic
features of Taiwanese IC firms rather than conducting a detailed analysis of individual
corporate cases.
Even providing an easily understandable summary of the general feature of firm-levelstrategy in a specific region/country is not an easy task. In this regard, recently, we
can find a lively discussion on the success and failure of several different types ofstrategy (or often called “business models”) in the IC (or IT) industry. Especially, in
the IC device industry, analysts often contrast the rise of Taiwanese IC firms which tendto specialize in a limited number of products/activities through constructing a minutedivision of labor among local firms on the one hand with the long-term decline ofJapanese major integrated device manufacturers (IDMs) which tend to undertake all ormost of the production stages from basic product planning/design to final testingbasically by themselves (or within their own corporate groups) and have a too wide
product line-up in each company on the other hand (Shimizu, 2006; Miyazaki, 2008;
Izumiya, 2006). Besides, some specialists suggest that difference between integrated
and disintegrated strategies is not critical. It is pointed out that the key factors for3

According to a textbook-like explanation, the firm-level strategy consists of three parts, namely,
corporate strategy, business strategy and functional strategy. The corporate strategy is relevant to theentire company which has two or more business units. It specifies a basic line of corporate growth andthe target business domains. The business strategy expresses more concrete plans to obtain anadvantageous status against competitors in a specific business domain. Finally, the functional strategy
deals with each component of the business strategy such as marketing, R&D, finance, personnel affairs,
and so on. In this paper which focuses on the IC industry, the words of “firm-level strategy” are roughly
equivalent to the business strategy. However, as mentioned afterwards, because one of the main featuresof firm-level strategy in Taiwan is concentration on core business, it is relevant to the corporate strategy
too. In addition, I will also mention some elements of the functional strategy such as marketing, R&D,
and so on. So, in order to imply such subtle distinction, I use the words of “firm-level strategy”.

4success in the IC business include to get hold of growing markets, to attain a dominant
share in a specific important product, to control state-of-the-art technology, to conductbold and timely investment in plant and equipment, and to have the strategic definitionof the scope of in-house activities (Hamada, 2008). This paper does not try to offer acomprehensive introduction of such discussion and a full-scale international
comparative study between two or more countries/regions. My task in this matter islimited to selecting some important strategic features of Taiwanese firms throughconsulting these existing studies and my own field research and to examining thesestrategic features in detail in terms of the cluster approach.
Finally, I should mention another important, but secondary, task of this paper.
Recently, people are taking an increasing interest in the significance of (sub-national)
regions (or region states) as the platform based on which local firms build dynamic
business linkages in the globalizing economy (Ohmae, 2006). In the cluster study too,
it was pointed out long ago that a cluster with closed structure easily dried up thedevelopment dynamism (Bell and Albu, 1999). In recent studies, it is suggested as
essential for local corporate managers and policy makers to consider the strategic
positioning of their region in a global value chain and to manage to promote upgradingin the chain through supplementing local resources (i.e. talents, markets, technology,
high-end parts/materials and equipment, and so on) with external linkages (Schmitz ed.,2004; Pietrobelli and Rabellotti eds., 2006). Although the full-scale analysis of thisissue is too much, at the least I will show that the development of local close partnershipis consistent with the active construction of external linkages in successful cases such as
Taiwan.
2. Overview of the Taiwanese IC Industry
In this section, I offer the overview of the Taiwanese IC industry in order to let thereaders know the background of the following sections. There are three aspects to bementioned for this purpose, namely, vertical disintegration, intensive enterprise
agglomeration, and aggressive exploration of overseas markets.
2.1. Vertical Disintegration
The most obvious feature of the Taiwanese IC industry is vertical disintegration
among five main production stages of ICs, namely, IC design, manufacturing of photomasks, wafer process, packaging and (final) testing, each of which stages is basicallyundertaken by specialized firms. In addition, Taiwan has a considerably large share in5

Table 1: The Output of the Taiwanese IC Industry（Unit: hundred million NT$)
2003
2004
2005
2006
2007
2007 World ShareTotal output of the IC industry
8,188
10,99011,17913,933
14,667－
IC design sector
1,902
2,608
2,850
3,234
3,997
26.5%
IC manufacturing sector
4,701
6,239
5,874
7,667
7,367
－
Foundry
3,089
3,985
3,735
4,378
4,518
67.8%
Excluding foundry
1,612
2,254
2,139
3,289
2,849
－
IC packaging sector
1,176
1,566
1,780
2,108
2,280
47.6%
IC testing sector
409
577
675
924
1,023
67.7%
Note: The data in this table include overseas production. In 2007, the share of overseas production is 10.0% in IC design, 2.2% infoundry, 6.7% in packaging, and 6.9% in testing.
Source: Made by the author based on ITRI-IEK (2008, p.1-15, p.1-21, p.1-23).

the total world output in each of main IC-related sectors (see Table 1). “Foundry”
means a business model which undertakes wafer process in behalf of the other IC firms.
Taiwan is well-known for pioneer specialized foundry manufacturers (called “pure-playfoundry”) such as TSMC and UMC, which offer manufacturing services without having
their own brand products. Because wafer process is a highly capital intensive stage
which possibly need the investment in plant and equipment of several billion US dollars
every year, by outsourcing this stage to specialized makers, even a small scale firm
without its own plant (so-called “fabless”) is able to concentrate on the design anddevelopment stage and attain considerable profits, as long as its design technology isfine and market focus is appropriate. There are also several foundry manufacturers in
the other countries including Japan and Korea, they are not necessarily specialized inthis business, which means that they have their own brand products and may becomecompetitors of their customers and/or give a lower priority to customers during a busy
season.
Strictly speaking, Taiwan has several IDMs, which have their own manufacturing
plants for their own brand products (mainly DRAMs). The share of these firms in the
total output of the IC manufacturing sector has tended to increase in these days (see“Excluding foundry” in Table 1). However, unlike Japanese and Korean counterparts
which basically internalize all (or most) of the production stages, they usually undertake
only design, wafer process and testing stages among the above-mentioned five mainstages by themselves (Ou, 2006). In addition, they often outsource a part of wafer
process to specialized foundry manufacturers and offer foundry services to the other IC
firms at the same time.
2.2. Intensive Enterprise Agglomeration
Another main feature of the Taiwanese IC industry is the highly developed
agglomeration of specialized local IC-related firms, most of which are located in a6relatively small area from Hsinchu to Taipei. Figure 1 shows the structure of the
Taiwanese IC industry including the above-mentioned five main stages and several
other sectors providing IC-related materials. Besides the sectors and stages in thisfigure, there are sectors which provide the various types of manufacturing machines,
tools and other materials. Despite the considerable agglomeration of local IC-related
firms, Taiwan still depends on foreign suppliers on the supply of many of these highly
technology-intensive machines, tools and materials, although local suppliers have
gradually developed.
Figure 1: The Structure of the Taiwanese IC Industry in 2007

IC design
N=272

Photo masks
N=3

Silicon wafers
N=8

Wafer process
N=14

Pharmaceuticals
N=19

Packaging
N=30

Testing
N=37

Substrates
N=15
Lead frames
N=4

Note: N=the number of firms.
Source: Made by the author through modifying Figure 3-32 in ITRI-IEK (2008, p.3-103).

In regard to geographical distribution, HSIP which was established in 1980 is the core
location4, which is usually seen as “the Taiwanese IC industry cluster”. According to
The Taiwanese Semiconductor Industry Year Book 2008 (ITRI-IEK, 2008, p.5-45), morethan 90% of the Taiwanese IC-related firms are located in the region from Hsinchu to
Taipei. However, this figure is calculated by only considering the address of firms’
headquarters and a firm may have several branch factories in different sites. So, if you
consider these branches too, you find the gradually growing number of business units
located in other regions, especially in central and southern parts of Taiwan of whichcenter is Taichung and Tainan/Kaohsiung respectively (see Figure 2). The emergenceof these new regional centers is largely attributed to the establishment of Southern
Taiwan Science Park (STSP) in 1995 and Central Taiwan Science Park (CTSP) in 20035.
4

HSIP consists of the original base in Hsinchu and five additional bases (Jhunan, Longtan, Tunglo, Yilan
and Biomedical park), of which gross area is 1,400ha. The overall sales of the park in 2007 was
NT$ 1,146.2 billion. ICs, optoelectronics (mainly, TFT-LCDs) and computers & peripherals were threemajor products, of which shares in the total sales were 72%, 16% and 8% respectively(http://www.sipa.gov.tw).
5
CTSP consists of three bases (Taichung, Huwei, and Houli), of which gross area is 765 ha. In 2007,
the overall sales reached NT$ 265.7 billion. Optoelectronics and ICs accounted for the most of it(http://www.ctsp.gov.tw). STSP consists of two bases (Tainan and Kaohsiung), of which gross area is1,608 ha. In 2007, the overall sales was NT$ 558.9 billion. The two major products, optoelectronics

7

Figure 2: Locations of Taiwanese IC-related Firms and Plants

Source: Made by the Author.

In this paper, I consider the region from Hsinchu to Taipei to be the IC industry cluster,
but its boundary is not so clear-cut and the cluster may include the central and southernparts in a broad sense in these days.

and ICs, combined together, occupied more than 90 % of the total (http://www.stsipa.gov.tw).

8

2.3. Aggressive Exploration of Overseas Markets
The third important feature of the Taiwanese IC industry is that the share of overseas
sales is substantially large in all of the IC-related sectors (see Table 2). Among them,
North America (mainly the USA) shows a large share in foundry, packaging and testing.
In IC design, mainland China is the main market for Taiwan, which reflects not only
growing importance of mainland China as a production site of electronic and othergoods but also the fact that Taiwanese manufacturers of electronic goods including PCs& peripherals, communication equipment and digital household appliances request IC
makers to deliver IC chips to their overseas factories in China (ITRI-IEK, 2008,
p.3-111). These figures seem to suggest that the Taiwanese IC industry has developed
through being incorporated into the IC industry global value chain, in which Taiwan has
developed mainly as a manufacturing site and as a design center to a certain extent.
Leading firms located mainly in the USA (and Europe and Japan) still have corefunctions such as the development of innovative IC chips and the supply of highly
technology intensive machines/tools and materials.
Table 2: Main Markets of Taiwanese IC-related Sectors in 2007 (Unit: %)TaiwanMainland China
Korea
IC design
32.9
56.7
2.8
Taiwan
North America
Western Europe
Foundry
20.5
67.0
6.0
Taiwan
North America
Japan
Packaging
42.6
41.1
7.1
Taiwan
North America
Japan
Testing
57.5
28.7
5.6
IC manufacturing
TaiwanJapan
Mainland China(excluding foundry)
44.6
16.9
14.1

Other
7.4
Other
6.4
Other
9.2
Other
8.2
Other
24.4

Source: Made by the author based on data derived from ITRI-IEK (2008, p.3-111, p.3-122, p.3-123, p.3-131, p.3-139).

3. Features of Firm-Level Strategy of the Taiwanese IC Industry
This section analyzes the feature of firm-level strategy in the Taiwanese IC industry
paying attention to three important factors including concentration on core business,thoroughgoing cost management, and active utilization of external knowledge sources.
The analysis of this and next sections is mainly based on information and data attained
from my own fieldwork (interviews and a questionnaire survey with IC firms) mainly
conducted in the region from Hsinchu to Taipei6.
6

The fieldwork consists of a questionnaire survey and interviews with IC firms. The questionnaire
survey was conducted in July to October 2007 in Taiwan and 36 firms replied in total. Interviews were9

3.1. Concentration on Core Business
As I mentioned in the previous section, the most conspicuous feature of Taiwan iswell-developed vertical division of labor and substantial accumulation of local
specialized firms in each of main production stages and sectors. This is partly because
many of Taiwanese IC-related firms used to be small-sized and not resourceful at leastin their early stage and could not avoid concentrating their company resources on one ora few products and/or services. Table 3 offers a list of main firms in each of main
sectors.

Table 3: Main Firms in the Taiwanese IC Industry in 2007 (Unit: hundred million NT$)IC Design
IC Manufacturing (Wafer Process)RankingCompany Name
Sales
RankingCompany Name
Sales
1MediaTek
804
1
TSMC
3,226
2
Novatek
361
2
UMC
1,068
3
Himax
301
3
PSC
775
4
Phison
203
4
NANYA
529
5
Realtek
157
5
ProMos
476
6
VIA
147
6
Inotera
459
7
Etron
132
7
Winbond321
8
Sunplus Technology
92
8
MACRONIX
243
9Global Unichip
70
9
VIS
160
10
ESMT
69
10
Episil50
IC Packaging
IC Testing
RankingCompany Name
Sales
RankingCompany Name
Sales
1
ASE
785
1
ASE
200
2
SPIL
565
2
KYEC
124
3
Powertech
139
3
ChipMOS
116
4
ChipMOS80
4Powertech
107
5Greatek
72
5
SPIL
57
Source: Made by the author based on ITRI-IEK (2008, p.1-17, p1-18, p.1-19).

Recently, firms tend to expand their product line-ups and/or services. However, if
you observe carefully, you can find that successful firms still keep well-selectedbusiness focuses. In many cases, they aim at one or a few volume market zones,
held with 13 Taiwanese IC firms including 6 IC design firms (fabless), 4 IC manufacturing firms (foundry
and IDMs), 3 packaging and testing firms in July/August 2007. I received a great support from Mr. Eric
Jain, Mr. Meng Shien Hsieh, and Ms. Naomi Yu, who were experts of Industrial Economics &Knowledge Center (IEK)/Industrial Technology Research Institute (ITRI, Hsinchu). They supported me
by implementing the questionnaire survey, arranging interviews with business people, and offering related
data. Besides, Dr. Hsien-Yang Su and the staff of Japan Center of Chung-Hua Institution for Economic
Research (CIER, Taipei) kindly helped me. I have also conducted more than ten sessions ofcomplementary interviews with IC-related firms and organizations in Japan since then. I would like toexpress my sincere gratitude to all of these people who cooperated with me.

10which leads to the realization of economy of scale. Otherwise, they divide an
overgrown company with too many product categories into several subsidiaries, each ofwhich concentrates on one or a few niche markets. These niche markets are often too
small-sized to be taken care of seriously in a relatively large firm, and the firm may
miss potentially promising markets which are trivial at this stage.
For example, MediaTek, the largest fabless IC design firm in Taiwan, has four or fivemain product categories, but they have not run all of them at the same time. Roughly
speaking, the company has shifted an application target in the sequence of CD-related
devices, DVD-related devices, mobile phones, digital TVs, and global positioning
system (GPS). In this manner, MediaTek has successfully realized technologicalsynergy and attained a substantial share in the volume market zone of importantconsumer electronic products in those days. On the other hand, Sunplus Technology
which is also one of the major IC design firms in Taiwan used to have the exceptionallylarge number of product categories. Since 2005, the company has conducted
reorganization in which several subsidiaries were separated and took charge of someproduct categories of the original company. For example, Orise Technology took overthe business of LCD controller/driver ICs, while Sunplus Innovation Technology started
to handle ICs for controllers/peripherals. Similarly, Sunplus mMobile has focused on
personal entertainment and communication business, while Sunplus Technology, as thehead company, has devotedly dealt with the platform for home entertainment businessand R&D of core intellectual properties (IPs).
How can they properly understand a market trend and find a promising product? I
heard in my fieldwork in Taiwan that, in the case of IC design firms, one of the mainknowledge sources in this regard was close interactions with their main customers,
namely, final product makers (i.e. manufacturers of final products such as PCs, digitalTVs, mobile phones, and so on). It is also important to point out that their precise
focus is enabled by the capability of quick adjustment. That is to say, they can get agood aim through accelerating the cycle of releasing a new product to the market,
receiving feedback from main customers, then offering an improved version to themarket. In addition, they are also very prompt in adjusting their target throughbenchmarking technological and cost advantages against competitors and, if necessary,readily modifying a plan. In contrast, I heard in my interviews in Taiwan and Japanthat Japanese major IC firms tended to be slow in market research and decision making,which prevented them to catch variable market trends. It is also often pointed out thatJapanese firms in general are too strict on quality guarantee to quickly release a new
product. In addition, because they used to deal with too many product categories
11

(namely, lack of concentration on core business), they had exhaustive competition
among domestic major players of which product line-ups overlap each other, although
the increasingly severe world-wide competition in these days has forced them to carryout the extensive reshuffle of their business.
3.2. Thoroughgoing Cost Management
Thoroughgoing cost management of Taiwanese IC firms is substantially attributed to
the realization of economy of scale through keeping well-selected business targets, as I
mentioned above. Aggressive exploration of overseas markets is also relevant to thispoint. In addition, you may mention some other factors in this regard such as
relatively low cost of engineers, strict cost accounting, economizing on R&D throughactively utilizing external resources, and so on. In this subsection, I will shed light on
an important factor which is especially relevant to the economy of scale, namely,
standardization of design and production process (see Miyake and Kimura, 2005 as acomprehensive analysis of cost management in the IC industry).
It is widely observed in Taiwan that IC firms try to construct a common fundamental(often called “platform”) of product design and/or production process which isapplicable to many kinds of products with small modifications. It enables them tooffer some customization without large cost rising. I will explain it in detail byshowing examples in IC design and manufacturing firms respectively.
In the design of system LSI, largely speaking, there are two product categories,
namely, application specific integrated circuit (ASIC) and application specific standard
product (ASSP)7. Both of them are designed for a specific application such as cellar
phones, digital steel cameras, digital TVs and so on. The difference is that ASIC is
designed for a specific customer, while ASSP is applicable to many customers bymodifying software embedded in an IC chip without changing the design of hardware(electronic circuits)8. In other words, ASIC is a more customized product category and
ASSP is a relatively standardized one. ASIC is designed to meet a specific customer’s
specific needs most suitably and it is also advantageous in terms of cost as long as the7

The definitions of ASIC and ASSP are not uniform among documents. According to a textbook, ASIC
means semi-customized ICs of which design tasks are allotted to both IC firms and customers. That is tosay, in the design flow of ASIC, a customer undertakes the high-level design stages (i.e. specification
design, RTL design, logic synthesis, logic verification), while an IC firm takes charge of the low-level
design stages (i.e. layout design). In the design of ASSP, IC firms undertake all of these stages anddevelop an IC chip for a specific purpose of various users.
8
The development and design of an IC chip consists of two segments, namely, the design of hardware(electronic circuits) and that of software embedded in the IC chip. In these days, the design of software
tends to require considerably large amount of time and human resource and it often demands more humanresource than that needed for hardware design.

12

output is large enough. However, in these days, because the development and design
cost of an IC chip has substantially increased (e.g. several hundred thousands US dollars
or more in many cases) and the lifespan of a specific product has become too short to
attain a substantially large amount of sales, ASSP is often more advantageous by
distributing the total design and development cost over various products of various
customers. In the IC design sector of Taiwan, the share of ASSP is predominant,namely, the proportion of ASIC: ASSP is 10.5: 89.5 in 2007 (ITRI-IEK, 2008, p.3-109).
In Japan, although I could not get hard data, it is generally said that ASIC has been
more important. It is partly because many of major Japanese IC chip makers were
established as one business unit of a huge electronic company (e.g. Panasonic, Hitachi,
NEC, Toshiba, and so on) and they mainly deal with final product makers of their own
company group (or other major company groups) which tend to prefer customized key
parts (Kojima, 2006). This is also the reason why the growth of independent fablessIC design firms is very difficult in Japan and, if any, in most cases, they must reconcile
themselves to a status of minor subcontractor of established electronic companies. In
addition, in my own interviews in Japan, I often head that the technological capabilityof these Japanese major final product makers is very high and they undertake substantial
parts of IC design process by themselves for their novel final products, so, IC chipmakers play a passive part and have weaken their own product planning capability. In
Taiwan, partly because there are not many indigenous final product makers with
globally well-known brands and Taiwanese final product makers as contract
manufacturers tend to adopt standardized key parts to oppress costs, Taiwanese IC chipmakers also tend to concentrate on a more standardized category.
According to information from my fieldwork in Taiwan, in the design of ASIC, acustomer generally shoulders the design cost and the price in a contract is guaranteed,but the chip is exclusively provided for the specific customer. In the design of ASSP,an IC maker may discuss a specification with a main customer, but the design cost isshouldered by the IC chip maker. It is often observed that an IC maker supplies a new
IC chip to a major customer first, then, showing off the trading achievement, tries toopen up many other minor customers. In the IC design sector, it seems a key factor forbusiness success to understand appropriately the common needs of various customers
and to promptly supply a product of good cost performance without falling into
excessive specification.
We can observe a similar effort to establish a basic common production process in IC
manufacturing firms in Taiwan. Taiwanese major foundry manufacturers such as
TSMC and UMC must have a wide range of wafer process technology to handle various
13

products of various customers. They must meet various demands in a production line
without establishing a factory specializing in a specific product. According to myinterview with one of the major foundry manufacturers, for this purpose, they havemade a painful effort to flexibly adjust a machine, tool and recipe9 for various products,
which is so thoroughgoing that it has finally become a company culture. Theyemphasized that the trial was painful at the early stage, but that it led to great flexibility
and substantially profited the company at the later stage. It is because that machines
for wafer process are extremely expensive (e.g. several dozens million US dollars for a
stepper) and that about 60 percent of the wafer process cost is relevant to depreciation
expenses of these machines. They prepare a limited number of technology platforms
and meet each customer’s special demands through a modification and/or combinationof them10. In connection with it, it is pointed out that Taiwanese IC manufacturers tend
to make much of technology development for the purpose of cost down (for example,
having a good command of standard machines, eliminating unnecessary production
steps, enhancing throughput and operating rate of machines, improving yield rate, andso on), while Japanese counterparts tend to attach great importance to R&D aiming athigh quality and state-of-the-art technology, which leads to expensive products withexcessive functions (Yunogami, 2005).
3.3. Active Utilization of External Knowledge Sources
In these days, it has become more and more important to actively utilize external
knowledge sources in order to speed up the rate of new product development and/or tosave cost and human resource for R&D. It is often said that the recent downfall ofJapanese IC device makers is partly attributed to their obdurate attachment to in-house
R&D. It is the so-called “Not Invented Here (NIH)” syndrome (Hamada, 2007).
Contrastively, I often heard that Taiwanese IC firms tended to readily utilize external
knowledge sources. In regard to this, in my questionnaire survey in Taiwan, I asked
questions about means to get necessary technologies. It revealed that many Taiwanesefirms were introducing technologies from external sources as well as conducting
in-house R&D at the same time. The questionnaire survey got replies from 36 firms in
9

A recipe is a program for controlling wafer process. It instructs the process sequence and control
parameters (i.e. setting values on temperature, pressure, the kind of gas and its flow rate, etc.) of a
specific process machine.
10
For example, TSMC prepares two platforms, namely, advanced technology platform and mainstream
technology platform, depending on the degree of coordination with customers. The former includes
wireless SoC platform, consumer technology platform, PC and network technology platform, while thelatter covers five applications such as power ICs, display driver ICs, CMOS image sensors,
microcontrollers and RFID (Ishihara, 2005; http://www.tsmc.com).

14

total, among which 28 firms (78%) replied that “In-house R&D” was a main means forgetting technologies.
At the same time, other means such as “Technology
transfer/licensing”, “Cooperative R&D” and “Headhunting” are conducted by 44%,
39% and 33% of the respondents respectively. As for “M&A” and “Investment tostart-ups”, only the small number of firms is relevant (11% and 6%, respectively).

Table 4: Partners for Technology and Product Development and Their Locations (Unit: Firm)
Types of Partners
Relevant firms
the USA
EuropeJapan
Korea
Suppliers of materials and parts
13(36%)
6
0
4
1
Suppliers of machines and tools
12(33%)
92
2
0
Contract manufacturers (Foundry,
19(53%)
0
0
2
1
etc.)
Customers and users
24(67%)
1610
17
10
Firms in the same trade10(28%)
52
4
1
Firms in different trades
2(6%)
1
1
2
0
Universities and research16(44%)
10
00
institutions
Other
1(3%)
1
0
0
0

China
1
1

Taiwan
10
6

Other

5

19

1

13
3
0

22
6
0

2
0
0

1

16

0

0

0

0

Note: "Relevant firms" means the number of respondents who acknowledged cooperation with each type of partners. The figures in parentheses mean the share in the total
respondents (36 firms). The respondents were also requested to tell countries/regions in which their partners were located. Because a respondent may point out two or morecountries/regions in this regard, the sum of figures in the cells of countries/regions in each line may exceed the number of respondents in the cell of "relevant firms".
Source: The international questionnaire survey on business environment of the East Asian semiconductor industry.

In my questionnaire survey, I also asked about partnership in technology and productdevelopment. The result is summarized in Table 4. According to the table, in regard
to the types of partners, about 30% or more of the total 36 respondents reply that they
have a cooperation and/or alliance with all the types of actors except “Firms in different
trades” and “Other”. Among these, the shares of “Customers and users” and “Contract
manufacturers” record more than 50% respectively.
This table also shows the location of partners. Taiwan is the most important
location in all the types of partners except “Firms in different trades” and “Other”.
However, all the foreign countries listed in the table, especially the USA and Japan, arealso substantially important as the location of “Customers and users” in cooperation.
This is consistent with the fact that the share of overseas sales reaches a substantiallyhigh level in all of the sectors of the Taiwanese IC industry (see Table 2). In addition,
the shares of the USA and Japan are relatively large in “Suppliers of materials andparts”, “Suppliers of machines and tools” and “Firms in the same trade”. Especially,
the importance of the USA as the location of partners is conspicuous in “Suppliers ofmachines and tools”. Finally, in “Contract manufacturers”, the share of Mainland
China is not small. All these figures tell us that overseas linkages have considerably
developed in knowledge exchange.

15

0
0

4. Inter-firm Relationship in the Taiwanese IC Industry Cluster
This section examines in detail inter-firm relationship in the Taiwanese IC industry
cluster of which core location is HSIP. In each of the following subsections, I will
focus on division of labor between IC design and manufacturing firms, relationshipbetween IC design firms and final product makers, and local competitive environment
respectively.
4.1. Division of Labor between IC Design and Manufacturing Firms
As mentioned above, the most conspicuous feature of Taiwan is the development ofvertical disintegration among five main production stages. Five stages are divided
roughly into two stages, namely, IC design and manufacturing. Here, I will focus onpartnership between IC design firms and manufacturing firms (especially, foundry
manufacturers).
One of the fundamental driving forces for evolution of the IC industry is
micro-fabrication technology. The development of micro-fabrication technology
enables IC manufacturers to place more transistors and wires on a specific chip area,
which means the realization of higher performance ICs if the chip size is constant. In
other words, they can get the increasing number of chips from a specific area of siliconwafer and it leads to lower unit cost because the cost of an IC chip is generally
proportionate to the size of it. The marvelous speed of technological development isusually expressed as “Moore’s law”, which is the empirical observation advocated by G.
Moore of Intel that the transistor density of an IC chip doubles every 24 months. The
progress of micro-fabrication technology has made it possible to materialize the entire(or most) functions of an electronic apparatus by only one IC chip, which is called a“system LSI” (or “system-on-a-chip, SoC”). Recently, as the transistor density has
extremely increased and wafer process technology has become highly complicated, it
has become difficult to prevent anomalies. So, nowadays, it is indispensable to takeaccount of how to keep a good yield rate and reliability of products not only at the
manufacturing stage but also at the design stage in advance (called “design for
manufacturability, DFM”), the trend which enhances the importance of close
coordination between the IC design and manufacturing stages. It seems that Taiwan IC
firms used to focus on the volume zone product category by taking advantage of theircost competitiveness rather than on the state-of-the-art technology realm. However, inthese days, customers have requested Taiwanese foundry manufacturers to advance into
more technologically complicated products such as SoC, in which close coordination is16needed between the design and manufacturing stages.
In addition, in the design of SoC, it has become common to utilize silicon intellectual
properties (IPs). An IP is a design data of functional block of SoC, which is developedin advance and is reusable as a module in the design of various SoC. Nowadays, there
are many vendors which specialize in the design and supply of IPs in the world. Inorder to eliminate the cost and time-to-market for the development of ICs, it isindispensable for IC designers to combine in-house IPs and IPs purchased from externalsources, not making all the necessary IPs by themselves from the scratch every time.
Recently, foundry manufacturers have prepared an “IP library” for their customers
which is a database of common and/or widely applicable IPs. Because IPs purchased(licensed) from third-party vendors sometimes do not work at the trial or mass
production stages and that causes a large loss, foundry manufacturers have alreadyverified the affinity of IPs in the library for their production process. By utilizing the
IP library, even IC design firms with limited in-house resources are able to concentrateon the development of a core IP and to accelerate new product development. In thesame way, foundry manufacturers have provided their customers with electronic design
automation (EDA) tools (software) which are indispensable for the development ofcomplicated and large-scale ICs. There are various kinds of EDA tools needed atvarious design stages, and EDA tools provided by foundry manufacturers are developedin cooperation with specialized EDA tool vendors in order to make the tools suitable for
their production process. In this context, in Taiwan, the relationship between IC
design firms and foundry manufacturers has been transformed from simple division oflabor to close partnership in which foundry manufacturers offer wide-raging design
support services (Shimizu, 2006). In the following part, I will examine the details
mainly based on information from my own fieldwork (see Figure 3 as the overall imageof vertical disintegration partnership).
In Taiwan, there are several types of foundry manufacturers. They are roughly
divided into two groups, specialized foundry manufacturers (“pure-play foundry”) andnon-specialized foundry manufacturers which produce their own brand IC chips at thesame time. The examples of former are TSMC, UMC, VIS, Inotera, Episil and so on.
The latter includes PSC, ProMos, NANYA, Winbond, Mosel Viteric and so on. In
terms of main product categories, they are roughly classified into two groups,
logic-centered foundry (e.g. TSMC and UMC) and memory-centered foundry (e.g. PSC,
ProMos, NANYA). Among them, TSMC and UMC are top two companies, of which

17Figure 3: Vertical Disintegration Partnership in the Taiwanese IC Industry

Final ProductMakers(incl.CMs）

IDMs: Flow of dealings (possibly including
partnership such as cooperative R&D)
: Turnkey solution

Fabless IC Design Firms
IC Design Service Firms

Photo Mask
MakersEDA Tool
Vendors

Foundry Makers (Wafer Process)
IP Providers

Design Support Services:◆IP Library◆EDA Tools (Design Kit,
Reference Design Flows,
Design Verification, DFM,
Low-Power Design, etc.)◆Prototyping Service …etc.

Machines/
Materials
Suppliers

Packaging Firms

Testing Firms

Note: CMs=contract manufacturers.
Source: Made by the author.

outputs combined together reach more than 50% of the total output of the Taiwanese IC
manufacturing sector including both foundry and IDMs11.
TSMC and UMC are also leading companies in providing their customers (namely,
fabless IC design firms and IDMs which outsource some parts of their manufacturing
process) with design support services (called “SoC Solutions”). As I mentioned above,
11

The total output of pure-play foundry manufacturers in the world reached US$ 193 billion in 2006, of
which the shares of TSMC and UMC were 50% and 17% respectively. In addition, Chartered
Semiconductor Manufacturing (CSM, Singapore) and Semiconductor Manufacturing International Corp.
(SMIC, China) accounted for 8% respectively. Remaining 17% were occupied by several other firms(http://www.tsmc.com).

18

in these days, foundry manufacturers offer various services including the provision of
an IP library, EDA tools and reference design flows which enable IC design engineers toeasily conduct design verification, DFM, low-power design and so on. In addition,foundry manufacturers provide a low-cost trial production service. These services andtools are developed in cooperation with various partners including major overseas EDA
tool venders (e.g. Synopsys, Cadence, Mentor Graphics, Magma and so on) and IP
providers (ARM, Virage Logic, MIPS, Rambus and so on) (On, 2006).
In Taiwan, I found “IC design service firms” which kept a special connection with a
specific foundry manufacturer. For example, as TSMC-related design service firms,
we can mention Global Unichip, SOTA, Innochip, Goyatek, PGC, Socle and so on12.
As an UMC-related design service firm, Faraday is famous (Xu et al., 2005). Thesedesign service firms undertake some parts of IC design process and IP development for
their customers, and play the role of windows through which a foundry manufacturer
provide above-mentioned design support services. I heard that a foundry manufacturer
kept a direct connection with major and/or technologically important customers, andthat design service firms dealt with other minor customers. In addition, fabless IC
design firms usually deal with third-party IP providers by themselves, but, design
service firms sometimes conduct licensing negotiations with major foreign IP providers
in behalf of them, through which even small-scale IC design firms may attain morefavorable terms (Xu et al., 2005).
Foundry manufacturers primarily focus on wafer process, but they may offer a“turnkey solution” for their customers, which means that a foundry manufacturer
undertakes coordination of the total manufacturing process. For this purpose, they go
into partnership with specialized suppliers of photo masks13, packaging and testing
services, and in some cases, they conduct technological exchange. In the provision of
turnkey solution too, above-mentioned IC design service firms may play the role ofliaison counter (Xu et al., 2005). Because the turnkey solution is often expensive,
substantially large-sized design firms try to directly deal with packaging and testing
firms, which leads to cost reduction and close communication. But, if thecompany-scale is small and/or the order size is small, design firms may attain morefavorable terms through the turnkey solution which brings collectively larger bargaining
12

TSMC-related design service firms are organized as “TSMC Design Center Partner (DCP)”. There
are DCP firms in foreign countries as well as in Taiwan. Among overseas partners, 8 firms are in Asia
(including Taiwan, but excluding Japan), 4 firms are in Japan, 2 firms are in Europe, and 10 firms are in
the USA (http://www.tsmc.com).
13
TSMC have the in-house photo mask manufacturing section, of which output is a highest class in theworld (http://www.tsmc.com). On the other hand, UMC does not have its own photo mask
manufacturing section.

19

power. By the way, in these days, the division of labor between packaging and testingstages has changed, namely, these two stages are often handled together in one company.
It means some modification of the vertical disintegration among main five production
stages.
Finally, it is often observed that foundry and manufacturing companies invest in
fabless design firms and/or design service firms. That is to say, they get information
about promising niche markets through their foundry business, and establish (orfacilitate spin-off of) fabless and/or design service firms as their group companies.
Then, these design (service) firms are offered favorable term by group manufacturing
companies and easily boost sales, which may lead to the rise of stock price. In thisregard, the case of UMC is conspicuous. Design firms which spun off from UMC
include MediaTek, SiS, ITE Tech, Novatek, Holtek, PixArt and so on (Cai-xun
Publisher ed., 2007). Besides these, there are other examples such as eMemory,
Silicon Optronics and Syntronix which are connected with PSC, and Gateway Silicon
which was set up by MACRONIX.
4.2. Relationship between IC Design Firms and Final Product Makers
In Taiwan, there are a lot of electronic final product makers which manufacture final
products such as PCs and peripherals, cell phones, digital TVs and so on, althoughmany of them are contract manufacturers without own brand products. Their
manufacturing plants are mainly located in mainland China, but headquarters still stayin Taiwan in many cases. This subsection sheds light on the relationship between IC
design firms and these final product makers, and examines the process of new productplanning and development by IC design firms in detail.
Partly because their business resources are often limited, partly because a productplanning based on long-term R&D is evaded in the case of listed companies (i.e.
individual stockholders prefer a short-term result), the primary stage of R&D is usually
put in the hands of public research institutes such as ITRI. On the other hand,
Taiwanese IC design firms actively try to get a correct understanding of customers’
needs at the present time and try to quickly supply appropriate products and services.
For this purpose, many of Taiwanese IC design firms have a product manager (PM),
who shoulders the responsibility for coordinating the total process of a new productdevelopment from product definition to design and mass production (outsourcing to
manufacturing companies). According to an IC design firm, a PM with technologicalknowledge makes a primary specification through exactly understanding customers’
needs and, then, a detailed specification is made by R&D staff, through which they20

quickly develop a product which has just enough quality and functions at a reasonable
price. On the other hand, I heard that, in the case of negotiation between Japanesecompanies, the definition of specification is often not very strict and modified
afterwards, which brings cost rise and delay. In addition, according to another
respondent, it is normal in Taiwan for IC design firms to make their engineers reside atcustomers’ sites, through which quickly respond to problems. They said that such“on-site-support” was one of the competitive advantages of Taiwanese firms.
As I mentioned above, in the Taiwanese IC design sector, the share of more standard
product category (i.e. ASSP) is predominant. While it is critical to exactly and fully
meet the needs of a specific customer through close communication in the case of morecustomized product category (i.e. ASIC), it is indispensable to understand importantcommon factors of various customers’ needs and to quickly offer a product with areasonable price in the case of ASSP. So, IC design firms must make substantial effort
to learn knowledge about final products in which IC chips are incorporated (Shindou,
2006). For this purpose, Taiwanese IC design firms have a lot of application engineers,part of which moved from final product makers, and try to get detailed understanding
about the development and manufacturing process of customers.
In regard to this, in Taiwan, it is often for IC design firms to provide customers with amodule which integrates IC chips, software and other electronic parts rather than asingle IC chip. In the case of a relatively simple final product, IC chip firms possiblyoffer a “total system solution” which realizes all or most functions of the final productand a reference design of the entire final product which may be easily adopted bycustomers. I heard that, in the provision of a total system solution or module, it wasusual to concentrate on the development of core IC chips/IPs and outsource orcooperatively develop other parts. The manufacturing of modules is also outsourced tocontract manufacturers.
4.3. Local Competitive Environment
Local competitive pressure is supposed to facilitate the improvement of skills andproducts of local firms, which is often mentioned as one of the merits of clustering. In
this subsection, I will examine local competitive environment of the IC cluster in
Taiwan mainly based on the result of our questionnaire survey.
First, we asked about the location of main competitors. Among all the respondents(36 firms), 27 firms (75 percent) replied that competitors were in the local area, while
31 firms (86 percent) said that they were outside the local area. This result means thatmany of the respondents have their competitors both in and outside the local area. As
21

Figure 4: Local Competitive Pressure
4-1: How Do You Feel Local Competitive Pressure?
(Among 36 Respondents)
Neither
0 firms (0%)

No answer
2 firms (6%)

Oppressive
4 firms (11%)

Constructive
7 firms (19%)

Both
23 firms (64%)

4-2: The Detail of "Oppressive" and "Both" (Among 27 Respondents)

23 (85%)Decrease in profits due to price down competition
Scramble for human resources

19 (70%)Decrease in bargaining power against customers

16 (59%)Commoditization due to the imitation of
products/technologies

13 (48%)No answer

1 (４%)
0

5

10

15

20

25
(Firms)4-3: The Detail of "Constructive" and "Both" (Among 30 Respondents)
20 (67%)Development of unique products
19 (63%)

Technological development capability

16 (53%)Customer support

15 (50%)

Cost management

13 (43%)Marketing11 (37%)

Quality control

10 (33%)

Speed-up/flexibility
6 (20%)

Employee treatment
2 (7%)

No answer
0

5

10

15

20
(Firms)

Source: The international questionnaire survey on business environment of the East Asian semiconductor industry.

22the locations outside the local area, respondents mentioned the following
countries/regions: the USA (55 percent), mainland China (48 percent), Japan (36percent), Korea (32 percent), Europe (26 percent), Taiwan excluding the local area (23percent), and other and no answer (6 percent).
Then, we asked the question: “Which do you think the local competitive pressure isoppressive or constructive for your company management?”
Among all the
respondents (36 firms), 4 firms (11 percent) replied “oppressive”, while 7 firms (19percent) replied “constructive”. 23 firms (64 percent) said, “It is both oppressive andconstructive”. The remaining 2 firms (6 percent) gave no answer (see Figure 4-1).
27 firms (75 percent) replied “oppressive” or “both oppressive and constructive”. The
breakdown is as the following: “Decrease in profits due to price down competition” (23firms, 85 percent), “Scramble for human resources” (19 firms, 70 percent), “Decrease inbargaining power against customers” (16 firms, 59 percent), and “Commoditization due
to the imitation of products/technologies” (13 firms, 48 percent) (see Figure 4-2). On
the other hand, 30 firms (83 percent) replied “constructive” or “both oppressive andconstructive”.
We asked them in which aspects they attained improvement.
Important items include “Development of unique products” (20 firms, 67 percent),“Technological development capability” (19 firms, 63 percent), “Customer support” (16firms, 53 percent), and “Cost management” (15 firms, 50 percent) (see Figure 4-3).
In sum, it is observed that the local competitive pressure in the Taiwanese IC cluster
has the aspect of constructive competition which contributes to innovation and better
management techniques as well as the aspect of excessive one which leads to thedevastation of management. In the both aspects, its influence covers a wide range ofitems. Based on Porter (1990), it is often said that strong competition in a home basestrengthens the international competitive advantage of firms rooted in the region.
However, I suggest that it is important to examine both of destructive and constructive
aspects and to clarify the details of the impacts.
5. Conclusion: Interaction between Inter-firm Relationship in the Cluster andFirm-Level Strategy
In the previous sections, I examined important features of firm-level strategy andinter-firm relationship in the Taiwanese IC cluster. The main factors of firm-levelstrategy lead to the creation of customer value, namely, the appropriate understanding ofcustomers’ needs and the offer of solution14, reasonable prices, and rapid product
14

The word of solution in the IT industry usually means (the proposal and/or construction of) the
information communication technology (ICT) system in order to solve daily operation problems. In a23

development. I often heard from Taiwanese business people that their technology was
not necessarily state-of-the-art and very unique, and that the main source of theircompetitive advantage is persistent effort to offer customers solution promptly at areasonable price, the practice which is seen as increasingly important in the IC (and IT)
industry. Although many experts in the world understand it, I believe that Taiwan isable to go thoroughly because the firm-level strategy is appropriate and the inter-firm
relationship in the cluster facilitates it in the background. In other words, thefirm-level strategy is compatible with the inter-firm relationship in the cluster, and viceversa, which realizes potential merits of clustering and creates development dynamism
in this region. The mere presence of a cluster and the textbook-like reference ofcluster advantages do not fully explain why firms of a specific region are competitive ina specific industry.
Figure 5 shows the interaction as a summary. Concentration on core business is
closely connected with the minute division of labor and cooperation, because a
specialized firm alone can not get through. In the Taiwanese IC industry, it resulted in
the development the unique vertical disintegration structure.
The substantial
agglomeration of various specialized firms in the relatively narrow area in/around HSIP
facilitates close partnership. At the same time, it enhances competitive pressure ineach of the production stages and IC-related sectors, which has constructive impact for
the improvement of management techniques in various fields including the developmentof unique products, better customer support, technological development, costmanagement, and so on. In addition, we can find linkages between the factors of
firm-level strategy. That is to say, concentration on core business probably leads to therealization of the economy of scale, which is fundamental to thoroughgoing costmanagement. Similarly, the concentration of corporate resources on well-selected
targets normally promotes active utilization of external knowledge sources tosupplement in-house R&D. Furthermore, it brings the economization of R&D
expenses, then, finally contributes to thoroughgoing cost management. However, suchfavorable linkages between factors do not necessarily happen in an automatic manner.
Or rather, as examined in detail, it is critical to have firm-level strategic efforts and local
business environment which is facilitative to the efforts.
In these days, it is observed that some Taiwanese IC firms pursue the diversificationof product categories and activities and the provision of solution (for example, modules,
turnkey solution, and so on), which seems contrary to concentration on core business.
broad sense, it means (the offer of) customized products/services or a package of products/services tocomprehensively solve a customer’s problems. In this paper, the word is used as the latter meaning.

24

25

Source: Made by the author.

Regional
Development
Dynamism !

Pressure for
Cost Reduction

Pressure forTechnology
Development

Competitive Pressure:◆Constructive Impact to Improve
Management◆Excessive Competition to
Oppress Management

Pressure for the Development of
Unique Products & Better Customer
Support

Vertical Disintegration:◆Partnership between IC Design and
Manufacturing Firms◆Partnership between IC Firms andFinal Product Makers

Inter-Firm Relationship in the
Cluster

Active Utilization of External Knowledge Sources:◆Conducting In-House R&D and Other Means in
Parallel◆Variety of Partners (Customers/Users, Contract
Manufacturers, Universities/Research Institutions, etc.)◆Internationalization of Partners (the USA, Japan,
China, etc.)

Economizing R&D Expenses

Thoroughgoing Cost Management:◆Standardization of Design and Production
Process (Avoiding Too Much Customization)◆Aggressive Exploration of Overseas Markets◆Other Means (Relatively Low Cost ofEngineers, Strict Cost Accounting, etc.）

Realization of the
Economy of Scale

Concentration on Core Business:◆Specialization and Division of Labor◆Close Interactions with Customers & Quick
Adjustment◆Providing Customers with All-Inclusive
Products/Services through Making Good Use of
Outsourcing and Partnership

Firm-Level
Strategy

Profits & Market
SharesRapid ProductDevelopment

Reasonable Prices

Appropriate Understandingof Customers' Needs &the Offer of Solution

Creating Customer Value

Figure 5: Interaction between Inter-firm Relationship in the Cluster and Business Strategy in the Taiwanese IC Industry

However, a more detailed examination reveals that they try to gradually expand a
product line-up considering technological synergy, and/or try to divide an overgrowncompany into several affiliates which focus on a limited number of targets, and/or try toactively rely on outsourcing and alliances in the product development except for thedevelopment of core technology. All these practices are not necessarily inconsistent
with the original strategy. Or rather, these can be seen as the evolution of it. A
similar explanation also seems the case in the development of close partnership between
IC design firms and foundry manufacturers, or between foundry manufacturers andpackaging/testing firms. Namely, it is considered that such close partnership should beseen as effort to upgrade their specialties rather than intention to become an IDM.
The other important finding in this paper is that external linkages with foreign actors
play an important role in the development of the Taiwanese IC industry and cluster.
As mentioned above, Taiwanese IC firms have substantial connections with foreign
partners in both of trading and knowledge exchange. Similarly, while Taiwan has asubstantial number of local specialized firms and close partnership among them which
covers most related sectors of the IC industry as a whole, they still rely on foreign actors
as the supplier of critical machines/tools and materials and as the source ofstate-of-the-art technology. However, the dependence is no longer unilateral in thesedays. For example, as Taiwanese foundry makers (especially, TSMC and UMC) havebecome world top-class IC manufacturers, it is indispensable for overseas major
suppliers of equipment, EDA tools, IPs and materials to have strategic partnership withthem in order to verify their new trial products by using the process lines of these major
foundry makers. It is a remarkable example of successful latecomer development thatthey entered into the IC business as middle-/low-technology manufactures focusing on
the volume market zone, then, relying on the unique business model and cost advantage,
they have gradually enhanced their presence in the sphere of technological development
as well as mass production in the world.

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Acknowledgements
This paper was researched and written with the help of grants from two Japanesebodies: Economic Research Center, Graduate School of Economics, Nagoya University,
and Japan Society for the Promotion of Science (Grant-in-Aid for Scientific Research).
The research would not have been possible without the cooperation of the many
people in firms and institutions in Taiwan and Japan who accepted my visits andgenerously granted me their valuable time.
My fieldwork was greatly facilitated by the help and encouragement of many
academic people in Taiwan and Japan. I am particularly grateful to Prof. Hitoshi
Hirakawa and Prof. Kenji Nozaki of Nagoya University. I also gratefully acknowledge
the institutional support from the Industrial Economics & Knowledge Center(IEK)/Industrial Technology Research Institute (ITRI, Hsinchu) and the Japan Centerof Chung-Hua Institution for Economic Research (CIER, Taipei) in Taiwan. I am
deeply indebted to Mr. Naoto Takaki, Mr. Hideyuki Okano, Ms. Ema Hirata of Kyushu
Economic Research Center (KERC, Fukuoka), and Prof. Akira Yamasaki of Chuo
University, Prof. Hatsumi Hamada of Ritsumeikan University, Akio Kondo of Hosei
University, with whom I conducted some part of research. Finally, I would like toexpress my gratitude to colleagues of the International Centre for the Study of East
Asian Development (ICSEAD, Kitakyushu), especially Prof. Susumu Hondai who was
my superior in regard to this research project.

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