A group of scholars takes Taiwan as a test
case for globalization.
"In place of the old national seclusion and self-sufficiency," wrote Karl Marx on the growing interconnection between trading nations, "we have intercourse in every direction, the universal interdependence of nations." Despite Marx's belief that capitalism would eventually burn itself out, the web of international commerce has only expanded.
Indeed, many would argue that there is nothing particularly new about globalization. "The French Sun King Louis would drink coffee from Vienna served on Chinese porcelain sweetened with [imported] sugar for dinner," noted Mike Moore, former director-general of the World Trade Organization--the institution charged with regulating global trade--and former prime minister of New Zealand. "To end his evenings, [he would] smoke Virginia tobacco. A lot of French noblemen drank the Aztecs' cocoa and chocolate, and the English preferred Indian tea."
Some scholars argue that the world was even more interconnected in the past. "Trade, investment and financial flows were actually greater in the late 1800s," writes Princeton professor Robert Gilpin in Global Political Economy. In the 1840s, the growth of cross-border trade spurred the French diplomat Chateaubriand to poetic musings on the vanishing of distances. Moore points out that Chateaubriand, commenting on the growth of railways, telegraphs and steamships, remarked: "Distances will disappear, it will not only be commodities which travel but also ideas which will have wings."
So what then, if anything, is so new about the international economy that would prompt the adoption of the new term "globalization"? Is globalization just the intensification of existing international trade links and the inclusion of more nations in an existing system or are there features that are entirely new in the global economy today?
In Global Taiwan: Building Competitive Strengths in a New International Economy , a group of scholars from the Industrial Performance Center at the Massachusetts Institute of Technology attempts to answer these questions by looking at Taiwan's economic growth and its role in the global economy. This study follows two earlier books on the effects of globalization on advanced industrial economies, Made in America (1989) and Made by Hong Kong (1997). Believing that macro-level analyses failed to explain many of the characteristics and complexities of globalization's impact on different local economies, the authors interviewed business leaders and policy-makers in Taiwan in an attempt to develop "a set of explanations from the ground level up to account for the strategic choices of firms operating in a global economy."
This seeking-truth-from-facts approach, to borrow a phrase from Deng Xiaoping, provides a refreshing reprieve from the often politically charged debates on economic growth in Taiwan. What emerges from this empirically driven study is not only a nuanced view of the sectors driving Taiwan's prosperity today but also a description of some radical changes in the international economy--changes which seem to indicate that globalization is indeed new in some very fundamental ways.
Global Supply Chains
To understand Taiwan's rapid industrialization and astonishing bound onto the top tier of industrial economies is in part to grasp those fundamental changes in the global economy. In the 1950s, the authors point out, foreign aid and agricultural output sustained Taiwan's economy. Today it is driven by a vibrant high-tech manufacturing sector, which, in 2001, manufactured 70 percent of all personal computer motherboards, 55 percent of all laptops, 56 percent of all liquid-crystal-display monitors, and 51 percent of all color-display-tube monitors.
Despite producing the lion's share of these essential high-tech components, few shoppers would search out Taiwanese-made products when purchasing computers. The reason, of course, is that Taiwanese companies still manufacture for foreign brands. With few well-known brand names of its own, Taiwan nonetheless grew prosperous. "Quanta, a Taiwanese ODM notebook manufacturer, succeeds with no links to final customers, no brand, and little involvement with product definition," the authors note. At the heart of this phenomenon lie the radical changes in global supply chains.
Traditionally, firms attempted to integrate vertically to ensure quality and predictability in production. A manufacturer might buy, or at least forge tight bonds with, suppliers and distributors to keep the process running smoothly. Any interruptions in the arrival of materials needed for production or the distribution of final products to the market resulted in lost profits. By the 1980s, Japan's vertically integrated firms provided a model for what was considered the best industrial practice: "In such an environment, vertically integrated companies had enormous advantages, since they were able to extend their range of control over all the steps between innovation and the final customer, and because owning the steps was usually the only way to ensure that there was a tight enough degree of integration between them for quality, efficiency and just-in-time delivery."
The implications of this model are daunting for all but the richest countries: If success in the modern economy arrived in the wake of well-integrated juggernauts, what were developing countries to do? Were they simply too far behind to catch up with the major industrial powers?
For a nation like Taiwan, which in the 1970s and 1980s was achieving modest growth through the low-skilled manufacturing of plastic products, bicycles and clothing, the jump to high-tech manufacturing would have been slow going if the vertical-integration model remained the only path to follow. But globalization presented a new model. "Fifteen years later," the authors write, "the world of production seems to have turned on its head." Today, manufacturers, even of products that rely on a highly skilled workforce and cutting-edge technology, shop out manufacturing and assembly to labor markets around the globe: "This fragmentation creates a new division of labor between brand or lead firms; subcontractors specializing in functions like manufacturing, logistics, testing or design, which were once encapsulated within the lead firms and have now been spun out; and assemblers, distributors, and retailers."
This fragmentation of the supply chain allowed industries in developing nations to leap forward, skipping over many of the steps of the traditional industrial model for development. "Taiwan's experiences in positioning itself in the global production systems . . . offer perhaps the most valuable of its lessons for other developing countries," write Suzanne Berger and Richard K. Lester. These two authors argue that, far from being shut out of the global economy, nations seeking to get into the game are more likely to succeed because of the new globalized supply chain. In the words of Berger and Lester, "the modularization of production creates the possibility of focusing on a single competence and linking up with other companies in value chains to produce final goods." This is just the strategy that Taiwan has famously adopted with such success.
Aside from the decreasing costs of transportation, the global supply chain is made possible--even optimal as a means to maximize profits--by the smooth flow of information. "Advances in information-processing power and speed and the standardization of communication protocols," the authors argue, "allow firms to exchange complex and voluminous data seamlessly so that products that once had to be made in-house in order to achieve conformance and high quality can now be manufactured by independent suppliers and subcontractors."
What this suggests is that the skills required for production have to some degree become commodified. Relying on transferred know-how, regional firms can plug into the global economy by specializing in a profitable niche in the supply chain without having to build brands on their own. For Taiwan, this has meant manufacturing, and often designing, high-tech components for a wide swath of buyers while keeping prices lower than the competition. The authors of Global Taiwan quote one Taiwanese executive who attributes this niche to the adaptive nature of Taiwan's manufacturers: "If you want to build something new where there was nothing before, go to the United States. If you want to build something to last for 20 years, go to Japan. If you want to work successfully under always changing conditions and changing regulatory systems, go to Taiwan."
Despite fears in recent years that Taiwan is being hollowed out by the relocation of manufacturing to China, investors are still coming to Taiwan for that famous flexibility. The authors quote an Economist Intelligence Unit report that indicates that from 1996 to 2000 investment in manufacturing increased by 18.1 percent per year and was accompanied by a 6 percent a year increase in manufacturing output over the same timeframe. The secret of Taiwan's continued success, it appears, is its ability to innovate and to keep moving up the production ladder toward increasingly sophisticated design and manufacturing.
Since Taiwan is nearing the top of that ladder--producing highly knowledge-intensive IT products--and labor prices are cheaper elsewhere, can Taiwan continue to prosper in this ever-changing environment without proprietary products? Douglas B. Fuller, in a chapter on Taiwan's innovations in electronics, argues that companies like Wistron (formerly Acer) and Quanta have reached a point where their gains from manufacturing for foreign brands have peaked. "The constraints of the supplier model," he writes, "are now apparent to both state actors and private industry." The question of where to go next is one that vexes Taiwanese entrepreneurs and also a government that has been very active in trying to foster a knowledge-based IT economy.
What's a Government To Do?
The shift in global supply chains presents opportunities for developing economies but also presents unprecedented challenges for governments trying to predict where things are headed. If products are manufactured by firms all over the world, just where does a country want to position itself in the supply chain?
A recent case highlights this dilemma. When Lenovo, China's largest PC manufacturer, bought IBM's PC business late last year, some American Congressmen reacted as if IBM had sold a national treasure. They winced at the thought of more job losses--more outsourcing--and fretted over the idea that a Chinese company would be gaining some vital secrets that made America great. It was as if the entire deal was a hostile takeover to be read in the context of a cold war. The jitters and jingoism, however, did not fit the reality of a globalized economy. In essence, IBM had chosen to do nothing more than shed an unprofitable part of its business. Moreover, it is not all that clear just what IBM was selling Lenovo. The parts of IBM's PCs were already outsourced. The case, keyboard and hard drive came from Thailand, the display screens from South Korea, and the graphics controller chips from Taiwan, while Intel produced the microprocessor in the United States. Making a PC, in other words, had become commodified, and the profits in the industry flowed from the creation of new applications, software and services--not manufacturing. IBM became a leaner, more profitable company because of the sale, while Lenovo was left to make a money loser profitable.
If IBM is not primarily a computer manufacturer then, just what should those Congressmen be doing to ensure its continued success? Is it in fact a question of how to support continuous innovation? These questions are fundamental for all governments in a global economy. "The challenge for contemporary industrial policy is not just that the pace of change is faster now than in the heyday of Japanese or South Korean industrialization," writes Edward S. Steinfeld in a chapter on the rising competition from China. "More important, the organizational mechanism of change--particularly the extent to which it is spread across ostensibly unrelated firms and industries--is completely new. For a nation to be strong in autos, aerospace or telecommunications, what does it need? Software companies? Semiconductor design houses? Handset manufacturers? Steel firms? Marketing firms?"
The decentralization of the production of commodities and uneven profitability between manufacturing and knowledge-based services and applications present a quandary for the leaders of Taiwan. Global Taiwan effectively illustrates the factors that have driven local prosperity--moving toward high-tech manufacturing, knowledge transfers from foreign manufacturers and a pool of innovative, well-educated workers. But how does a government sustain something as abstract as creativity?
In an article on the electronics industry, Fuller points to the benefits of the relationship between private enterprise and government laboratories such as the Chungshan Institute of Science and Technology, a military research facility. Revolutionary inventions that sprung up from military labs in the US--the Internet and GPS, for example--drove the private sector in unpredicted ways. In Taiwan, government efforts to break down the walls separating private innovation from military research, which is often generously funded in ways that private firms cannot justify to investors, seem to be producing good results, as is government support for Taiwan's science parks, which are magnets for foreign R&D investment.
Keeping those ideas percolating and facilitating the continuous adaptation needed to reap profits in a quickly shifting international economy, however, are in essence global challenges. Perhaps the most salient point that emerges from Global Taiwan is that by looking closely at the sectors that are driving Taiwan's prosperity, a much broader picture emerges, for the distances between the economic concerns of different nations are quickly disappearing.
Robert Green, a former resident of Taiwan, is presently a graduate student at Harvard University.
Copyright (c) 2005 by Robert Green.