Taiwan's business model has been highly successful and yet it also has some great structural weaknesses. One of these is the reluctance of Taiwanese businesses to invest in research and development (R&D). The reason for this is still debated. One theory is that in the formative years of Taiwan's economic boom, capital was hard to obtain and interest rates very high. As a result, capital had to be put to work building production capacity to earn the money to service companies' debt; R&D spending was simply an unaffordable luxury. Another theory holds that Taiwan's development strength lay in the tremendous versatility of its small and medium-sized enterprises, but these companies were simply too small to be able to do useful R&D work themselves.
Probably both these elements have contributed to a reluctance on the part of Taiwan's private enterprise to spend money on research. Enter, then, the government, in the form of the Hsinchu-based Industrial Technology and Research Institute, more commonly known by its acronym ITRI.
ITRI, founded in 1972, is an unsung hero of Taiwan's development. The institute's function has been to do R&D that the private sector would not. ITRI would decide what technology should be developed and then do the research needed to make it commercially viable before either spinning off or passing on the result to the private sector. Taiwan's "Silicon Island" identity is to a great extent the result of decisions made at ITRI over the last 30 years. A list of the institute's research projects sounds like a litany of Taiwan's high-tech successes. There is far more than just the semiconductor industry. Taiwan has dominated the notebook PC, computer peripherals, wireless LAN and CD and DVD drive product sectors; currently it is sucking up the global market for flat-panel displays. None of this would have been possible without ITRI, which is now developing flexible electronics.
The ITRI story gives the lie to the idea that government interference in the market is always malign. Sometimes government intervention is needed to resolve market inadequacies. And these shortcomings can occur for reasons to do with business culture as much as economics.
It is interesting to look from this perspective at the new regulations on Taiwanese investment in China announced in March. Critics claim that such regulations prevent the market from working efficiently--while Taiwan restricts trade and investment in China, it fails to take advantage of the comparative advantages on either side of the Taiwan Strait and the potential division of labor.
But another aspect of Taiwan's business culture, related to the reluctance to spend on R&D, is that many Taiwanese businesses, when they find it no longer economical to manufacture a certain product at home, would sooner ship their production line overseas than upgrade production to higher value-added items. That is, unfortunately, the Taiwanese version of globalization. China has been the major destination for the offshoring of Taiwan's sunset industries--which are sunrise industries across the strait.
When the draft of the new regulations was released, a part was aimed at making sure that some companies which invest large sums in China also match them with investment in Taiwan. The intention is to force those companies with the resources to make big investments across the strait to also consider Taiwan's economic environment--which is, after all, the source of their investment capital--and to pay attention to keeping this viable through investment and industrial upgrading. This has, of late, been neglected; now the government has to intervene in the market to redress a failure perhaps not so much of the market system as of the local business culture.