Taiwan’s small and medium enterprises have been recognized as the key driving force of the country’s economic development over the past half century. Although the SME sector has changed its structure and operations over time, most economists believe that with continued government support it will maintain its position as the mainstay of Taiwan’s economy for years to come.
According to Day Jaw-yang, director of the Taiwan Research Institute’s Research Division III, SMEs emerged in Taiwan due to a combination of domestic conditions and global economic developments.
Under Japanese colonial rule (1895-1945), Japan targeted Taiwan as its supplier of steel, chemicals and machinery, Day told Taiwan Today Oct. 15. “After the Nationalist government moved to Taiwan in 1949, it selected agriculture for high-priority development, as the first step in tackling shortages of food and other essential domestic commodities.”
As a result, family and small businesses engaging in agricultural food processing increased considerably, creating Taiwan’s earliest SME sector, he said.
In the 1950s, the government adopted an import substitution strategy in an effort to use limited state resources to speed up economic growth. According to Day, this strategy focused on developing less high-tech, more labor-intensive light industries, such as textiles, shoemaking and tools and hardware. Government loans backed by U.S. aid to small private businesses established the foundation for the development of SMEs, he noted.
Taiwan’s SMEs continued to grow into the 1960s and 1970s, as the global economy gradually recovered after World War II. When advanced economies such as Japan, European countries and the U.S. were looking for a world factory floor with cheaper labor, Taiwan was among their top choices, Day said.
“When a company makes decisions on where to set up its plants, it takes into consideration the country’s available resources and the educational level of the labor force,” he explained.
Thanks to the government, which had built a firm economic foundation by improving infrastructure and implementing nine-year compulsory education in 1968, many SMEs were able to transition quickly from producers of daily necessities to industrial original equipment manufacturers supplying electric parts and other components to developed countries.
Meanwhile, Day said, to bolster the increasingly export-focused economy, the government controlled exchange rates and provided tax incentives to boost exports, benefitting local SMEs at the same time.
“SMEs have a relatively low entry capital threshold; therefore, many former SME employees started their own businesses after acquiring business know-how from factories they worked for,” he said.
SMEs were going strong and making their greatest contributions to Taiwan’s domestic economic growth through the mid-1980s, according to Day. However, after that time, as the government relaxed its grip on the New Taiwan dollar, the rising value of the currency and increasing labor costs, along with growing environmental awareness, caused some SMEs to move their operations to mainland China and Southeast Asian countries in search of cheaper labor and new business opportunities.
Day said those who stayed were forced to become more innovative, upgrade their operations and partner with companies from developed economies to cope with the increasingly adverse conditions.
In this period the semiofficial Industrial Technology Research Institute played an important role in helping local companies acquire and develop new technologies, he noted.
In the past two to three decades, Taiwanese companies, including SMEs, have gone through industrial restructuring to become more technology- and service-oriented. “Nowadays, the SME sector is more aware of the importance of technology, innovation and quality,” Day said.
Although bigger corporations have emerged and gradually replaced the SMEs in terms of contributions to the nation’s GDP, SMEs have continued to thrive as satellite vendors in the domestic supply chain, Day observed. This contrasts with the situation in Japan and South Korea, where core technologies and state resources are still mainly in the hands of the big firms, a situation detrimental to the development of SMEs.
“This is a unique phenomenon in Taiwan: big firms did not kill off SMEs; instead, large corporations helped drive their progress,” he said.
Day gave the example of the many SMEs manufacturing bicycle parts concentrated around Dajia Township, Taichung County, where major bicycle manufacturers Giant Manufacturing Co. Ltd. and Merida Industry Co. Ltd. are based, forming an industry cluster. “Many similar clusters can be found all around the island,” he pointed out.
According to the Ministry of Economic Affairs, an SME is defined, in the manufacturing and construction sector, as a company with less than NT$80 million (US$2.6 million) paid-in capital, and in the service sector as one with less than NT$100 million in annual revenues. As of 2009, there were 1.2 million SMEs in Taiwan, accounting for 98 percent of all businesses. They generated 31 percent of the nation’s total sales and 17 percent of its exports.
While the SME share of Taiwan’s exports may seem unimpressive, Day said the most important contribution of the sector is its crucial role as a local job provider and thus a stabilizing force in society.
“Though a single SME creates very limited employment opportunities compared to large corporations, it helps establish job security in a community and therefore spurs more spending and investment, resulting in a thriving local economy,” he said.
In 2009, Taiwan’s SMEs provided more than 75 percent of the nation’s total employment in the private sector.
To help Taiwan’s SMEs stay strong in ever-changing conditions, Day believes the government should divide SMEs into at least three categories, recognizing their different needs and supporting them accordingly.
“For example, the government should help the top-performing 1 to 2 percent of SMEs increase their international presence and boost their brand name recognition,” he said. Meanwhile, more awards and certifications should be granted to midlevel SMEs so as to enhance their competitiveness and facilitate market access.
In addition, he suggested the government provide more small loans and on-the-job training for microenterprises, helping operators make adjustments to the changing economic environment.
On top of government initiatives, Day said, SME operators should set up sound accounting systems, including comprehensive financial statements that would make it easier to get financed, particularly in the post-Great Recession era.
In terms of how SME can differentiate themselves from competitors and ensure long-term growth, Francis Chen, founder of Franz Collection Inc., an SME and supplier of design porcelain, encouraged SME operators to focus on creating products that reflect the country’s cultural characteristics, thereby tapping into the spirit of the modern aesthetic economy.
Citing the example of U.S.-based The Coca-Cola Co., Chen said the key to its success is the imagination of American culture it offers, including open-mindedness, freedom and the American dream, rather than its flavored sparkling drink and other beverage products.
“A successful brand has to be rooted in culture and be able to strike a chord with local consumers first,” he said, adding that Coca- Cola would lose its luster if Americans themselves stopped drinking it.
“Because SMEs can be more flexible in their operations, they can let their creativity run wild and develop products that embody both a human touch and promising economic value,” he said.
Looking ahead, Wang Chih-kang, chairman of the Taiwan External Trade Development Council (TAITRA), sees the vast mainland Chinese market as the perfect place for incubating and strengthening Taiwan’s SMEs.
“TAITRA has been hosting exhibitions featuring Taiwan’s specialty products in major mainland Chinese cities since last year in an effort to open up more distribution channels for Taiwan’s SMEs,” he said. These events are a prelude to the establishment of Taiwanese shopping centers in mainland China in the near future, he said.
Wang urged local SMEs to partner with the semiofficial TAITRA. “I believe those who can do well in the mainland Chinese market will be much better equipped to make inroads into the international arena,” he said.
Day also called for the government to help develop and market local specialty items. “We have remarkable traditional industries around the country, such as ceramics in Yingge Township, Taipei County, and sun cakes and taro ice cream in Taichung, to name just a few. Revitalizing these local businesses would not only generate more local jobs but would also help prevent young people from leaving rural areas.”
Although on average 30 percent of SMEs survive no more than five years, Day said, Taiwan’s SME sector has proven itself to be energetic and quick to adapt to changing conditions. The sector has consistently made up a high proportion of Taiwan’s total enterprises. “The value of SMEs is their nonstop innovation; new members of the sector will continue to bring better and more creative new elements into Taiwan’s business environment,” he said. (THN)
Write to Audrey Wang at audrey@mail.gio.gov.tw