I’ve just now been catching up on reading since returning from Iceland. In perusing the periodicals I most enjoy, I came across an interesting article about high tech in Taiwan (see Taiwan’s Tech Firms Conquer the World). The article, aside from providing an interesting read in its own right, holds some important lessons for the People’s Republic of China.

Taiwan is now the home of many of the world’s largest makers of computers and associated hardware. Its firms produce more than 50% of all chips, nearly 70% of computer displays and more than 90% of all portable computers.

This is, no doubt, quite an achievement.

Acer, for example, surpassed Dell last year to become the world’s second-biggest maker of personal computers. HTC, which started out making smart-phones for big Western brands, is now launching prominent products of its own.

Much of the credit for the growth of Taiwan’s information technology (IT) industry goes to the state, notably the Industrial Technology Research Institute (ITRI). Founded in 1973, ITRI did not just import technology and invest in R&D, but also trained engineers and spawned start-ups: thus Taiwan Semiconductor Manufacturing Company (TSMC), now the world’s biggest chip “foundry”, was born. ITRI also developed prototypes of computers and handed the blueprints to private firms.

Taiwan’s overall economic development over the past 50 years has been nothing short of spectacular. And there is no doubt in my mind that China is trying to emulate elements of Taiwan’s development strategy. However, a strategy centered almost exclusively around manufacturing (whether it be in high tech or other industrial goods) comes with some serious risks. As the article explains,

This strength, however, is also Taiwan’s weakness. Most firms are junior partners in the world’s IT supply chains, making things others have developed. They are good at incremental innovation, mostly related to manufacturing…many of them are stuck in a “commodity trap”, cautions Dieter Ernst of the East-West Centre, a think-tank in Honolulu. Profit margins, he says, are razor-thin and do not allow adequate investment in R&D and branding. The Taiwanese industry is particularly weak where the most valuable intellectual property is created these days: in software, services and systems.

Hmmm, a commodity trap!

That’s an appropriate moniker, and exactly the position that China (and many other developing economies) risks finding itself in as it continues its commitment to manufacturing and export-oriented growth. I have discussed these issues in various blog posts (see Emergence of Emerging Market Innovation, China Attracting High-Tech Research, China Alternative Energy, and Globalization Discontents). The key for countries like Taiwan and China is to transition from an economy that simply manufactures the goods that are designed and developed elsewhere to one in which innovation, creativity, and high value-added services take root. Unfortunately, for developing countries, those transitions take an inordinate amount of time.

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