Academic journal article International Journal of Management

The Development of Relations between Taiwan and the People's Republic of China in the High-Technology Economic Sector

Academic journal article International Journal of Management

The Development of Relations between Taiwan and the People's Republic of China in the High-Technology Economic Sector

Article excerpt

The competition between China and Taiwan to attract high-tech industry investment recently has become increasingly severe. This study presents an in-depth analysis of the cross-strait (Taiwan, China) high-tech industry, considering the areas of industrial environment, government policy and industrial performance. This investigation examines the likely influence of WTO entry on increasing industry competition. It reveals that considerable development space exists for improving cross-strait relationships and that a competitive and cooperative relationship may appear during the transformation process.

1. Introduction

Chinese comprise the bulk of the population of Asia. However, owing to different political views, the Taiwan Strait has separated China into two different states, the People's Republic of China (PRC) and the Republic of China (ROC, Taiwan) since 1949. The cross-strait relationship refers to the interaction between these two sides. Following 50 years of separation, both sides developed respective advantages and specialties in science technology. Recently, the high-tech industry has not only created numerous high-tech elites and employment opportunities, but also exerted some very positive effects on international trade, making both sides significant players in the global market. With the global economy remaining gloomy, the Chinese market has attracted enterprises from all over the world. Since its formal WTO entry in 2001, China has been aggressively preparing for challenges from global trade competition. This phenomenon has significantly influenced investment in high-tech industry in China. Many other countries in the world are striving to prevent the magnetic effect between China and Taiwan in high-tech industry. Corporate management thus must create a cross-strait high-tech industry, involving industrial environment, industrial history and industrial infrastructure, to keep up with the development of the Chinese high-tech industry in Asia and succeed in the competitive international market.

2. Criteria for Assessing Industrial Competitiveness

Most researchers from an economic or management point of view study the industrial international competitiveness based on an overall economic environment outside the industry and industrial structure.

In "The Competitive Advantage of Nations" , Porter (1990) applied the Diamond Model to interpret the origins of national competitiveness, including five key elements: factor conditions, demand conditions, related and supporting industries, firm strategy, organizational structure, and two additional elements: government and chance. If a nation has good overall performance in all seven conditions, it will be competitive in some industry in the world. Rugman & D'Cruz (1993) and Rugman & Verbeke (1993) proposed a modified version of the Double Diamond Model that they applied to interpret the trade relationship among Canada, Mexico and U.S.A. Porter (1991) considered that since the Diamond Model is continuing the theory on competitive strategy and advantage and has been verified by field investigations and studies involving hundreds of industry types in dozens of countries (Grein and Craig, 1996), its theory is accountable and has integrity. On the other hand, Buckley (1985) adopted a perspective based on the competitive process to identify the determinants of international competitive as being competitive capability, management process and competitive performance. D'Cruz and Rugman (1993) employed the Five Partner Model to emphasize the importance of upstream suppliers and market scale to international competitiveness. Freemantle (1996) found that improving British industrial competitiveness requires both specialized division of labor and basic infrastructure for scientific and technical development.

Gardener (1990) emphasized the complete integration of research academia, university, industry, government, the importance of technology transfer and high-tech industrial parks to make international competitiveness into a national characteristic. The above literature study, demonstrates that factors such as government policy, industrial history, operating environment and technical innovations are essential in strengthening international competitiveness in the face of globalization. This study uses these factors to assess the competitiveness of the cross-strait high-tech industry.

3. Cross-Strait High-tech Industry Development Policy

3.1 Three Stages in the Development of the High-tech Industry Policy of the Taiwan Government

In Taiwan, the high-tech industry has been established based on government policy, an incentive system and a system of science-based industrial parks. Technology transfer and diffusion were successfully implemented. Notably, the number and scale of fabless IC design companies in the Taiwanese semiconductor industry ranked second globally in 1999, during which year Taiwan ranked as the third largest semiconductor manufacturing nation. Moreover, at the end of 2000, Taiwan maintained a market share that was fourth in the world. Recently, the Taiwanese high-tech industry has begun relocating to Mainland China, causing significant change in the industry. The entire development history of the industry is as follows:

During the first stage from 1949 to 1968 (since 1949 Chinese communist party took over Mainland China, and the original government moved to Taiwan, until the year of 1968) the main objective was to nourish R&D human resources.

Later, during the second stage (from 1969 to 1980), the main objective was to improve the scientific research foundations.

Finally, during the third stage (from 1981 until now), the main goal has been to keep up technologically with advanced western nations, establish clear and systematic technology development policies, and strengthen the incubation and recruitment of high-tech talent.

To further stimulate the economic growth, key science and technology research projects have been planned by the Taiwanese government for the period from 2002 to 2007. These projects include the "Biotechnology Development Project", the "National Nanotechnology Project", the "Chip System National Project", the "Telecommunications National Project", and so on. These projects are designed to support the technology development of the domestic core industries.

The high-tech industrial structure of Taiwan is focused on contract manufacturing. The advantages associated with enterprises mostly derive from process improvement, high yield and operational excellence for low-cost advantage possessing. However, the small scale of the domestic market limits the size of enterprises. Consequently, to improve resource use efficiency, companies in specific industries specialize in specific fields, leading to the high-tech industry being restructured and adopting a unique highly "specialized vertical division of labor system" operation model in the global industry.

3.2 Six Stages of Chinese High-tech Industry Policy

During the first Stage (previous to 1978), development focused on independent R&D and business development, mainly for military applications and non-consumer products.

Later, during the second stage (from 1979 to 1990), science and technology policy turned towards using utilizing foreign investment access foreign technologies and equipment and make science and technology development to drive economic growth, as part of Mainland China's economic liberalization. Moreover, from 1987 China began restructuring its science and technology development system to enable technical personnel to communicate among each other, and to allow the implementation and commercialization of technical achievements.

During the third stage (from 1991 until now), the main objective has been to allocate science and technology resources to restructure the high-tech industry. A government policy "One Dragon" (i.e. packaging, test, manufacturing, and design in one company) was gradually replaced by "specialized division of labor". The Chinese government began actively supporting the IC design industry and adopted the policy of introducing foreign technology to stimulate domestic technology development in 1995. In 1999 China established a Science Technology Development 15 Plans, Science and Technology Driven Economic Growth Plan and the 2015 Prospective Plan Proposals.

China considers the high-tech industry to be important to science and technology development. Chinese local governments are providing numerous incentive programs and cheap labor. Given the increasing market liberalization following WTO entry, foreign investment to China has grown tremendously recently. The growing economic power in China is widely viewed by other nations as a threat. The recently published "Asian High-tech Industry Review" by S&P1 stated : High-tech industry competition runs on a ten year cycle. If we make a scrutiny into the history of semiconductor industry, in the '80s America dominated the business; between 1988 and 1992, Japan took over the market; from 1993 to 2000, Taiwan and South Korea rose to prominence. From 2000 to 2010, the global semiconductor market will witness fierce competition owing to the over investment in China.2

4. Status of Cross-Strait High-tech Industry Exchanges

During four decades, the two sides of the strait experienced mutual conflicts and evolved in different directions while having minimal contact. Even today, the two sides remain hostile towards each other. Recently, both sides have experienced significant economic and political changes. Taiwan is developing a political identity independent of china. However, during the early 1990s Taiwan also loosened restrictions on contact with China to allow the conditional exchange of people, capital, and products. Those policies persisted until 2000, when the newly elected president Chen Shuiben, a supporter of Taiwan independence, ended 40 years of KMT rule and triggered a period of political instability. In 2001 Taiwan suffered a severe economic depression. Many information technology companies moved to China, and only the high-level information design industry remained in Taiwan. Opposite political views directly affect mutual interaction in the cross-strait high-tech industry.

The governments on both sides of the strait have restricted cross-strait civilian and academic exchanges excluding official contact. Non-specialized government officials or irrelevant people are excluded from cross-strait technical exchanges. Therefore, the governments on both sides of the strait entrusted the Straits Exchange Foundation (Taiwan) and the Association for Relations Across the Taiwan Strait (Mainland China) to form the "Cross-Strait Technology Exchange Foundation". Private Taiwanese groups formed "China Cross-Strait Technology Exchange Promotion Association" in January 1997 in Taipei, to establish a channel for Chinese technical intelligence and coordination mechanism assistance for Chinese and Taiwanese companies investing there. However, cross-strait technology exchange involves highly specialized discipline beyond the Straits Exchange Foundation or the Association for Relations Across the Taiwan Strait, owing to geological difference, both sides have different technical terms, academic terms and product specifications, creating barriers to implementing and exchanging technical accomplishments.

Taiwan is good at technical innovation, while China is good at implementation. This compensative relationship provides opportunities for cooperation, a fact that is well recognized by industry. Taiwan has commercialization ability but lacks fundamental research ability. The Taiwanese high-tech industry still faces legal, political and bureaucratic risk about their Mainland China investments. On the other hand, China has put considerable effort and resources into fundamental research, but lacks hightech talent, as well as lacking commercialization ability and infrastructure such as communication and transportation facilities. Taiwan can learn something about fundamental research from China, while Taiwan can help China in commercialization.

The gap between the two sides is largest in the foundry industry, and this is also where the most compensative relationship exists. Meanwhile, the design industry displays the least difference between the two sides and the lowest compensative relationship. Regarding industrial technology capability, the design and DSP industries have the smallest gap and the lowest compensative relationship. Notably, Taiwan still enjoys a competitive advantage in the wafer foundry industry and in terms of global integration, and thus can act as a technical bridge between China and the world. However, when both sides are in the competition of "strategic trade policy", they must carefully determine their position to minimize the gap of cross-strait recognition by government and civilians. Both sides need to pay attention to high-tech products and trade activity, as well as intellectual property right, investment laws and environmental protection. Notably, Taiwan is faster than Mainland China in upstream new product development. From electronic industry OEM to ODM, it indicates the commercialization capability. The ideal model for the future would involve conducting R&D design in Taiwan, while production is Mainland China. We can convince big customers that design should be done in Taiwan and products are best produced cheaply in China, which is the production base for Taiwanese companies. China cross- strait is positioned in global market to diffuse production base.

5. Discussion

With growing global competition, national competitiveness depends on the quality of the industrial environment. The cross-strait high-tech industrial environment characteristics are outlined below. These characteristics will influence the business plans of enterprises regarding operating location.

5.1 Comparison of the Cross-Strait Overall Industrial Environment

The section analyzes the influences on high-tech industry operations, as follows:

(1) Basic Industrial Environment

The previous section comparing cross-strait production demonstrated that China possesses advantages in terms of production cost and market potential, while Taiwan possesses advantages in industrial structure, talent, administration efficiency, and so on. With many Taiwanese companies having moved to China, many overseas Chinese talented personnel have returned to China, and the government has aggressively promoted business investment, minimizing cross-strait differences. Regarding capital markets, industrial intelligence and system, Taiwan retains an advantageous position.

(2) Transportation Cost and Efficiency

Since the distance between manufacturing plants in China is further than in Taiwan, domestic land transportation costs are higher in China than in Taiwan. However, transportation capacity is not an issue, since cross-strait transportation differences are minimal.

(3) Custom Clearance Fee and Efficiency

Both sides use computer systems for customs clearance operations, meaning there is little difference between the two. Only in some parts of China, due to transportation routes, is double customs clearance required.

(4) Business Operation Environment

Regarding operation flexibility, China is far less flexible than Taiwan owing to restrictions on production contract, proportion of domestic sales, domestic purchase proportion requirements, and so on. Thus most high-tech companies move their low price and mature production line to China, and keep high price and new product manufacturing in Taiwan.

Regarding tax and capital, the measure to acquire value increment tax first and then refund the tax in China has produced capital accumulation and harmed competitiveness. Regarding industrial intelligence, the demand is mainly on domestic market, and China has shown itself to be relatively unconcerned with the global market. Additionally, numerous restrictions have further slowed down the information flow among industries.

Regarding administration efficiency, although China still has numerous local governments that charge various levies of administration fees, recently it has adopted flexible administration measures to attract investment. In Taiwan, local governments sometimes use environmental issues to resist industrial development and even improperly tax enterprises using administrative measures. The companies accept more administration services in Taiwan than in China.

The two sides of the strait have different levels of economic development. Taiwan is a developed economy while China has an underdeveloped economy. Consequently, 2001 WTO membership will have a different effect on the two sides. China offers exciting future opportunities in the multimedia digital consumer market and information appliances. However, reduced customs taxes following WTO participation, and the opening up of markets and sales channels will create some disadvantages high-tech industry development in China. Taiwan originally followed a low tax policy, and provided no protection for its high-tech industry, meaning it faces no tax reduction issue following WTO entry. Instead, the Taiwanese IC industry will become more competitive following WTO entry. Previously, Taiwan sometimes was charged for illegal dumping sales and infringement of intellectual property when Taiwan's electronic products were exported 40%. After joining the WTO, Taiwan obtained free access to markets in member nations, particularly China. In March 2002, the Taiwan government conditionally permitted 8inch wafer foundry investment in China and advocated establishment of 12- inch wafer foundry in Taiwan. According to a survey by ITRI, in 2005, Taiwan will have over ten: 12-inch wafer foundries, and will become the global center for 12-inch wafer foundry. In its future high-tech industrial development Taiwan should promote the upstream design industry and middle and downstream value adding services. Under the new environment of WTO free trade, Taiwanese companies will have to make a difficult decision about whether to pursue a cross-nation operation strategy, localization policy (roots in Taiwan), westbound policy (Mainland China).

The cross-strait semiconductor industry is now used as an example to further explain the difference :

1. Both sides of the strait use wafer foundries to achieve the goal of the specialized division of labor. However, a key difference is that the specialized division of labor in Taiwan was formed naturally while in China it resulted from strong government support.

2. Regarding the semiconductor life cycle, before 1987 Taiwan was in the beginning stage of this cycle, and moved into the growth period after 1987. From 1995, the technical level in Taiwan began growing. Besides the Washena agreement restricting IC equipment imports, China has easy access to foreign technology but its domestic semiconductor technology currently is only in the beginning stage.

3. Low labor costs are the main reason that China is attracting foreign investment. Currently this foreign investment is concentrated in packaging and test operations. The only difference is that foreign investors also wish to gain a share of the Chinese domestic market.

4. Differences exist between the two sides of the strait in terms of research organization, R&D teams and technology transfer. Taiwan's research organization is a non-profit organization with a demonstration plant to facilitate commercialization. Local wafer foundries in Taiwan have access to an entire R&D team from ITRI. However, China has numerous research organizations scattered around the country. An excess of organizations and R&D subjects in China have caused R&D resources to become too scattered, and have caused technology to become unfocused, and have caused the isolation of commercial operations. Additionally, technical people come from all parts of China and sometimes face difficulties in cooperating owing to cultural differences.

In short, China continues to lag behind Taiwan in semiconductor technology, and does not yet represent a serious threat to Taiwan. With the relocation of middle and downstream assembly of companies to Mainland China, where they can be close to their customers, IC manufacturing companies or design companies in Taiwan also feel increasingly compelled to move to China. Furthermore, investment in China benefits the Taiwanese mother companies by helping them to expand their operational base and improve their strength.

5.2 Cross-Strait High-tech Development Conflicts and Analysis of Competition and Cooperation

According to Department of Statistics, Ministry of Economic Affairs of Taiwan, Taiwan enjoys a significant lead over China in terms of competitiveness in the 20 largest industries, including: semiconductor manufacturing, data processing (mainly computer related industry), machinery, motorcycles, bicycles, and metal products (mainly screws, nuts). From 1998 to 2000 Taiwan had many more patents approved than China. This fact also indicates Taiwan is most competitive in machinery, electrical and electronic products, and vehicles. Breaking the patents granted to Taiwan down by category, Taiwan ranked third in the world in number of semiconductor technology patents in 2000. In contrast, in 2000 China had more patents for motorcycles and bicycles than any other country. The focus of future growth in China has shifted from the traditional consumer industry to intermediate materials (including metals and petrochemicals) and technologically intensive information technology products. Notably, electronics industry exports will take up 40% of total manufacturing output in Taiwan in 2005. Therefore, both sides face inevitable competition in the high-tech industry. According to research by the Industrial Development Bureau Taiwan3, recently the most rapidly growing exporting industry in Taiwan has been the electrical and electronic machinery manufacturing and installation industry, in which China is expected to be very competitive. Although Taiwan enjoys advantages compared to China in technical innovation and commercialization ability, its legal system remains immature and can not keep up with the rapidly changing environment. Additionally, the transformation and upgrade of Taiwan's traditional industry has been slow, and thus the development of the high-tech industry has reached a bottleneck. On the other hand, China has spent significant efforts and resources on fundamental research. Additionally, China has an enormous land area, large population (over 1.27 billion in 2001, or 22% of the world population), low cost of living, and highly disciplined and cheap labor. These factors help attract foreign investment. However, on the negative side, the communist political system differs significantly from that in free nations. Both sides of the strait suffered from the outbreak of SARS outbreak and were classified by WHO as epidemic areas, scaring away foreign investors.

In the future, the Taiwanese high-tech industry should focus on product leadership and customer intimacy. This means developing Taiwan into a global high-tech product service center. The Chinese high-tech industry is focused on manufacturing technology and mass production management. Large corporations will diversify into the high-tech industry. In the competitive and cooperative relationship between Taiwan and China, Taiwan can compensate China for its lack of mass production technology management, while China can provide Taiwan with opportunities to develop in product innovation, R&D capacity and customer service. The focus of competition is mass production and diversified business operations.

Taiwanese companies have used rapid R&D capacity development, basic infrastructure, market potential and human resources to establish alliances with local companies in China and develop a complete competitive advantage, and thus eventually have become the main economic power in greater China. Chinese companies can learn from Taiwan in the areas of mass production, international business operation and low cost management experience, and thus can become leading regional enterprises. During the transitional period to form a greater China economy, competition and cooperation between the two sides of the strait will increase. How to exploit this special relationship is the key to cross-strait business operations. Besides the business aspect, the policy and industry must also be considered in investigating the difference in industrial competitiveness between the two sides. For example, the timing and main points during the initial stage are different. Taiwan stressed consumer product technology development, while China stressed military science development. Both sides thus reached different technical achievements. China actually implemented such reforms before Taiwan. China may apply its past strength in defense technology development, for example rockets, satellites, spacecraft and so on, to the semiconductor industry. Owing to its large population, abundant talent, intense labor and vast domestic market, China can develop her own high-tech specifications and establish exclusive advantages. Recently, China has also dedicated itself to reforming its R&D system. The Chinese government thus has encouraged national research organizations and higher education to focus on market economics and promoting a national innovation system. While both sides of the strait consider the high-tech industry to be a key industry, they use different methods for developing it. Specifically, Taiwan uses a policy of science park development, while China uses clear industry development government policy, centralized resources and government subsidies to assist domestic companies. China continues to use various trade barriers to keep imports out. However, for political reasons China has also opened its market to imports and opened the door to allow its citizens to travel and invest in Southeast Asia. China actively cooperates with the USA, Japan and the four little Asian dragons (Taiwan, South Korea, Singapore and Hong Kong) in trade and investment. China hopes to become a global manufacturing plant, with the ability to control global land costs, labor costs, and price setting. The Korean high-tech industry is based on large enterprise, so China faces challenging competition. Meanwhile, Japan feels threatened by China mainly because of the dumping of low price products from China and the large Chinese immigrant population in Japan. Singapore also faces structural unemployment risk owing to the moving out of industries. Taiwan currently is facing a flood of low price products onto the domestic market and a large outwards capital flow, as well as the problem of politics interfering with cross-strait economic activity, creating a very difficult situation. Especially recently, China has faced structural changes and changes in technical innovation capacity, creating an important cross-strait issue.

6. Conclusions

While Taiwan has strong high-tech manufacturing capabilities, China has large land resources and low labor costs, as well as an enormous and potentially lucrative domestic market. Many nations have attempted to develop their high-tech industries. Both sides of the strait are facing knowledge and technology driven challenge and rapid increases in speed and efficiency. For successful high-tech industry development, both sides of the strait must exploit their similar language and ethnic background and dismantling barriers to economic links. Both sides of the strait should use the principles of "mutual help" and "mutual compensation" to expedite the implementation of a system of legal and fair technology exchange for cross-strait technology and talents. Moreover, both sides also should devote themselves to logistics, marketing, and cooperation, and core manufacturing technology, ensuring low product replace ability in a value chain and entering a high value-added stage with strategic management. Both sides of the strait need to improve the competitiveness of its high-tech industry and establish sciencebased industrial parks. Both sides of the strait should improve their investment and business operating environments through balanced development in high level industry and industry for internal demand, with the goal of making both sides of the strait highly competitive.

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1 [Industry Commerce Times] 2002/6/26 Chun-Yung Hong/Taipei : The report "Taiwan Industry moving to Mainland China" written by S&P representative in Taiwan, Christopher Irwin : John Bailey said it will take ten years for the Chinese high-tech industry to threaten the high-tech industries of Taiwan and elsewhere in Asia.

2 Executive Yuan, ROC, "Challenge 2008 : National Development Projects (20022007), 91.05.31 issue number 0910027097, page 2.

3 Minshin Kon, Yufeng Tsai, 2002 : "Study on Cross-strait Competition and Cooperation and Dependence Indicator" Taiwan Institute of Economic Research project commissioned by IDB.



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[Author Affiliation]

Yi-Chun Lin

Central Police University, Taiwan

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