Paradigm Shift in Koreas Science

1
Industrial Policy Forum in Nicaragua Economic
Development and Policy Measures and the
Participation of SMEs in the Development of Taiwan
Jiann-Chyuan Wang Chung-Hua Institution for
Economic Research November 14-15, 2007
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Outline

• Taiwans Basic Facts and Global Trade
• The Influential Factors behind Taiwans Economic
  Development
• Two Key Development Strategies for Taiwans
  Economic Development
• Policy Measures in Different Stages of Taiwans
  Economic Development
• The reasons for the emergence of SMEs in Taiwan
• The role of SMEs in Taiwans economic development
  after the 1980s
• Policy measures for creating a favorable
  environment for SMEs
• The Guidance Programs for SMEs
• Concluding Remarks

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I. Taiwans Basic Facts, Global Trade and
Investment
1. Basic Facts
Table 1 An Outline of Taiwans Economic Growth
(2006)
Unit US dollars
Sources Taiwan Statistical Data Book, CEPD, 2007.
4

• 2.Global Trade and Investment

224.02 billion US dollars
202.69 billion US dollars
Fig.1 Taiwans destination of exports (2006)
Fig.2 Taiwans sources of imports (2006)
5
Fig.4 Taiwans imports structure
Fig.3 Taiwans exports structure
6
II. The Influential Factors between Taiwans
Economic Development
1. Literature Review

• Capitalist Economy (Protection of private
  property, respects of market mechanism)
• Infrastructural provision from Japanese
  Governance age. (railway, electric power,
  seaport)
• Land reform in 1950s promoted agricultural
  productivity (farmer income ?? demand for
  industrial products ?? release surplus labor to
  assist industrial sector)
• Industrial policy followed comparative advantage

7

• US Aid in 1951 - 1965
• High saving rate (saving/GDP 38) provided
  sufficient capital for economic development
• Fixed exchange rate (until 1979) facilitated
  international trade
• High level of educational investment
• Fair income distribution
• Fast growth for global economy (1950-1970)
  created a favorable environment for Taiwans
  expert-oriented economic strategy.

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2. Special features of Taiwans Economic
Development

• Moderate public finance policy (government saving
  gt government expenditure)
• The promotion of state-owned enterprises and
  natural division of labor with SMEs
• Providing tax incentives for strategic industry
  but did not become government financial burden

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III. Key development strategy for Taiwans
Economic Development
1. Conventional wisdom development strategy in
1950s-1960s

• Impose high tariff and import restriction to
  promote infant industry
• Keep interest rate low to provide low cost of
  investment for firms, even under inflationary
  pressure.

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2. Taiwans non-mainstream development strategy

• Import substitution strategy ? export-oriented
  strategy
• N.T depreciation (US 1 15 N.T ? 40 N.T)
• depreciation ? inflation (?import
  restriction)
• depreciation ? main exports from sugar, rice
  to
• labor-intensive
  products
• (umbrella,
  shoes, agricultural
• processing
  products etc.)
• High interest rate to encourage saving, which
  become productive capital for firms and major
  force for anti-inflation

1960
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Table 2 Taiwans trade structure
Sources same as Table 1.
12
Table 3 Structure of Production ( of GDP by
Sector)
Sources same as Table 1.
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3. The reasons why Taiwans could pursue economic
development and fair income distribution

• Exchange rate depreciation and trade
  liberalization pushed labors from land-intensive
  agriculture industry to labor-intensive export
  industry(MPL?? Wage?)
• Discard low interest rate policy to prevent
  capital-intensive production method ? employment
  ? ? income ?
• Abundant SMEs provide more job opportunity

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IV. Policy Measures in Different Stages of
Taiwans Economic Development
Establish Science Park
Establish ITRI
Set up export-processing zone
Setup Tax reform committee
High interest rate to curb inflation
High interest rate policy
1950
1962
53
1980
54
56
60
65
66
67
68
69
70
71
72
73
Exports tax refund
US Aid stop
Loosen import restriction
Implement 9 year obligatory education
Unify exchange rate
Promote family plan for reducing birth rate
Statute for Investment Encouragement
Implementation of National Science Development
Plan
Labor-intensive Light Industry Import
substitution Stage
Export-oriented Stage
Import substitution stage
Industrial and Labor Policy
Science and Technology policy
Financial policy
Exchange rate policy
Fig. 5 Taiwans economic development stages and
related policy measures
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Implement Fair Trade Law
Setup 15 new private banks
Promote interest rate liberalization
Enact Labor standard law
Implement health insurance
Promote the promising industry
1980
82
94
2002
89
96
97
84
86
87
91
98
95
Develop ten promising industry and eight key
technologyImplement statute for Industrial
upgrading
N.T appreciation
Admitted to WTO
Setup NII promotion committee
Implement the incentives for strategic industry
Promote privatization of state-owned enterprises
Expand Science Park
6-year National Development Plan
Technology-oriented Stage
Industrial and Labor Policy
Science and Technology policy
Financial policy
Exchange rate policy
Fig. 5 Taiwans economic development stages and
related policy measures
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Two Trillion Twin Star
Conservative Mainland China policy
WiMax technology Drugs
Promote cultural creative industry
Bio-tech New prags Act
Cheap land price provision 006688
Guideline for Service Industry
Sino-Panama FTA
2002
2007
03
04
05
06
Military Service exemption
Low interer rate, devalue currency
Financial reform
SMEs, low incomes protection
U-Taiwan infrastructural
Regional operation center promotion
Antitrust policy to avoid dumping
Free Trade Port Area
Enlarge Science Park
Layout vision for 2015
Extend SIUP
Globalization Stage
Industrial and Labor Policy
Science and Technology policy
Financial policy
Exchange rate policy
Fig. 5 Taiwans economic development stages and
related policy measures
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V. The reasons for the emergence of SMEs in Taiwan

• The special characteristics of Taiwans SMEs
• The kinship structure of SMEs provides start-up
  capital and required manpower.
• Policy design created a fair and competitive
  environment for SMEs
• State-owned enterprises assumed the role of
  supplying raw and intermediate materials in
  stable quantities and at reasonable prices to
  down-stream export-oriented SMEs.
• The government applied industrial policies with a
  high degree of flexibility and self-restrained.

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• A favorable macroeconomic environment and
  self-restrained industrial policies were market
  friendly and the key to foster Taiwans SMEs.
• The subcontracting system among SMEs helped them
  compete effectively with large enterprises and
  among themselves.
• before the 1980s Taiwans subcontracting system
  existed basically only among SMEs with only a few
  existing between SMEs and large enterprises.
• The intra-firm flexibility of SMEs in adopting
  existing technology and the inter-firm
  flexibility of SMEs in exchanging information and
  handling OEM or trading contracts helps Taiwans
  SMEs compete effectively with their larger
  counterparts.

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• The absorption-type export-oriented network
  allows SMEs to engage in exports without being
  subordinated to large enterprises.
• The sophisticated network existing among SMEs,
  subcontractors and local small trading companies.
  Subcontractors allow SMEs to operate efficiently
  and flexibly, providing medium quality products
  at reasonable prices.
• Local small trading companies help SMEs to engage
  in foreign trade transactions, allowing them to
  assume a production role and escape scale
  constraints in international marketing.

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• Low threshold entry and exit costs facilitate the
  rapid transfer of resources from less efficient
  to more efficient producers, which makes a
  significant positive contribution to industrial
  productivity growth.
• A dense network of firms specializing in
  subcontracting and trading services lowers the
  start-up costs of new manufacturing firms.
  Moreover, in Taiwans legal system, it is easier
  for firms to file for bankruptcy, thereby
  facilitating the exit of inefficient firms.

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6. Government should collaborate with civic
organizations to establish organizations for the
promotion of foreign trade and which could
conduct market research both domestic and
overseas, thereby helping companies to gain a
better understanding of international markets and
to move into those markets successfully.
Markets are the most important element in
exporting. The small size companies makes it
impossible for them to collect market information
on their own, and consequently they often lose
business opportunities. Private companies still
need help from the government in the collection
of information about international markets if
they are to overcome the obstacles in their way.
At the same time, government purchasing can help
companies to achieve steady development within a
stable market.
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7. Keep exchange rate stable to promote saving,
and turn saving into productive capital. in
Taiwans experience, stable exchange rate,
reasonable interest rate, and controllable
inflation rate encouraged people to deposit money
into bank, which could provide abundant capital
for economic development.
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• 8. Provide start-up capital but coupled with own
  capital and management assistance to raise
  successful rate (Taiwans Ten Guidance Programs).
• 9. Create a favorable environment for SMEs
  without being crowded out resources by large
  enterprises. (part of government procurement
  designed for SMEs but without violating WTO
  principle).

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VI. The role of SMEs in Taiwans economic
development after the 1980s

• Definition of SMEs

Table 4 The Definition of SMEs Used in Different
Countries and Regions
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Sources Taiwan White Paper on Small and Medium
Enterprises in Taiwan, consecutive
yearsAustralia Department of Industry, Tourism
and Resources, /www.industry.gov.au/Canada
Department of Industry, /strategis.ic.gc.ca/Hong
Kong Support and Consultation Centre of SMEs,
/www.sme.gcn.gov.hk/Japan Small and Medium
Enterprise Agency, /www.chusho.meti..go.jp/Malays
ia Small and Medium Industries Development
Corporation, /www.smidec.gov.my/Mexico OECD
Small and Medium Enterprise Outlook 2002New
Zealand Statistics New Zealand,
/www2.stats.govt.nz/Philippines National
Statistics Office, /www.census.gov.ph/Russia
Russian SME Resource Centre, /docs.rcsme.ru/Singa
pore Ministry of Trade and Industry,
/www.mti.gov.sg/South Korea Small and Medium
Business Administration, /www.smba.go.kr/Thailand
Office of SMEs PromotionUK Department of
Trade and Industry, www.sbs.gov.uk/ USA Office
of Advocacy, Small Business Administration,
/www.sba.gov/advo/
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• 2. The Number of SMEs in Taiwan Has Increased
  Gradually Over Time

Source Small and Medium Enterprise
Administration, White Paper on Small and Medium
Enterprises in Taiwan, consecutive years.
Figure 6 The Number of SMEs in Taiwan, and SMEs
Share of All Enterprises, 1981 2006
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• 3. Enterprises with Capitalization of Less than
  NT100,000 Account for the Largest Share of
  Enterprises

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• 4. SMEs Sales Have Increased over the Years, but
  Their Share of Total Sales Has Been Falling
  Slowly

Source Small and Medium Enterprise
Administration, White Paper on Small and Medium
Enterprises in Taiwan, consecutive years.
Figure 7 SMEs Annual Sales and Their Share of
Total Sales for All Enterprises, 1986 2006
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• 5. A Slight Increase in SMEs Export Sales
• 6. The Number of SMEs That Have Been Established
  for Five Years or Less Has Been Falling Gradually

Source Small and Medium Enterprise
Administration, White Paper on Small and Medium
Enterprises in Taiwan, consecutive years.
Figure 8 SMEs Export Sales and Share of Total
Export Sales for All Enterprises, 1997 2006
30
Table 5 Trends in SME Age, 1995 2006
Note Data of Lienchiang County, a small offshore
island, are included in the calculation since
2005. Source Ministry of Finance, Tax Data
Center, VAT data (consecutive years).
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• 7. Around One-third of Enterprises in Taiwan are
  Owned by Women Female-owned Enterprises
  Account for 13.95 of the Total Sales for All
  Enterprises
• 8. Female-owned Enterprises Are More Oriented
  Towards the Domestic Market
• 9. Eight Leading Banks Provided a Particularly
  Large Amount of Financing to SMEs

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• 10. The indirect financing for SMEs has been
  steadily decreasing

Source Central Bank, ROC.
Figure 9 Share of Total Financing Held by Direct
and Indirect Financing, 1993 2006
33
VII. Policy measures for creating a favorable
environment for SMEs

• Firms
• Strat-up capital
• Entreprenurship
• Skill (technology)
• Market

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Government (supply / demand / environment)

• Supply side measures directly influences
  technology supply through provision of such
  factors as financial resources, manpower and
  technology know-how.
• Demand side measures demand-side tools
  government to provide stable market demand
  through contract research, and to use government
  procurement programs to guide the direction of
  technological development.
• Environmental side measures government can
  create a favorable economic climate to indirectly
  influence firms innovative activities through
  tax incentive schemes, patent protection and
  other regulations.

35
Source Summarized form Rothwell and Zegveld
(1981), Chen (1986), and Sun (1989)
Fig. 10 Taiwans Innovation Policy Measures and
Responsible Agencies
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VIII. The Guidance Programs for SMEs in Taiwan
1. Ten Guidance system for assisting SMEs

• Finance and credit guidance system
• Primary tasks include providing credit
  instruction and assisting small and medium
  enterprises in improving their financial
  structures.
• 2) Management guidance system
• Primary tasks include instructing and
  assisting small and medium enterprises in setting
  up management systems and boosting management
  efficiency and the development of human
  resources.

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• 3) Production technology guidance system
• Primary tasks include guiding and
  assisting small and medium enterprises in
  boosting technology levels and adopting new
  technologies.
• 4) Research and development guidance system
• Primary tasks include assisting in the
  development of new products and technologies
  and supporting the individual or joint RD
  efforts of small and medium enterprises.

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5) Information management guidance system
Primary tasks include guiding and assisting
small and medium enterprises in the collection of
information and the establishment of information
management systems to enhance efficiency through
the utilization of information. 6) Industrial
safety guidance system Primary tasks
include providing guidance to small and medium
enterprises in establishing or improving
industrial safety systems and assisting in the
resolution of industrial safety problems.
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7) Pollution control guidance system
Primary tasks include providing guidance to small
and medium enterprises in improving pollution
control facilities and assisting in the
resolution of pollution control difficulties.
8) Marketing guidance system Primary
tasks include assisting small and medium
enterprises in market expansion by collecting and
providing necessary market intelligence.
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9) Mutual support and cooperation guidance
system Primary tasks include guiding and
assisting small and medium enterprises in
conducting exchanges and cooperation activities
in order to bolster their competitive ability.
10) Quality enhancement guidance system
Primary tasks include assisting small and medium
enterprises in creating a management environment
of outstanding quality, raising levels of product
and service quality in the enterprises, and
promoting joint quality improvement efforts among
enterprises.
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2. Some Specific Programs for SMEs

• SMEs credit guarantee fund (SMBCGF)
• The objective of the system is to provide
  credit guarantees to small and medium
  enterprises which are promising but short of
  collateral necessary to obtain finance from
  contracted financial institutions(CFI).

42
Outline of Credit Guarantee System Relations
among SMBCGF and related institutions
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3. SMEs incubator center
Definition Incubator Centers are a place where
individuals or enterprises are allowed to
incubate new products, mew businesses and new
technology, to start up a new business and to
conduct enterprises transformation and
upgrade. Functions 1. Reduce risk and
expenditure involved in incubating anew
business, improve success rates.
2. Assist in the process of industrial
incubationprojects and the development of new
technology/products. 3.
Provide guidance in commercializing RD results.
4. Provide a location where
academics and industry can work together.
5. Provide testing services, speed
up productdevelopment 6.
Provide training for personnel, related
informationand consulting services for operation
management. Effectiveness 60 incubators, 1,300
firms (since 1997)
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4. Encouragement programs In order to
encourage firms to pursue for quality, technology
excellence, government implements several
programs as follows.

• National Award of Small and Medium Enterprises -
  Management, upgrading technology
• National Award for Innovation - RD, technology
  upgrading, product quality improvement etc.
• Little Giant Award - excellent export and
  management performance

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IX. Concluding Remarks
1. The maintenance of political and social
stability, timely implementation of
effective policies, and vigorous private
entrepreneurship stand out as key factors
in Taiwan experience.
2. Consider adopting export-oriented development
strategy and selecting a group of strategic
industries on which the government would
concentrate its resources to promote their
development
46
In Taiwans experience, to avoid lack of focus,
the government selected a group of strategic
industries with significant potential and should
concentrate its resources on these industries, in
order to achieve economies of scale and
international competitiveness. It was not until
the government began to concentrate resources on
textiles and a handful of other industries that
it was able to increase output and achieve
economies of scale and competitiveness. If a
country adopted this strategy and succeeded in
achieving a breakthrough, this would have a
demonstration effect, and would encourage
multinational enterprises to invest in that
country.
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3. to provide one-stop service to attract
foreign investment.
Some developing countries are relatively late
starter in seeking to attract foreign investment,
so it needs to provide incentive measures and
administrative assistance that are better than
what other countries have to offer. Besides tax
breaks, one-stop service, transparency, making
it easy to obtain land for factories,
establishing industrial parks and other ancillary
measures are all very important. Currently,
provide tailor-made incentive measures for big
companies, to reduce the level of uncertainty
accompanying investment. In this way they would
be able to attract up, mid and downstream
industries, creating a cluster effect.
48
4. Government should collaborate with civic
organizations to establish organizations for the
promotion of foreign trade and which could
conduct market research both domestic and
overseas, thereby helping companies to gain a
better understanding of international markets and
to move into those markets successfully.
Markets are the most important element in
exporting. The small size companies makes it
impossible for them to collect market information
on their own, and consequently they often lose
business opportunities. Private companies still
need help from the government in the collection
of information about international markets if
they are to overcome the obstacles in their way.
At the same time, government purchasing can help
companies to achieve steady development within a
stable market.
49
5. Keep exchange rate stable to promote saving,
and turn saving into productive capital. 6.
Provide start-up capital but coupled with own
capital and management assistance to raise
successful rate. 7. Create a favorable
environment for SMEs without being crowded out
resources by large enterprises. (government
procurement, alliance etc.)
50
Thank You !