#1The Competitive Advantage of Taiwan Professor Michael E. Porter Harvard Business School Commonwealth Speech Taipei, Taiwan July 31, 2001 , This presentation draws on ideas from Professor Porter's articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), "The Microeconomic Foundations of Economic Development," in The Global Competitiveness Report 1998, (World Economic Forum, 1998), "Clusters and the New Competitive Agenda for Companies and Governments" in On Competition (Harvard Business School Press, 1998) and ongoing statistical study of clusters, Competing for Prosperity: The Microeconomic Foundations of Development, forthcoming, and "What is Strategy?" (Harvard Business Review, Nov/Dec 1996). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter.#2Taiwan's Current Malaise • Recent economic downturn Highest unemployment in decades. • Uncertainty of future relationship to Chinal CAON Taiwan Presentation 07-31-01 CK 2 Copyright © 2001 Professor Michael E. Porter#335,000 33,000 Taiwan's Economic Performance Weighted average OECD US 31,000 29,000 Canada Weighted 27,000 GDP per average capita Japan Finland¦ OECD (PPP 25,000 Germany Australia adjusted) Ireland* in US-$, Sweden Singapore 23,000 2000 UK 21,000 New Zealand Israel 19,000 South Korea TAIWAN 17,000 I 15,000 0% 1% 2% 3% 4% 5% 6% 7% Note: Compound annual growth rate of GDP per capita, 1990-2000 Irish GNP per capita is about 20% lower than the reported GDP per capita figure due to large dividend outflows to foreign investors. We use GNP per capita for Ireland because it is more representative. For other countries GDP and GNP are very similar. Source: WEO CAON Taiwan Presentation 07-31-01 CK 3 Copyright © 2001 Professor Michael E. Porter#4Annual Real GDP growth rate, 1990 - 2000 15% 10% 5% Asian Economic Performance By Country 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -5% -10% -15% Source: EIU Malaysia TAIWAN Singapore Indonesia Hong Kong S Korea Thailand Australia New Zealand CAON Taiwan Presentation 07-31-01 CK 4 Copyright © 2001 Professor Michael E. Porter#5Annual U.S. patents per 1 million population, 2000 450 International Patenting Output 400 USA 350 300 TAIWAN 250 Japan Sweden 200 Germany 150 Israel 100 Canada South Korea Singapore UK New Zealand 50 Australia 0 0% 5% 10% 15% 20% 25% 30% 35% 40% Compound annual growth rate of US-registered patents, 1990 - 2000 Source: US Patent and Trademark Office (www.uspto.gov). Author's analysis. CAON Taiwan Presentation 07-31-01 CK 5 О = 10,000 patents granted in 2000 Copyright © 2001 Professor Michael E. Porter#6200 Increase in 150 the annual number of U.S. patents per 1 million 100 population, 1990 to 2000 50 0 TAIWAN ՏՈ 250 Sweden Japan Singapore International Patenting Output Israel S Korea Finland Source: US Patent and Trademark Office (www.uspto.gov). Author's analysis. CAON Taiwan Presentation 07-31-01 CK 6 Canada Germany Netherlands New Zealand UK Australia France Italy Switzerland Copyright © 2001 Professor Michael E. Porter#7U.S. Information Technology Investment Share of Real Private Non-residential Investment by Type Share of Real Private US Non- Residential Investment 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% Note: Quarterly data seasonally adjusted at annual rates Source: BEA, author's calculations CAON Taiwan Presentation 07-31-01 CK 0% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 7 1999 2000 2001 Q1 2001 Q2 IT Equipment and Software Other Equipment Business Structures Copyright © 2001 Professor Michael E. Porter#8U.S. Information Technology Investment Level of Real Private Non-residential Investment by Type Real Private US Non-Residential Investment, Billions of 1996 US-$ 700 600 500 400 300 200 100 0 Note: Quarterly data seasonally adjusted at annual rates Source: BEA, author's calculations CAON Taiwan Presentation 07-31-01 CK 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 8 2000 2001 Q1 2001 Q2 IT Equipment and Software Other Equipment Business Structures Copyright © 2001 Professor Michael E. Porter#9Taiwan's Economic Challenges Three Agendas 1. Addressing some chronic weaknesses II. Making the transition from an Investment-driven to a true Innovation-driven economy III. Defining Taiwan's economic relationship to China These agendas are integrally connected CAON Taiwan Presentation 07-31-01 CK 6 Copyright © 2001 Professor Michael E. Porter#10• Sources of Rising Prosperity A nation's standard of living (wealth) is determined by the productivity with which it uses its human, capital, and natural resources. The appropriate definition of competitiveness is productivity. - - - - Productivity depends both on the value of products and services (e.g. uniqueness, quality) as well as the efficiency with which they are produced. It is not what industries a nation competes in that matters for prosperity, but how firms compete in those industries Productivity in a nation is a reflection of what both domestic and foreign firms choose to do in that location. The location of ownership is secondary for national prosperity. The productivity of "local" industries is of fundamental importance to competitiveness, not just that of traded industries Devaluation does not make a country more "competitive”, rather it reveals a lack of fundamental competitiveness . Nations compete in offering the most productive environment for business The public and private sectors play different but interrelated roles in creating a productive economy CAON Taiwan Presentation 07-31-01 CK 10 Copyright © 2001 Professor Michael E. Porter#11CAON Taiwan Presentation 07-31-01 CK Innovation and Prosperity Prosperity Competitiveness (Productivity) Innovative Capacity For advanced economies innovation has the critical role supporting high levels of prosperity 11 Copyright 2001 Professor Michael E. Porter#12Determinants of Productivity and Productivity Growth Macroeconomic, Political, and Legal Context for Development Microeconomic Foundations of Development Sophistication of Company Operations and Strategy Quality of the Microeconomic Business Environment • Sound macroeconomic policies and a stable political / legal context are necessary to ensure a prosperous economy, but not sufficient Competitiveness ultimately depends on improving the microeconomic foundations of competition CAON Taiwan Presentation 07-31-01 CK 12 Copyright © 2001 Professor Michael E. Porter#13Productivity and the Microeconomic Business Environment Context for Firm Strategy and Rivalry Factor (Input) Conditions • A local context that encourages efficiency, investment, and sustained upgrading Open and vigorous competition among locally based rivals Demand Conditions High quality, specialized inputs available to firms: - human resources - capital resources - physical infrastructure - administrative infrastructure - information infrastructure - scientific and technological infrastructure - natural resources CAON Taiwan Presentation 07-31-01 CK Related and Supporting Industries • Presence of capable, locally- based suppliers and firms in related fields . Presence of clusters instead of isolated industries Sophisticated and . demanding local customer(s) . • Unusual local demand in specialized segments that can be served globally Customer needs that anticipate those elsewhere Copyright © 2001 Professor Michael E. Porter#14Grapestock Fertilizer, Pesticides, Herbicides Grape Harvesting Equipment The California Wine Cluster State Government Agencies (e.g., Select Committee on Wine Production and Economy) Irrigation Technology Growers/Vineyards Wineries/Processing Facilities California Agricultural Cluster ✓ Winemaking Equipment Barrels Bottles Caps and Corks Labels Public Relations and Advertising Specialized Publications (e.g., Wine Spectator, Trade Journal) Educational, Research, & Trade Organizations (e.g. Wine Institute, UC Davis, Culinary Institutes) Tourism Cluster Sources: California Wine Institute, Internet search, California State Legislature. Based on research by MBA 1997 students R. Alexander, R. Arney, N. Black, E. Frost, and A. Shivananda. CAON Taiwan Presentation 07-31-01 CK 14 Food Cluster Copyright © 2001 Professor Michael E. Porter#15Global Competitiveness Report 2000 The Relationship Between Microeconomic Competitiveness and GDP Per Capita, 1999 Data 35,000 30,000 25,000 20,000 1999 GDP per Capita* 15,000 United States Singapore Norway Iceland Switzerland Denmark Canada Belgium Ireland Japan Australia Austria Netherlands Hong Kong ◆ Italy France Germany Finland United Kingdom Sweden TAIWAN New Zealand Spain Israel ◆ Portugal ◆Greece Korea Chile Czech Republic Mauritius Hungary Argentina Slovakia 10,000 Poland Venezuela Colombia Mexico Russia Costa Rica Ecuador Bulgaria Peru Thailand Brazil ◆ Malaysia ◆Turkey ◆ South Africa 5,000 Bolivia Ukraine Philippines El Salvador Vietnam China Egypt Indonesia ◆Jordan Zimbabwe India * Adjusted for Purchasing Power Parity Microeconomic Competitiveness Index Source: Porter, Michael E. "The Current Competitiveness Index: Measuring the Microeconomic Foundations of Prosperity." The Global Competitiveness Report 2000, New York: Oxford University Press, 2000 CAON Taiwan Presentation 07-31-01 CK 15 Copyright 2001 Professor Michael E. Porter#16Stages Of Economic Development . • . Resource- driven Economy Basic factor conditions (low cost labor, natural resources, geographic location) are the dominant sources of competitive advantage Technology is assimilated through imports, FDI, and imitation • Companies compete on price and lack direct access to consumers • . Companies have limited roles in the value chain, focus on assembly, labor intensive manufacturing, and resource extraction The economy is highly sensitive to world economic cycles, commodity prices, and exchange rates Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990 CAON Taiwan Presentation 07-31-01 CK • • • • • • Investment- driven Economy Efficiency in producing standard products and services is the dominant source of competitive advantage Technology is accessed through licensing, joint ventures, FDI, and imitation The nation is not only assimilating foreign technology, but has the capacity to improve on it The national diamond supports heavy investment in efficient infrastructure and modern production processes Companies serve OEM customers and extend capabilities more widely in the value chain The economy is concentrated on manufacturing and outsourced service exports 16 • . • • Innovation- driven Economy Innovative products and services at the global technology frontier are the dominant sources of competitive advantage The national diamond is characterized by strengths in all areas together with the presence of deep clusters Companies compete with unique strategies that are often global in scope The economy has a high service share, and is resilient to external shocks Copyright © 2001 Professor Michael E. Porter#17Taiwan's Current Position • Primary focus on manufacturing Compete on price and efficiency • Prevalent strategy of serving OEM customers High rate of investment in modern production methods and assimilating technology Strong capabilities to improve and enhance foreign technology • Export-led growth • Substantial government role in steering the economy Emerging innovative capacity CAON Taiwan Presentation 07-31-01 CK • Investment-driven stage 17 Copyright © 2001 Professor Michael E. Porter#18Limits Of The Current Strategy • Labor costs are now high relative to neighboring countries • Other domestic costs are rising • Taiwan is facing increasing pressure in export markets • Taiwanese companies are investing heavily in lower wage- locations in the region to maintain current strategies The proximity of China offers an easily available alternative location with access to a huge domestic market • Taiwanese exports are heavily dependent on a single cluster in which other Asian countries also compete - The U.S. downturn in IT investment has a large impact on Taiwan CAON Taiwan Presentation 07-31-01 CK 18 Copyright © 2001 Professor Michael E. Porter#19Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses II. Making the transition from an Investment-driven to a true Innovation-driven economy III. Defining Taiwan's economic relationship to China CAON Taiwan Presentation 07-31-01 CK 19 Copyright © 2001 Professor Michael E. Porter#20Rank 1234 5 Global Competitiveness Report 2000 Current Competitiveness Index Finland United States Germany Netherlands Switzerland Denmark Sweden United Kingdom Taiwan's Ranking Company Strategy & Operations Index Germany United States Finland Japan Switzerland Sweden Netherlands Denmark France Belgium United Kingdom Austria Israel Iceland Singapore Canada National Business Environment Index Finland United States Netherlands Denmark Singapore Germany Australia Canada United Kingdom Switzerland Sweden Austria Belgium Hong Kong France 6 7 8 9 Singapore 10 Australia 11 Canada 12 Belgium 13 Austria 14 Japan 15 France 16 17 Iceland Italy 18 Israel Taiwan 19 New Zealand Ireland Iceland New Zealand Norway Japan 20 Norway Australia Israel 21 Taiwan Norway Taiwan 22 Ireland New Zealand Ireland 23 Spain Hong Kong Spain 24 Italy Spain Chile 25 South Africa Korea South Africa Hong Kong CAON Taiwan Presentation 07-31-01 CK 20 20 Copyright © 2001 Professor Michael E. Porter#21Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses Improve physical infrastructure CAON Taiwan Presentation 07-31-01 CK 24 21 Copyright © 2001 Professor Michael E. Porter#22Factor (Input) Conditions Physical Infrastructure Taiwan's Relative Position Competitive Advantages Relative to GDP per Capita Competitive Disadvantages Relative to GDP per Capita Country Ranking Country Ranking General Internet Use 6 Availability of Cellular Phones 33 Government Infrastructure Investment 12 International Direct Dial 30 Communication Costs Railroad Infrastructure Development 14 Overall Infrastructure Quality 25 Telephone/Fax Infrastructure Quality 25 Computer Utilization 24 Air Transport Infrastructure Quality 24 Port Infrastructure Quality 22 22 Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment) Source: Global Competitiveness Report 2000 CAON Taiwan Presentation 07-31-01 CK 22 Copyright © 2001 Professor Michael E. Porter#23Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses - Improve physical infrastructure - Upgrade domestic financial markets CAON Taiwan Presentation 07-31-01 CK 23 23 Copyright © 2001 Professor Michael E. Porter#24Factor (Input) Conditions Financial Markets Taiwan's Relative Position Competitive Advantages Relative to GDP per Capita Competitive Disadvantages Relative to GDP per Capita Country Ranking Country Ranking Ability to Finance Start-ups 10 Financial Market Sophistication 29 Ease of Access to Loans Venture Capital Availability 14 Financial Disclosure Requirements 28 18 Access to Local Equity Market 26 Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment) Source: Global Competitiveness Report 2000 CAON Taiwan Presentation 07-31-01 CK 24 Copyright © 2001 Professor Michael E. Porter#25Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses. - Improve physical infrastructure - Upgrade domestic financial markets Increase transparency, openness and legal accountability CAON Taiwan Presentation 07-31-01 CK 25 Copyright © 2001 Professor Michael E. Porter#26Factor (Input) Conditions Openness and Accountability Taiwan's Relative Position Competitive Advantages Relative to GDP per Capita Competitive Disadvantages Relative to GDP per Capita Country Ranking Country Ranking Judicial Independence 39 Adequacy of Private Sector Legal 37 Recourse Political Protection of Private 30 Businesses Extent of Required Financial 28 Disclosure Bureaucratic 'Red Tape' Business Information Availability 27 24 Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment) Source: Global Competitiveness Report 2000 CAON Taiwan Presentation 07-31-01 CK 26 Copyright © 2001 Professor Michael E. Porter#27Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses - Improve physical infrastructure - Upgrade domestic financial markets Increase transparency, openness and legal accountability Boost the efficiency of domestic industries CAON Taiwan Presentation 07-31-01 CK 27 Copyright © 2001 Professor Michael E. Porter#28Source: WEO CAON Taiwan Presentation 07-31-01 CK Competition and Local Prices Relative Prices for Local Goods and Services, 2000 Rank GDP per capita (current GDP per capita (PPP) exchange rate) Index rank Index rank 4 5 Luxembourg 1 23 Japan United States Norway Switzerland Luxembourg United States Norway Iceland 6 Denmark 7 Iceland 8 Singapore Ireland Switzerland Canada Denmark 9 Sweden Belgium 10 Ireland Austria 11 United Kingdom Japan 12 Finland Australia 13 Hong Kong 14 Netherlands 15 Austria 16 Germany 17 Belgium 18 Canada 19 France 20 Australia 21 Italy 22 Israel 23 Spain Netherlands Germany Finland Hong Kong France Sweden Italy United Kingdom Singapore New Zealand Israel 24 Taiwan 25 25 New Zealand 26 Portugal Spain Korea Taiwan 28 Copyright © 2001 Professor Michael E. Porter#29Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses - Improve physical infrastructure Upgrade domestic financial markets Increase transparency, openness and legal accountability Boost the efficiency of domestic industries II. Making the transition to a true Innovation-driven economy Transform company strategies 29 CAON Taiwan Presentation 07-31-01 CK 29 Copyright © 2001 Professor Michael E. Porter#30CAON Taiwan Presentation 07-31-01 CK Determinants of Relative Performance Types of Competitive Advantage Differentiation (Non-Price Value) Competitive Advantage Lower Cost 30 30 Copyright © 2001 Professor Michael E. Porter#31• Sources of Competitive Advantage Operational Effectiveness Strategic Positioning • Assimilating, attaining, and extending best practice Creating a unique and sustainable competitive position Do the same thing better CAON Taiwan Presentation 07-31-01 CK 31 Compete in a different way Copyright © 2001 Professor Michael E. Porter#32Position: Variety/Needs/Access-Based Dell Computer Particular Product Variety Set of Activities . Large corporate and institutional customers and their employees Particular Customer Group Moderate range of standard, mid- and large capacity personal computers, PC servers, and PC workstations with low support requirements • Prices 15% below rivals • Employees of institutional customers. get same discount on personal machines • Direct sale via sales force, telephone, and the Internet • Models include most up to date components • Build to order from a menu of options • Assemble only, using just-in-time relationships with nearby suppliers • Outsource maintenance and repair • Limited R&D CAON Taiwan Presentation 07-31-01 CK 32 32 Copyright © 2001 Professor Michael E. Porter#33Typical Company Strategies in Taiwan • • • • Concentrate on manufacturing versus services Rapid adoption of new technologies Compete on price and time-to-market Serve OEM customers in the US and other Asian countries • Focus R&D on cost and process improvements Seek low cost inputs Invest modestly in human capital Many Taiwanese companies face a strategic transition from competing on cost to competing on unique products and services CAON Taiwan Presentation 07-31-01 CK 33 Copyright © 2001 Professor Michael E. Porter#34Company Operations and Strategy Taiwan's Relative Position Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Country Ranking Country Ranking Customer Orientation 3 Capacity for Innovation 24 Licensing of Foreign Technology 9 Senior Management Recruitment 23 Extent of Branding 22 Marketing Expertise 21 Production Processes 20 Attention to Staff Training 20 Extent of Regional Sales 19 Product Designs 19 Control of International Distribution 15 Company Spending on R&D 15 Breadth of International Markets 15 Note: Rank by countries; overall Taiwan ranks 21 (18 on Company Operations and Strategy) Source: Global Competitiveness Report 2000 CAON Taiwan Presentation 07-31-01 CK 34 Copyright 2001 Professor Michael E. Porter#35Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses Improve physical infrastructure Upgrade domestic financial markets Increase transparency, openness and legal accountability Boost the efficiency of domestic industries II. Making the transition to a true Innovation-driven economy Transform company strategies Upgrade Taiwan's scientific and technological capacity CAON Taiwan Presentation 07-31-01 CK 35 Copyright © 2001 Professor Michael E. Porter#36Change in R&D Investments Compound Annual Growth Rate in R&D Expenditures, 1985-1998 R&D Spending as Share of GDP, 1998 4.5% Sweden 4.0% 3.5% 3.0% Japan South Korea USA 2.5% Germany Israel France TAIWAN 2.0% UK Australia Singapore 1.5% Ireland Canada New Zealand 1.0% Italy 0.5% 0.0% 0% 5% 10% 15% 20% 25% R&D Expenditures, Compound Annual Growth Rate, 1985 - 1998 Source: US Competitiveness 2001: Strengths, Vulnerabilities, and Innovation Priorities Report; Global Competitiveness Report 2000 CAON Taiwan Presentation 07-31-01 CK 36 Copyright © 2001 Professor Michael E. Porter#37Science and Technology Infrastructure Taiwan's Relative Position Competitive Advantages Relative to GDP per Capita Patents Per Capita (2000) Competitive Disadvantages Relative to GDP per Capita Country Ranking Country Ranking 4 Capacity for Innovation 24 Computer Utilization 24 Quality of Scientific Research Institutions 22 Intellectual Property Protection Company Spending on R&D Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment) Source: Global Competitiveness Report 2000 CAON Taiwan Presentation 07-31-01 CK 37 21 15 Copyright © 2001 Professor Michael E. Porter#38• Composition of Taiwanese Patenting in the US Top Patenting Industries and Companies, 1999 Top 15 Taiwan-based companies by U.S. patents filed in 1999 - - - - - - - - TAIWAN SEMICONDUCTOR MANUFACTURING CO., LTD. (288 patents) UNITED MICROELECTRONICS CORPORATION (285) INDUSTRIAL TECHNOLOGY RESEARCH INSTITUTE, TAIWAN (203) VANGUARD INTERNATIONAL SEMICONDUCTOR CORPORATION (107) WINBOND ELECTRONICS CORP. (102) HON HAI PRECISION IND. CO., LTD. NATIONAL SCIENCE COUNCIL TEXAS INSTRUMENTS - ACER INCORPORATED MOSEL VITELIC, INCORPORATED MUSTEK SYSTEMS, INC. UNITED SEMICONDUCTOR CORP. MACRONIX INTERNATIONAL CO., LTD. - ACER PERIPHERALS, INC. - PRIMAX ELECTRONICS LTD. • The top 15 Taiwan-based companies account for 23% of all patents. filed by all Taiwanese entities • Electronics cluster dominates patent filing with more than 80% of all filings Source: US Patent and Trademark Office (www.uspto.gov). Author's analysis. CAON Taiwan Presentation 07-31-01 CK 38 Copyright © 2001 Professor Michael E. Porter#39Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses Improve physical infrastructure Upgrade domestic financial markets Increase transparency, openness and legal accountability Boost the efficiency of domestic industries II. Making the transition to a true Innovation-driven economy - - Transform company strategies - Upgrade Taiwan's scientific and technological capacity - Upgrade the quality of human capital CAON Taiwan Presentation 07-31-01 CK 39 Copyright © 2001 Professor Michael E. Porter#40Comparison of Expenditure on Education Growth and Level of Spending by Country Public expenditure on education, Share of GDP 1996 Source: UN CAON Taiwan Presentation 07-31-01 CK 9% Sweden 8% Finland TAIWAN Canada 7% New Zealand Ireland 6% US UK Australia Malaysia Thailand 5% 4% T S Korea 3% Philippines Singapore 2% 1% 0% 0% 2% 4% 6% 8% 10% 12% 14% Growth of public education spending, CAGR 1990 - 1996 40 Copyright © 2001 Professor Michael E. Porter#41Improvements in the Quality of the Workforce Researchers Per Ten Thousand Workers, 1998 and 1985 Number of researchers per 10'000 workers 120 100 00 80 60 60 40 40 20 20 0 Japan TAIWAN* Sweden U.S.A. Singapore Australia 1985 1998 France Germany Canada U.K. Ireland OECD 1998 S. Korea Italy Note: Taiwan data is for 1988 and 1998 Source: US Competitiveness 2001: Strengths, Vulnerabilities, and Innovation Priorities Report; Taiwan National Statistics CAON Taiwan Presentation 07-31-01 CK 41 Copyright © 2001 Professor Michael E. Porter#42Factor (Input) Conditions Education System Taiwan's Relative Position Competitive Advantages Relative to GDP per Capita Quality of Public Schools Competitive Disadvantages Relative to GDP per Capita Country Ranking 9 Country Ranking Quality of Business Schools 25 Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment) Source: Global Competitiveness Report 2000 CAON Taiwan Presentation 07-31-01 CK 42 Copyright © 2001 Professor Michael E. Porter#43Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses Improve physical infrastructure Upgrade domestic financial markets Increase transparency, openness and legal accountability Boost the efficiency of domestic industries II. Making the transition to a true Innovation-driven economy Transform company strategies - Upgrade Taiwan's scientific and technological capacity • Upgrade the quality of human capital Create advanced demand conditions CAON Taiwan Presentation 07-31-01 CK 43 Copyright © 2001 Professor Michael E. Porter#44Demand Conditions Demand Conditions Taiwan's Relative Position Competitive Advantages Relative to GDP per Capita Country Ranking Competitive Disadvantages Relative to GDP per Capita Country Ranking 12 Demanding Regulatory Standards Stringency of Environmental Regulations Consumer Adoption of Latest Products 8 Extent of Regulatory Distortion of Competition Note: Rank by countries; overall Taiwan ranks 21 (21 on Quality of Business Environment) Source: Global Competitiveness Report 2000 CAON Taiwan Presentation 07-31-01 CK 44 22 21 Copyright © 2001 Professor Michael E. Porter#45Finnish Wireless Cluster Context for Firm Strategy and Rivalry Factor (Input) Conditions • Substantial public investment in telecommunications-related R&D, with a focus on wireless technology • Significant local venture capital for mobile applications • Finland is becoming an international center for WAP development (e.g., Hewlett Packard, Siemens) Source: "The Economic Impact of Third- Growth Wireless Technology," U.S. Council of Economic Advisors, October 2000 CAON Taiwan Presentation 07-31-01 CK • A history of competition in telecommunications services throughout the 20th century • Early to deregulate in telecom related industries • More than 100 local operators • Active local rivalry in wireless communications ↓ Related and Supporting Industries • Finland is home to Nokia, the world's most competitive handset company • There are approximately 3,000 Finnish firms in telecom and IT related products and services 45 Demand Conditions World's most sophisticated consumers • 70 percent penetration of mobile phones (20 percent of households have abandoned wireline phones) • First country to allocate licenses for 3rd generation wireless networks (3 competitive groups) • Heavy usage of short message services • Finland is a test market for WAP applications Copyright 2001 Professor Michael E. Porter#46· • Environmental Regulation and Competitiveness Competing based on weak environmental standards perpetuates low incomes Corporate pollution is a sign of inefficient and unproductive use of resources Firm • Inefficient extraction of resources •Incomplete material utilization • Unnecessary waste products • Unnecessary energy use • Unproductive land use Customer • Usable materials in products that are discarded • • Products that use energy inefficiently •Discarded or unnecessary packaging The need to control or treat pollution causes companies to perform activities that add cost but create no customer value - e.g., handling, storage, processing, disposal Pollution is a reflection of unsophisticated technology and weak management Strict environmental regulation stimulates the upgrading necessary to achieve advanced economic development CAON Taiwan Presentation 07-31-01 CK 46 Copyright © 2001 Professor Michael E. Porter#47Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses Improve physical infrastructure Upgrade domestic financial markets Increase transparency, openness and legal accountability Boost the efficiency of domestic industries II. Making the transition to a true Innovation-driven economy - Transform company strategies - Upgrade Taiwan's scientific and technological capacity - - - · Upgrade the quality of human capital Create advanced demand conditions Encourage private sector-led cluster development Widen the base of cluster in the economy CAON Taiwan Presentation 07-31-01 CK 47 17 Copyright © 2001 Professor Michael E. Porter#48Houston Oil and Gas Cluster Upstream Downstream Oil Oil Oil Oil Trans- Oil & Natural Gas Exploration & Development Oil & Natural Gas Completion & Production Trading Oil Refining Oil Distribution portation Wholesale Marketing Retail Marketing Gas Gathering Gas Processing Gas Trading Gas Transmis- sion Gas Distribution Marketing Gas Oilfield Services/Engineering & Contracting Firms Equipment Suppliers (e.g. Oil Field Chemicals, Drilling Rigs, Drill Tools) Specialized Technology Services (e.g. Drilling Consultants, Reservoir Services, Laboratory Analysis) Subcontractors (e.g. Surveying, Mud Logging, Maintenance Services) Business Services (e.g. MIS Services, Technology Licenses, Risk Management) Specialized Institutions (e.g. Academic Institutions, Training Centers, Industry Associations) CAON Taiwan Presentation 07-31-01 CK 48 Copyright © 2001 Professor Michael E. Porter#49Taiwanese Clusters Established Clusters ⚫ Electronics • Plastics • Textiles and apparel Other Clusters ? 49 CAON Taiwan Presentation 07-31-01 CK 49 Copyright © 2001 Professor Michael E. Porter#50Public / Private Cooperation in Cluster Upgrading Minnesota's Medical Device Cluster Factor (Input) Conditions • • Context for Firm Strategy and Rivalry Aggressive trade associations (Medical Alley Association, High Tech Council) Effective global marketing of the cluster and of Minnesota as the "The Great State of Health" Full-time "Health Care Industry Specialist" in the department of Trade and Economic Development Demand Conditions • • • • Joint development of vocational- technical college curricula with the medical device industry Minnesota Project Outreach exposes businesses to resources available at university and state government agencies Active medical technology licensing through University of Minnesota State-formed Greater Minnesota Corp. to finance applied research, invest in new products, and assist in technology transfer CAON Taiwan Presentation 07-31-01 CK Related and Supporting Industries • State sanctioned reimbursement policies to enable easier adoption and reimbursement for innovative products Copyright © 2001 Professor Michael E. Porter#51Massachusetts Clusters Widening the Cluster Base Information Technology Metalworking Polymers CAON Taiwan Presentation 07-31-01 CK Tourism and Leisure Healthcare Financial Services Environmental Products and Services Knowledge Creation Specialty Paper Apparel Textiles and Footwear Marine 51 Copyright © 2001 Professor Michael E. Porter#52Organizing for Competitiveness Commonwealth of Massachusetts Governor's Council on Economic Growth and Technology Functional Task Forces . International Trade • Marketing Massachusetts Tax Policy and Capital Formation • Technology Policy and Defense Conversion • Issue Groups Cost of Doing Business Financing of Emerging Companies • Health Care • Restructuring Revitalizing Western Massachusetts Industry Cluster Working Groups Advanced Materials Biotechnology and Pharmaceuticals • Defense Marine Science and Technology Medical Devices • Software 52 52 CAON Taiwan Presentation 07-31-01 CK • . Telecommunications Textiles Copyright 2001 Professor Michael E. Porter#53Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses Improve physical infrastructure Upgrade domestic financial markets Increase transparency, openness and legal accountability Boost the efficiency of domestic industries II. Making the transition to a true Innovation-driven economy - Transform company strategies - Upgrade Taiwan's scientific and technological capacity - - - • Upgrade the quality of human capital Create advanced demand conditions Encourage private sector-led cluster development Widen the base of cluster in the economy - Shift the role of government CAON Taiwan Presentation 07-31-01 CK 53 Copyright © 2001 Professor Michael E. Porter#54Appropriate Roles of Government in Economic Development 1. Establish a stable and predictable macroeconomic, political, and legal environment 2. Improve the availability, quality, and efficiency of general purpose inputs, infrastructure, and institutions 3. 4. 5. Set overall rules and incentives governing competition that encourage productivity growth Facilitate cluster development and upgrading Create an explicit, ongoing process of economic change and competitive upgrading which informs citizens and mobilizes the private sector, government at all levels, educational and other institutions, and civil society. CAON Taiwan Presentation 07-31-01 CK 54 Copyright © 2001 Professor Michael E. Porter#55Recent Taiwanese Economic Policies Public sector investment to stimulate the economy • Direct loans, tax relief, and export processing zones • "Job creation program" to attempt to create 44,000 new regional jobs • 'Special' measures of the Cabinet's Financial and Economic Task Force: - Guarantee to keep tax rates stable for 4 years - Rescind the 2% business tax on banks – Enlarge SME Credit Guarantee Fund and provide preferential loans - - Encourage the entry of international asset management companies to help speed up financial sector modernization - Assure reliable supplies of power and water - Allocate funds to ensure availability of land in industrial zones - Assist traditional industries and SMEs with upgrading and restructuring - Enhance local workforce skills and import foreign labor Source: ROC Government Reports CAON Taiwan Presentation 07-31-01 CK 55 559 Copyright © 2001 Professor Michael E. Porter#56Government Policy Towards Employment Job Creation strategy Subsidies to create jobs - - Wage subsidies Foreign Direct Investment subsidies Jobs are costly and often unsustainable Competitiveness strategy Creating the conditions for productivity and cluster development Improving the efficiency of infrastructure Cluster-based training Improving the flexibility of labor markets Healthy clusters generate competitive jobs that are sustainable There is no direct and easy answer to job creation; short-term solutions are costly and do not often succeed in the long run CAON Taiwan Presentation 07-31-01 CK 56 56 Copyright © 2001 Professor Michael E. Porter#57Percent of 24 GDP 20 20 16 12 8 4 Taiwan's Tax Revenues Public Sector Balance / GDP Tax Revenue / GNP 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 -4 -8 -12 Source: ROC Government National Statistics, May 2001. CAON Taiwan Presentation 07-31-01 CK 40 57 Copyright © 2001 Professor Michael E. Porter#58Tax revenues share of GDP Tax Revenues As Percentage Of GDP Selected Countries, 1998 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Finland Source: ROC Government National Statistics, OECD CAON Taiwan Presentation 07-31-01 CK Ireland US TAIWAN 58 59 Copyright © 2001 Professor Michael E. Porter#59Cluster Policy versus Industrial Policy Industrial Policy Cluster-based Policy . • · Target desirable industries / sectors Focus on domestic companies Intervene in competition (e.g., protection, industry promotion, subsidies) Centralizes decisions at the national level • • • • All clusters can contribute to prosperity Domestic and foreign companies both enhance productivity Relax impediments and constraints to productivity Emphasize cross-industry linkages/ complementarities Encourage initiative at the state and local level Distort competition 59 59 CAON Taiwan Presentation 07-31-01 CK Enhance competition Copyright © 2001 Professor Michael E. Porter#60Taiwan's Economic Agenda in 2001 I. Addressing some chronic weaknesses - Improve physical infrastructure - Upgrade domestic financial markets - Increase transparency, openness and legal accountability - Boost the efficiency of domestic industries II. Making the transition to a true Innovation-driven economy - Transform company strategies - Upgrade Taiwan's scientific and technological capacity - Upgrade the quality of human capital - Create advanced demand conditions - - Encourage private sector-led cluster development Widen the base of cluster in the economy - Shift the role of government III. Defining Taiwan's economic relationship with China CAON Taiwan Presentation 07-31-01 CK 60 60 Copyright 2001 Professor Michael E. Porter#61Share of Taiwan's total exports in 2000 35% 30% Taiwan's Export Destinations 1995 to 2000 25% Hong Kong I China 20% 15% 10% Japan USA Taiwan average export growth 1995-2000: 6.1% European Union Singapore S Korea 5% Thailand Malaysia 0% -4% -2% 0% 2% 4% 6% 8% 10% 12% Export growth CAGR, 1995 - 2000 Note: Size of bubble is $ volume of exports to destination country Source: Taiwan National Statistics CAON Taiwan Presentation 07-31-01 CK 61 Copyright © 2001 Professor Michael E. Porter#62$M US 10,000 Exports 9,000 Imports 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1989 Source: Taiwan National Statistics CAON Taiwan Presentation 07-31-01 CK Taiwan's Trade With China 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 62 Copyright © 2001 Professor Michael E. Porter#63Taiwan's Economic Relationship To China • The economic relationship with China will inevitably be important - Common language ― Strong historical ties - - Strong personal ties through family relationships and migration Substantial economic presence of Taiwanese companies in China • The key question is what kind of relationship it will be • Taiwan's goal should be to create a mutually beneficial relationship that supports Taiwan's higher standard of living • Taiwan needs to define a unique role vis-à-vis China that - Builds on its distinctive strengths - Offsets China's weaknesses and rigidities CAON Taiwan Presentation 07-31-01 CK 63 63 Copyright © 2001 Professor Michael E. Porter#64Economic Relationship To China Criteria for Mutually Beneficial Roles for Taiwan A unique position builds on specialization in areas where Taiwan can give China access to its competitive advantages - - In clusters where Taiwan will for the foreseeable future provide a more conducive environment than China In parts of the value chain where Taiwan has developed unique advantages that China will have difficulty replicating CAON Taiwan Presentation 07-31-01 CK 59 64 Copyright © 2001 Professor Michael E. Porter#65Economic Relationship To China Illustrative Roles for Taiwan Role in the Value Chain • R&D and Design - - For the foreseeable future, Taiwan should offer a better R&D infrastructure and more conducive environment for innovation than China Taiwan can play this role combined with manufacturing activities located on the mainland and provide a competitive advantage to the region Sophisticated Services - Taiwan can develop its professional services for China's export industries Complementary Fields of Specialization • Education and Training - - Taiwan can improve its management education capabilities to educate the business leaders of the region Taiwan can build on its science and technology base to become the center of science education in the region • Media/Entertainment Taiwan's more liberal media environment gives it the potential to become a media/entertainment/publishing-hub for the region CAON Taiwan Presentation 07-31-01 CK 99 65 Copyright © 2001 Professor Michael E. Porter#66Economic Transition And Relationship To China Reinforcing Agendas CAON Taiwan Presentation 07-31-01 CK Successful transition to the Innovation-driven stage makes a mutually beneficial relationship to China more likely Transition to an Innovation-driven Economy Economic relationship to China Proximity to China increases the pressure on Taiwan to move from the Investment- driven to the Innovation-driven stage 66 Copyright © 2001 Professor Michael E. Porter