Curb or Catalyst: An Investigation of the RelationshipBetween Clusters and Globalization Through a Case Study of the Hsinchu Cluster in Taiwan
Introduction and Conceptual Framework
Have you ever started your morning with a cup of Colombian coffee? Or eaten a banana from Brazil while calling a colleague who was working in a different country? Such common conventions of everyday life reflect the process of globalization: the increasing integration of global economies and societies through the movement of ideas, people, goods, services, and capital across spatial boundaries (International Monetary Fund, 2008). While early evidence of globalization can be found in the ancient activities of the Assyrians, Phoenicians, and Romans, the process has increased significantly since the end of World War II (Moore & Lewis, 2000). Although technological innovations that reduced transportation and communication costs enabled such integration, multinational enterprises (MNE) were especially influential. Led by a desire to optimize markets, costs, and competitive variables within the liberalized trade and investment environment that emerged largely because of the United States’ international importance during this period, their strategies served to promote the process of globalization (Dunning, 2000).
The economic development of nation-states was broadly influenced as a result, especially in Hong Kong, Singapore, Taiwan, and South Korea, which became known as the “Four Asian Tigers” because of their remarkable economic growth during this period (Gulati, 1992). While the specific determinants of such growth remain contested, it is generally agreed that the export-oriented industrialization strategies these countries pursued by liberalizing trade and attracting foreign direct investment (FDI) were the decisive drivers of this growth (Lall, 2022; Nayar, 2007). One could rightly assert that location had diminished in importance for the competitiveness of both companies and countries because of globalization, but was this entirely accurate?
The concept of clusters offers an alternative perspective. Clusters are defined as geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions that compete but also cooperate, such as standards agencies, trade associations and universities (Delgado et al., 2014; Porter, 2000). They are a salient feature of national, regional, and metropolitan economies, especially in developed countries (Porter, 2000). Globalization has transformed the world economy from national and regional markets into a set of markets that operate with minimal regard for national boundaries, allowing companies – and therefore countries – to access resources and markets abroad as a means of improving competitiveness (Porter, 1998).
Cluster thinking, however, suggests that companies and governments have a tangible stake in their local business environments (Porter, 1990). Although globalization has made it possible for companies to relocate their operations to more favorable foreign business environments, strongly constructed clusters at the local level can improve competition by increasing the current productivity of cluster participants, their capacity for innovation, and by stimulating new business formation – all of which generate external economies across interconnected firms and institutions (Porter, 1998). The coordinated cultivation of a technology cluster in Hsinchu, Taiwan, was a decisive element in its ability to achieve rapid industrialization. And yet, existing studies regarding the role and conception of clusters have concentrated on local forces arising in specific locations rather than the effect of external, global dynamics (Giacomin, 2017).
There thus exists a need to reconcile the two and explain how worldwide integration affects the formation of clusters and how clusters, in turn, affect the process of globalization. As such, the following paper will explore the formation of the technology cluster in Hsinchu, Taiwan, to explore the ties between clusters and globalization. By utilizing the cluster as the unit of analysis rather than any individual actor – such as the government, companies, or individuals, which all influence the creation of clusters – it becomes clear that new clusters can form by establishing linkages with pre-existing, foreign clusters through the movements of people, knowledge, capital, goods, and services. Importantly, linkages between clusters also serve as a catalyst for the process of globalization.
Case Study: Silicon Valley’s Sibling and the Development of the Hsinchu Cluster
Taiwan was colonized by Japan in 1895 in the wake of the Sino-Japanese War, after which the colonial administration established various institutions and projects to promote property rights, education, sanitation, and to commercialize the agrarian economy by increasing the incentive to produce (Chen, 1988). As a result, Taiwan was transformed into an agricultural production base that specialized in the production of tea, rice, and sugar production while simultaneously serving as a market for industrial goods produced in Japan (Cheng, 2001). In 1945, The Republic of China (ROC) took control of Taiwan as a result of the communist revolution in China. Four years later, the ruling Kuomintang (KMT) – also known as the Guomindang (GMD) or the Chinese Nationalist Party – fled from China to Taiwan, where KMT leader Chiang Kai-Shek established authoritarian rule (Roy, 2003). A new strategy of import substitution industrialization (ISI) was pursued until 1960, when the country’s development strategy transitioned to export-oriented industrialization (Haggard, 1990). It was at this point that a technology cluster began to form in Hsinchu, a coastal city located in northwestern Taiwan, approximately 90 kilometers south of Taipei.
The existence of the Silicon Valley cluster was especially influential for the development of the information technology (IT) cluster in Hsinchu. In the early 1960s, consumer electronics and semiconductor corporations from Japan and the United States established manufacturing facilities in Taiwan to exploit its low-cost labour. This did little to improve the skill base and infrastructure of the economy, however, as reflected in measures of Taiwan’s per capita income, which was just USD $170 in 1962, on par with the Republic of the Congo (Saxenian, 2007). Towards the end of the decade, however, Taiwanese government officials began travelling to Silicon Valley. They wanted to study how the San Francisco Bay-based cluster had formed and to elicit advice on technology and policies from overseas engineers, who were viewed as an asset in their efforts to upgrade Taiwan’s position in the global economy (Saxenian, 2007). The Chinese Institute of Engineers (CIE), a technical association established by Silicon Valley-based Chinese engineers, served as an initial medium for collaboration and knowledge transfer until 1966, when the Modern Engineering and Technology Seminars (METS) were established by Taiwan’s Minister of Economic Affairs, Dr. Sun Yun-Suan (Yang, 1985) Held every two years, these week-long seminars brought leading engineers and scientists from Silicon Valley to Taipei to provide advanced expertise to local industry, introduce modern technologies, and form personal and professional relationships between engineers based in both countries.
Instead of establishing export processing zones or publicly financing “national champions,” as was the then-dominant practice in East Asia, Taiwanese policymakers worked with United States-based engineers to establish a highly competitive entrepreneurial environment of industrial decentralization that provided a foundation for the emergence of a technology cluster in Taiwan (Saxenian, 2007). Following the advice of overseas engineers, Taiwanese politicians invested in supportive institutions to improve factor quality and enhance the productivity of the emerging cluster. In 1966, for example, the first Manpower Development Program (MDP) was implemented by the government to control and increase enrollments in tertiary education, after which the number of Taiwanese graduates increased from approximately 10,000 in 1961 to more than 200,000 in 1996 (Liu & Armer, 1993). Investing in research and development (R&D) was also a primary priority. The establishment of the Industrial Technology and Research Institute (ITRI) in 1973, and then the Electronics Research and Services Organization (ERSO) in 1976, were especially important because these institutions recruited overseas Chinese engineers working in Silicon Valley and encouraged them to return to Taiwan, which created a connection to the Silicon Valley cluster. Among these engineers was Ding Hua-Hu, a Stanford University graduate from China who served as ERSO’s first Director General (Cheng, 2001).
Such ties soon sparked technology transfers between Silicon Valley and Taiwan, which were used to drive the development of an IT cluster in Hsinchu. Dr. Wen-Yuan Pan, a Chinese electrical engineer active in METS and CIE who had graduated from Stanford University before working for the Radio Corporation of America (RCA), was recruited for this purpose (Saxenian, 2007). He established and led the Technical Advisory Committee in 1974 by recruiting distinguished senior executives and researchers from preeminent corporations and institutions in the United States – such as Bell Labs and IBM – to oversee the development of the cluster (Huang et al., 2008). These members met each week in New York and regularly traveled to Taiwan to provide domestic engineers with information on industry and technology trends. Led by Li Kwoh-Ting, a Cambridge University-educated Taiwanese engineer, they developed a plan to specialize in manufacturing customer chips and application-specific integrated circuits (IC), which would allow Taiwan to avoid direct competition with the foremost firms in the United States and Japan (Saxenian, 2007).
To cultivate the cluster, foreign advisors from the Technical Advisory Committee and ITRI selected RCA as a partner for the transfer of semiconductor technology, and in 1976, the ERSO signed a five-year, USD $12 million technology transfer agreement with the consumer electronics giant (Chang et al., 1994). As part of the agreement, ERSO sent a team of thirty-seven engineers – known as the RCA-37, which were recruited from both Taiwan and Silicon Valley – to an RCA facility in the United States for a year of rigorous training in IC design and production. After returning to Taiwan in 1977, the team of engineers took charge of ERSO’s newly constructed IC pilot production facility and began designing and manufacturing chips on a small scale. To transfer the technology into the private sector, United Microelectronics Corporation (UMC) was established as a subsidiary, and quickly became one of Taiwan’s leading companies (Windham, 2003). Just two years later in 1979, the Technology Advisory Group (STAG) was established and fifteen “foreign monks” from Silicon Valley were recruited as independent policy advisors to accelerate the advancement of the IT cluster in Hsinchu. The “foreign monks” advanced an aggressive industrialization policy to develop private-sector manufacturing capabilities. They envisioned an entrepreneurial environment of rigorous rivalry between small- and medium-sized enterprises (SMEs) that would foster innovation, which they endeavoured to create by imitating the institutions of Silicon Valley.
The Hsinchu Science-Based Industrial Park (HSP) and the development of a domestic
venture capital industry were the outcomes of such efforts. After ITRI established its first foreign office in Silicon Valley in 1980, Taiwan’s National Science Council studied the San Francisco Bay-based cluster and subsequently established the HSP as a high-technology export-processing zone that offered land and tax incentives – including a five-year tax holiday – to attract foreign firms (Chen et al., 2013). The HSP was strategically positioned in the booming Technopolis of Hsinchu – where many leading research institutions were located – to facilitate knowledge-sharing and to create synergies between the manufacturing and R&D sectors (Wang, 1995). To complement the cluster in Hsinchu, Taiwanese policymakers simultaneously studied the venture capital industry in the United States by consulting with investment professionals and organizing partnerships with leading banks to share financial and managerial expertise. Described as a “pure transfer” from Silicon Valley, a venture capital industry in Taiwan was soon established (Saxenian, 2007).
The Ministry of Finance provided initial funding of NTD $800 million (USD $19.90 million) and offered to cover 20 percent of the capital invested in strategic, technology-intensive ventures to mitigate the challenge of raising capital from Taiwan’s risk-averse industrial community (Padney & Jang, 1996). Taiwanese policymakers also leveraged the relationships they had developed with Taiwanese senior executives working in the financial services industry in Silicon Valley, who were invited to Taiwan to establish venture capital companies. Many did, leading to a proliferation of United States-style venture capital funds in Taiwan after Acer founded the first domestic venture capital firm – Multiventure Capital Corporation – in 1984 (Brown et al., 2010). In fact, the number of venture capital firms in Taiwan expanded significantly in the subsequent decade, increasing from just 20 in 1990 to 153 in 1999 (Saxenian, 2001).
Although Taiwan remained a low-value-added producer of electronic components throughout the 1980s, the influx of capital from the venture capital industry, the creation of the Hsinchu Science Park, and the accumulation of production experience stimulated entrepreneurship and allowed local firms to differentiate products through innovation and quality improvements during the 1990s, rather than competing exclusively on cost. Previous investments in supportive cluster institutions and the proliferation of specialized, independent input producers within the geographically concentrated HSP provided efficient access to specialized inputs, employees, technological knowledge, and research institutions while simultaneously fostering intense competition (Porter, 2000). This, in turn, facilitated rapid innovation and cluster upgrading, which attracted foreign investment from major companies based in the United States, including Sun Technology, and Counterpoint. These firms provided access to innovative products, novel technologies, and industry information, all of which served to improve the competitiveness of local companies and thus, Taiwan.
By 1988, both Acer and Microtek – a scanner company that was established by four returnees from California – went public, demonstrating the extent of economic opportunities available in Taiwan. As a result, more than 40,000 people returned to Taiwan from the United States between 1986 and 1996 to seek jobs in the Hsinchu cluster (Saxenian, 2007). Many returnees had worked in positions of prominence at technology companies in the United States and thus brought technical skills, organizational and managerial know-how, intimate knowledge of leading IT markets, and networks of contacts to Taiwan. Importantly, many of these returnees leveraged their experience and networks – sometimes by recruiting entire teams from overseas – to establish their own companies. In fact, 121 of the 289 companies (42%) that were operating in the Hsinchu cluster in 2000 were founded by returnees from the United States, which undoubtedly increased the intensity of competition in the cluster, and thus perpetuated the process of innovation (Porter, 2000; Saxenian, 2001).
By the turn of the 21st century, Taiwan had achieved unrivaled economic growth, largely because of the rapid rise of the IT cluster in Hsinchu. Between 1955 and 2000, annual GDP per capita increased by 6.82% in Taiwan – relative to just 2.49% in the United States – which was the highest growth rate in the world during that period (Wu, 2016) Although IT output was less than USD $100 million in 1980, by 1999, IT output exceeded USD $21 billion, making Taiwan the third largest IT producer in the world (Saxenian, 2004).
Clusters as a Catalyst for Globalization
A critical – but often unrecognized – driver of Taiwan’s success was the pre-existing technology cluster in Silicon Valley. Taiwan’s reliance on California-based Taiwanese engineers for policy advice and technical and organizational expertise undoubtedly contributed to the growth and direction of development for both the cluster and Taiwan as a country. Importantly, the connections between both clusters also served to drive the process of globalization. While the physical movement of engineers, entrepreneurs and politicians between Silicon Valley and Taiwan illustrates this point, the transfer of knowledge between both clusters does, too.
Institutions such as the CIE, METS, ESRO, ITRI, and STAG brought people from both sides of the Pacific together physically but also provided platforms through which technical expertise and knowledge could be shared. Such knowledge not only involved industrial policy advice – such as instructions to invest in supportive institutions, including education and R&D institutes – but also specialized, industry-specific information, which enabled the domestic development of technological capabilities, a venture capital industry and the HSP. This is best reflected in Taiwan’s rapid rise in the international rankings of patent recipients, in which Taiwan moved from the twenty-first rank in 1980 to the fourth rank in 2000 (Wong, 2007). While this clearly demonstrates how information transfers from Silicon Valley influence cluster growth, it also indicates increasing integration, because anybody on Earth can use the internet to access the knowledge and ideas contained in those patents.
In much the same way, the growth in global trade and FDI between Taiwan and the United States illustrates how clusters can increase the process of globalization. Inflows of FDI from the United States to Taiwan measured just USD $17.71 million in 1966, before the IT cluster was created, but increased to USD $1.33 billion in 2000 when the cluster had fully formed (Amirahmadi & Wu, 1994). The value of FDI outflows from Taiwan to the United States also measured just USD $500,000 in 1972 but increased to USD $3.95 billion by 2000 (McBeath, 1999). Such statistics clearly indicate that economic integration – measured inflows of capital – between the United States and Taiwan increased during the second half of the twentieth century. While it is true that there are various forces affecting financial flows that are not related to clusters, this nevertheless suggests that clusters can increase globalization (Read, 2002). Trade data between the United States and Taiwan suggest the same phenomena. The value of exports from Taiwan to the United States increased from USD $21.78 billion in 1990 to USD $35.59 billion in 2000, while the value of imports from the United States to Taiwan increased from USD $12.63 billion to USD $25.27 billion over the same period (Liu, 2016). While credible, comprehensive data regarding the composition of such exports and imports were unavailable, these statistics nevertheless indicate that globalization – measured in terms of the value of goods and services moving between regions – has increased since the creation of the IT cluster in Taiwan.
Conclusion
It is easy to accept that globalization has diminished the importance of location for the competitiveness of companies and countries. Open global markets and superior communication and transportation technologies allow companies to source inputs and serve consumers, regardless of their location. And yet, cluster theory provides a paradoxical perspective, suggesting that sustainable competitive advantages in our globalized economy lie increasingly in local things. The case of Taiwan’s IT cluster suggests both perspectives can be reconciled. Local clusters that improve the domestic competitiveness of companies and countries can be created through connections with foreign clusters, but such linkages also drive the process of globalization. As countries seek strategies to address the challenges that coincide with contemporary challenges, such as climate change and geopolitical strife, cluster creation might therefore serve as an advantageous approach amid our increasingly integrated world.
By Campbell Clarke for MGPO 470: Strategy and Organization
Edited by Kai Page, Myriam Tounekti, & Mary-Michelle Brown
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