Facilitators of national innovation policy in a SME-dominated country: a case study of Taiwan.

Author:Chen, Chia-Yi

Many developing countries in Southeast Asia, Eastern Europe, and Latin America are currently trying to transform from traditional industry bases to high-tech, knowledge-driven economies. However, small and medium sized enterprises (SMEs) are often the dominant economic structure in these developing countries (OECD, 2004; Wignaraja, 2003). In such SME-dominated economy, few private enterprises are able to afford large, independent R&D expenditures that would generate their own technological capabilities (Chang & Hsu, 1998). Accordingly, the government of a SME-dominated country must build an adequate infrastructure to compensate for the relative scarcity of large-scale private firms possessing large R&D budgets. Most developing countries pursued private sector development strategies skewed toward the needs of large-scale business, including foreign invested ones. However, this type of policy was partly motivated by the rather disappointing results achieved through extensive SME support systems operated in developed countries since the 1970's (OECD, 2004).

Twenty years ago, Taiwan also faced the common constraints of SME-dominated developing countries. Driven by a unique national innovation and diffusion system, the successful development of Taiwan's high-tech industry has been widely acclaimed today. The International Institute for Management Development (IMD) ranked Taiwan's technological and scientific infrastructures fourth and fifth among 61 countries (IMD, 2006). In 2006, Taiwan is the largest TFT-LCD supplier in the world, ranks fourth in semiconductor manufacturing, and is third in information technology.

Taiwan government has over time generously supported non-profit R&D institutions engaged in technological development. These government-funded organizations have embedded themselves into the 'triple helix' model of university, industry, and government to facilitate the implementation of national innovation and technological policies. Jan & Chen (2006) suggested that these government-supported R&D institutes were most likely one of the most important factors in Taiwan's ability to innovate and industrially develop. Among the institutes, the Industrial Technology Research Institute (ITRI) is the most visible and dynamic (Amsden, 2003; Luo, 2001). Hsinchu Science-based Industrial Park (HSIP) has also played a critical role in forming synergistic industry clusters that upgrade Taiwan's domestic industry (Hu, Lin, & Chang, 2005; Lee & Yang, 2000; Tsai, 2005; Xue, 1997). These institutions have functioned largely like hubs facilitating the triple helix model of technology development in Taiwan by forming a partnership network integrating Taiwan government, universities and firms (Chu, Lin, Huang, & Liu, 2009). For other countries seeking to build up scientific and technological capabilities and currently reliant on SMEs, it is worth studying the Taiwan model. Therefore, in this study we aim to explore the following questions:

1. What common problems a SME-dominated developing country has to deal with when it intends to develop a high-tech sector?

2. What ITRI and HSIP associate with the development of Taiwan's high-tech industry specifically?

3. How could other less resourceful SME-dominated countries learn to facilitate their national innovation policy via non-profit institutes such as ITRI and HSIP?

The rest of this paper is organized as follows. In the next section, we first review germane literature of technology and national innovation policy. Taiwan's national innovation system section gives a brief introduction of Taiwan's technological innovation system. How ITRI and HSIP facilitating Taiwan's innovation policy section describes how ITRI and HSIP facilitating to the development of the Taiwan's high-tech industry. Finally, the conclusions and policy implications of this study are discussed.

Theoretical background

National innovation system

In a knowledge-based economy, innovation has become the principal driving force for the sustainable development of nations, for competitive advantage in industry and in the accumulation of added-value. It is thus recent policy research has seen a growing interest in studying the development of 'National Innovation System' in order to build on a more comprehensive view of innovation and technical change (Freeman, 1987; Lundvall, 1992; Nelson, 1993). Freeman (1987) defined a national system of innovation as the network of institutions in the public and private sectors whose activities and interactions initiate, import, modify and diffuse new technologies. There have been different approaches to National Innovation System in the past decade of scholarly work. According to Ergas (1987), technology policy of a nation can be either mission-oriented or diffusion-oriented. The former concentrates on a small number of technologies in early phases of their life cycle, whereas the latter aims to create large base technological capabilities within the entire industrial base of small, medium and large firms. It has been suggested that the diffusion of new knowledge in a National Innovation System require dynamic interactions among innovative institutions within an economy, including public and private institutions (Lundvall, 1992). Rothwell and Zegveld (1982) also proposed that innovation policy tools generally can be grouped under three main categories:

(a) Supply: Provision of financial, manpower and technical assistance, including the establishment of a scientific and technological infrastructure.

(b) Demand: Central and local government purchases and contracts, notably for innovative products, processes and services innovative products, and processes and services.

(c) Environment: Taxation policy, patent policy and regulations (economic, worker health and safety and environmental), that is those measures that establish the legal and fiscal framework in which industry operates.

Based on the foregoing studies, it is suggested that the successful development of an economy's high-tech sector requires two policy inputs. The first is usually public sector-led in the form of public infrastructure, favorable tax statuses, investment incentives, and academic resources. The second aims at fostering the technological advantages that an industry or firm needs to survive and compete.

The triple helix model

In a national innovation system, there are various organizations or systems assisting the development and expansion of new technologies innovation, including universities, research institutes, government departments, and private firms. Etzkowitz and Leydesdorff (2000) proposed the 'triple helix' model to capture the evolution of innovation systems. The triple helix model stated that three institutional spheres (government as public, industry as private, and university as academic) form the critical elements in a knowledge-based economy's innovation process (Leydesdorff & Meyer, 2003). Etzkowitz and Leydesdorff (2000) introduced three types of triple-helix policy models and suggested that most countries are presently trying to attain some form of the third model (illustrated in Figure 1) where university spin-offs, tri-lateral initiatives for knowledge-based economic development, and strategic alliances among firms, government laboratories, and academic research groups abound (Etzkowitz & Leydesdorff, 2000). In the triple helix model, the functions of state and academia usually implemented by public sector, while the function of industry is carried out by private sector. To accelerate industrial improvement, all three spheres collaborate closely, represented in the model by the intersection of the circles.

However, the triple helix system may have some possible shortcomings for developing country, because these countries' technological development is learning-oriented rather than innovationoriented (Jan & Chen, 2005; Viotti, 2002). There are some limits to the extent to which government and academia can cooperate with and assist private sector efforts in developing technological capabilities. First, the public sector typically has less information than the private sector about the market. Second, industrial policy designed to help private investors venture into new activities can unfortunately end up serving as a mechanism for rent transfer to less scrupulous businessmen and more self-interested bureaucrats (Rodrik, 2004). Last, the research results of academia are often difficult to link with industrial production (Chang & Hsu, 1998). Thus, in order for government and academia to more effectively support and promote technology policy and development, innovation policy-making should embed itself into a network of linkages...

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