Creating an Economic Strategy for Taiwan

Creating an Economic Strategy for Taiwan Prof. Michael E. Porter Harvard Business School Global Leaders Forum Taipei, Taiwan April 8, 2010 This presentation draws on ideas from Professor Porter s articles and books, including, The Competitive Advantage of Nations (The Free Press, 1990), The Microeconomic Foundations of Economic Development, in The Global Competitiveness Report, (World Economic Forum), Clusters and the New Competitive Agenda for Companies and Governments in On Competition (Harvard Business School Press, 1998) and ongoing research at the Institute for Strategy and Competitiveness. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu 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. 1

Taiwan s Current Malaise Recent economic downturn Highest unemployment in decades Uncertainty of future relationship to China 2

Taiwan s Current Malaise Recent economic downturn Highest unemployment in decades Uncertainty of future relationship to China Slide from The Competitive Advantage of Taiwan Commonwealth Speech delivered on July 31, 2001 3

PPP-adjusted GDP per Capita, 2000 ($USD) $60,000 Prosperity Performance Selected Countries, 1990 to 2000 OECD average: 4.15% $50,000 $40,000 $30,000 $20,000 Norway United States Belgium Switzerland Austria Canada Netherlands Ireland Iceland Singapore Sweden Denmark Finland Australia Japan Italy Hong Kong OECD average: $24,590 United Kingdom France Germany Spain Taiwan New Zealand Israel Greece Portugal South Korea Czech Republic $10,000 Russia (-1.8%) Hungary Mexico Poland Brazil Turkey Chile Malaysia Thailand Philippines (-0.3%) Indonesia China (11.0%) Laos India Vietnam $0 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1990 to 2000 Source: EIU (2010), authors calculations 4

PPP-adjusted GDP per Capita, 2009 ($USD) $60,000 Prosperity Performance Selected Countries, 2000 to 2009 OECD average: 3.26% Norway $50,000 United States $40,000 $30,000 Switzerland Netherlands Sweden Austria Canada Denmark Belgium Iceland France Finland Italy Japan Germany New Zealand United Kingdom Spain Israel Ireland Australia Singapore Hong Kong Taiwan Greece South Korea Czech Republic OECD average: $32,810 $20,000 Portugal Hungary Poland Slovakia Mexico Chile Russia Malaysia $10,000 Brazil Turkey Thailand China (12.44%) Indonesia India Vietnam Philippines Laos Cambodia $0 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 2000 to 2009 Source: EIU (2010), authors calculations 5

Index of GDP per Capita (1950 = 100) 2,500 Taiwan s Prosperity Performance 1950-2009 CAGR: +5.05% CAGR: +7.22% CAGR: +5.63% CAGR: +2.21% 2,000 Taiwan China 1,500 1,000 Hong Kong 500 USA 100-0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009 Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (Accessed March 2010) 6

Unemployment Rate, 2009 20% 18% Improving Unemployment Performance Selected Countries Spain Deteriorating 16% 14% Turkey 12% 10% 8% 6% 4% 2% Slovakia Brazil Poland India China Hungary France Chile Canada Greece Russia Finland Sweden Indonesia Israel United Kingdom Italy Belgium Philippines Czech Republic Germany Vietnam New Zealand Netherlands Taiwan Australia Hong Kong Japan Austria Luxembourg South Korea Malaysia Switzerland Norway Thailand Singapore Ireland Portugal United States Iceland 0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% Change of Unemployment Rate in Percentage Points, 1999-2009 Source: EIU (2010) 7

Exports as % GDP, 2009 100% 90% Malaysia (-27.9%) Export Intensity Selected Countries Ireland OECD Average: 3.1% Singapore (24.4%, 208.3%) Hong Kong (68.3%, 196.6%) 80% Belgium Hungary 70% 60% Slovakia Netherlands Thailand Czech Republic Vietnam Taiwan 50% 40% 30% 20% 10% Philippines (-20.2%) Russia Canada Indonesia Sweden Austria Switzerland South Korea Cambodia Denmark Iceland Norway Chile Germany Finland Israel New Zealand Mexico Spain United Kingdom Turkey China France Italy Australia Greece India OECD Average: 23.8% Japan United States Brazil 0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% Change of Exports as Share of GDP, 1999 to 2009 Source: EUI (2010) 8

Average U.S. patents per 1 million population, 2006-2008 300 United States Innovative Output Selected Countries, 1998 to 2008 250 Japan Taiwan 200 Finland 150 Switzerland Israel 100 50 0-10% -5% 0% 5% 10% 15% 20% 25% 30% CAGR of US-registered patents, 1998 to 2008 10,000 patents = Source: USPTO (2008), EIU (2008) Sweden Germany South Korea Canada Denmark Netherlands Singapore Belgium UK Austria France Australia Norway Hong Kong Italy South Africa Spain India China 9

Change in the annual number of U.S. patents per 1 million population International Patenting Output Change 1998-2008 85 65 45 25 5-15 Taiwan Singapore Finland Iceland South Korea Israel Japan Ireland Austria Hong Kong Sweden Germany Australia Norway Canada Denmark Malaysia China India Thailand Philippines Indonesia Vietnam Russia United Kingdom United States Switzerland Source: USPTO (2008), EIU (2008) 10

Top 20 Taiwanese Originators of U.S. Patents, 2004-2008 First-Named Assignee 2004 2005 2006 2007 2008 Total Taiwan Semiconductor Manufacturing Co., Ltd. 455 430 459 454 355 2,153 Industrial Technology Research Institute, Taiwan 196 159 237 224 271 1,087 Hon Hai Precision Ind. Co., Ltd. 216 136 231 183 278 1,044 Au Optronics Corp. 76 104 157 176 174 687 Via Technologies, Inc. 112 118 159 144 125 658 Macronix International Co., Ltd. 161 101 107 124 119 612 United Microelectronics Corporation 74 91 104 122 117 508 Ben Q Corporation 79 81 105 134 39 438 Mediatek Inc. 22 29 104 121 151 427 Delta Electronics Inc. 85 70 90 82 86 413 Inventec Corporation 26 36 47 84 130 323 Nan Ya Technology Corporation 100 84 74 17 28 303 Advanced Semiconductor Engineering, Inc. 53 41 82 66 57 299 Winbond Electronics Corp. 81 54 48 31 17 231 Chunghwa Picture Tubes, Ltd. 12 27 32 49 70 190 Realtek Semiconductor Corporation 10 16 41 64 55 186 Quanta Computer Inc. 40 25 45 38 37 185 Powerchip Semiconductor Corp. 27 37 35 40 44 183 Hannstar Display Corp. 44 30 34 23 37 168 Lite-On Technology Corporation 35 27 42 25 37 166 All Other Taiwan Assignees 3,380 2,872 3,439 3,283 3,381 16,355 Total Taiwan Utility Patents 5,284 4,568 5,672 5,484 5,608 26,616 Source: Patenting By Geographic Region (State and Country), Breakout By Organization, USPTO (2010) 11

Taiwan s Economic Challenge Three Agendas I. Address some chronic weaknesses II. Expand, upgrade, and globalize the innovation-driven economy III. Redefine Taiwan s economic relationship to China These agendas are interrelated 12

What is Competitiveness? Competitiveness is the productivity with which a nation uses its human, capital, and natural resources Productivity sets the standard of living Productivity growth sets sustainable economic growth Productivity and prosperity depends on how a nation competes, not what industries it competes in Productivity in the modern global economy arises from a combination of domestic and foreign firms Relentless innovation is necessary to drive productivity growth and enable the standard of living to rise Technology, products, and organizational methods Nations compete to offer the most productive environment for business The public and private sectors play different but interrelated roles in creating a productive economy 13

Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness Social Infrastructure and Political Institutions Macroeconomic Policies Inherited Endowments Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 14

Macroeconomic Competitiveness Social Infrastructure and Political Institutions Basic human capacity Basic education Health system Macroeconomic Policies Fiscal policy Government surplus/deficit Government debt Political institutions Political freedom Voice and accountability Political stability Government effectiveness Decentralization of economic policymaking Monetary policy Inflation Interest rate spread Macroeconomic Management Rule of law Judicial independence Efficiency of legal framework Business costs of corruption Civil rights 15

Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment Macroeconomic Competitiveness Social Infrastructure and Political Institutions State of Cluster Development Macroeconomic Policies Inherited Endowments Sophistication of Company Operations and Strategy Sophistication of Company Operations and Strategy The internal company skills, capabilities, and management practices required to attain a given level of productivity and innovation 16

Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment The external business environment conditions supporting company productivity and innovation Quality of the National Business Environment Macroeconomic Competitiveness Social Infrastructure and Political Institutions State of Cluster Development Macroeconomic Policies Inherited Endowments Sophistication of Company Operations and Strategy 17

Quality of the Business Environment Context for Competition Factor Inputs Access to high quality business inputs and infrastructure e.g., human resources, capital, physical infrastructure, administrative rules, scientific and technological infrastructure Local rules and incentives that encourage investment and productivity e.g. incentives for capital investments, intellectual property protection, corporate governance standards Open and vigorous local competition Openness to foreign competition Competition laws Related and Supporting Industries Availability of suppliers and supporting industries Demand Conditions Sophisticated and demanding local customers and needs e.g., Strict quality, safety, and environmental standards Consumer protection laws Many things matter for competitiveness Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing 18

Determinants of Competitiveness Microeconomic Competitiveness Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy Macroeconomic Competitiveness State of Cluster Development Social Infrastructure and Political Institutions Macroeconomic Policies The presence of a concentration of firms in particular fields, together with specialized skills, infrastructure, and supporting institutions, enabling productivity through externalities across related entities 19 Inherited Endowments

State of Cluster Development Tourism Cluster in Cairns, Australia Public Relations & Market Research Services Travel agents Tour operators Local retail, health care, and other services Food Suppliers Property Services Restaurants Attractions and Activities e.g., theme parks, casinos, sports Local Transportation Souvenirs, Duty Free Maintenance Services Hotels Airlines, Cruise Ships Banks, Foreign Exchange Government agencies e.g. Australian Tourism Commission, Great Barrier Reef Authority Educational Institutions e.g. James Cook University, Cairns College of TAFE Industry Groups e.g. Queensland Tourism Industry Council Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden 20

Cluster Linkages and Economic Diversification Fishing & Fishing Products Agricultural Products Hospitality & Tourism Prefabricated Enclosures Textiles Jewelry & Precious Metals Footwear Business Services Financial Services Apparel Processed Food Leather & Related Products Distribution Services Publishing & Printing Oil & Gas Transportation & Logistics Education & Knowledge Creation Chemical Products Plastics Information Tech. Medical Devices Entertainment Analytical Instruments Tobacco Aerospace Vehicles & Defense Biopharmaceuticals Communications Equipment Lightning & Electrical Equipment Building Fixtures, Equipment & Services Power Generation Motor Driven Products Furniture Aerospace Engines Heavy Construction Services Heavy Machinery Construction Materials Forest Products Production Technology Mining & Metal Manufacturing Sporting & Recreation Goods Automotive Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions. 21

Defining a National Economic Strategy National Value Proposition What are the distinctive competitive assets of the nation s economy given its location, legacy, existing strengths, rate of progress, and potential strengths? What unique value as a business location? In what areas of the economy / clusters? Playing what roles with neighbors, the region, and the broader world? Developing Unique Strengths Addressing Crucial Constraints What elements of institutional context and the business environment can be unique strengths relative to peers/neighbors? What existing and emerging clusters can be built upon? What are the crucial weaknesses and constraints that must be addressed to achieve parity with peer countries and allow the country to move to the next level? Priorities and sequencing are a necessity in economic development 22

Taiwan s Economic Agenda in 2010 I. Address some chronic weaknesses II. Expand, upgrade, and globalize the innovation-driven economy III. Redefine Taiwan s economic relationship to China These agendas are interrelated 23

Taiwan s Competitiveness Profile, 2009 Harvard Country Competitiveness Model Country Competitiveness (19) Macroeconomic Competitiveness (24) Microeconomic Competitiveness (13) Political Institutions (22) Macroeconomic Policy (12) Business Environment Quality (13) Company Sophistication (14) Rule of Law (29) Human Development (24) Taiwan s GDP per capita rank is 19 th versus 133 countries Note: Rank versus 133 countries; overall, Taiwan ranks 19 th in 2009 PPP adjusted GDP per capita and 19 th in Global Competitiveness Source: Institute for Strategy and Competitiveness, Harvard Business School and Harvard University (2009), based in part on data??? by the World Economic Forum 24

Taiwan s Strengths Context for Competition Factor Inputs Strong intellectual property protection and enforcement Network of industrial parks, export processing zones, and free trade zones Free and open media Demand Conditions High level of innovation Strong university education, especially scientists and engineers Strong research institutions Excellent basic education Strong physical infrastructure Labor-management cooperation Venture financing Related and Supporting Industries Some deep clusters in higher technology Strict local regulations on environmental protection, consumer safety Sophisticated demand in technologyrelated fields 25

GDP per Capita, log scale (Purchasing Power Adjusted) $100,000 5.0 Ranking Economic Competitiveness and Prosperity Harvard Country Competitiveness Index, 2009 Qatar Luxembourg 4.5 4.0 $10,000 Argentina Venezuela Brazil Dominican Republic Jamaica Croatia Russia Greece Hungary Peru Kuwait Italy Brunei Bahrain Spain Poland Mexico Turkey Malaysia Costa Rica Saudi Arabia Thailand Tunisia USA UAE Ireland Japan UK South Korea Estonia Chile Taiwan Norway Singapore Switzerland Sweden Finland Denmark New Zealand 3.5 3.0 $1,000 Egypt Algeria Jordan Paraguay Mongolia Morocco Indonesia Guyana Philippines Nicaragua Vietnam India Colombia Indonesia Nigeria Senegal Bangladesh Benin Ghana Gambia Uganda Madagascar Tanzania Ethiopia Malawi China R 2 = 0.7377 2.5 Burundi Low New Global Competitiveness Index 2009 26 High

Taiwan s Economic Agenda in 2010 I. Address some chronic weaknesses Improve political institutions 27

Best country in the world Governance Indicators Selected Countries Index of Governance Quality, 2008 Voice and Accountability Political Stability Government Effectiveness Regulatory Quality Rule of Law Control of Corruption Worst country in the world Finland New Zealand Netherlands Australia Singapore Hong Kong United States Japan Chile Hungary Taiwan South Korea China Note: Sorted left to right by decreasing average value across all indicators. The zero horizontal line corresponds to the median country s average value across all indicators. Source: World Bank (2009) 28

Taiwan s Economic Agenda in 2010 I. Address some chronic weaknesses Improve political institutions Reduce corruption 29

Rank in Global Corruption Index, 2009-1 Low corruption -11-21 -31-41 Corruption Perception Index, 2009 Deteriorating Italy Denmark New Zealand Singapore Sweden Finland Netherlands Switzerland Iceland Canada Australia Improving Hong Kong Luxembourg Norway Ireland Germany United Kingdom Austria Japan USA Belgium Chile France Israel Spain Portugal Taiwan South Korea Hungary Poland Czech Republic Slovakia Malaysia Turkey High corruption -51-61 -71 Mexico Argentina Greece Brazil China Thailand Vietnam India Indonesia -81 Philippines Russia Note: Ranks only countries available in both years (91 countries total) Source: Global Corruption Report, 2009-91 -20-15 -10-5 0 5 10 15 20 Change in Rank, Global Corruption Report, 2009 versus 2001 30

Taiwan s Economic Agenda in 2010 I. Address some chronic weaknesses Improve political institutions Reduce corruption Reduce bureaucracy and regulatory complexity 31

Doing Business Selected Countries Ease of Doing Business Rank Starting a Business Dealing with Employing Construction Workers Permits Getting Credit Protecting Investors Paying Taxes Enforcing Contracts Closing a Business Singapore 1 4 2 1 4 2 5 13 2 Hong Kong 3 18 1 6 4 3 3 3 13 United States 4 8 25 1 4 5 61 8 15 Thailand 12 55 13 52 71 12 88 24 48 Japan 15 91 45 40 15 16 123 20 1 South Korea 19 53 23 150 15 73 49 5 12 Taiwan 46 29 97 153 71 73 92 90 11 China 89 151 180 140 61 93 125 18 65 Rank out of 183 countries. Source: World Bank Doing Business (2010). 32

Factor Conditions Factor Conditions Taiwan's Relative Position 2009 Competitive Advantages Relative to GDP per Capita Utility patents per million population 1 Telephone lines per 100 population 3 Tertiary enrollment 4 Quality of railroad infrastructure 6 Ease of starting a new business 6 Quality of math and science education 6 Financing through local equity market 7 Availability of scientists and engineers 7 Personal computers per 100 population 8 Quality of roads 9 Quality of domestic transport network: business 9 Internet access in schools 9 Venture capital availability 10 Quality of port infrastructure 11 Quality of telephone infrastructure 11 Ease of access to loans 11 Quality of the educational system 11 University-industry research collaboration 13 Competitive Disadvantages Relative to GDP per Capita Time required to start a business 59 Getting Credit, legal rights 54 Paying Taxes, tax rates 44 Soundness of banks 41 Number of procedures to start a business 38 Quality of air transport infrastructure 35 Protection of minority shareholders interests 32 Financial market sophistication 31 Mobile telephone subscribers per 100 population 30 Quality of management schools 26 Quality of electricity supply 24 Regulation of securities exchanges 23 Note: Rank versus 133 countries; overall, Taiwan ranks 19 th in 2009 PPP adjusted GDP per capita and 19 th in Global Competitiveness Source: World Economic Forum and Institute for Strategy and Competitiveness, Harvard University (2009) 33

Context for Firm Strategy and Rivalry Context for Strategy and Rivalry Taiwan's Relative Position 2009 Competitive Advantages Relative to GDP per Capita Intensity of local competition 2 Pay and productivity 3 Low extent of market dominance by 5 business groups Efficacy of corporate boards 12 Cooperation in labor-employer relations 13 FDI and technology transfer 13 Impact of taxation on incentives 13 to work and invest Competitive Disadvantages Relative to GDP per Capita Rigidity of employment 64 Restrictions on capital flows 61 Distortive effect of taxes and subsidies on competition 58 Market disruption from state-owned enterprises 47 Tariff rate 42 Prevalence of trade barriers 41 Strength of investor protection 39 Prevalence of foreign ownership 32 Regulatory quality 30 Strength of auditing & reporting standards 26 Note: Rank versus 133 countries; overall, Taiwan ranks 19 th in 2009 PPP adjusted GDP per capita and 19 th in Global Competitiveness Source: World Economic Forum and Institute for Strategy and Competitiveness, Harvard University (2009) 35

Employees as % of Total Population, 2009 70% Labor Force Mobilization Selected Countries 60% 50% 40% 30% 20% 10% 0% Singapore Switzerland China Thailand Cambodia Norway Netherlands Vietnam Australia HongKong Japan SouthKorea Finland Indonesia UnitedStates Taiwan Malaysia NewZealand India Philippines Source: Groningen Growth and Development Centre, Total Economy Database, accessed March 2010; Labor Force Mobilization is defined by total employment over total population. 36

Taiwan s Economic Agenda in 2010 I. Address some chronic weaknesses Improve political institutions Reduce corruption Reduce bureaucracy and regulatory complexity Improve labor force flexibility and ease skilled immigration Reduce distortions and barriers to competition Improve the quality and transparency of financial markets II. Expand, upgrade, and globalize the innovation-driven economy Open Taiwan to foreign direct investment by world-class companies 41

Inbound FDI Stocks as % of GDP, Average 2000-2008 80% Inbound Foreign Investment Stocks and Flows, Selected Countries OECD Average 17.9% Ireland (105.8%) Hong Kong (92.9%, 320.2%) Netherlands Singapore (60.7%, 157.1%) 60% New Zealand Vietnam Switzerland Czech Republic Hungary Chile Sweden 40% 20% 0% OECD Average: 37.3% Indonesia South Korea India Japan Greece China Italy Taiwan Portugal Spain Denmark Australia Thailand Canada Finland Laos Austria France Poland Norway Mexico Russia Philippines Germany United States Turkey Malaysia Brazil Iceland Israel Slovakia Cambodia United Kingdom 0% 5% 10% 15% 20% 25% 30% 35% 40% FDI Inflows as % of Gross Fixed Capital Formation, Average 2000-2008 Source: UNCTAD, World Investment Report (2009). OECD Average does not include Luxembourg. 42

Inbound FDI Flows, % of GDP 40% 30% Inbound Foreign Investment Performance Flows, Selected Countries HongKong Singapore China UnitedStates SouthKorea Taiwan Japan 20% 10% 0% 1990 1994 1998 2002 2006 2008 Source: UNCTAD, World Investment Report (2009) 43

14.0% 12.0% Change In Taiwan s average world export share: - 0.23% National Cluster Export Portfolio Taiwan, 1997-2007 Information Technology Taiwan s world export market share, 2007 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Change (97-07) Rising Exports Declining Exports Sporting, Recreational and Children's Goods (-5.5%) Textiles Plastics Metal Manufacturing Lighting and Electrical Apparel Motor Products Logistics Production Technology Entertainment Automotive Communications Equipment Chemical Products Medical Devices Tourism Business Services Oil and Gas Products Change in Taiwan s world export market share, 1997 2007 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 47 Analytical Instruments Taiwan s average world export share: 2.08% -2.5% -1.5% -0.5% 0.5% 1.5% 2.5% 3.5% 4.5% 5.5% Exports of US$8.8 Billion =

World Market Share 2% - 4% Share of World Exports by Cluster Taiwan, 1997 4% - 6% > 6% Jewelry & Precious Metals Fishing & Fishing Products Processed Food Business Services Financial Services Apparel Agricultural Products Transportation & Logistics Distribution Services Publishing & Printing Oil & Gas Education & Knowledge Creation Chemical Products Plastics Hospitality & Tourism Information Tech. Medical Devices Analytical Instruments Tobacco Aerospace Vehicles & Defense Entertainment Biopharmaceuticals Communications Equipment Lightning & Electrical Equipment Prefabricated Enclosures Building Fixtures, Equipment & Services Power Generation Motor Driven Products Furniture Aerospace Engines Textiles Heavy Construction Services Construction Materials Forest Products Heavy Machinery Production Technology Automotive Mining & Metal Manufacturing Footwear Leather & Related Products Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. 48 Sporting & Recreation Goods Marine Equipment

World Market Share 2% - 4% Share of World Exports by Cluster Taiwan, 1997 4% - 6% > 6% Jewelry & Precious Metals Fishing & Fishing Products Processed Food Business Services Financial Services Apparel Agricultural Products Distribution Services Publishing & Printing Oil & Gas Transportation & Logistics Education & Knowledge Creation Chemical Products Plastics Hospitality & Tourism Information Tech. Medical Devices Analytical Instruments Tobacco Aerospace Building Vehicles & Fixtures, Defense Equipment & Services Entertainment Biopharmaceuticals Communications Equipment Lightning & Electrical Equipment Prefabricated Enclosures Power Generation Motor Driven Products Furniture Aerospace Engines Textiles Heavy Construction Services Construction Materials Forest Products Heavy Machinery Production Technology Automotive Mining & Metal Manufacturing Footwear Leather & Related Products Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. 49 Sporting & Recreation Goods Marine Equipment

World Market Share 2% - 4% Share of World Exports by Cluster Taiwan, 2007 4% - 6% > 6% Jewelry & Precious Metals Processed Food Fishing & Fishing Products Business Services Financial Services Apparel Agricultural Products Distribution Services Publishing & Printing Oil & Gas Transportation & Logistics Education & Knowledge Creation Chemical Products Plastics Hospitality & Tourism Information Tech. Medical Devices Analytical Instruments Tobacco Aerospace Vehicles & Defense Entertainment Biopharmaceuticals Communications Equipment Lightning & Electrical Equipment Prefabricated Enclosures Building Fixtures, Equipment & Services Power Generation Motor Driven Products Furniture Aerospace Engines Textiles Heavy Construction Services Construction Materials Forest Products Heavy Machinery Production Technology Automotive Mining & Metal Manufacturing Footwear Leather & Related Products Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. 50 Sporting & Recreation Goods Marine Equipment

Clusters and Economic Diversification Develop Related Clusters Deepen Existing Clusters Turn Niche Products Into Clusters Build Clusters Around Strong MNCs 52

Taiwan s Trade With China 1993-2007 US $B 80 60 40 Imports Exports 20 0-20 -40 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Taiwan Bureau of Foreign Trade (2008) 54

Taiwan s Total Exports By Partner Exports (US$M) 300,000 250,000 200,000 150,000 100,000 All Other Italy Australia United Kingdom Thailand Germany South Korea Singapore Japan United States Hong Kong 50,000 China 0 1998 2008 Source:Taiwan Directorate-General of Budget, Accounting and Statistics 55

Outbound Flows ($B) Approved Taiwanese Indirect Investment In Mainland China, 1991-2008 12 10 8 6 4 2 0 Source: Investment Commission, Ministry of Economic Affairs, R.O.C., Statistics on Overseas Chinese & Foreign Investment, Outward Investment, Indirect Mainland Investment, R.O.C., March 2009. 56

Ranking, 2009 (of 183 countries) Favorable Ease of Doing Business Rankings Taiwan s Relative Position, 2009 Unfavorable Taiwan s per capita GDP rank: 19 180 160 140 120 100 80 60 40 20 0 Ease of Doing Business Rank Closing a Business Starting a Business Registering Property Trading Across Borders Getting Credit Protecting Investors Hong Kong Taiwan China Enforcing Contracts Paying Taxes Dealing with Construction Permits Employing Workers Source: World Bank Report, Doing Business (2010). 57

Toward A Taiwanese Economic Strategy What Is Unique About Taiwan? Highly innovative Strong intellectual property protection Entrepreneurial Flexible business culture reacts rapidly Large pool of researchers Strong science and technology education, research institutions Some deep technology clusters in closely related industries Logistics strengthened In past 10 years Strong outbound FDI Gateway to China: strongest democracy, freedom of speech of any Chinese-speaking country 58

Creating a Complementary Positioning Taiwan Innovation center for first-generation technology Manufacturing of high-technology, complex products Strong intellectual property rights and protection make Taiwan a prime destination for MNC Asian innovation centers Higher education center in science and technology Skills training center for technical workers China Hong Kong Assembly location for less complex manufacturing Source of commodities and natural resources Manufacturing center for mass consumer market 59 China commerce and trade gateway Business and financial services Commercialization center for consumer products Management training center

Highly innovative Toward A Taiwanese Economic Strategy What Is Unique About Taiwan? Strong intellectual property protection Entrepreneurial Flexible business culture reacts rapidly Large pool of researchers Strong science and technology education, research institutions Some deep technology clusters in closely related industries Logistics strengthened In past 10 years Strong outbound FDI Gateway to China: strongest democracy, freedom of speech of any Chinese-speaking country Some Implications Make Taiwan the research, technology, and complex manufacturing base for MNCs in Asia Become the most attractive site for R&D centers Create a welcoming, transparent, and highly efficient investment climate Make Taiwan the easiest place in Asia to do business Serve as the secure technology gateway to China Provide world-class logistics and business services Develop Taiwan as a knowledge and education center Become a hub for information 60