Human Capital Flows in Taiwan's Technological

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Jun 9, 2013 - Catch Up in Integrated Circuit Manufacturing, Journal of Contemporary Asia, 44:1, 64-83, DOI: 10.1080/00472336.2013.801167. To link to this ...

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Human Capital Flows in Taiwan’s Technological Catch Up in Integrated Circuit Manufacturing a

b

Yeo Lin & Rajah Rasiah a

College of Public Administration, Zhejiang University, Hangzhou, Zhejiang, Peoples Republic of China b

Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia Published online: 09 Jun 2013.

Click for updates To cite this article: Yeo Lin & Rajah Rasiah (2014) Human Capital Flows in Taiwan’s Technological Catch Up in Integrated Circuit Manufacturing, Journal of Contemporary Asia, 44:1, 64-83, DOI: 10.1080/00472336.2013.801167 To link to this article: http://dx.doi.org/10.1080/00472336.2013.801167

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Journal of Contemporary Asia, 2014 Vol. 44, No. 1, 64–83, http://dx.doi.org/10.1080/00472336.2013.801167

Human Capital Flows in Taiwan’s Technological Catch Up in Integrated Circuit Manufacturing Downloaded by [University of Malaya] at 16:04 25 June 2015

YEO LIN* & RAJAH RASIAH** *College of Public Administration, Zhejiang University, Hangzhou, Zhejiang, Peoples Republic of China, **Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia

ABSTRACT This paper examines how knowledge gained by the diaspora abroad played a strategic role in driving technological catch up in the integrated circuit industry in Taiwan. The evidence shows that efforts led by the government created conditions for the return and circulation of strategic human capital and the evolution of the absorptive capacity necessary to drive technological catch up. The integrated circuit industry was successful in getting human capital endowed with tacit and experiential knowledge to return and to circulate with considerable rooting in Hsinchu Science Industrial Park, which helped propel the integrated circuit industry in Taiwan to the technological frontier. KEY WORDS: Catch up, human capital, integrated circuits, diaspora, Taiwan

The importance of embodied knowledge flows in the growth of firms was explained in detail by Marshall (1890), who emphasised the systemic nature of knowledge. However, such Marshallian knowledge synergies were confined to small firms that were not engaged in high tech operations where considerable acquisition of knowledge is needed from research and development (R&D) operations and partnerships with universities. Saxenian (1994) and Rasiah (1994) discussed the movement of experienced human capital away from older firms towards either starting or supporting new firms in Silicon Valley, Route 128 (United States) and Penang (Malaysia), respectively. While firms in Penang were hardly connected to the system of universities and R&D centres in Penang and hence did not produce the synergies required for technological catch up to the technology frontier (see Rasiah 1988, 2009, 2010), there were considerable connections between them and Silicon Valley and Route 128. Saxenian (2006) further discussed the new entrepreneurs who returned to stimulate entrepreneurial activities in China, India, Israel and Taiwan. Whereas the role of foreign human capital in providing technical and professional labour in economic growth is well known, with developed countries such as the USA, UK, Canada and Australia benefiting enormously from the process; only Singapore and Israel from the developing countries are known to have benefited explicitly from such policies. Correspondence Address: Rajah Rasiah, Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia. Email: [email protected]

© 2013 Journal of Contemporary Asia

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Human Capital Flows in Taiwan’s Integrated Circuit Manufacturing 65 Given the aforementioned circumstances, a profound understanding of how knowledge embodied in human capital circulates, from pre-employment qualifications to its enrichment with tacit and experiential knowledge, will help governments organise strategies that can systematically enhance their development policies. Taiwan offers an excellent case study in which to examine how government policy gradually targeted and utilised nationals who studied and worked abroad to advise and lead technological catch up in high tech industries (see Nelson 2008; Malerba and Orsenigo 1996; Malerba 2002). The arousal of national concerns in the 1950s triggered wide discussions among scholars and policy makers about the nation’s brain drain, eventually advancing Taiwan to the global technology frontier in several industries as national human capital from abroad began to participate significantly in the country’s technological catch up (Glaser 1978; Ranis and Fei 1961; Vogel 1991). Investments in education were critical in driving structural transformation in Korea and Taiwan (see Nelson and Pack 1999). This paper, thus, seeks to examine how flows of knowledge embodied in human capital were instrumental in driving technological catch up in the integrated circuit (IC) industry in Taiwan. The rest of the paper is organised as follows. Section two discusses the critical theoretical considerations essential to the subsequent analysis. Section three examines the phases of human capital movements to and from Taiwan. Section four analyses the role played by both the returning diaspora and the government in driving a catch up in the IC industry. Section five discusses technological catch up and economic performance. Section six presents the conclusions. Theoretical Considerations The importance of the capacity for innovation in humans has long been recognised as the driver of economic development (Marx 1956, 1967; Schumpeter 1934; Hirschman 1958; Rosenberg 1976, 1982). Whereas extensive emphasis has been put on governments to educate their labour force, particularly ex ante, and actual employment, focused initiatives to attract talented human capital have largely been undertaken by only the developed countries (see OECD 2002; Kapur and McHale 2005; Solimano 2008). The approach taken by developed countries, such as the USA, UK, Canada and Australia, have largely targeted qualifications irrespective of national citizenry, while fast developing countries, such as Korea, Taiwan, China and India, have sought to attract their own diaspora back. Lacking a critical mass of nationals, Singapore, Ireland and Malaysia tend to approach even non-nationals. Taiwan’s experience in appointing the diaspora to lead technological catch ups is somewhat different from the experiences of Japan and Korea. In the case of the latter two countries, teams of nationals went abroad through licensing agreements to learn, adapt and transfer outside knowledge. Freeman (1987) and Fukasaku (1992) had discussed how the Japanese were able to use licensing agreements to capture a wide range of technologies and practices to support their industrial catch-up activities.1 Kim (1997) revealed how licensing agreements were appropriated by Korean engineers who creatively duplicated technology to move from imitation to innovation. Although there are accounts of engineers returning to work in electronics firms, including in the take up of patents in the USA (see Song, Almeida, and Wu 2003), the role of the Korean diaspora leading technological catch up of lead firms, such as Samsung and LG Electronics, is not very obvious. It will be shown in this paper that nationals identified by government as those

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66 Y. Lin & R. Rasiah having studied and having held key positions in flagship firms through the technical advisory council became important drivers of technological catch up in the IC industry in Taiwan. While most movement of human capital has been from developing to developed sites, causing a brain drain,2 there have been dramatic changes as economic progress at hostsites along with government initiatives have attracted the return of significant numbers of human capital to countries such as Korea, Taiwan, China and India since the 1970s. Tung (2008) argued that globalisation and the loosening of immigration and emigration barriers were important drivers of such brain gain experiences. Most countries experiencing such beneficial reversals have enjoyed strong government policies to attract back their talents. Diasporas have in particular been targeted by home governments to return and support national technology development initiatives (see Rasiah and Lin 2005; Lowell and Gerova 2004; Sequin et al. 2006; Tung 2008). However, as pointed out by Meyer and Brown (1999) and Barre and colleagues (2003), 30-50% of the developing world’s experts trained in science and technology still lived in the developed world in the late 1990s.3 It has been argued in the past that brain drain leads to a loss of skilled people from developing to developed countries and with that the resources that were used to develop them.4 While the out-migration of experts represents a loss to governments that have invested in their education and training (Bhagwati and Hamada 1974; Bhagwati and Rodriguez 1975; Kapur and McHale 2005), some developing countries have managed to turn such losses into benefits with the right policies to encourage their return. Significant numbers of scientists and engineers graduating from first class universities in developed countries gained employment in flagship multinational companies, such as International Business Machines, Intel, Motorola and Texas Instruments, building experiential knowledge capabilities there before returning to their home countries to play a productive role in transforming the technological capabilities of national firms (see Carrington and Detriagiache 1999; Rasiah and Lin 2005; Lien 2006; Tung 2008; Solimano 2008). The relative success of Ireland, Israel, Korea, Singapore and Taiwan in fostering the return of the diaspora has been attributed to the opening of their economies and policies that foster domestic investments in innovation and R&D (see OECD 2002). The initiatives of countries such as China, Ireland, Israel, Taiwan and Korea show that it is possible to attract human capital to drive technological catch up in the developing countries. Countries, such as China, Korea and Taiwan, launched deliberate policies to reattract human capital and to solicit advisory support from their emigrants to gain innovation synergies and market access. This paper seeks to discuss the experience of Taiwan in connecting and co-ordinating the spill-over of such globally evolved knowledge embodied in human capital in the technological catch-up experience of the IC industry in Taiwan. It starts with the premise that proactive government policy is critical to turn brain drain experiences into brain gain experiences at developing home sites. The framework for examining the outward movement, enrichment and inward return of human capital against the policy-driven government and related organisations is shown in Figure 1. Countries starting at the foot of the development ladder generally start their own national universities and send students to study in developed countries with superior universities to develop their human capital. Multinational subsidiaries and national and foreign labs also act as training grounds for human capital. Brain gain is said to occur when those acquiring knowledge abroad return to work at home. Some members of the diaspora remain abroad but participate interactively in the circulation of knowledge with

Human Capital Flows in Taiwan’s Integrated Circuit Manufacturing 67

National and Foreign Educational Organisations

Home and Host Multinationals

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Return to work at Home Countries

Offer advice

National and Foreign R&D Labs

Circulate without returning

Expansion in National Institutions and Organisations to absorb and evolve

Support for national firms and organisations

Figure 1. Global human capital synergies, IC Industry, Taiwan.

national organisations and firms. The depth and significance of such knowledge flows depend on the absorptive capacity of national institutions and organisations (see Ernst 2010), all of which play a critical role in stimulating technological advancement in national firms and organisations. Phases of Human Capital Flows This section discusses how the return of the diaspora snowballed in Taiwan with the movements dynamically affected by the opportunities available from knowledge gained abroad, demands placed by changes in high tech industries and the response of the government, which has been influenced by domestic political and economic pressures. The discussion examines five clear periods, which is important for other countries seeking to adapt and implement policies to attract back their own diaspora. Like other developing countries, Taiwan experienced brain drain in the 1950s. There were 4,515 students studying abroad between 1950 and 1959 (see Lin 2009).5 The number of students studying abroad increased rapidly by five-fold to more than 21,000 in the 1960s and by another 50% to more than 31,000 in the 1970s. The number doubled again in the 1980s. From 1950 to 2003, in total there were approximately half a million

68 Y. Lin & R. Rasiah 35000

32380

30000

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Numbers

25000

22221

22802

20000

15000

10000 4998 5000

2177 55

184

418

505

7045

6182

2401

2347 27

150

0 1950−53 1954−57 1958−63 1964−67 1968−73 1974−77 1978−83 1984−87 1988−93 1994−97 1998−03 Period NYCÕs figures on Returnees

Returnees to HSIP

Figure 2. Returnees to Taiwan, 1950-2003. Source: HSIP (2010).

students who went abroad from Taiwan for their studies.6 They were to later form a large overseas talent reservoir for Taiwan’s development. Although the government strived hard to encourage the Taiwanese diaspora to return, the numbers were small.7 In the 1950s, approximately 9% of them returned home to work, and in the 1960s the returnee rate fell to 5.5%. The rate increased to 16.5% in the 1970s before reaching its peak of 27% over the period from 1986-90. The overall average was 18% over the whole period from 1950-2003. Lin (2009) reported a relatively high wave of diaspora returning to Taiwan every 10 years. For example, in the first wave from 1968 to 1973, 2,177 Taiwanese returned to Taiwan, which was four-fold higher than the 505 who returned in 1964-67 (Figure 2). There were almost 5,000 diaspora returning to Taiwan during the second period, 1978-83, which was double the number that returned over the period of 1974-77. There were 22,221 diaspora returning to Taiwan during the third period of 1988-93, which was almost four times the number of diaspora returning in the previous period, 1984-87. Over the fourth period, from 1988 to 2003 almost 30,000 diaspora returned to Taiwan. Since Taiwan’s development of high-tech industries has been led by the development of the IC industry, we will use this to discuss the trends over five time periods. The 1950s Given political confrontations with mainland China and the poor economic conditions, Taiwan’s government adopted a very strict policy regarding those studying abroad in the 1950s. Students had to obtain enrolment permission from foreign universities first, and

Human Capital Flows in Taiwan’s Integrated Circuit Manufacturing 69 then pass the examinations carried out by the Ministry of Education (MOE) before they could go abroad to study. In the 1950s, Taiwan had only 4,515 students studying abroad. The Taiwan government encouraged those studying abroad to focus on engineering (see Vogel 1991). Vogel (1991) noted the vital role of educational targeting by the Ministry of Economic Affairs, which enjoyed the services of many engineers. Incentives to return to Taiwan were started as early as in the 1950s. The incentives comprised, inter alia, helping returnee diaspora find proper jobs in Taiwan and providing them with lodging and living expenses before they assumed their new jobs. The incentives were expanded in the 1960s, albeit with the same poor results.

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The 1960s The 1960s were a period of economic take-off for Taiwan as the government embarked on export promotion. The first export processing zone in Asia was established in Taiwan in Kaoshiung in 1966. American semiconductor firms, such as General Instruments, Philips, Texas Instruments and Radio Company of America (RCA), set up their IC packaging facilities in the Kaoshiung to take advantage of cheap labour endowments. The relocation helped these multinationals achieve labour cost savings of 50% (Xu 2000; Mathews and Cho 2000). Without transferring any “hard” technology, the investment of these MNCs in Taiwan helped Taiwanese engineers understand what semiconductors were about, what production technology was comprised of and what constituted plant and company management. When those engineers left the MNCs, they brought the tacit and experiential knowledge with them to local companies. During this period the Taiwan government obtained financial assistance from the United Nations (UN) to facilitate capacity building.8 The UN provided a grant of US $300,000 to the National Jao-Tung University in Taiwan to install equipment for performing microwave and laser experiments and to establish a “Far East Training Center for Electronics and Telecommunication” in 1960. In 1964, the National Jao-Tung University developed solid state technology with silicon surfaces and established a semiconductor laboratory from which the first doctorate in semiconductor research in Taiwan was obtained (Zhang and You 2001). Between 1969 and 1974, professors in semiconductor fields collaborated with enterprises in traditional industries and established five semiconductor-related companies in Taiwan. The collaborations among professors who possessed the critical knowledge and enterprises that provided investment funds seemed ideal. However, all five companies failed because the gap between essential knowledge and mass production remained too large. Despite shutting down, the five companies created precedents for collaboration between academia and industries in Taiwan, in particular in the field of high tech industries. Rapid economic development raised the demand for highly educated personnel in the 1960s, which led the Ministry of Education (MOE) to loosen controls on students who desired to study abroad. Students with admissions from foreign universities no longer needed to take the MOE examinations. Meanwhile, the US government significantly revised US immigration laws in the 1960s, which shifted from resisting to welcoming Asian immigrants to support American firms. The US government enforced “Amendment Act 1” in 1965, which, inter alia, offered science and engineering graduates easier access to immigration status in the country. Hence, both “push” and “pull” factors helped

70 Y. Lin & R. Rasiah

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increase Taiwanese studying and immigration to the USA in the 1960s, which helped raise the Taiwanese diaspora. The number of students studying abroad soared to 21,248 in the 1960s from just 4,515 in the 1950s, a five-fold increase. Most of the students were enrolled in the fields of science and engineering (see Lin 2009). Rapid economic development attracted the first wave of diaspora (2,177) to work in Taiwan in the period from 1968-73. Although this figure seems small when compared to the over 25,000 students studying abroad at the time, it was a big leap when compared with the 505 who returned between 1964 and 1967. The majority of the diaspora joined universities or government organisations because the private sector in Taiwan was underdeveloped in the 1960s. The 1970s The first half of the 1970s was a turbulent period for Taiwan. Politically, it experienced several setbacks. First, the US government established formal diplomatic relations with mainland China in 1971, which precipitated Taiwan’s withdrawal from the UN. Secondly, Japan broke off diplomatic relations with Taiwan in 1972, and terminated direct air transport between the two countries in 1974. Taiwan’s businesses then began to encounter severe problems as it had depended on the Japanese supply of raw materials and technology. Thirdly, the first oil crisis broke out in 1973 with oil prices rising four-fold in just 3 months. The Taiwan government initiated ten construction projects to stimulate the economy and to overcome deficits in infrastructure to promote export growth. Ten construction projects. The ten construction projects comprised the construction of highways, international airports and harbours, the establishment of China Steel and China Ship corporations, and the building of the first nuclear power plant to develop new sources of energy. The total cost of the ten construction projects was about US$5 billion. The Minister of Economic Affairs at the time, Mr Lee, even went to Saudi Arabia to negotiate a loan from the Saudi Arabian government to finance the project. These projects attracted 5,000 diaspora from 1978-83. To consolidate the work of recruiting Taiwanese diaspora, in 1971 the Taiwan government assigned the National Youth Council (NYC) to take full responsibility for the matter of diaspora returning to Taiwan. IC technology. The government recognised in the late 1960s that the competitive advantage of labour-intensive exports was coming to an end; this led the government to shift focus towards high level technology to sustain Taiwan’s economic development. The mission of searching for the “right” industry was left to the Technology Advisory Committee (TAC), whose major responsibilities were to provide the decision makers of the Taiwanese government with information on technology development and trends in the global markets. TAC members were all Chinese people overseas, who had gained considerable experiential knowledge working in MNCs located in the USA.9 TAC members were drawn from the Taiwanese diaspora, although they did not stay in Taiwan for long. In 1974, TAC members recommended to the Taiwan government developing the integrated circuits (IC) industry with Radio Company of America (RCA) as the anchor from which technology transfer should originate (Hong 2003). TAC specifically recommended that RCA was only necessary to provide the start to entering the IC industry but indigenous IC technology would have to evolve from there through domestic efforts. The

Human Capital Flows in Taiwan’s Integrated Circuit Manufacturing 71

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development of indigenous capability in IC manufacturing in Taiwan was expected to take 4 years and US$10 million in investment. This recommendation immediately came under fire from local scholars and businesspeople who claimed that the required investment and risks were too high. Given the fact that the per capita income in Taiwan was only US$400 in 1970, it was no surprise that the amount of investment required seemed an astronomical figure in the 1970s. However, in retrospect, it was the acceptance and implementation of this recommendation that made Taiwan the global IC market leader today. Technology transfer. The government established the Industrial Technology Research Institute (ITRI) to upgrade Taiwan’s technological capabilities in 1973 and the Electronics Research and Service Organisation (ERSO) within ITRI was founded in 1974, initially to execute the transfer of IC technology from RCA to United Microelectronics Corporation (UMC) and subsequently to support the development of the industry into a world leader. Stage 1 of the project for transferring technology from RCA targeted the establishment of an IC Pilot Plant in the period from 1975-79 (see Rasiah, Kong, and Lin 2010). In April 1976, ERSO sent the first batch of 19 engineers to RCA for technical training.10 The RCA project provided the following impact on the development of ICs and other high tech industries in Taiwan: (i) ERSO required not only manufacturing technology, but also knowledge of how to operate IC businesses, such as the management of plants, materials and inventories, and even how to meet customers’ needs;11 and (ii) the project brought design and R&D to ERSO’s engineers. ERSO started the construction of the pilot plant to manufacture IC chips following the acquisition of knowledge by Taiwanese engineers in RCA in 1976, which started operations in 1977. The pilot plant manufactured its first batch of ICs targeted at electronic watches. Having acquired the manufacturing technology, they began to realise that marketing was essential in order to sell the ICs. No one in the pilot plant had any experience in product sales. One of the project leaders then recruited his classmate from university who was a businessman in Hong Kong who helped sell thousands of pieces of ICs to electronics watch makers. Once sales were integrated with production, IC yield rose from 50% to 70%, which even exceeded the yields achieved by RCA. In addition, it is important to mention the contributions of a few members of the returning diaspora who helped with Taiwan’s first IC project. In 1974, two doctoral graduates from Princeton University, C.T. Shih and T.Y. Yang, returned to Taiwan to participate in the project. They also helped attract C.C. Chang following his graduation from Princeton University. The return of the three doctoral graduates from Princeton University certainly boosted the project.12 The 1980s and 1990s Four influential works helped explain how Taiwanese firms successfully upgraded to high value-added activities in integrated circuit manufacturing. The first by Mathews and Cho (2000) and Mathews (2006), which pointed out the strategy used by the Taiwan government of targeting catch up in product lines during times when incumbents are derailed by crisis. The second by Amsden and Chu (2003) showed the overwhelming role of the government in driving upgrading. The third by Vogel (1991) amassed evidence of the expansion in technical and engineering graduates to provide the human capital for piloting technological catch up. The fourth by Saxenian and Hsu (2001), together with Saxenian

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72 Y. Lin & R. Rasiah (2006), noted the critical role of the diaspora in the technological catch-up process. The interaction between technical employees in the Silicon Valley and Hscinhu Science Industrial Park has been significant in the transfer of knowledge to the latter. Carrying significant tacit and experiential knowledge gained from holding high positions in world class firms and R&D labs, the returning diaspora brought with them a whole knowledge network that was transplanted or extended geographically to start and run high tech firms in Taiwan. We attempt to complement these works by focusing on ITRI’s IC projects. Even though the Taiwan government offered incentives to encourage the diaspora to return home for work as early as in the 1950s, a formal policy of recruiting science and technology talents was not put in place until 1983. In 1983, the Executive Yuan, the highest administrative organisation in the Taiwan government, introduced the Programme of Strengthening the Development and Recruitment of High-Tech Talents (in the context referred to as the Program). The Program set out the basic policy to promote the development of domestic talents, which it emphasised was equally important as recruiting diaspora from overseas. The aggressive promotion of the IC industry largely shaped the causes and consequences of the diaspora programme in Taiwan. Experts with experience and tacit knowledge were strongly encouraged to return. The TAC helped in highlighting critical issues which were important in attracting the participation of Taiwanese working abroad. Large-scale IC projects. The government initiated four large-scale IC projects in total. The first project was successfully concluded after the required technology was transferred from RCA. The government then, through ERSO, launched the remaining projects to advance IC technology in Taiwanese firms. They were the “Stage II” Project of 1979-83, the VLSI project of 1983-87, the sub-micron Project of 1990-94 and the advanced submicron project of 1996-2000 (Figure 2). The government also initiated other large-scale projects in computer and peripheral production – for example, the Computer Project I (1979-83), Computer Project II (198387) and Computer and Telecommunication Project I (1987-91) (Figure 2). The technological capabilities developed in the computer industry benefited from brand-name contractors (Huang 1995). Out of the four concurrently implemented IC projects, ITRI spun-off UMC in 1980 (Tsai and Zhou 2006, 95), Taiwan Semiconductor Manufacturing Corporation (TSMC) and Taiwan Mask in 1987 and Vanguard International in 1994. TSMC acquired its technological capability through the VLSI Project, but the Chair of TSMC, Morris Chang, a returning diaspora, created a new business model. TSMC specialises in IC chip fabrication based on customers’ design without using its own design. TSMC was the first horizontally integrated IC foundry specialising only in fabrication in the world (Rasiah and Lin 2005). Traditional IC companies are all vertically integrated, which develop the IC designs and then manufacture the self-designed IC chips by themselves. The establishment of TSMC for the first time transformed this structure. Performing the role of an anchor company taking charge of the most expensive operation in the value chain, TSMC generated tremendous market opportunities for independent IC design companies. As a consequence, numerous small IC design firms mushroomed in Taiwan. Nevertheless, TSMC evolved to become a world leader in logic IC design, though its fabrication plant continues to specialise horizontally (Interview, President, Semiconductor Manufacturing Association of Taiwan, Hsinchu, November 11, 2008).

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Human Capital Flows in Taiwan’s Integrated Circuit Manufacturing 73 Hsinchu Science Industrial Park. The government established the Hsinchu Science Industrial Park (HSIP) in 1980 to host high tech companies in Taiwan (Amsden and Chu 2003). UMC was the first company to relocate to HSIP. HSIP provides incentives, such as tax holidays, tax reduction and subsidised land, to companies in the following high tech industries, namely, IC, telecommunication, computer and peripherals, bio-tech, precision machinery and opto-electronics. All large-scale projects initiated by ITRI and spin-offs have made HSIP the centre of information and communication technology (ICT) industries in Taiwan, and have created a large number of job opportunities. The development of HSIP was relatively slow until 1986 when the number of employees and sales volumes increased by almost 50% and 61.8%, respectively, from 1986 to 1987 (Table 1), which was driven by two reasons. First, a large number of returning diaspora started their own businesses in the HSIP, particularly to set up IC design houses after TSMC was established in 1987, which expanded further after 1993. The TSMC acted as the capital-intensive anchor for brain-intensive design houses. For example, Dr Ming-Qiu Wu, brought back 27 engineers and their families from Silicon Valley to start Macronix in HSIP in 1989, which recorded US$1.5 billion in sales in 2008. From 30 IC design houses in 1987, the number in HSIP increased to 64 in 1993 and to 250 in 2008 in Taiwan. Taiwan has the second largest number of IC design houses in the world in 2008. IC-related companies became the largest group with a total number of 202 companies accounting for 45.4% of all the companies, 68.3% of paid-up capital and

Table 1. Statistics of Hsinchu Science Industrial Park, 1986–2008 Year

Number. of employees

Sales (US$ million)

Growth rate (%)

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

8,275 12,201 16,445 19,071 22,356 23,297 25,148 28,416 33,538 42,257 54,806 68,410 72,623 82,222 102,775 96,293 98,616 101,763 113,329 114,836 121,762 129,512 130,577

– 866 1,737 2,124 2.443 2,903 3,406 4,810 6,706 10,940 11,565 13,915 13,693 20,387 29,803 19,619 20,454 24,973 32,552 30,765 34,503 34,829 31,964

– 61.8 78.2 14.1 17.4 18.5 12 48.3 37.8 68.3 6.4 25.6 13.9 43.1 42.6 –28.7 6.5 22.3 27.1 –9.0 14.2 2.3 –12.1

Source: HSIP (2010) “Quarterly Statistics”, Unpublished data, Hsinchu Industrial Science Industrial Park, Hsinchu.

74 Y. Lin & R. Rasiah Table 2. Structure of companies in Hsinchu Science Industrial Park, 2008

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Companies approved Industries

No.

%

Integrated Circuits Computer & Peripherals Telecommunications Electro-Optical Precision Machinery Biotechnology Subtotal Others Total

202 53 45 90 26 29 445 5 450

45.4 11.9 10.1 20.2 5.8 6.5 100.0

Paid-up capital

Employees

NTSM

%

No.

%

68.3 7.4 2.4 20.7 0.7 0.6 100.0

77,634 12,467 7,798 27,711 2,141 1,164 128,915 307 129,222

60.2 9.7 6 21.5 1.7 0.9 100.0

773,344 83,500 26,818 234,244 8,169 6,441 1,132,516 1,994 1,134,510

Source: HSIP (2010) “Quarterly Statistics”, Unpublished data, Hsinchu Industrial Science Park, Hsinchu.

60.2% of all employees in the HSIP in 2008 (Table 2). This development would not have been possible without the returning diaspora. HSIP’s rapid growth after 1987 also received a massive boost when Acer Computer and Microtech went public in 1987 and 1988, respectively. Prior to 2004, stock dividend was taxed based on the issuing instead of market prices.13 The usual issuing price is NT$10 dollars (equivalent to 30 cents in American currency) per share. In addition, the capital gains resulting from buying and selling of stocks or stock options have been tax exempt in Taiwan since 1990. The benefits of bypassing the tax on share returns were borne primarily by the employees. A large number of the employees as shareholders have become millionaires following the high productivity of these companies. For example, Phison, which specialises in flash-related controller chip design, started operations in a small cubicle at an ITRI lab in Hsinchu with US$900,000 of equity pooled from the five initiators of the firm, but its value soared to US$600 million in 2008 (Interview, Chief Executive Officer Pua Khein Seng, Phison, Hsinchu, November 11, 2008). Over 50% of its 200 employees in 2008 were engineers and enjoyed the opportunity to benefit from the firms’ expansion through ownership of shares. Companies in the HSIP have much better chances to go public than those in the traditional industries, which gave the signal that HSIP provides unlimited opportunities with very high pecuniary rewards (Saxenian 2006). Role of diaspora. The diaspora played an important role in transforming Taiwan’s IC landscape by creating successful high tech firms. Since 1982 over 1,000 diaspora started returning home each year to Taiwan, with the number of returnees going from 1,920 in 1987 to over 3,000 in 1991. Over 40,000 returned to Taiwan between 1985 and 1995. The significance of the diaspora can be seen from the rise in the share of the returnees taking jobs in the HSIP, which grew to 2% in 1983 from 1.9% in 1990, then 4.9% in 1995 and 9.3% in 2001 before falling to 8.8% in 2003 (Figure 3). On the one hand, the incubation and remuneration opportunities at HSIP were attractive (Chiu Chen and Hou 2004a, 2004b). On the other hand, the diaspora helped drive economic growth and innovation synergies at HSIP. It was only after HSIP became successful that the number of returning diaspora rose sharply. The third wave of diaspora returning home in the period between 1988 and 1993, therefore, increased sharply. Thus, the HSIP was one of the key instruments that helped turn “brain drain” into “brain gain” in Taiwan. Also, the development of

Human Capital Flows in Taiwan’s Integrated Circuit Manufacturing 75 12000

9922

10000

9163 9011

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Numbers

8000

6000 5025 4000 2563

2859 3057

3265

2080 2000

27

32

39

52

92 137 223

422

622

851 1040

1362

0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year Returnees to HSIP

Figure 3. Returnees employed at HSIP, 1984-2004. Source: HSIP (2010).

HSIP helped shift the aim of returnees from government and universities to starting their own businesses beginning in the 1980s. Networking. Human capital interactions have also been instrumental in driving the transfer of knowledge from abroad to Taiwan. The returnees from Silicon Valley who enjoyed important careers in engineering and management brought flows of knowledge informally from the Silicon Valley to HSIP (Saxenian and Hsu 2001). Through brain circulation, this network has played an important role driving technological catch up. The formation of the Monte Jade group by Chinese Americans in the field of science and technology is one such initiative, which holds conferences on new technology and market trends. Technical and market information began to flow formally and informally among the members of these groups, narrowing the process and knowledge gap between the USA and Taiwan (Xu 2000). For example, an engineer facing a technical problem in HSIP would easily pick up a phone and call a friend in Silicon Valley, which would often result in quick solutions (see also Mathews 1995). Therefore, knowledge flows from abroad are often more significant than the official figures report. Since 2000 Although ITRI has continued to play an important role in facilitating the development of high tech industries in Taiwan, government planning and co-ordination of its activities ended after 2000. Private firms have since taken on the role of expanding and diversifying

76 Y. Lin & R. Rasiah IC design, fabrication and manufacturing. Furthermore, ITRI’s resources have been targeted at projects regarding the development of other new industries (such as displays and biotechnology) in Taiwan. All IC firms became privately owned by 2000 and a number of which grew rather large with subsidiaries abroad. TSMC is one of the companies that began contract manufacturing of microprocessors for Intel in 2009.

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Pooling of Foreign and National Talents As Saxenian and Hsu (2001) and Rasiah and Lin (2005) have shown, diaspora have played a unique role in the technological catch-up process. The interaction between technical employees in Silicon Valley and Hsinchu Science Industrial Park has been significant in the transfer of knowledge to the latter. Carrying with them significant tacit and experiential knowledge gained from holding high positions in world class high tech firms and R&D labs, the returning diaspora brought a whole knowledge network that was transplanted to start and run high tech firms in Taiwan. We attempt to complement existing works on such knowledge transfer with a focus on ITRI’s IC projects. The returning experts often held higher-level managerial positions in the newly formed Taiwanese firms because of the experience and qualifications they carried. TSMC is one of the sophisticated companies with a workforce of 22,843 employees world-wide comprised of 2,618 managers and 8,830 professionals in 2008 (TSMC Annual Report 2008). TSMC’s chair, Morris Chang, holds a doctorate from Stanford University and was Vice President of Texas Instruments and Chief Operating Officer of General Instruments before returning to Taiwan. Among the 18 members of its management team, 16 of them hold doctorates from top US universities and have extensive senior management experience. Apart from the 16 senior managers, the remaining diaspora head technical groups or work as middle-level managers. The chair of the Semiconductor Manufacturing Association of Taiwan, Dr Wu TaiYuan,14 noted that the contributions to technological catch up of individuals with such depth and experience in key IC activities, such as Morris Chang, were also critical in convincing other Taiwanese living abroad that the government was doing the right thing to attract them. The marked differences in the technological capabilities, as well as the commercial performance of UMC (which has been led by home-grown talent) and TSMC became a major reference point for the Taiwanese to recognise the role of talent evolved through working in flagship firms abroad. Interviews show that few individuals returned to Taiwan for a higher salary (Interviews, Hsinchu Industrial Science Park, June 2009; see also Tang 1984). The support and sense of belongingness developed by the Taiwan government acted as a more powerful tool to attract the diaspora than immediate monetary benefits. The diaspora brought back knowledge gained while working for top multinational companies or laboratories, such as Hewlett Packard, Intel and Bell Lab. Their fluency in English facilitated easy communication with TSMC’s customers. Two-thirds of TSMC’s customers are located in the USA. While foreign sources of knowledge were flowing into Taiwan, the government has also expanded national capabilities since 1983 by stimulating the launch of new graduate programmes as well as expanding existing ones. As a consequence, after 1980 the number

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Human Capital Flows in Taiwan’s Integrated Circuit Manufacturing 77 of masters and doctoral graduates from Taiwanese universities jumped dramatically, from 11,814 in 1970-79 to 13,229 in 1980-84, 24,684 in 1985-89 and then 62,430 in 1990-95. Hence, the number of doctorates trained by Taiwanese universities exceeded the number of doctorates granted by universities to Taiwanese in the USA for the first time in 1999 (see also Saxenian 2006). It is only after domestic capacity expanded to meet the growing demand for engineering and other related qualifications that the numbers of both Taiwanese studying abroad and those returning home declined. The rate of returnees as a whole, and those with masters and doctorates fell from 25.7% and 35.4%, respectively, in 1993 to 10.2% and 16.0%, respectively, in 1996 and 8.9% and 12.5%, respectively, in 1998 (computed from Taiwan 2005). Government and private organisations also began to offer training courses to adapt to the environment of rapid advancement of industrial technology. The largest scale of training courses is offered by the Institute for Industrial Information (III), which specialises in courses that take six months to complete. From 1980 to 1996, III trained 175,000 persons (Saxenian 2006). Technological Catch Up and Economic Performance While the development of human capital at domestic universities and colleges was important, the diaspora played a crucial role using tacit and experiential knowledge gained from holding high positions in frontier firms and R&D labs to pilot the technological catch up of Taiwan’s incubated IC firms. This section analyses the impact of such human capital development on increasing patent applications and revenue performance of Taiwanese firms. Patent Take Up. Given the importance of patents in IC production, it can be used as an important proxy to denote technological sophistication of firms. Although a number of Taiwanese IC firms run by their own domestically trained graduates have gradually played an important role applying for patents, the early demonstration role was provided by the diaspora. The diaspora helped quicken and simplify the co-ordination of patenting through network integration (Ernst 2010) – because of having worked in the USA, they were familiar with the procedures of US patenting. By the turn of the millennium, the Taiwanese firms, UMC and TSMC, were among the top seven acquirers of patents among IC firms in the USA (Table 3). Growth in Revenue Taiwan’s IC firms’ revenue performance was even more dramatic. Being contract manufacturers, the focus of UMC and TSMC had largely been on providing fabrication services. They used original design manufacturing capabilities to obtain process patents, using their process capabilities to leverage strong revenues from the contractors. The overall revenue of Taiwan’s lead IC firm, TSMC, rose from US$8.2 billion in 2005 to US$10.6 billion in 2008 (Table 4). Whereas the revenue of Intel contracted by 0.9% per annum over the period 2005-08, TSMC’s revenue grew by 8.7% per annum over the same

78 Y. Lin & R. Rasiah Table 3. Patents filed in the USA, leading firms, 1982–2009 Firm

1982–86 1987–90 1990–95 1996–00 2000–05 2006–09

Intel (US) Texas Instruments (US) Advanced Micro Devices (US) Taiwan Semiconductor Manufacturing Corp. United Microelectronics Corporation Samsung Electronics Co., Ltd. Hitachi

81 766 112 0

145 1041 341 1

682 1955 448 50

2935 2657 2859 1084

6304 3292 4242 2286

4991 1983 777 1268

0 2 2928

1 102 3704

209 1526 4645

1156 5095 4953

1197 6988 7433

343 8214 4231

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Source: USPO (2010).

Table 4. World’s top integrated circuits firms by revenue, 2005 and 2008 (US$ million) 2005 Company Intel Samsung Electronics Texas Instruments TSMC* Toshiba STMicroelectronics Renesas Technology Qualcomm Sony Hynix Semiconductor Infineon Technologies AMD

2008

Nation

Revenue

Rank

Revenue

Rank

USA Korea USA Taiwan Japan Italy Japan USA Japan Korea Germany USA

35,395 17,838 11,300 8,217 9,045 8,870 8,266 3,457 n.a. 5,599 8,297 3,936

1 2 3 8 4 5 7 18 n.a. 10 6 16

34,490 20,272 11,618 10,556 10,422 10,325 7,017 6,477 6,420 6,182 5,903 5,808

1 2 3 4 5 6 7 8 9 10 11 12

*Because TSMC is a contract manufacturer it does not produce and sell its own chips. Source: RMG and Associates (2010); Arensmen (2007).

Table 5. Market share of world’s top DRAM manufacturers by revenue, 1st half of 2009 Rank

Company

National origin

1 2 3 4 5 6 7 8 9

Samsung Hynix Elpida Micron Nanya Powerchip Winbond ProMos Etron Others

Korea Korea Japan USA Taiwan Taiwan Taiwan Taiwan Taiwan

3rd and 4th quarters added from original source. Source: From data reproduced in Shilov (2010, 2).

Sales (US$ million)

Market share (%)

4,924 3,189 2,705 1,762 830 601 312 153 136 183

33.3 21.6 18.3 11.9 5.6 4.1 2.1 1.0 0.9 1.2

Human Capital Flows in Taiwan’s Integrated Circuit Manufacturing 79

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period. TSMC’s revenue also grew faster than that of Samsung (4.4% per annum) and Texas Instruments (0.9% per annum). Because of the difficulty of disentangling the revenue of TSMC by product type, it was excluded from Table 5. Nevertheless, Taiwanese firms using their own brand names were among five of the nine highest revenue earners from dynamic random access memory (DRAM) sales in the first half of 2009, which together accounted for 13.7% of global DRAM revenue in 2009. The Taiwanese share would be even higher if the contract manufacturing contribution of TSMC and other Taiwanese firms are included. It is obvious that Taiwan’s IC firms are close to the technological frontier, which is also reflected in their economic performance. Such an achievement has been possible only because of strong flows of knowledge from the returning and circulating diaspora. Conclusion The diaspora have played a critical role in propelling IC firms from Taiwan up the technology ladder. The experience of the IC industry in Taiwan obviously shows that small developing countries with a proactive government can benefit rather than lose from the process of sending out human capital for knowledge acquisition through both education and employment in flagship firms, R&D and related organisations before they are targeted for return to support national catch up. Government policy is important but needs to be flexible enough to take account of the views of human capital – especially experts with working experience in frontier multinational corporations. About half a million students studied abroad to generate a significant talent reservoir to eventually support technological catch up in Taiwan through brain gain and circulation channels, which Taiwan has used successfully in its development. The early phases of human capital flows into Taiwan went largely to serve government bodies as the industry was still in its infancy. Over the 1970s, 1980s and 1990s, the government initiated a series of large-scale technology-development projects to support technological catch up and deepen technological capabilities of computer and IC industries. Strategic human capital with employment experience in foreign flagship firms played critical leadership roles in the management of IC companies that were spun-off through the government spawned ITRI labs. Some expanded their formal and informal networks to help local companies solve technical problems and build bridges between customers and frontier R&D labs. The role of the government has been central here. Not only did the government play a critical role in identifying IC manufacturing as a strategic industry, it also built the high tech infrastructure and created the conditions for the return of tacit and experiential human capital from abroad. Taiwan’s swift catch up in the IC industry owes much to the vision and steering capabilities of the TAC whose members enjoyed strong links with the diaspora and the knowledge to anticipate the direction of IC manufacturing. While the returning diaspora were strategic in steering technological catch up, it was complemented by proactive human capital development policies on the domestic scene. The government promoted the development of national human capital, which responded effectively to participate in the catch up led by the diaspora from abroad. Through relentless focus on providing and improving formal education and training (especially in engineering), Taiwan managed to step up the supply of masters and doctorates and other highly skilled people in commercially viable technical fields.

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80 Y. Lin & R. Rasiah The government in Taiwan, working in co-ordination with the TAC, played a strategic role in providing support and resolved collective action problems involving research, training and high tech infrastructure to make its incubators succeed. The diaspora – both resettled as well as those circulating from abroad – were also motivated by excellent living, working and schooling facilities built by the government at the HSIP. The rapid growth of the HSIP acted as a snowballing magnet to attract the diaspora who played a critical role in driving the integrated circuits industry in Taiwan to the frontier of technology. Other Asian developing countries, such as China, Malaysia, Indonesia, Philippines, Sri Lanka, Thailand and Vietnam, have much to learn from the Taiwanese experience of targeted links to connect and co-ordinate knowledge flows with strategic high tech industries and human capital developed simultaneously nationally. By engaging national experts working at the technology frontier these countries can reduce government failures à la Taiwan by ensuring that incentives, grants and policies are fine-tuned with markets through effective consultation. Acknowledgements Comments from Richard Nelson and three anonymous referees are gratefully acknowledged. The usual disclaimer applies.

Notes 1

2

3

4

5

6 7

8 9

10

Fukasaku (1992) had relied extensively on oral history interviews and secondary government and company documents to present the catch-up experience of Mitsubishi Nagasaki Shipyard. The authors used these channels of data gathering to capture the role of the diaspora in the technological catch up in IC manufacturing. Docquier and Marfouk (2006) define brain drain as the proportion of working-age individuals with at least a tertiary education who have moved from their home country to live and work in another country. This definition may be overly narrow since human capital, even with less education, gains experience while working. However, because of problems of measuring the latter the paper excludes this category when estimating movements of human capital. These are rough estimates only as it is extremely difficult to monitor movements of people by skills and qualifications categories (Lowell and Gerova 2004; Carrington and Detragiache 1999). For example, Cervantes and Guellec (2002) have reported that some countries have lost many of their talented people to their more economically powerful neighbours. Solimano (2008) has also indicated that the phenomenon of South-South migration certainly exists and is related to living standards and opportunities within developing countries. The data on students studying abroad and returning was originally compiled by the Ministry of Education and National Youth Council (NYC). Since January 1, 1996, NYC stopped providing tickets to returning diaspora, which discouraged the diaspora from registering with the NYC. As a result, the figures of returning diaspora after 1996 are not as reliable as the figures before 1996. We believe the actual total exceeded over half a million. In this context and the rest of the paper, we use “Taiwanese” to refer to people who were originally citizens of Taiwan. Taiwan withdrew from the United Nations following China’s entry as a member. To prevent a conflict of interest, all TAC members obtained permission from their own companies before joining the TAC. TAC members did not accept pecuniary rewards from the Taiwanese government and used their own vacation time to return to Taiwan for meetings and other activities. The Taiwan government provided only one round-trip ticket to TAC members every year. RCA had agreed to offer training to the amount of 353 people-months to 53 people.

Human Capital Flows in Taiwan’s Integrated Circuit Manufacturing 81 11 12

13

14

The head of the accounting department of ERSO subsequently learnt how RCA built its accounting system. Dr Shih served as the president of ITRI and at the time of this study he was the Dean of the School of Technology Management in Tsinghua University in Taiwan. Dr D. Y. Yang was the Chair of Winbond Semiconductor International. Dr C. C. Chang was the head of ERSO, and now the chair of Vanguard International. All 19 engineers who went to RCA have high achievements in their career development. After 2004, the Taiwan government adopted a new accounting system, where stock dividends are taxed based on market prices. Interview conducted by the authors on November 12, 2008 in Hsinchu. Dr Wu Tai Yuan himself studied at Stanford University and worked at IBM before returning home.

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