The Competitive Advantage of Taiwan

Discussion topics included the recent economic downturn, the unemployment levels and the uncertainty of the future relationship with China.

Challenges facing Taiwan include addressing chronic weaknesses, making the transition from an investment-driven to an innovation-driven economy, and defining the economic relationship with China.

The rising prosperity includes a nation’s standard of living which is determined by the productivity with which it uses its human, capital, and natural resources. The definition of competitiveness is prosperity. Productivity not only depends on the value of products and services but also the efficiency that they are produced. What industries a nation’s companies compete in are not the issue, the issue is how the firms compete in those industries. The productivity of a nation is reflected by what domestic and foreign firms choose to do in the areas they choose to locate. The productivity of local industries and their competitiveness are extremely important to the levels of competitiveness of traded industries. Devaluation does not make a country more competitive it just reveals a lack of fundamental competitiveness therefore many nations compete in offering the most productive environment for business. Public and private sectors play different but interrelated roles in creating a productive economy.

Innovation and prosperity is built on competitiveness and productivity, and the capacity for innovation. Advanced economies usually have their innovation supported by high levels of prosperity.

Development of productivity and productivity growth is determined on macroeconomic, political and legal context factors. Macroeconomic foundations of development are linked to the sophistication of the company and its operations and strategy with the quality of the microeconomic business environment.

It’s important to have sound macroeconomic policies and a stable political and legal system to promote a prosperous economy. Competitiveness can and almost always depends on improving the microeconomic foundations of competition.

The microeconomic business environment is closely related to productivity.

There are many conditions that affect the context for firm strategy and rivalry. IF there is a local context it encourages efficiency, investment and that upgrading is continued.

Competition among local based rivals is healthy as it allows the presence of capable and locally based suppliers and firms in related firms. This also promotes clusters instead of isolated industries. A firm relies on factor conditions or inputs that are of high quality and specialized. These include human resources, capital resources, physical infrastructure, administrative infrastructure, information infrastructure, scientific and technological infrastructure and natural resources. The demand conditions of a firm include having sophisticated and demanding local customers, having unusual local demand in specialized segments that can be served globally and having customer needs that anticipate needs elsewhere.

There are stages of economic development, these include resource driven economy, investment driven economy and innovation driven economy.

3.8.1 Resource driven economy

Competitive advantage can be gained from basic factor conditions such as low labor, natural resources and geographic situation or location.

Technology is usually gained through imports, FDI and imitation. There is sometimes a lack of direct access to customers and many companies compete on price. Companies can have a limited role to play on the value chain and mainly focus on the assembly of labor intensive manufacturing and resource extraction. This type of economy is very sensitive to world economic cycles, commodity prices and exchange rates.

3.8.2 Investment driven economy

Producing standard products and services efficiently may be a competitive advantage.

Technology is accessed through licensing, FDI, joint ventures and imitation. The nation usually has the capacity to not only assimilate foreign technology but also has the capacity to improve on it. The economy supports heavy investment in efficient infrastructure and modern production processes. Companies are capable and do serve

original equipment manufacturing customers and are able to extend their capabilities more widely in the value chain. The economy can be more focused on outsourcing and service exports.

3.8.3 Innovation driven economy

The dominant source of competitive advantage is based on the innovation of products and services at the global technology frontier. The economy is characterized by strengths in all areas together with the presence of deep clusters. Companies often have unique strategies with a global scope. The economy has a high service share and is resilient to shocks in the economy.

3.8.4 Taiwan’s current position

Taiwan’s primary focus is on manufacturing. It competes strongly on price and efficiency. Taiwan has a strong strategy of serving OEM customers. There is a high rate of investment in modern production methods and assimilating technology. Strong capabilities to improve and enhance foreign technology have been the trend for many years. Taiwan has shown to have export led growth. The government has had a substantial role in steering and molding the economy. There is an emergence in innovative capacity as Taiwan is in an investment driven period.

3.8.5 Limits of the current strategy

Labor costs are now high as compared to relative neighboring countries in a similar stage of development. Other domestic costs are also rising and it means Taiwan is facing an increasing pressure in the export markets. As a result, Taiwanese companies are investing heavily in lower wage locations around Asia so as to maintain current strategies. The proximity of China offers an easily available alternative location with access to a huge domestic market. The exports from Taiwan are heavily dependent on a single cluster in which other Asian countries are also involved and compete. The downturn in IT investment from the US has a large impact on Taiwan.

Some of the weaknesses that need to be addresses are improvements in the physical infrastructure, the upgrading of domestic financial markets, the increase of transparency, openness and legal accountability, and boosting the efficiency of domestic industries.

There are many sources of competitive advantage that can be gained from performances.

Operational effectiveness such as assimilating attaining and extending best practice or Strategic positioning which involves a unique and sustainable competitive position are some of the strategies being taken. Company strategies that are typical in Taiwan include concentrating on manufacturing more that service. Rapidly adapting new technologies when they become available, and competing on price and time to market aspects also.

Servicing OEM customers in the US and other Asian countries while focusing R&D on cost and process improvements. Others include searching for low cost inputs while investing modestly in human capital. Many companies in Taiwan face the challenge of making the transition from competing on cost to competing on unique products and services.

Environment regulation and competitiveness is an important area to focus. Competing in the past has been based on weak environmental standards, which perpetuates low incomes for the citizens. Corporate pollution is a sign of inefficient and unproductive use of resources. Firms need to combat inefficient extraction of resources, incomplete material utilization, unnecessary waste products, unnecessary energy use, and unproductive use of land. The customer needs to be aware of usable materials that are part of discarded products, products that use energy inefficiently, and discarded or unnecessary packaging. The need to treat pollution and control to a certain extent these problems causes companies to perform activities that are costly but create no value to the customer. So pollution is a reflection of the company and their sophistication of technology and their weak management. Strict environmental regulation stimulates the upgrading that is necessary to achieve advanced economic development.

Taiwan has some established clusters such as electronics, plastics, textiles and apparel.

The government should play an appropriate role in economic development of Taiwan.

Firstly they need to establish a stable and predictable macroeconomic, political and legal

environment. Improve the availability, quality and efficiency of general purpose infrastructure and institutions. Set up rules and incentives that govern the competition and encourage productivity growth. Facilitating cluster development and upgrading is very important. Creating an explicit, ongoing process of economic change and competitive upgrading informs citizens and mobilizes the private sector, it mobilizes the government at all levels the education institutions and civil society.

The government in Taiwan has come up with some strategies to combat low employment levels the job creation strategy included subsidies to create new jobs and FDI subsidies.

Competitive strategy includes creating the conditions for productivity and cluster development. This involves improving the efficiency of infrastructure, cluster based training and improving the flexibility of labor markets.

Industrial policy and cluster policies offer different advantages and problems. Industrial policy targets desirable industries and sectors while focusing on domestic companies. It intervenes in competition and centralizes decisions at the national level this can lead to distorted competition. Cluster based policy focuses on all clusters and believes the clusters can contribute to prosperity. Domestic and foreign companies both enhance productivity in this policy. Impediments and constraints are relaxed and cross country linkages and their complementarities are emphasized. Encourage initiative at the state and local level which will all add up to enhanced competition.

The relationship with China is important there is a common language, a strong historical ties and personal ties through family relationships and migration, and there is a substantial economic presence of Taiwanese companies in China. Taiwan’s goal should be to create a mutually beneficial relationship that supports Taiwan’s higher standard of living. Taiwan needs to define a unique role with China so that they can build on its distinctive strengths and offset China’s weaknesses and rigidities. For mutually beneficial roles between the two, Taiwan needs to gain a unique position and build on the specialization in areas where they can give China access to its competitive advantages.

Areas for this may include the clusters in Taiwan, which may provide a more conducive environment than China. There are parts of the value chain where Taiwan has developed unique advantages that China will have difficulty replicating. For example in the area of

R&D and design Taiwan should offer a better R&D infrastructure and a more conducive environment for innovation than China. Taiwan can play this role combined with manufacturing activities located on the mainland and provide a competitive advantage to the region. Taiwan has some sophisticated services and can develop its professional services for China’s export industries. There are some complementary fields of specialization that can be utilized by Taiwan such as its management education and its capabilities to educate the business leaders of the region. Taiwan can build on its science and technology base to become the center of science education in the region. Media and entertainment can also play a role in this because Taiwan is more liberal with regards to its media and it has the potential to become the media, entertainment or publishing hub for the region.

So in conclusion a successful transition to the innovation driven stage makes a mutually beneficial relationship with China more likely, the proximity to China increases the pressure on Taiwan to move from the investment driven to the innovation driven stage.