6
IPR and Catch-Up
The Case of Taiwan’s IC Industry
Hsueh-Liang Wu, Yi-Chia Chiu, and Ting-Lin Lee
I N T RO D U C T I O N
Recognizing the prime importance of innovation to driving economic and social progress, the granting of intellectual property rights (IPR) has long been viewed as one way to encourage innovation. Departing from a traditional argument that IPR regime plays a strong role in the generation of innovation (Kumar, 2003), this article is an attempt to highlight the necessity of matching IPR regime with technological development activities in different stages of industrial development. Technological catch-up, as a special form of technological progress in late-comer countries, and the ways it takes place have long been conceptually and empirically examined in the literature. However, the institutional determinants of technological catch-up have had relatively less attention (Dosi et al., 2006). Based on the different development trajectories of three sectors of Taiwan’s semiconductor industry, namely, IC foundry, DRAM, and IC design, we aim to illuminate how the changing roles of IPR regime affect the technological catching up of the three sectors.
The semiconductor industry in Taiwan is established through a process of resource leverage that has been accelerated under a judiciously constructed institutional framework. Furthermore, despite being a late-comer most of this industry is sustainable and capable of standing on its own in the face of tough international competition. Resource leverage implies the capacity of firms to access financial, technological, and other resources to enhance their technological capacity and to catch up quickly with the first movers abroad. This is precisely what Taiwanese firms have been able to do in the case of the semiconductor industry. There are exemplary “path-skipping or path-breaking” types of catch-up as Taiwanese firms were following the path initially taken by Western firms (Mu and Lee, 2005). They successfully leveraged technologies from abroad, through foreign direct investment (FDI), technology transfer, licensing, OEM production, and eventually, joint collaborative development efforts, either mediated through ITRI (a government-sponsored industrial technology research institute), or implemented through direct, bilateral firm-to-firm arrangements.
For Taiwanese experience in the semiconductor industry it is worth under-lining that firms engaging in the catch-up processes have not had to do their “leveraging” entirely on their own. Instead, firms have operated within a frame-work of institutions, consisting of government agencies, inter-firm linkages, and institutional infrastructure, including the IPR regime. This institutional setting acted as an accelerating national system of economic learning (Mathews, 1997), where the emphasis has been on technology acquisition and diffusion. The resource leverage practiced in Taiwan’s catch-up industrialization involves a capability of following closely the Western trend of innovation, and of disrupting occasionally the status quo, and of utilizing the technological gap as windows of opportunity rather than seeing them as barriers to entry. The competitiveness of Taiwan’s semiconductor industry as a whole provides a dramatic demonstration of how institutional support underpins the catch-up process of late-comer entry; that is, a lax IPR regime in the pre-WTO period induced the flow of resources and encouraged the imitation-based catching up whereas a stronger IPR enforcement during Taiwan’s application for WTO induced the flow of innovative ideas and encouraged the innovation-based catching up. Since Taiwan’s entry into WTO, not only has the IPR regime become more internationally harmonized but more favored settings have been created for local firms to pursue innovation based on cross-border knowledge spillover, therefore, making the path-breaking type of catching up more likely to happen.
This chapter is organized as follows: the next section introduces the evolution of IPR regime in Taiwan and the status of economy over time; then three chosen industry cases are presented, showing the different types of technological progress in IC foundry, DRAM, and IC design sectors. Based on the industry cases, the next section discusses the link between IPR regime and technological catching up, followed by the conclusion.
EVO LU T I O N O F I P R R E G I M E A N D E C O N O M I C D EV E LO P M E N T
Overview of Taiwan’s economic development
Out of the remnants of the rural economy left after World War II, Taiwan has quickly transformed itself and successfully reached the status of an industrialized economy. Dating back to the early 1950s, Taiwan was an agriculture-based economy and the government sought to increase industrial production by ex-porting more agricultural products and processed agricultural products, which demonstrated just how important the farming sector was in generating foreign exchange reserves. The government pressed in 1958 for a more liberal trade policy which would permit more rapid and sustained industrialization. When the agricultural sector’s peripheral productivity fell, the government took the initiative
to develop foreign trade and establish labor-intensive industries in the Export-Processing and Industrial Zones in the late 1950s to absorb the excess labor from the declining farming sector. In the early 1960s, an export boom was followed by the dramatic adjustment of the exchange rate system, which fueled the rapid develop-ment of some labor-intensive light industries. The export-led expansion of industry was further supported by additional export promotion measures.
In 1972, the government launched the “Ten Major Projects,” including the setting up of several state-owned heavy industries and other capital-intensive investments in infrastructure, which helped the economy to ride out the recession which followed the first oil crisis. In reaction to the increased oil prices in 1973–4 and again in 1979–80, the government adopted a series of policy measures attempting to transform gradually the economy to more technology-intensive, rather than capital- and energy-intensive production. For example, the Hsinchu Science-based Industrial Park was established in 1980, offering special incentives for new installations of high-technology industries covering integrated circuit (IC) manufacturing, precision machinery, and biochemistry, etc.
Being listed as one of Asia’s “four little dragons” for its considerable economic growth from the 1960s, Taiwan maintained its undisrupted economic develop-ment in the 1970s despite the impacts of the two global energy crises. During that decade, the island managed to maintain an average economic growth rate of 9.83 percent with impressive export figures and significant expansion in foreign trade. However, observers have noted that, until the 1990s, Taiwan remained at what Porter (1990) described as the “investment-driven stage” of development (Lau, 1994). Although much of its past economic success can be attributed to well-educated manpower and strong entrepreneurship, Taiwan is still mainly restrict-ed to OEM and ODM production in terms of the level of technology. While its industrial production process technology is of a very high standard, it is still not on a par with that of the leading international manufacturers. Taiwan is thus some way from the “innovation-driven stage” which the developed nations have now reached. A similar view put forward by Krugman (1994) suggests that, unlike the model in the industrialized nations where growth is driven by technological progress, the “Asian Miracle” of rapid economic growth was spurred just by the accumulation of capital, manpower, and other production resources, which cannot be maintained over the long term.
Notwithstanding the achievement of economic growth, Taiwan’s government realized that the domestic economy was excessively dependent on labor-intensive industries, a source of structural weakness that made it vulnerable to the fading out of comparative advantages in labor costs and the fast catching up of other developing economies. It was thus clear that the economy needed to undergo a major structural adjustment, shifting away from labor-intensive to high-value-added industries, and that this should be achieved not only by fostering a cluster of new strategic industries (Spencer et al., 2005) but also by promoting overall industrial upgrading through policies designed to encourage industrial innova-tion. Since then, there has been a steady intensification both of state support for technology ventures and firms’ commitment to R&D activities (The Economist
(15 April 1995), 62–3), with the government giving priority to upgrading industrial technology in selected industries and firms. Table 6.1 shows a steady growth in national R&D expenditure and its percentage of GDP in Taiwan since 1980. Although the public sector still accounts for a significant portion, the percentage of business spending takes the lion’s share, reflecting the government’s efforts to ensure that the primary responsibility for industrial upgrading should be shoul-dered by businesses rather than the state.
The development of IPR regime in Taiwan
As a small economy in East Asia, Taiwan’s IPR regime dates back the law promulgated in China in the early twentieth century, which reflects its isolation from international standards. However, since the KMT government retreated to Taiwan in 1949 and developed the island into an export-oriented economy, the IPR regime has been strongly influenced by international patent law, particularly the US IPR law No. 301 governing US foreign trade negotiations. Taiwanese patent and copyright laws were in effect in the 1950s and 1970s, respectively. However, the substantive development and international harmonization began in the early 1980s, decades later than other developed countries.
Table 6.1. The national R&D in Taiwan.
year National R&D
exp.
R&D/ GDP
Distribution of R&D expenses (%)
NT$ million (%) Business Public
sector University Foreign business 1980 71548 1.66 62.20 36.40 1.20 0.20 1990 125031 1.81 59.90 38.00 2.10 0.00 1995 137955 1.84 60.90 36.50 2.50 0.10 1996 156321 1.92 63.80 34.30 1.90 0.00 1997 176455 1.97 65.30 32.60 2.00 0.10 1998 190520 1.91 65.40 32.20 2.10 0.30 1999 197631 1.98 64.50 33.10 2.08 0.32 2000 204974 2.08 64.66 33.30 1.80 0.24 2001 224428 2.18 63.10 35.20 1.60 0.10 2002 242942 2.25 63.30 34.68 1.58 0.44 2003 263271 2.31 64.80 33.60 1.54 0.06 2004 280980 2.38 65.78 31.50 1.63 1.09 2005 304254 2.45 63.29 33.13 1.67 1.91 2006 307037 2.58 62.75 34.69 1.72 0.84
Note: The government sector includes government agencies, state-owned enterprises and government-owned laboratories. R&D expenditure for national defense is not included.
Source: Indicators of Science and Technology Taiwan (2008), National Science Council, Taiwan. (http://www.nsc. gov.tw/tech/index.asp).
Taiwanese patent law can mostly be traced back to the Temporary Memoran-dum of Artwork Reward drafted in 1911.1The memorandum, which was revised in 1923, endeavored to reward innovation in manufactured products. The subsequent Special Industry Reward Act (1929) and Industrial Technology Re-ward Temporary Clause (1932) extended the initiative of this legislation and expanded the scope of protection.
The Patent Act of Taiwan, originating in Mainland China in 1944, was im-plemented in 1949 when the central government moved to Taiwan. Except for minor amendments in 1958 and 1978, the bulk of the changes to the IPR regime could date back to the 1980s as a result of rapid growth in international trade driven by Taiwan’s industrialization. Despite the application by Taiwan for GATT entry in 1995 and its willingness to harmonize the IPR regime with the require-ments of TRIPS (Chen, 2001), IPR concepts were not a major concern in Taiwanese society until the early 2000s. Based on the characteristics of the evolution of IPR regime, we can divide the development of Taiwan’s IPR regime into three main periods: (1) the period before 1995 when Taiwan filed a formal application to access into GATT/WTO; (2) the period over 1995–2002 during which Taiwan actively adjusted its IPR regime in accordance with TRIPS agree-ment; (3) the period after 2002 when Taiwan became a WTO member country. Not only do we see the evolution of IPR regime over time but also its linkage with the status of industrial developments.
Before 1995: learning stage
During 1980–90, Taiwan demonstrated slow but steady economic growth yet its international trade remained relatively stagnant. Since 1990, the high-tech in-dustries have accounted for most of the growth in exports. However, an increas-ing number of IPR infrincreas-ingements also raised the public awareness of IPR.
In the past five decades Taiwan has successfully transformed from an agricul-tural economy to an industrialized one. Since the 1980s, traditional labor-inten-sive industries have been replaced by technology-intenlabor-inten-sive industries. The composition of exports then changed accordingly. Figure 6.1 shows the growth of the Taiwanese economy in the past two decades.
As Taiwan and the USA had long developed a mutually beneficial economic relationship, some major US electronics firms relocated their manufacturing activities to Taiwan from the 1960s. The Taiwanese government successfully attracted foreign investment by establishing specialized export processing zones to boost the efficiency of export administration. Subsequent development during the 1970s and 1980s was based on technology transfers and spillover which enabled local firms to gradually develop their own indigenous technology and
1 The political party, KMT, established the Republic of China in 1911. After a civil war after World
War II, the KMT government retreated from mainland China to Taiwan in 1949 and resumed sovereignty until the presidential election held in 2000, when DPP became the ruling party.
export to the USA. Therefore, from the 1980s, the Taiwanese economy started to have a trade surplus with the USA, and both imports and exports had rapidly grown.
As a result of US–Taiwan trade negotiations, the 1980s saw the introduction of the IPR concept to Taiwan. As the Taiwanese economy grew, imitation and counterfeit products were produced on a large scale and exported to the US market. The Taiwanese government therefore adopted the Antipiracy Rules and Regulations, and issued an “Alliance Self-Restraint Declaration,” but these mea-sures proved ineffective. In cooperation with the private sector, the government established the National Industry and Commerce Anti-piracy Committee to promote IPR management. Additionally, the General Industry Committee and Hsinchu Science Park Trade Union also formed an IPR committee to increase awareness of IPR issues among private firms. These measures demonstrated government commitment to introducing IPR, while industry endorsement continued to lag well behind. In spite of government recognition of the impor-tance of the IPR regime, governing authorities were not integrated and efforts varied greatly. For example, the Central Standards Bureau of MOEA (the Minis-try of Economic Affairs) is responsible for trademark and patent affairs. However, many of its functions overlap with those of other IPR-related agencies, creating confusion and conflicts for trademark and patent applicants.
Taiwan was listed on the Special 301 Watch List during every year from 1989 to 2002, with the exception of 1996 and 1997. Furthermore, in 1992 and 1993 Taiwan was listed as a Priority Foreign Country. The government was thus obliged to amend its IPR laws to comply with a memorandum of understanding jointly signed with the USA in 1992. The IPR reform the following year was again a quick response to threatened retaliations by the USA and demonstrated the determination of Taiwan to resolve IPR infringements. During the same period, the GATT expanded protection for IPR-related trade agreements, namely TRIPS
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 1980 1981 198219831984 198519861987 1988 19891990 19911992 19931994 1995 1996 19971998 1999 2000200120022003 20042005 2006 Year $ million –4 –2 0 2 4 6 8 10 12 14 Growth rate (%)
National Income GNP Economic growth rate
Figure 6.1. Changes in national income, GNP, and economic growth from 1980 to 2006 Source: Compiled from http://tie.tier.org.tw/tie/index.jsp?data_base_id¼DB001.
(Trade-Related Intellectual Property Rights). Since then, this agreement has become the international IPR enforcement standard. Following negotiations with the USA, Taiwan began to amend the laws related to trademark, patent, and copyrights in accordance with TRIPS principles under GATT. Besides, Taiwan has also implemented IP legislation for integrated circuit (IC) layout, business knowhow, and some other aspects of IPR enforcement regulations.
Following numerous legislative revisions to the Taiwanese IP-related laws, the society as a whole was still not fully aware of the importance of IPR in the 1980s. However, the patenting of the export-oriented industries was relatively active when compared with other Asian countries at that time. In 1980, there were 2,765 Taiwanese patents issued by the USPTO (see Table 6.2). Since then Taiwan remains as one of the top countries, next only to Japan, Germany, and South Korea, which earned the greatest number of patents issued in the USA. Although both the public and private sectors began to realize the importance of IPRs near the end of this period, there were some lawsuits of patent infringement by international competitors. For example, UMC, one of the leading IC manufacturing firm, was sued for patent infringement by National Semiconduc-tor Corporation in 1985. Another example was Acer, the leading PC manufactur-er with MPF-II system sued by Apple in 1982 and its BIOS firmware sued by IBM in 1989. On the one hand, industries learnt bitter lessons from these disputes or patent infringements. On the other hand, increasing royalty payments also gave a stronger motive of local firms to pursue indigenous innovation and patent application.
From 1995 to 2002: growth stage
Unlike the high growth rate achieved by the high-tech industry during the early 1990s, economic growth began to slow during 1995–2002. Simultaneously, the Table 6.2. Statistics on Taiwanese patents issued in the USA
Year Amount Growth rate (%) Global rank
1986–90 2,765 – – 1991–95 7,760 180.65 – 1996 2,419 15.91 6 1997 2,597 7.35 6 1998 3,805 46.52 4 1999 4,526 18.95 3 2000 5,806 28.28 3 2001 6,546 12.75 4 2002 6,730 2.81 4 2003 6,676 0.80 4 2004 7,207 7.95 4 2005 5,993 16.85 4 2006 6,490 8.29 4
industrial structure also changed, with the high-tech sector replacing the tradi-tional manufacturing industries as the main driver of economic development. During this period (see Figure 6.1), the high-tech industries still played an important role but the cost-cutting pressures industry-wide shrank their eco-nomic contribution. Traditional OEM and ODM firms were forced to adopt more cost-oriented business models, driving a number of manufacturing firms to migrate to lower wage regions such as Mainland China or Southeast Asia to remain competitive, raising worries of “industrial hollowing-out.”. However, more technology-intensive industries, such as semiconductor and TFT-LCD, also emerged as the new engine of industrial development. The IC foundry model adopted by TSMC and UMC had been proved a feasible model at this stage, fostering the quick development of IC design sector. Meanwhile, because of the export-oriented growth of the Taiwanese high-tech industries, the frequency of patent disputes increased considerably in the 1990s. Learning from earlier experiences of lawsuit losses owing to ignorance of IPRs, patenting activity of firms intensified through more resources devoted to IPR-related activities, including more budgets for IPR management, setup of legal department and specialists, and IPR training.
In the public sector, the TIPO (Taiwan Intellectual Property Office) was established in 1999 by uniting several IP-related government departments and agencies, and the prosecution of IP Infringement and counterfeiting has been more actively pursued. With the coordination efforts of TIPO, judicial depart-ments work closely with police force to form various task forces, including “The Optical Media Joint Investigation Taskforce” and “Anti-Counterfeiting Committee” of the MOEA, “National Police Administration” and “IRP Team” of Minister of Interior, and the customs authorities, all of which undertake the prosecution and prevention of counterfeit and piracy. The number of crack-downs on IP infringement, particularly copyrights and patents, has decreased gradually since 2000. In summary, the reform of IPR regime and stricter enforce-ment upon IP infringeenforce-ment served as favorable conditions for Taiwan’s appli-cation for WTO membership. A series of reforms in Taiwan IPR regimes from 1996 were also made in consistent with TRIPSs regulations promised by the government.
During the mid-1990s, the fifth National Science and Technology Conference held by Taiwanese government concluded with the “White Paper on Science and Technology” and the draft of the “Fundamental Science and Technology Act” (FSTA). The FSTA was finally approved and implemented in 1999, and aimed to promote the patenting and commercialization of innovation by academic and non-profit research institutes. The functions of the FSTA resembled those of the Bayh-Dole Act of the USA.
2002 to the present: harmonization stage
After Taiwan joined the WTO in early 2002, the IPR regime complied fully with what was promised in the process of WTO entry negotiation. Public awareness of
IPR has been continuously promoted. Government kept focusing on IPR protec-tion and claimed 2002 as IP “Acprotec-tion Year.” A three-year (2003–5) acprotec-tion plan, with the aim of improving the enforcement and judiciary framework of IPRs, was announced. The revised Patent Law not only protects innovation and prevents disturbing lawsuits, but also promotes IPR trading. The government has estab-lished an IP trading platform. These initiatives demonstrate that both the private and public sectors adopted a more active attitude toward IPR rather than simply responding passively to this issue.
Since the Taiwanese IPR regime became consistent with TRIPS regulations, Taiwanese firms are in a better position to partner foreign firms, and thus the number of technological alliances and transfers involving Taiwanese firms has increased significantly ever since. Technology trading has increased steadily from 4.47 billion NTD in 1999 to 70.6 billion NTD in 2005. The high growth rate of IP trading relies somewhat on the internationally harmonized and strictly enforced IPR regime in Taiwan but also causes trade deficits. As noted above, the growth momentum of patent registration has continued from the previous phase. Table 6.3 shows the number of patent registration in Taiwan over time. Not only has this grown significantly since the 1990s but also the ratios of invention and new design to total patents have increased, implying that the contribution of local innovation shifts gradually from minor improvement (utility patent) to more novel ones (invention patents) and new designs. The percentage of local inventors in patent registrations also illustrates the gradual dominance of locals over foreigners in terms of registered innovation. Finally the structure of patent assignees implies that structural innovation became prevalent from the 1990s, which may be attributed to the increasingly intensive patenting of high-tech firms. As regards the patent registration by industry, a study shows that 28.4 percent of patents issued in 2006 are from electronic and electric engineering, 21.1 percent from digital and communication, 14.3 percent from semiconduc-tors, while machinery accounts for 16.5 percent of new patents and bio-chemicals for 8.5 percent.
In general, although patent counts increase rapidly and more innovative firms are able to profit from IP trading, there is room allowed for quality enhancement as the impact of Taiwanese patents in the USA is on average low. According to the statistics of IP loyalty payments, Taiwan paid over US$2,000 million in licens-ing fees for technology development in 2006 only. Figure 6.2 shows that the Taiwanese continue to pay more for IP loyalty than benefit from IP trading. Patent lawsuits and the exclusion actions of International Trade Commission (ITC) against Taiwan firms have been rising dramatically (more than 200 cases in USA after 2005). It is said that Taiwan electronics companies are paying, on average, 5–10 percent royalties per case settled, amounting to billions of US dollars.
T able 6.3. P atent registration and composition in T aiwan. Y ear P ate nt ap plied P ate nt granted P aten t ty pes (%) In ventor (%) P atent assigne es (% ) In vention U ti lity model Design T aiwa nese F o reigners Corpora tion In dividuals 1960 646 217 0.46 99.54 0.00 31.98 68.02 11.98 88.02 1970 4218 1951 20.43 73.16 6.41 41.76 58.24 36.90 63.10 1980 13016 6633 31.57 57.99 10.44 49.15 50.85 40.38 59.62 1990 34343 22601 34.13 50.63 15.25 55.16 44.84 54.44 45.56 1995 43461 29707 32.49 48.83 18.68 58.37 41.63 55.75 44.25 1996 47055 29469 34.16 46.23 19.61 57.42 42.58 54.40 45.60 1997 53164 29356 34.69 45.90 19.41 59.58 40.42 57.47 42.53 1998 54003 25051 33.84 43.55 22.61 65.87 34.13 56.24 43.76 1999 51921 29144 38.70 44.06 17.24 61.94 38.06 60.45 39.55 2000 61231 42241 41.44 42.77 15.79 61.11 38.89 66.07 33.93 2001 67860 47721 46.03 38.18 15.79 66.60 33.40 69.00 31.00 2002 61402 45042 51.14 35.78 13.08 65.53 34.47 72.80 27.20 2003 65742 53034 47.39 36.43 16.18 69.74 30.26 73.78 26.22 2004 72082 57717 52.99 34.25 12.76 71.89 28.11 70.98 29.02 2005 79442 58306 43.18 39.38 17.44 73.95 26.05 67.49 32.51 2006 81658 49315 47.62 39.79 12.59 69.24 30.76 73.22 26.78 Source : Compiled fr om the ar chive of T aiwan Intellectual P rop ert y Office.
T H E I N D U S T RY C A S E S : T H R E E S E C TO R S O F TA I WA N ’ S I C I N D U S T RY
Taiwan’s integrated circuit (IC) industry is an example of mixed types of technological catch-up that were driven jointly by the deintegration trend of IT industry, govern-ment support, and private-sector entrepreneurship (Chang et al., 1993). In 1975 the production technology of semiconductors, namely, Complementary Metal-Oxide-Semiconductor (CMOS), was first introduced by a government-sponsored research institute (ITRI) from RCA in the USA and then transferred gradually to the private sector, fostering the whole IC industry in Taiwan. The local IC industry began with little technological capacity but caught quickly up with the technical support of ITRI and a series of industry–academia research projects sponsored by government. For example, the success of the government-sponsored five-year submicron project (1990–5) of ITRI not only helped Taiwan assimilate and improve the original technology learnt from RCA, but also to catch up technologically in terms of submicron IC fabrication and design technology, making Taiwan among the top five IC production countries in the world (with the USA, Japan, Germany, and Korea). The US electronics industry, in the face of increasingly fierce competition domestically and abroad in the late 1960s, sought opportunities of offshore production in Asia so as to lower their costs. In the very beginning, FDIs to this region were just for the production of the transistor, then gradually for the testing and packaging of semiconductors. Under the logic of comparative advan-tage, more labor-intensive operations and production lines of low-end compo-nents were outsourced to Taiwan which provided inexpensive but relatively well trained workforces and mediocre basic infrastructure. Taiwan passively integrated
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 1984 1985 19861987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Millions of US dollars
Figure 6.2. IP loyalty payments (inward and outward) of Taiwanese firms over the period 1984–2005 Source: Annual reports of balance of payments, Central Bank of Taiwan, various years.
into a system of international division of labor in the electronic industries at first, but started to break the “flying geese theory” (Mathews, 1997) by catching up quickly from the path set by advanced countries.
In a nutshell, Taiwan’s IC industry, originating from the inward FDI in the 1960s, has its technological roots in the late 1970s when Taiwanese firms learnt and absorbed the technologies transferred from abroad, and started to improve them in the 1980s and 1990s. The changes of IPR regime in Taiwan because of its planned entry into WTO, along with increasing number of patent infringement lawsuits filed against Taiwanese IC firms, brought attention to the industry-wide awareness of IPRs. Table 6.4 shows the number and composition of IC-related patents granted in Taiwan. There is a significant growth in the number of patents issued only after the late 1990s when local firms were able to skip the technological path set by market leaders abroad by pursuing more incremental innovation. Despite a short span of time since Taiwan’s entry into WTO, the years after 2002 saw a significant growth in patent counts, manifesting the achievement after a decade of efforts on technological catch-up.
IC foundry sector in Taiwan
From the late 1960s, the Taiwanese government realized that knowledge-intensive industries, such as microelectronics, would be an important but missing building Table 6.4. The composition of patent registration in Taiwan’s semiconductor industry.
Year Patent granted Patent types Patent assignees
Invention Utility model Taiwanese Foreigners
1990 1,141 796 345 254 887 1991 1,482 1,061 421 338 1,144 1992 1,178 795 383 324 854 1993 1,030 563 467 437 593 1994 1,212 783 429 519 693 1995 1,870 1,300 570 857 1,013 1996 2,609 1,878 731 1,202 1,407 1997 3,338 2,498 840 1,459 1,879 1998 3,085 2,388 697 1,347 1,738 1999 4,372 3,526 846 1,887 2,485 2000 7,178 6,105 1,073 3,325 3,853 2001 11,399 9,592 1,807 5,529 5,870 2002 10,433 9,082 1,351 4,366 6,067 2003 13,628 11,476 2,152 5,197 8,431 2004 18,431 15,783 2,648 8,677 9,754 2005 22,961 20,100 2,861 11,818 11,143 2006 23,771 22,111 1,660 12,115 11,656
Note: The technological domain of semiconductor industry is defined as several IPC classes, namely, H01L, H03L, H03M, and H04N (related to basic electric elements, electronic circuitry, and electric communication techniques), and G06F, G11B, G11C (related to computing, calculating, and counting information storage).
Source: Compiled from the archive of Taiwan Intellectual Property Office.
block for the downstream electronics assembly industries established in the 1950s. After consulting various foreign experts and organizing a team of Taiwa-nese Americans involved in the semiconductor industry in the USA to serve as advisers, the Taiwanese government signed an agreement with RCA, one of leading electronics firms in the USA, to transfer CMOS logic technology to ERSO of ITRI. The reasons behind RCA’s willingness to transfer out such sophisticated semiconductor manufacturing technologies include the increasing competitive pressure quickly eroding RCA’s profit margins, the high capital demands for production ramp-up generation by generation, and the shifted focus of RCA on product R&D with potentially higher rates of return.
However, the Taiwanese were not simply passive recipients in the technology transfer by assigning a few engineers to the whole task. ERSO and its parent organization, ITRI, MOEA, National Science Council, the Science and Technolo-gy Advisory Group of the Executive Yuan, all actively promoted the industry technologically and administratively. Some higher ranking government officials, such as Premier Sun and Minister without Portfolio Kuo-Ting Li, were personally involved in the coordination of government resources and actions. The most prominent Taiwanese research-oriented universities and several state-owned banks also played important roles in the development process.
At first, active R&D efforts were mainly taken by ERSO of ITRI to learn, improve and advance the CMOS logic technology transferred from RCA. With the administrative and financial support of government agencies, ERSO served as a locus of R&D support for new firms and was the organization from which many of the new Taiwanese IC companies were spun off, as described above. Further-more, with the establishment of the Hsinchu Science-based Industrial Park (HSBIP) in 1980 and related industrial consultancy services of ITRI, industrial clustering was fostered to create the requisite infrastructure needed for a world-class IC industry. The proliferation of local firms also helped upgrade and expand Taiwan’s human capital by luring back well-educated and experienced Taiwanese from the USA and all major research universities in Taiwan. These factors mutually reinforce each other and ensured that the local firms could gradually innovate on their own and leave behind technological dependence on foreign licensing. Without such orchestrated efforts led by government, many local firms would not be able to enter the IC industry as the formidable technological or capital barriers were too intimidating to the generally small firms and young startups that composed the private sector of Taiwan’s economy.
What makes the CMOS technology adopted successfully by local IC manufacturing firms and distinctive from the other sectors of the Taiwanese electronics industry is the presence of an innovative business model of IC foundry. When the local IC industry was burgeoned in the early 1980s, the IC industry worldwide was dominated by integrated device manufacturers (IDMs). Led by a senior executive from Texas Instruments in the USA, Morris Chang, TSMC was the first to experiment with a new type of IC manufacturing organi-zation that took advantage of several emerging technological opportunities. Chang tried a business model that focuses on IC fabrication only, leaving IC
design, testing, and assembly activities to other firms. While many IDMs had also served as foundries for chip designers as a sideline to their own business, TSMC’s pure-play approach was called the foundry model because it would focus solely on being a fabrication foundry for IC design houses without any conflict of interest with its customers which usually occurred between fabless firms and IDMs.2
The decoupling of the IC design and fabrication sectors had been considered in the 1970s and experimented on a small scale, but no one had ever proven that this concept would work in a larger scale. TSMC definitely reaped the advantages as the first mover in this regard when the trend of the IT industry justified this new type of fabrication-only firm, the pure-play foundry, and it outstripped its domestic rival UMC to become the largest IC producer in Taiwan in 1993 and one of the leading foundries in the world ever since. The pure-play foundry model succeeded not only because the trend of vertical deintegration led to the emergence of a great number of fabless design houses in search of fabrication services, but also due to the ability of pure-play foundries to capitalize on the benefits of focus. Pure-play foundries devoted their energies to increasing the sophistication of their wafer production rather than having their R&D budgets split between product innovation and process innovation. The pure-play foundry model was also ideal for firms that were technologically behind because their customers were more willing to feed back and share advanced information without the fear of potential competition. This type of learning along with much more focused R&D on process development soon made a few Taiwanese firms world-class leaders, able to produce multiple specifications of products via multiple processes within a single fab, and achieve extremely high production yields. Today, it is well recognized that the leading Taiwanese foundries are among the industry leaders in process technology. The annual benchmarking done by ITRI saw Taiwan’s IC foundry sector, represented mainly by two leading foundries, already at the technological frontier of submicron process technology along with the US and Japanese electronics giants (TSIA, 2007). As the top pure-play foundry in the world, TSMC has been cooperating with other leading IC firms including members of the Crolles-2 alliance and NEC to align their next generation of process technology. UMC also took part in the pure-play foundry model by receiving CPU orders from one of the CPU-making IDM firm, AMD, marking the first time that these complex products have been outsourced from IDMs to the foundries. However, it must be acknowledged that the successful catch-up of Taiwan’s foundry firms in terms of IC fabrication in the past two decades relies not only on a first move advantage but on a clear and strong positioning in global IT supply chain, which is underpinned by continuously embodying great amounts of process technology in the capital investment to keep up with the advancing technological frontier. Figure 6.3 shows TSMC’s
techno-2 ‘Fabless’ refers to a company that does not manufacture its own silicon wafers and concentrates
on the design and development of semiconductor chips.
logical progress in terms of its fabrication process. TSMC caught up in 1999 with the trajectory predicted as a technology roadmap facing the semiconductor industry and has widened its lead since then.
The above case also raises a doubt whether the technological catch-up in the sector of IC manufacturing would have taken place without resorting to this new model. The evidence shows that the catch-up would not succeed without such a new approach adopted from the late 1980s; that is, the Taiwanese firms that just followed the IDM path may not experience the same level of revenue growth as the foundry model did. More importantly, they do not appear to be leaders in either process or product innovation. Leaving aside the DRAM case to be discussed below, the firms which decided to attempt to pursue the IDM model fall into three possibilities: failing by trying, or surviving in small niche segments, or the ones converted from IDM or DRAM to the pure-play foundry model once this model proved successful (such as UMC, the Acer/TI and Holtek) and several firms struggling to simultaneously design higher value-added products and invest in production facilities, Macronix (MXIC) and Winbond, which also has engaged in DRAM fabrication. Recent news revealed that even MXIC may enter the pure-play foundry path by spinning off its design functions.
Nevertheless, it was not the pure-play foundry model alone that determined the success of Taiwan’s catch-up in the IC industry. By and large, the pure-play foundry model was able to get local firms to focus more on the manufacturing activities in the whole value-added chain, which plays exactly to Taiwan’s strengths, quick learning for replication or production ramp-up. The focus model taken by Taiwan’s foundries softens the need for “patient capital”3(Sirmon
97 250 180 130 100 Technology Generation (nm) 90 65 99 01 03
‘99 ITRS (International Technology Roadmap for Semiconductors) ‘00 ITRS ‘01 ITRS Year TSMC 05 07 09
Figure 6.3. The technological catch-up in Taiwan’s IC foundry: TSMC
3 Patient capital refers to financial capital that is invested without pressure of short-term profit or
and Hitt, 2003) by not trying to specialize and profit from a broad range of activities, like the IDM route. Instead, foundries are more likely to benefit from a focus through decoupling the traditional IT production chain and picking one part of the chain in which to specialize. The problem of entering an industry as late-comers with a strong demand for patient capital is amply demonstrated by the DRAM case presented below.
The success of Taiwan’s leading foundry firms using relatively limited capital to focus on a particular sector of the IC production chain raised another question of why the first mover advantage has not yet been neutralized by imitation from other countries. First, this strategy had tremendous risks when Morris Chang of TSMC adopted it in the late 1980s because it was not clear if the digital interface between fabrication and design would work for large-scale commercial produc-tion. Thus, Taiwanese foundries received first-mover advantage over potential rivals and maintain the lead in process technology until now. Secondly, the other major IC players (in the Europe, the USA, Japan, and Korea) had all committed to and positioned themselves as IDMs by the mid-1990s when the pure-play found-ry model was gradually proved profitable. Thus, they had demonstrated their own route to success and felt no need to switch to a new approach. As regards the IC industry in the USA, deintegration of IC production chain had long begun, but the industry then and still now has the lead in less capital-intensive IC design so it has made sense for flourishing fabless design houses to pursue their advantage on the design side with the support of the capacity of foundries offshore. Aspiring IC players including Singapore, China, Malaysia, and even Korea (once the DRAM model appeared to turn unattractive with the failure of LG) have attempted to mimic the Taiwanese pure-play model since the latter half of the 1990s, but they remain behind the Taiwanese foundries in terms of market share and technology (TSIA, 2005).
DRAM sector in Taiwan
The entry into the memory chip (DRAM/SRAM) market by Korean firms Samsung, Hyundai, and Goldstar in 1983 as well as the continued technical acceleration of firms in Japan and the USA beyond VLSI towards “submicron” technological standards (with DRAMs of 256K and then 1M capacity) made Taiwanese firms and government officials aware of the importance of technolo-gically sophisticated DRAM products in the late 1980s. Taiwan’s semiconductor industry, beginning with the CMOS technology transferred from RCA, was not thought to be competitive in the fast-paced memory chip market at that time. The only way to get a foothold in the global market was to obtain the submicron technology necessary for mass production of DRAM/SRAM products, which are critical components for Taiwan’s downstream PC and peripherals industries. Since most RAM products were then supplied by Japan and Korea, whose IT industries competed directly with Taiwan’s, dependence on Japanese or Korean semiconductor suppliers or failure to develop indigenous RAM products would
put the Taiwanese information industry at the mercy of competitors. This understanding by the government, ITRI, and the Taiwanese semiconductor industry lead to the consensus that Taiwan should enter the memory chip market as early as possible based on the established CMOS logic technology base of ITRI and continued support from government grants.
The PC and IT peripherals companies Acer and Umax were the first movers which invested on DRAM fabrication through joint ventures with Texas Instru-ments and Mitsubishi respectively. The TI—Acer joint venture, which was formed in 1992, with financial assistance from state-owned banks, was Taiwan’s first DRAM fabricating operation and, as such, a controversial initiative. But it broke the long-running debate in Taiwan as to whether DRAM fabrication was feasible or desirable. The scanner firm Umax took action afterwards, and set up its DRAM business, Powerchip Semiconductor, which started to produce chips by the end of 1996. In addition, Taiwan’s largest chemicals manufacturer, Formosa Plastics, entered this sector by establishing Nanya Technology, obtaining DRAM technology from the Japanese firm Oki. Winbond followed this bandwagon through a technology tie-up with Toshiba, finalized in 1995. Despite the scale of Taiwan’s memory chip industry which had expanded quickly in the 1990s, its technological capabilities still relied heavy on foreign firms.
Although the CMOS logic technology of DRAM fabrication was based on ITRI in the beginning, firms like Acer, Umax, Nanya, and Winbond started and ramped up their DRAM production through signing technology transfer agree-ments with foreign firms. Furthermore, the DRAM ventures in Taiwan never went beyond passive acquisition of technology from foreign partners except one spin-off (Vanguard) from ITRI’s five-year (1990–5) submicron technology project in which a total of NT $7 billion would be invested to develop 0.5–0.35ìm fabrication technology along with the establishment of an 8-in wafer submicron pilot plant. The reasons why foreign firms were willing to transfer the DRAM technology is similar to what happened in the 1970s, more specifically, the competitive pressure eroding their profit margins quickly and huge capital demands for new generation of production facilities. The firms which have a lead in advanced product and process technology are more likely to focus on more advanced product areas and transfer the mature technology to Taiwanese firms which are specialized in cost-cutting operation and produc-tion ramp-up.
In the second half of the 1990s, most of Taiwan’s DRAM firms invested heavily in expanding their scale but remained technologically dependent. The mediocre performance of the ITRI’s spin-off, Vanguard, did not earn much government financial support. One of the reasons for the state’s retreat from large-scale technology development projects after ITRI’s five-year submicron project was because industry and government officials wanted to change government’s role to a facilitator and infrastructure-builder, given the gradual maturation of the IC industry in Taiwan. Furthermore, more and more private conglomerates, such as the Formosa Plastics Group, Umax, and Walsin Lihwa, were attracted to the potential of RAM businesses and thus formed new DRAM ventures in the face of
fast growing ICT industries in the early 1990s, making continued government involvement in the industry unjustified.
Given that the process technologies underpinning IC foundries and DRAM firms are similar, what is the primary difference accounting for the inability of Taiwan’s DRAM firms to make technological catch-up happen on their own? According to the study by Fuller et al. (2003), the memory chip market is characterized by the economy of scale; that is, a DRAM firm typically needs 15–20 percent of the world market to be able to generate enough profits to maintain the necessary production capacity and to fund the R&D expenditure to develop the next generation of DRAM products. A low profit margin for per unit of DRAM products necessitates a large scale of manufacturing (which refers to a firm’s total production volume rather than to the scale of individual plants). Thus, to succeed in the DRAM business, a new entrant would meet such requirements as mastery of the current generation of DRAM technology, and abundant capital investment on production capacity in the minimum efficient scale and on R&D at a fast pace to catch the next-generation technology. As shown by the case of IC foundry, foundry firms just have to meet the challenges of multiple specifications of products for their production facilities, while DRAM firms need to handle not only the process upgrading but also the new product development in a fast cycle market which begins with advanced product at price premium and then moves soon to mass production at low cost. Committing a vast quantity of resources to maintaining a competitive position in the DRAM market would require management of risk; that is, very few entrants into DRAM sector successfully manage their investment on process and product at the same time. In fact, seldom have new entrants have ever simply built up to an enormous scale overnight. Instead, Japan and then subsequently Korea relied on their access to “patient capital,” which is willing to forego short-term returns in the hope of yielding profits when the firm has the large volume production of its own proprietary cutting edge DRAM. Apparently, Taiwanese DRAM firms, given their late entry into the market, carried much less of such patient capitals in the run-up to the large volume production needed to be competitive, than their Korean and Japanese counterparts during their respective thrusts as serious DRAM contenders. No Taiwanese firm has ever achieved the scale of production considered necessary to survive from fast DRAM cycle (Fuller et al., 2003). In 2004, the four purely DRAM producers (Nanya, Powerchip, Promos, and Van-guard) together only had US$2.37 billion in revenues and none individually had more than US$700 million in revenues. In contrast, Samsung Electronics, one of the DRAM leaders, had US$27.23 billion in revenues in 2000 of which US$10.35 billion, 38 percent of revenue, was generated by the DRAM division. With the constraints of small volume, the Taiwanese DRAM manufacturers have neither obtained financial support from government nor been able to generate sufficient profits to fund new fabs and technological development simultaneously.
Taiwan’s DRAM firms, despite their low-cost standing, have relied on transfer of technology from foreign firms for each successive generation of DRAM and been operating with high licensing fees and low margins. The percentage of royalty
payments to sales has remained constantly above 8 percent, severely crowding out capital on in-house R&D. In the example of Powerchip, royalty payments are constantly higher than R&D expenditures by 1.5–3 times. The investors also felt impatient at low profits with no sign of future riches and decided to withdraw their capital. Of the seven firms that have entered DRAM in Taiwan (Quasel, Powerchip, Nanya, Acer-TI, Vanguard, Mosel Vitelic including its Promos joint-venture with Infineon, and Winbond), three (Quasel, Acer-TI, and Vanguard) have gradually exited the DRAM market and the other four continue to rely technologically on foreign licensing to be able to compete on the mature product lines.
Out of the seven Taiwanese DRAM firms and the nine different foreign technol-ogy transfer agreements, not single Taiwanese firm has been able to create a new product generation rather than paying for technology from foreign partners. Thus atthe beginning of the twenty-first century, Taiwan’s semiconductor industry was well set in place, with revenues generated from IC design, fabrication, testing, and assembly. These firms exhibited technical capabilities across the board—with DRAMS the only exception, still being held to be too fast-paced, risky, and capital-hungry for Taiwan’s out-scaled DRAM firms when compared with the integrated giants in Japan and Korea that had made rules of game in this field. With the end of the submicron project in the mid-1990s, ITRI no longer plays a major role in providing leading-edge pilot plants, leaving technology development and personnel training to IC firms alone. Nor is financial assistance needed for the launch of new companies and ventures; most of the later DRAM ventures are privately funded or, in a few cases, assisted indirectly by government venture capital.
1994 Technological Complexity 1998 2002 2007 Time • Established in 1994 • 0.4 μm → 0.3 μm (1998) • 16 Mb → 64 Mb (1998) • US patent −H01L*:100
• wafer size: 8-inch
• 0.1 μm
• 128 Mb →256 Mb
• US patent −H01L*: 81
• wafer size: 12-inch
• 90 nm (nanometer) • 512 Mb
• US patent −H01L*: 263
Figure 6.4. The technological evolution of the Taiwanese DRAM firms: Powerchip Co. Source: USPTO and www.psc.com.tw Note: Powerchip’s innovation can be found mostly in IPC Subclass H01L which is defined as semiconductor devices and electric solid state devices. The technological evolution of the Taiwanese DRAM firms: Powerchip Co.
IC design sector in Taiwan
ICs had their beginnings in the early 1960s, and the following decades saw the increasing complexity of circuits, the number of chips produced, the circuit speed, and the variety of applications. Since the late 1970s the necessity of internalizing product design and process development in an integrated device manufacturer has weakened in many semiconductor product categories. This trend of vertical deintegration has been associated with the entry of new firms that specialize in semiconductor component design or production. Hundreds of so-called “fabless” semiconductor firms that design and market semiconductor components have entered the global semiconductor industry since 1980, and they are increasingly supported by contract manufacturers (or foundries). Contract manufacturers include not only the foundry subsidiaries of established integrated device manufacturers seeking to utilize excess fabrication capacity but the “pure-play foundries“ which emerged from the late 1980s.
Fabless IC firms serve a variety of fast-growing industries, especially computers and communications, by offering innovative designs with more diversity and faster market responsiveness than integrated semiconductor firms. The growth of ICT markets drives IC design and production activities respectively to exploit economies of specialization and scale. Fabless IC firms focus more on design while specialized manufacturers can exploit production scale economies. Fabless firms’ revenues increased from slightly less than 4 percent of global industry revenues in 1994 to more than 15 percent by 2004 (Macher et al., 2007). The increasing capital requirements of semiconductor manufacturing is another impetus to vertical deintegration and specialization, since the high fixed costs make it necessary to produce large volumes of a limited array of semiconductor components in order to achieve lower unit costs. The cycle time of designing new IC products also becomes shorter and product lifecycles more uncertain. As a result, it is more difficult to determine whether demand for a single product will fully utilize the capacity of a fabrication facility that is devoted exclusively to a particular product, increasing the risks of investing in such “dedicated” capacity. Despite the US dominance in IC design sector, Taiwan’s IC fabless industry follows closely. In 2006, among some 400 fabless companies in the world, there are some 234 IC design houses active in Taiwan, accounting for more than 10 percent of global market share. Five of the top twenty fabless companies world-wide are from Taiwan; and two Taiwanese design houses (MediaTek and VIA) have moved up to the number 5 and 6 position, capturing 16 percent of total fabless revenues in Taiwan. From the technological perspective, Taiwan, as a late-comer, caught up quickly after mid-1990s in terms of patents granted in the USA. The technological roots of Taiwan’s IC design sector began with ERSO’s efforts on computer simulation programs and development of its own CAD software/ mask design automation program. In 1985 ERSO of ITRI established the Com-mon Design Centre to coordinate the activities of university CAD centres, IC design function of local IC firms and related industries. In the mid-1980s,
through the push of ERSO, the first independent IC design house in Taiwan (Synteck) was established, then followed by Holtek. However, it was the estab-lishment of the indigenous VLSI foundry firm (TSMC) which triggered the boom of the IC design sector in the late 1980s when a number of fabless IC design houses, such as Etron and Via, entered the market with the backup of TSMC’s fabrication capacity. Those Taiwanese startups were focused on semi-customized or ASIC design, with the goal of avoiding the high cost and time required for a full-customized IC. Thank to the establishment of TSMC in 1987 as a provider of contract IC fabrication services for fabless IC design firms, Taiwanese IC design startups thus gain privileged access to a low-cost, flexible supporting manufacturing system that encompasses both fabrication and testing.
An equally important enabling factor behind the fast development of IC design sector worldwide was the emergence of electronic design automation (EDA) tool vendors (like Synopsys, Cadence, and Mentor). ASIC design required well-de-fined procedures to develop and use cell libraries that contain design modules. To do this cost-effectively, a new design methodology was developed where the design requirements were implemented in a software language that described digital circuits at the so-called register-transfer level (RTL). To implement this new design, access to increasingly sophisticated EDA tools was critical. As these tools were available on the market, albeit at a very high price in the beginning, this provided entry opportunities for Taiwan design houses. And as the effective use of these tools always requires substantial tweaking and adjustments, the Taiwanese were able to accumulate a broad set of capabilities related to the implementation of these increasingly automated design methodologies.
1997 Technological Complexity 2000 2003 2007 Time • Established in 1997 • CD-ROM, DVD-ROM • Chipset • US patent -G11B*: 6 • CD-R/RW, DVD-Dual • Chipset • US patent -G11B*: 15 • DVD player
• SoC (System on chip)
Figure 6.5. The technological evolution of Taiwanese IC design firms: MediaTek Source: USPTO and www.mediatek.com Note: MediaTek’s innovation can be found mostly in IPC Subclass (G11B) which is defined as information storage based on relative movement between record carrier and transducer.
Benefiting from the fabrication service of foundries and the widespread EDA tools, Asian and especially Taiwanese design firms are more likely to concentrate their limited resources on IC design and pursue their competitive strengths in speed, cost, flexibility, and quality, all resulting in a rapid growth of Taiwan’s fabless IC design sector. The compound annual growth rate between 1995 and 2005 reached 31 percent.
As the lower salary level of well-trained design engineers in Asia is always considered by Western firms an important pull factor (in light of the fact that the annual cost of employing a chip design engineer in East Asia is between 10 and 20 percent of the cost in Silicon Valley in the early days), Taiwanese IC design firms, which are mainly located near the semiconductor clusters in Hsinchu Science Park, gained business opportunities from Western firms’ relocation of chip design tasks; that is, the quick catch-up of Taiwan’s IC design sector is a result of its proximity to a network of specialized components suppliers, manufacturing services, and other engineering services, all of which are jointly fertilized in the formation of semiconductor clustering in Hsinchu Science Park.
Another driving force behind the catch-up of IC design sector is that some local firms emerge as potential new sources of innovation and global standards. This began with the innovations in process technology for electronic components (especially semiconductors and displays), and gradually moved to the innova-tions in the design of complex system architectures in sectors like digital con-sumer systems and wireless telecommunication systems. However, technological independence does not come without costs. For example, MediaTek, founded in 1997 and currently a market leader and pioneer in cutting-edge SOC system solutions, has been innovating in the chip design of optical storage drives and wireless handsets. The major competitor of MediaTek in the USA, Oak Technol-ogy Inc. continued to file legal attacks upon MediaTek and its parent company UMC for patent infringement from the late 1990s and sought exclusion of the allegedly infringing products from the US market. MediaTek’s position all along has been to fight back by building own patent pools, claiming that plaintiff ’s patents are invalid and unenforceable upon MediaTek’s designs.
The role of ITRI
It is no doubt that ITRI was a vital force behind the technological catch-up in Taiwan. ITRI was established under the auspices of the MOEA in 1973 and given the mission of undertaking applied research to accelerate the industrial develop-ment of Taiwan. At present, ITRI has six core laboratories and five linkage centers, which carry out research in a wide range of fields, such as communication and optoelectronics, precision machinery, materials and chemical engineering, bio-medical technology, energy, and nanotechnology, etc. The performance of ITRI is summarized in Table 6.5. In 2008, ITRI’s budget has reached more than $1 billion.
T able 6.5. The performance o f ITRI co re business. Cor e busine ss units 199 7 199 8 1999 200 0 2001 2002 200 3 2004 T echnology transferr ed to Industr y Cases 332 361 353 314 337 414 520 712 R ec eiving firms 499 582 538 457 471 542 641 825 Cont ract & joint resear ch P rojects 1,019 1,046 1,124 969 1,159 1,055 1, 094 1,176 T echnical service R ec eiving firms 27,811 27,09 9 27,82 7 28,431 30,42 7 25,81 2 25,846 27,28 2 P atents 548 559 537 640 862 821 766 1,146 T echnology seminars & training pro gra ms Sessions 957 998 1,485 1,229 1,148 956 1, 136 – A ttend ees 68,918 76,26 5 96,03 6 73,959 78,33 6 90,59 4 94,534 – Sour ce : The Annual R eport of ITRI, 1997–2004.
ITRI’s role is very much like that of the supporter of government policies. It coordinates commissioned government projects as well as technology research projects commissioned by the private sector. In other words, ITRI works to bridge government and the private sector so as to close the gap between the local and more advanced levels of technology abroad. Similarly, ITRI transfers technology to the private sector, inducing investment as well as stimulating industry growth. To be specific, ways of technology diffusion include technology transfer, contract research/joint R&D, technical services, spin-off companies, technical seminars, and personnel dissemination. Moreover, ITRI has been entrusted with four major bridging functions in industrial development.
A bridge for leveraging advanced technology
ITRI is not only the largest research institute thus far in Taiwan, but also a technological seed for the development of several of Taiwan’s high-tech indus-tries. ITRI has acted as the prime powerhouse for leveraging advanced technol-ogies abroad to local firms. In addition to transferring technoltechnol-ogies, ITRI is known for its contract technical services available to local industries. As previ-ously mentioned, ITRI has successfully fostered the creation of UMC, TSMC, TMC, and VISC through (1) its initial contract licensing from RCA and pilot run with wafer fabrication facility, (2) its subsequent spin-off ventures, and (3) its finally comprising the foundation of the semiconductor industry in Taiwan.
A bridge for leveraging human resources
Well educated and talented human resources are the main source of competitive-ness. In 1983, the NSC (Executive Yuan), Ministry of Education, and ITRI jointly undertook an IC chip design and manufacturing project. There were 150–200 professionals trained under this project of IC design and CAS skills. ITRI alone has approximately 6,000 full-time staff, including more than 4,500 professional researchers. Among these staff members, over 1,000 hold a doctoral degree. As of 2006, over 160,000 trainees had graduated from ITRI, with more than 140,000 currently working in related business and industry communities. A total of 68 top managers of Taiwanese high-tech companies have formerly worked for IRTI. Noticeable examples include Morris Chang (chairman of TSMC), Robert Tsau (chairman of UMC), and Ming-Kai Tsai (chairman of Media Tek). To a lesser and greater degree, these people are connected to ITRI. As shown from many facts, the movement of these talented people has created a further connection between IRTI and other companies that also served as an important channel for technology diffusion and has been a great benefit to Taiwan’s industrial development.
A bridge for leveraging knowledge
Although ITRI is not an educational institution, it is one of the main suppliers of industrial talent, especially to the high-tech sectors. It set up ITRI College as an
industrial academy to propagate its knowledge and accelerate the training of human resources required for the knowledge-based economy. ITRI also offers systemized programs to enhance industrial competitiveness, including strategic technology, new knowledge, and customized and specialized management courses. ITRI provides both on-the-job training and comprehensive seminar programs for its employees to develop working knowledge in their respective fields. ITRI is fully committed to derivation of value-added core services and effectively connects domestic research institutes, technology-transfer organiza-tions, and startup investors. It is also devoted to utilizing its patents and techniques to create valuable patent combination and brand-new IP applica-tion formats and opportunities (ITRI website, 2008). Recently, ITRI has actively initiated a number of industrial consortia in the high-tech sectors and pursued strategic management of IP in terms of forming “patent pools” in order to provide local participating firms with more bargaining power against infringement suits (Hu and Mathews, 2005). Up to the present, ITRI has held more than 8,700 patents. ITRI’s value-added plan, as one of its objectives to implement strategies of R&D activities and IP management, includes leveraging the IP of others, bypassing existing IP blocks by cross-licensing, incubating IP-based new ventures, producing high-impact IPs, and providing strategic IP services.
A bridge for leveraging international linkages
For its international outreach, ITRI has long been collecting timely industrial and technological information worldwide to help map research directions and iden-tify cooperation opportunities as well as interact with foreign prestigious uni-versities (such as MIT, Stanford, UCLA), technology centers, and distinguished companies to undertake a wide range of joint projects.
In sum, the development of Taiwan’s IC industry is sufficiently reflected in changes in ITRI’s strategic roles mentioned above. In the past four decades, ITRI has nurtured semiconductors as well as many other emerging industries in Taiwan, such as fine chemical, optoelectronics, pharmaceuticals, advanced mate-rials, and aerospace. Its strategies over time can be characterized as follows (Hsu and Nystrom, 2004; Shih et al., 2007). (1) The learning phase in the 1970s had a focus on manufacturing technologies and establishing pilot-runs for mass production. (2) The stage of dissemination and commercialization in the 1980s meant spinning off companies, notably UMC and TSMC. This spin-off strategy involved close relationships among capital, technology, and talent. (3) Industry linkages were built in the 1990s: focusing on open laboratories, incubation centers, multi-industry cooperation, patents, and IPR. (4) Since 2006, consider-able efforts have been devoted to international, interdisciplinary, and intellectual property linkages.
Subconclusion: a more active stance toward IPR battles
The importance of IPR to most of export-oriented firms in Taiwan has been recognized in the face of increasing number of patent infringement lawsuits against them since late 1980s. A well-known patent infringement between Tai-wanese firms and foreign firms (especially from the USA) is that Intel accused VIA Technologies of infringing the PC133 chip set. The Taiwanese firms, since then, have been aware of the indispensability of defending themselves by building their own portfolio of patents as the best defense. Beginning from the 1990s, Taiwan’s semiconductor industry, under the threat of technological advanced firms abroad, has constantly paid high licensing fees to patentees in the USA, such as AT&T, IBM, and Texas Instruments. Having to make yearly payments of licensing fees and facing the constant threat of patent infringement lawsuits, Taiwan’s semiconductor firms reacted with not only a more active patenting strategy but a more experienced approach (e.g. countersuits) in the courts in Taiwan or abroad.
Looking at the chronicle of IRP infringement lawsuits of Taiwan’s semicon-ductor firms (particularly TSMC, MediaTek, and PowerChip as shown in Table 6.6), we learn that these firms react to the patent lawsuits from foreign firms with advanced technology not only by building up the patent office as an IP coordinator and administrator for increasingly diversified R&D efforts but by pursuing patent portfolio to actively protect their R&D. In addition, more sophisticated legal approaches have been observed as Taiwanese firms started to use countersuits to reach settlement or intimidate the plaintiffs. Through using strategies of patent building and cross-licensing, Taiwanese firms have success-fully changed their role from defendant to plaintiff.
T H E L I N K O F I P R R E G I M E A N D T E C H N O LO G I C A L C ATC H I N G U P
Although the body of knowledge in technological catch-up has long been accu-mulating, the institutional determinants of technological catch-up are relatively underexamined. Based on the above description of economic development and the evolution of IPR regime in Taiwan and the three industry cases, this section moves on to link the institutional influence of IPR regime and technological catching up, which is considered a special form of technological development in late-comer countries. We define two types of technological development here. First, innovation is a form of technological development that not only expands a firm’s existing knowledge set but also the existing world knowledge set. Secondly, when technological development expands the firm’s existing knowledge set but not the existing world knowledge set, it is called imitation (Grossman and Help-man, 1991). Regardless of whether it is imitative or innovative, technological
T able 6.6. IPR infringement la wsuits of thr ee repr esentativ e semic onductor firms in T aiwan. Date Plaintiff Defendant Litigation P roc eedings R esult 19 N o v. 2003 TSM C SMIC TSMC file d la w suit agains t Semic onductor M anufacturing In ternational Corpora tion (SMIC ) for patent infringement and trade secr et misappr opriation. The sui t also ask s for injunc tiv e relief alon g with mon etar y d amages. 30 Jan. 2005, TSM C reaches settlement with SMIC under such terms as US$175 m cash pa ym en t and patent cr oss-lic ense thr ough De c. 201 0. 24 M ay 2007 M ediaT ek (2nd counter -suit) Ma tsush ita and Panaso nic Me d ia Tek h ads u edi nC al if o rn iac la im in gt h at Ma ts us h it a in fr in ge d it s p at en ts, b u t it w as st il l at an early st age befor e a M arkman hearing and ve ry lik ely to be dr opped as p ar t o f th e sett le ment later . The co m p an ie s in vo lv edi nt h iss u ith av e w o n an dl o sts ev er al millions dollars in la w suits in the pa st tw o years. 9 July 200 7, M atsu shita and M ediaT ek settle all patent dispu tes (ending thr ee pe nding la wsu its about var ious patents ). The term s o f the sett lement ar e confident ial. 17 F eb . 2006 San yo M ediaT ek The patent la wsu it (T exas Eastern District Court) w as the latest dev elopment in a dra wn-out and complicated disp ute between San yo and M ediaT ek . After a T exas federal court rule d that San yo could not mak e counter cla ims in T exas, San yo took its case back to Califo rnia. On 25 A p r. 2006 San yo and M ediaT ek filed a joint stipula tion that the act ion in the Centr al District b e dism issed with pr ejudic e. 6 June 2007, San yo and M ediaT ek agr eed to ex ch ange cr oss-lic enses under the patents in volv ed in each litiga tion. The other term s o f the settlement agr eeme nt ar e confide ntial. 17 Oc t. 2005 M ediaT ek (1st counter -suit) Ma tsush ita and Panaso nic M edia Te k is the o wner of US pa tent N os. 580 2068 and 611848 6 for dat a enc oder chips used in D V D pla yers. M ediaT ek is entitled to re co ve r fr o m Defend ants the damage s sustained b y M ediaT ek (patent infringement la wsu it)—T exas Easte rn DC. 14 June 200 7, judge denied M atsus hita ’s request to dism iss. Judge cited anoth er ca se (San yo ) in volving M edi aT ek in the same district o ver patents co ve re d in the same assignm ent agr eemen t as a pr ec edent. 31 A ug. 2005 M ediaT ek San yo M edia Te k filed a compla int agains t San yo , stati ng tha t San yo ’s D V D pla yers, re co rders , and dig ital tele visions separat ely infringed M ediaT ek ’s pa tent (5 867819 and 611848 6), seeking damage s and fut ur e injunctiv e relief against an y and all of San yo ’s infringing pr odu cts. M edi aT ek amend ed it s complai nt on 3 Oct. 200 6, addin g tha t San yo ’s D V D rec or ders, dig ital came ras and cellu lar phones also infringed another one of the M edi aT ek ’s pat ent N o .5 751356
