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The East Asian Technological Miracle

The East Asian Technological Miracle Invited Paper dti/UNIDO Conference on Competitiveness Midrand, South Africa June 2004  Professor John A. Mathews Macquarie Graduate School of Management Sydney Your presenter

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The East Asian Technological Miracle

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  1. The East Asian Technological Miracle Invited Paper dti/UNIDO Conference on Competitiveness Midrand, South Africa June 2004  Professor John A. Mathews Macquarie Graduate School of ManagementSydney

  2. Your presenter Professor of management at MGSMTeaches courses in international business and international management, with focus on Asia-Pacific Researches competition and strategy in Asia-Pacific Most recent books: Tiger Technology: The creation of a semiconductor industry in East Asia; Dragon Multinational: A New Model of Global Growth

  3. Your presenter (cont) Worldwide editor: Industry and Innovation Invited presentations to: World Bank development forums; OECD Knowledge Economy conference; ILO Asia-Pacific: comp & strategy UNCTAD: World Investment Report UNIDO: Industrial Development Report 2002

  4. The starting point: a world rich in resources Global economy rapidly changing 64,000 MNEs/TNCs Control 870,000 subsidiariesPlethora of inter-firm arrangements UNCTAD WIR 2003 Unprecedented scale of technology transfers, licensing, subcontractingUNIDO WIDR 2001Capital transfers: World FDI ($651 b in 2002) now 10% of global gross domestic capital formation (cf 2% in 1980) UNCTAD: World Investment Report 2003

  5. East Asian Miracle: A case of resource leverage Creation of new high technology industries eg electronics, semiconductorsUsed latecomer status to overcome incumbent advantagesLatecomer firms fashioned complementary strategies, eg OEM contracting, second-sourcing, licensingBuilt new knowledge-intensive industries very fastRepeated the process over and over again, eg Taiwan DRAMs in 1990s Korea CDMA cellular telephony Taiwan Optoelectronics in 1990s Best described as managing the process of resource leverage-- But calls for comprehension of latecomer industrial dynamics

  6. The Growth and Development of Taiwan, 1951-2000 (1950s) Source: Industrial Development Bureau, Ministry of Economic Affairs, Taiwan

  7. The Growth and Development of Taiwan, 1951-2000 (1980s) Source: Industrial Development Bureau, Ministry of Economic Affairs, Taiwan

  8. The Growth and Development of Taiwan, 1951-2000 (1990s) Source: Industrial Development Bureau, Ministry of Economic Affairs, Taiwan

  9. Latecomer industrial dynamics

  10. Flying geese

  11. Latecomer industrial dynamics: The flying geese paradigm

  12. The flying geese paradigm lives on: Revealed Comparative Advantage data for East Asia Source: World Bank

  13. RCAs in East Asia: Consumer Electronics Source: World Bank

  14. RCAs in East Asia: IT Source: World Bank

  15. RCAs in East Asia: Electronic Parts and Components Source: World Bank

  16. RCAs in East Asia: Telecommunications products Source: World Bank

  17. RCAs in East Asia: Semiconductor products Source: World Bank

  18. Share of Export 1976-1988 1989-2001 Taiwan World Taiwan World Consumer Electronics 2.5% 1.2% 1.8% 1.1% IT Products 2.9% 1.4% 8.5% 2.8% Parts and Components 2.1% 1.9% 9.6% 3.4% Telecommunications 6.2% 1.5% 3.7% 2.6% Semiconductors 2.4% 1.3% 8.6% 3.4% Total Electronics 16.1% 7.3% 32.2% 13.3% Taiwan’s Export Performance in Electronics, 1976-2001 Source: World Bank

  19. Manufacturing the Engine of Growth in Taiwan • Source: Industrial Development Bureau, Ministry of Economic Affairs, Taiwan • Note: • Industry includes Manufacturing, Construction, and Electricity, Gas and Water sectors. • Services include Trade & Eating-Drinking Places, Transport, Storages and Communications, Government Services, • and Finance, Insurance & Business Services.

  20. Electronics the Engine of Manufacturing in Taiwan Source: Industrial Development Bureau, Ministry of Economic Affairs, Taiwan

  21. One way forward: Latecomer MNEs Examples: Ispat, Cemex, Acer, Li & Fung Overcome initial disadvantages eg accelerated global coverage through linkage and leverage OEM contracts Second sourcing Global scope -- bypass earlier ethnocentric and polycentric phases

  22. Ispat International World Top 5: steel industry Small company, origins in India Rapid expansion in NICs Late 1990s: penetration into US, Europe

  23. Cemex World’s 3rd largest cement company World’s largest cement trader Rapid expansion following opening of Mexican economy Advanced management and technology, e.g. GPS

  24. Acer Now a worldwide IT company Founded 1976; began international expansion in 1986

  25. Acer’s cellular structure Acer consists of 40-50 business “cells” Each business autonomous Seeks own customers, growth Each business internationalizes eg AIPG, API

  26. Acer’s global organization“Circle dragon no head”

  27. Another way forward: Insertion in Global Value Chains An interconnected global economy

  28. How a GVC worksMultiple value-adding steps: multiple points of insertion

  29. How a GVC works (2): Three strategies of industrial upgrading

  30. Emergence of GVCs Global value chains constitute a new form of integration in the global economy Traditional GVCs: producer networks Examples: Japanese supplier pyramids (Toyota, Nissan, Mitsubishi) Generated enormous advantages for Japanese automotive companies over western rivals (vertically integrated) New GVCs: buyer networks Examples: US garments retail chains (The Gap, Tommy Hilfiger) Opportunities for local firms? Case: Torreon, Mexico (Gereffi & Martinez)

  31. Creation of GVCs • New GVCs being created all the time – as source of global competitive advantage • Example: EMS • Driven by outsourcing trends by leading MNEs Ericsson, Sony, Nokia, IBM, Motorola et al • Main arguments for outsourcing: • Focus on brand and core activities • Getting to market faster • Leaner and more agile • Better supply chain management (global logistics) • Lower levels of tied-up capital

  32. Flextronics: Global Manufacturing Operations

  33. General features of GVCs What drives the location decisions of instigators?What drives the competitiveness of the GVC? What issues govern investment decisions? How does the GVC develop competitive advantages over: Integrated MNEs Local firms What do local firms need to do to become integrated within (linked to) GVCs? How can local firms leverage advantages (e.g. knowledge, technology) from their linkage to GVCs? Can these processes be repeated, with local firms learning from the process? How does the GVC as a whole learn?

  34. GVCs and clusters • Latecomer firms practising LL&L can operate within GVCs and local clusters simultaneously • vertically integrated in GVC • horizontally integrated in local cluster • The two kinds of network/cluster can operate synergistically • Example: Ammar and Sarah in Pakistan (successful knitwear group) • member of GVCs created by US buyers, such as The Gap • member of local Pakistan cluster of knitwear firms, with complementary skills • operates itself as a group, rather than as discrete firm i.e. cellular organization

  35. The latecomer strategy Formulate a strategic goal: industrial development through catchup Strategize as a latecomer: overcome barriers through utilizing knowledge available Harness latecomer industrial dynamics: The flying geese paradigm Utilize the connections available in the global economy – Linkage, leverage, learning Think globally; use global tools and institutions (e.g MNCs; GVCs) Build domestic institutions to support linkage, leverage and learning Taiwan’s NSEL as exemplar Innovation as management of technology diffusion to Management of knowledge generation and diffusion (IPR, patents) A never-ending process – of capability enhancement

  36. Ingredients of success Linkage Links with global players --> drawn into collaborative networks Acer: links with TI (DRAMs), IBM Leverage Technology leverage from links with advanced firms Long-term focus: Capabilities enhancement Securing more from contractual link than revenues Learning Repeated application of linkage and leverage Enhancement of capabilities Rapid catchup as goal

  37. Product innovation Process innovation Diffusion management Competitive focus Product Process Access to technologies; diffusion Competitive tools Intellectual property rights; first mover advantages costs; quality Resource leverage Competitive vehicles firms firms firms; government research institutes; consortia Dynamic capabilities Product enhancement: R&D Process enhancement: quality/time improvement Combinative capabilities; learning Strategic goals Sustainable competitive advantage Temporary competitive advantage Transient competitive parity Sources of competitive advantage First mover advantages Quality/time enhancement Fast followership Institutional framework Atomistic competition Limited competition Accelerated diffusion within consortia; MNCs Lead countries USA Japan Korea, Taiwan, Singapore Propagation of innovations: competitive postures

  38. Innovation vs. diffusion management Diffusion management calls for organizational and institutional innovationIdentification of technological possibilities Linkage to frontiers of technology Leverage of knowledge, e.g. from MNCs Examples: EDB (Singapore); ITRI (Taiwan) Such public institutions overcome diseconomies of scale and promote organizational and economic learning Cases of latecomer industry creation strategies: Electronics in East Asia – semiconductors; flat panel displays

  39. Taiwan electronics production, 1986-1998 Source: Tung (2001).

  40. Semiconductor capital spending: By regionArrival of East Asians

  41. World semiconductor investment, 2003

  42. DRAM Generations Source: IC Insights

  43. How did Korea do it? Large firms (chaebol) as vehicles of Developmental Resource Leverage Prior experience in mass manufacturing (eg electronics) Prior market entry contacts Prior OEM contractual links Leveraged access to product technology eg circuit designs from Silicon Valley Leveraged access to process technology eg US suppliers and Japanese engineers Leveraged access to strategic alliances Needed: strategic goals and combinative capabilities

  44. The key to Korean success: A national system of economic learning

  45. Korea Closes the Technology Gap in Memory Chips

  46. How did Taiwan do it? Taiwan -- started with smaller firms Utilized public sector research institutes eg ITRI Industrial Technology Research Institute Strategy of managed diffusion of technologies Foreign partners -> ITRI -> small Taiwan firms Use of innovative institutions, R&D alliances

  47. The key to Taiwan success: A system of strategic alliances

  48. Taiwan Closes the Technology Gap in Semiconductors Source: ERSO

  49. Value Chain in Semiconductor Sector

  50. Taiwan: IC related revenues: 1989-1998 Starts at back-end of value chain, and moves forward Source: ERSO/ITRIS

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