Q: Why did the government choose this time to come out with the incentive program for TNCs to establish new R&D centers in Taiwan? What is the goal for the future?

A: The main consideration behind the large effort being put into promoting innovation and R&D is the comprehensive restructuring of industry in Taiwan.

As everyone knows, the 21st century is the age of the knowledge-based economy, in which innovation will play the leading role. To meet this new challenge, Taiwan must undertake a difficult structural upgrading to transform relevant industries.

This shift, which has been called the most important transformation of the Taiwan economy in 50 years, can be understood at three levels. The first level is the upgrading of the country's overall economic structure. This means reducing the proportion of manufacturing and moving toward service industries, until services account for more than 70% of the economy. This also involves adopting a new way of thinking, which is to say "guiding manufacturing toward a more service-oriented approach and upgrading services to meet international standards." For example, Taiwan Semiconductor Corporation (TSMC) chairman Morris Chang has stated that TSMC is a company that takes "service" as its guide; its business is not just selling computer chips, but even more it also provides professional service that puts the customer first.

The second level is transformation within industrial sectors. Taking manufacturing for example, in future there will have to be a move toward higher-value-added industries, such as digital content, ICs, image displays, biotechnology, high efficiency electric vehicles, optoelectronics, high-grade textiles, and so on.

The third level is adjustment within each individual company. For example, small pharmaceuticals manufacturers in Taiwan today invest about 80% of their human resources in manufacturing. In large international drug companies, in contrast, the proportion invested in production does not exceed 30%. Therefore, the main test for each company will be to reduce its proportion of manufacturing and shift its central focus toward upstream innovative R&D and downstream services and marketing.

There is already a high level of consensus in the business community on these three levels of change. Everyone realizes that this is a necessary process if we are to maintain economic growth in Taiwan, and it is also a natural development. However, structural adjustment is like climbing up a mountain in which the slope becomes steeper the higher you get. If we cannot get to the next level, Taiwan's economy could very well tumble down and actually regress. This is why the government created this incentive program to encourage TNCs to come here to establish R&D centers. This is simply a matter of going with the flow, so that these kinds of necessary transformations can proceed faster and smoother.

Now let's look at it from the point of view of the foreign firms. Before the 1980s, foreign companies came to Taiwan to set up factories for production. But as production costs rose in Taiwan, they could no longer afford their own factories here, so they shifted over to operating as international purchasers giving large orders directly to Taiwan firms, incorporating Taiwan as a critical link in their global supply chains.

But in the past five years, high-tech companies in Taiwan have been moving their manufacturing operations to mainland China, shifting low-end products out of the country, leaving behind only high-end products and core capabilities. They are now beginning to compete for the territory occupied by TNCs, so the relationship between the two parties has become more complex, and can only be maintained in the long run if other forms of mutual trust and mutual benefit can be found. In other words, the status and role of Taiwanese companies has changed, and foreign companies have to adapt.

In terms of strategic goals, the Challenge 2008 national development program proposed last May by the Executive Yuan sets very high standards for innovative R&D in Taiwan. For example, the plan calls for Taiwan to have top ranking in the world in at least 15 products or technologies by 2008. It also seeks raising the percentage of GDP spent on R&D from the current level of 2.3 to 3.0. The government wants especially to encourage private companies to do R&D, so that the proportion of R&D undertaken by the private sector will rise from the current level of 40% to 70%. Moreover, since basic research is at the root of creative R&D, we also hope that funding for basic research can reach 15% of total R&D expenditures in the country.

In other words, we hope that over the next five years, Taiwan can transform itself into the high-value-added manufacturing center of the Asia-Pacific region, and that ten years from now, Taiwan will be a stronghold of innovation in the global economy, so that companies around the world can utilize the fruits of research in Taiwan to support their transnational corporate production activities.

Q: Under the shadow of mainland China's role as "factory to the world," the four Asian newly industrialized economies have been devoting great effort to upgrading in the direction of R&D centers. What advantages do you think Taiwan has? How can we develop creative R&D centers that reflect the special characteristics of Taiwan?

A: There are three main conditions for advancing along the path of innovative R&D.

The first is comparative advantage in manufacturing. This means a powerful manufacturing capability, and a decisive position in the global value chain. Taiwan has an absolute advantage in this respect. Moreover, Taiwan has an extremely comprehensive economic structure, from agriculture and textiles from the early period of industrialization to later-stage petrochemical and precision-machinery industries to the current information technology, optical electronics, and communications sectors. We have a dense web of up- and downstream economic activities. Moreover, Taiwan's many small enterprises have organizational structures as flexible and adaptable as changelings, so peripheral support industries and core industries can develop together, and it is very easy to subcontract out work.

The second thing that is needed is a sound mechanism for innovative R&D and a culture of innovation. In this respect, compared to the pristine but somewhat sterile way things are arranged in Singapore, Taipei may be disorganized, but it is also, as many people describe it, "filled with vitality" and "loads of fun."

Many people assume that Taiwan can only copy, but in fact this impression is simply wrong. Looking at the statistics for the number of patents applied for in the US, Taiwan ranks fourth in the world. In terms of basic research, Taiwan ranks 15th in absolute number of theses and dissertations, and first in the world per capita. The problem is not that Taiwan can't innovate, but that because of objective limitations of capital and the market, the business community has always put the emphasis on "innovation in the manufacturing process," and there is still not close enough interaction between academia and industry. To compensate for this shortcoming, in recent years the government has begun to set up business incubators at research institutions and universities, in hopes that the brilliance of the academic community can be transformed into productive results.

Thirdly, an R&D base must have attractiveness as a market, so that innovators can see a return quickly. This is another of the comparative advantages of Taiwan. The scale of Taiwan's capital market is comparable to that of Hong Kong, Shanghai, or Shenzhen. Moreover, there is plenty of capital to go around, and the venture capital industry is extremely active. In fact, in recent years, despite the global economic downturn, it has been possible to find the traces of involvement by Taiwan venture capital in small innovative industries in Korea, Japan, and even the United States.

As for disadvantages, some people believe that Taiwan offers inadequate protection of intellectual property rights, particularly in terms of digital products like laserdiscs and software. In fact, if you just look at countries with comparable levels of national income, at present Taiwan's intellectual property rights protection situation is about the same as its counterparts. But we still must work harder to improve.

Q: Compared to the tax incentives and administrative shortcuts offered by various other countries in the Asia-Pacific region, does Taiwan offer adequate incentives to foreign firms? What areas most need improvement?

A: Among the Asia-Pacific countries, Singapore offers the best tax conditions. Unfortunately, as a city-state, it is small and lacks a comprehensive industrial structure. But anyway, our understanding is that TNCs have plenty of capital, so tax incentives are not in fact the major factor attracting them to a given country. Instead, aspects of the larger picture-social stability, policy transparency, administrative efficiency-are the factors that will most affect willingness to invest among foreign firms.

The Ministry of Economic Affairs places high priority on interacting with TNCs, and recently established an International Business Advisory Committee, inviting high-ranking persons from TNCs to share their ideas. But the MOEA also understands that in terms of the burning question about which people are most concerned, policies on cross-strait economic and trade relations, including direct links and the opening up of imports and investment, our country has to have a comprehensive strategy, and economics is not the only consideration.

Q: There are many TNCs, so how does the MOEA determine principles for recruiting companies?

A: The MOEA has been courting foreign companies for decades now, with the only variation being that we have favored different sectors and goals under different circumstances. Fundamentally, attracting foreign companies does not involve us selecting targets, but of us thinking about how TNCs see Taiwan, and about what they want to use Taiwan for. TNCs all have their own global strategies, and they will only come to Taiwan if we can meet their needs.

For example, European and American firms see us as a portal into mainland China. Japan, on the other hand, is already very close to mainland China and has its own connections and bases in the mainland. They do not need Taiwan's geographic advantages, but want to use partnership between Taiwan and Japan to sidestep anti-Japanese sentiment in mainland China.

The larger point is that Taiwan's role can be very diversified. Don't presume that there is only one type of answer, or that if there are no direct links Taiwan will be much less functional.

Because we are making concessions to attract foreign companies to set up R&D centers in Taiwan, we are very strict in the review process, and by no means accept all comers. We take many factors into consideration: Is the level of R&D high enough? Will it produce a significant and critical impact on our industry? Is it complementary with our industry, or is it redundant, thereby creating waste and competition? Will it bring in advanced technology and skilled manpower from overseas? Can it raise Taiwan's status in global R&D deployments in the particular industry involved? How many resources will be invested in Taiwan itself?

Some people worry that having foreign R&D centers right here in Taiwan will create even greater pressure on, and even "exploitation" of, Taiwanese companies that get orders from the TNCs. In fact, if a foreign enterprise can jointly develop a product with a domestic company, and smoothly turn that product over to its local partner for production, this will help ease the cutthroat competition between domestic firms, and prevent TNCs from engaging in unfair competition.

Overall, we are basically where we hoped to be in attracting foreign firms, so we are more or less satisfied. But don't forget that this is only a provisional stage. The long-term trail still leads to developing R&D capabilities among local industries, because that is where Taiwan's future really lies. When foreign R&D centers reach a critical mass in the future, this will stimulate growth in peripheral firms in Taiwan, and will encourage more and more Taiwan companies-constantly tempted by apparently greener pastures abroad-to keep their operational headquarters here on the island. There really is a great deal of potential for Taiwan to become a technology hub.

p.044

Industrial upgrading is like mountaineering-the slope gets steeper the higher you climb. Taiwan will have to stay focused to get to the next level. One step is attracting multinational R&D centers to Taiwan. Shih Yen-shiang, vice minister of economic affairs, is quite satisfied with progress in this regard so far.

p.046

(facing page) Buyers from around the world congregate at each international information industry exhibition in Taipei. They represent affirmation of the technical prowess and capacity for innovation in Taiwan's high-tech industries.