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  1. 1. 10/06/10 How did SMEs in Taiwan Survive the Crisis Chi Schive Vice Chairman Council for Economic Planning and Development and Professor of Economics National Taiwan University 1999 Industry Economics Conference July 12-14, 1999, Melbourne How did SMEs in Taiwan Survive the Crisis* * This paper is revised from a presentation at 1999 Industry Economics Conference, organized by Department of Economics of Monash University and sponsored by the Productivity Commission of Australia, July 12-14, Melbourne.
  2. 2. Chi Schive** 1. Introduction Taiwan has been less affected during the recent crisis in East Asia. We could look at this fact from various perspectives of the cause of the crisis. On the microeconomic aspect, it has been the labor market rigidity, over-concentration of market structure, and influential state-owned enterprises, all of which have retarded the flexibility and upgrading of industries. Such microeconomic feature, however, is not the essential ingredient of Taiwan’s economy. Taiwan’s industrial policy, though accentuating the development of large enterprises, has not discriminated strongly against small and medium-sized enterprises (SMEs). In the early period of its economic development during the 1950s and 1960s, Taiwan was abundantly endowed with labor. Without much advanced technology and capital, micro-businesses (living-room factories) could only begin with labor-intensive products, say knitting and handicrafts, and the successful ones grew into SMEs. The offspring of existing firms came to the stage and became another source of SMEs. Very soon, the dominance of SMEs has become a very unique feature of Taiwan’s industrial organization ever since their very first appearance. In Taiwan, the efficiency and flexibility of SMEs have raised competitiveness to the extent that they have been able to coexist and compete with large enterprises, thus saving the economy from the dominance of large enterprises. Being efficient and flexible, the SME sector has been constantly adjusting its competitive edge (or niche) in times of great change, needless to say some of its members have grown into larger ones, while more of them just vanished. Since the mid-1980s, Taiwan has quickened its pace in liberalization (Schive, 1995), accompanied by a noticeable industrial restructuring. Though it is widely held that liberalization threatens existing domestic industries with more competition, efficiency and welfare gain from it proves to have outweighed loss. The SME sector, which largely comprises vulnerable businesses in terms of size and shock absorption capacity, has shown to survive the days of rapid liberalization. The East Asian financial crisis is a test of a different kind to SMEs’ ability to deal with difficulties and * * Vice Chairman, Council for Economic Planning and Development, Republic of China, and Professor of Economics, National Taiwan University. 2
  3. 3. challenges. The hypothesis is that a well-developed SME sector is conducive to Taiwan’s relative strength shown during the crisis. Traditional SMEs are not only small, family owned, but have little to do with science or technology. However, in the information age and fast growing high-tech industries, some SMEs have been actively responsive to new technologies and played an important role (Hu and Schive, 1998). The new challenge is still evolving and gaining momentum. The prospects for SMEs in Taiwan to survive this new situation can be looked at from technological capacity and the capacity to foster knowledge- based industries. How have Taiwan’s SMEs responded to fast technological progress? What are the prospects for SMEs in Taiwan of surviving the information technology (IT) age? In this paper, how SMEs in Taiwan have responded to one great challenge in the 1990s, namely the East Asian financial crisis, will be addressed. Before going into that direction, however, a highly related topic -- SME response to Taiwan’s great liberalization movement since the mid-1980s – will be discussed. With that foundation, the author will examine SME restructuring since 1990 in response to IT, and opportunities arising from new challenges, the development of global logistics in particular. 2. SMEs and the Great Liberalization in the mid-1980s In the 1980s, the Taiwan economy was confronted by several problems: mounting trade surpluses, upward pressure on domestic currency, escalating excess savings, and rising cost of labor and land. In response, Taiwan lifted most of foreign-exchange controls, lowered import tariffs, relaxed import restrictions and opened domestic services market for foreign competition. The resulted pressure on SMEs, who were mainly engaged in export business, was overwhelming. Meanwhile, Taiwan had grown from a capital-poor to a capital-rich economy, which was attributable to mounting excess savings. With over two decades of rapid industrialization of export sectors, Taiwan’s industrialists have developed a strong international network and have accumulated international management skill and technology capability. 3
  4. 4. One may conclude that pressure from both external and internal market forces has triggered the great transition for SMEs in Taiwan, who quickly adjusted to the new business environment in the mid-1980s. They reacted with accelerating automation, improving product quality, shifting to production of higher value-added goods, employing foreign labor and relocating traditional manufacturing overseas. There is abundant evidence that verifies the admirable adaptability of SMEs in Taiwan during the great transition period. Furthermore, in five of Taiwan’s major export industries, i.e., foods, textiles, plastic products, machinery, and electronics, there was a clear trend toward increased use of automatic machinery after 19871. Accordingly, manufacturers would be able to increase production with less labor input, implying a gain in labor productivity. Between 1987 and 1991, employment of the manufacturing sector fell 16%, while the manufacturing production index posted a 14% growth. While automation could help reduce production cost, upgrading product quality was in no less degree important in maintaining export competitiveness. With two export price indices: one, unit export price index expressed as total export value divided by export volume while embodying quality factor and two, the commonly used export price index net of quality factor, we can calculate a quality index. Empirical study confirmed the hypothesis nicely (Schive, 1995) Before the 1980s, foreign direct investment was mainly the domain of multinational corporations. In the mid-1980s, however, SMEs from Taiwan, equipped with their skills, business relations, and capital, were attracted to lower production cost in Southeast Asia and Mainland China. While Taiwan’s SMEs were extremely experienced in low-skilled and labor-intensive operations, they went abroad to capitalize on neighboring countries’ abundant labor. It must be noted, however, the absence of de facto control on outward investment and the coming of rather free foreign exchange operations also facilitated the outward investment by firms of Taiwan, SMEs in particular2. Most of the earlier outgoing investors to Southeast Asia were from the traditional manufacturing industries such as textiles, electronics, electrical appliances, paper 1 For details, see Schive (1995). 2 There were 1,800 investment projects, totaling US$8 billion, in Mainland China and ASEAN countries between1988 and 1990. The average money per project indicates most of them belong to SMEs. 4
  5. 5. products, printing, chemical products, metal products and non-metallic products. Later on, services, such as trade, banking and insurance and wholesale and retail, were destined for investment in Hong Kong and Singapore, and so were some capital- intensive industries, such as petrochemical and steel industries. Instead of eroding domestic manufacturing base, outward investment has been a first step in globalizing local enterprises. Indeed, a survey of 4,056 manufacturers that had invested abroad, showed that 59.6% of these outward investors continued to maintain their investment in Taiwan and 24.3% of them actually planned to expand domestic business operations3. The firms most likely to reduce or eliminate operations in Taiwan were manufacturers of ready-to-wear garments, leather, wood materials, and rubber, which were totally losing comparative advantage in Taiwan. As Taiwan-based firms moved their factories overseas, they created demand for capital and intermediate goods from Taiwan, leaving a significant impact on the patterns and partnership of Taiwan’s trade. Thanks to growing investment in Southeast Asia and Mainland China, Taiwan’s trade with these economies has been expanding rapidly since the mid-1980s. Taiwan has also become an important exporter of capital goods and intermediates to the neighboring economies, which in turn produced goods for the U.S. market. At the same time, Taiwan’s exports have quickly switched away from the traditional labor-intensive products to capital- and technology-intensive one since 1987. At the company level, Taiwan’s trade with ASEAN has displayed an increasingly complementary relationship. Intra-industry trade coefficient suggests vast intensification of vertical or horizontal integration among Taiwan and ASEAN4. In sum, Taiwan’s SMEs took actions that had been uncommon elsewhere during the economy’s restructuring in the mid- and late 1980s. With such adaptability they survived the transitional challenge. 3. SMEs in Taiwan and the East Asian Financial Crisis since 1997 3 Ministry of Economic Affairs (1994), Manufacturing Investment Survey, June 1994, Taipei, Taiwan: MOEA. 4 Council for Economic Planning and Development (1992). 5
  6. 6. The impact of the East Asian financial crisis on Taiwan has been latent and relatively mild. On the macroeconomic aspect, economic growth declined moderately from 6.8% in 1997 to 4.8% in 1998. Growth rate of 1999 is expected to climb to 5.1% or even higher. The misery index, measured by the combination of unemployment and inflation, rose only 0.8 percentage point to 4.4% in 1998 and remained considerably lower than the rest of the recession-laden economies of East Asia. On the microeconomic aspect, signs of slowdown have been detected, yet the resilience of the economy has still been there. For instance, the number of start-up companies posted higher than the previous year in 1997, and did not show significant fall in 1998 (Table 0). At the same time, the number of companies that had capital expansion was higher than the previous year in 1997, and also did not show significant fall in 1998. The number of closures or dissolution in 1997 was a bit higher than the previous year, yet was about the same level as before the crisis. Similar developments were observed in plant operations (Table 0). The largest exporting sector, information and high-tech industries, continued to expand its share of total exports from 45.8% in 1996 to 48.6% in 1997, and further, yet with smaller margin, to 49.9% in 1998. The exodus of traditional export production, pressed by the sharp appreciation of the NT dollar in the latter half of the 1980s, implies a shift of Taiwan’s comparative advantage to more technology- and capital-intensive production from the traditional one. Such development is deemed desirable for an economy pursuing upgrading like Taiwan. More recently, information electronics industry has also invested heavily overseas, in response to pressure from cost competition (Table 0). Since the majority of the traditional exporting businesses and, to a less extent, the informatics producers, are SMEs, we have seen the trend of SME share of Taiwan’s total exports is on the decline. 6
  7. 7. Table 4 Births and Deaths of Companies in Taiwan, 1986-98 Existing Companies New Companies No(1,000) Capital (NT$billion) No(1,000) Capital (NT$billion) 1986 281 1,661 27 76 1987 317 2,037 33 143 1988 400 2,483 41 271 1989 361 3,102 40 343 1990 373 3,640 37 277 1991 395 4,240 46 356 1992 427 4,922 57 672 1993 464 5,570 52 392 1994 493 6,232 56 470 1995 527 7,145 54 424 1996 546 8,225 44 480 1997 565 9,537 44 479 1998 583 11,107 37 443 Capital Expansion Closure & Dissolution No(1,000) Capital (NT$billion) No(1,000) Capital (NT$billion) 1986 13 160 4.8 17 1987 17 190 6.6 22 1988 22 229 7.9 28 1989 14 316 8.6 62 1990 14 475 111.9 151 1991 16 547 12.3 155 1992 16 594 15.0 141 1993 16 425 19.2 153 1994 11 169 18.5 125 1995 22 584 20.3 135 1996 18 772 25.3 162 1997 22 1,062 30.0 197 1998 17 814 24.2 173 Source: Company registration statistics of the Ministry of Economic Affairs. 7
  8. 8. Table 5 Plant Activity, 1986-98 Existing Plants New Plants No(1,000) Capital (NT$billion) No(1,000) Capital (NT$billion) 1986 60 3,139 13 34 1987 69 3,292 11 37 1988 78 3,519 10 50 1989 86 3,691 8 47 1990 92 3,902 7 46 1991 84 4,446 7 53 1992 101 5,491 7 75 1993 96 6,083 7 82 1994 95 6,985 7 86 1995 97 8,430 7 92 1996 98 9,211 5 85 1997 99 10,892 6 128 1998 98 13,201 6 131 Capital Expansion Closure & Dissolution No(1,000) Capital (NT$billion) No(1,000) Capital (NT$billion) 1986 7 116 2.9 - 1987 9 130 2.2 - 1988 9 158 3.7 - 1989 6 153 4.3 - 1990 6 294 7.5 - 1991 6 369 4.9 - 1992 5 806 7.0 - 1993 6 460 4.7 90 1994 6 353 6.9 91 1995 7 492 6.0 66 1996 7 383 5.3 51 1997 7 500 2.9 40 1998 7 618 6.8 77 Source: Ministry of Economic Affairs. 8
  9. 9. Table 6 Location of Taiwan’s Production of Information Electronics US$million(%) Output 1995 1996 Domestic 13,587 (72.0) 16,414 (67.9) Overseas 5,284 (28.0) 7,760 (32.1) Source: Institute for Information Industry, MIC. With their accumulated experiences, technology pool, and management skill, SMEs have extended the life circle of the traditional industries overseas. At the same time, the overseas link is strengthened between domestic (parent) SMEs and overseas (subsidiary) ones. Moreover, vertical integration, the very acclaimed characteristics of SMEs in relation to core companies in Taiwan, is no longer a matter limited only to domestic network but also one extended to overseas. This development has two implications. Firstly, Taiwan thus becomes even more related with Southeast Asia and Mainland China, who have hosted most of Taiwan’s overseas manufacturing. Secondly, the growing and fortified network has facilitated the development of global logistics, which will be discussed in latter sections. During the financial crisis, Taiwan’s NT dollar devalued less than most of other East Asian economies, which immediately eroded price competitiveness of Taiwan’s products. However, the impact of price competitiveness loss due to change in foreign exchange rate has not been serious as was originally expected. Firstly, currency devaluation benefits exports only to the portion of value added domestically. Secondly, SMEs in Taiwan could keep their price competitiveness through their overseas subsidiaries, which also benefited from the same developments. Thirdly, such non- price competitiveness as flexibility, international vertical integration network, and scope economies remained strong in Taiwan’s industry, particularly information electronics and could offset disadvantage from relative higher currency value. Indeed, a study shows that for every 10% increase in Southeast Asian share of the U.S. market, there is only 1.4% shrink in Taiwan’s market share in the U.S.5 Other factors that contribute to the strength of SMEs in Taiwan are technology competitiveness and management in global logistics. In the next section we will discuss 5 Chen (1997) indicates that there were about only 2,000 items, defined by 6-digit HS codes, that are produced both by Taiwan and ASEAN countries. 9
  10. 10. how SMEs perform in R&D, how they remain technologically competitive by working with core companies which form strategic alliance with multinationals (MNCs). And after that, we will find out that global logistics is not the domain of large enterprises only. 4. SMEs in Taiwan and Changing Technology Technology industry is believed to be the mainstay of the Taiwan economy in the new century. The number of SMEs as a percent of the high-tech sector and SME share of the value-added of manufactured products indicate that SMEs occupy a stable and important position within the sector (Table 0). For instance, during 1993-95 the percentage of SME number in a high-tech sector exceeds 90% for all but the aircraft and its component parts industry, whose sample size may be too small to reflect the real picture of the industry6. SME value-added share, however, varies among different industries during the same period. In industries such as data storage and processing, video and audio electronics, communications equipment and electronic components, SMEs account for 30% to 40% of value added of the industry as a whole. In the medical instrument and equipment industry, there were only SMEs, and so was the case in non-optical precision equipment until 1995. In the pharmaceutical manufacturing and electro-optical and optical instrument industry, SMEs accounted for around 70%. The history of the aircraft industry dates back to the 1970s, when the Aerospace Industry Development Center repaired U.S. warplanes during the Vietnam War. Then came the IDF project inviting for the participation of local parts industry. The development of SME aircraft component makers is a typical illustration of the remarkable adaptability, flexibility and efficiency of SMEs in Taiwan7. The aircraft industry demands high degree of product reliability, much higher than those for industries Taiwan used to have an advantage, say machinery and electronics. For new comers to the industry, not only advanced technology is required, but also credibility 6 For instance, the, the largest aircraft manufacturer producing indigenous-developed-fighter (IDF) was not in the sample. Many makers of aircraft components and parts were in the machinery industry followed by producer’s main product classification. And hence, one should be careful in the interpretation of the industry’s data. 7 With flexibility, other manufacturers also enter the aircraft component parts industry. For example, there is a combustion chamber maker, who used to make plastic window blinds. Without large machinery equipment for punching holes, the SME does the jobs manually. 10
  11. 11. has to be built via international certification of quality control, inspection, documentation, etc., and years of good reputation. With technology assistance from the Center and the government, high value-added, not high profit yet, and a name connected to aircraft, the industry did attract a lot of new comers, most of which were medium sized companies. By now there are 75 firms registered with the aerospace industrial association, excluding other manufacturing industries producing aircraft parts as non-core products. SMEs spent slightly less in R&D in terms of R&D expenditure share relative to value-added share. It follows that SMEs are less, yet not significantly less, technology- intensive than their larger counterpart. Though disadvantaged in R&D spending, Table 4 indicates that SMEs are more active and productive with regard to R&D personnel and patent applications. The latter is even larger, percentage-wise, than the former, which is a promising indicator of the efficiency in SMEs’ R&D activity. Indeed SMEs always accounted for more than half of patent applications in all industries except video and audio electronics, though in which SME share was already 48.56%. In an earlier study (Schive and Wu, 1989), R&D intensity of a firm was found to be insignificantly correlated with scale, yet correlated with type of industry. The new finding is more interesting and significant than the previous one. 4.1. Venture Capital and SMEs There are two factors that are crucial to the prosperity of technology-oriented SMEs. One is about innovation, and how and where to source new technology, and to maintain the technology superiority. The other is to find the indispensable capital to commercialize the innovation, which is often a more difficult challenge to SMEs. Here, venture capital can play a key role. 11
  12. 12. Table 8 SME Share of High-Tech Industries (%) R&D R&D Patent Value- No. of Enterprises Sector Year expenditure personnel applications added Share No. 1993 63.0 66.6 87.6 66.8 97.3 524 Pharmaceutical 1994 65.9 62.1 - 69.9 97.1 515 Manufacturing 1995 65.9 - - 67.8 97.7 528 1993 27.7 58.4 70.8 33.6 91.2 785 Data Storage and 1994 23.0 31.4 - 27.9 90.9 847 Processing 1995 32.8 - - 30.0 92.7 985 1993 25.1 49.6 48.6 34.1 93.7 805 Video and Audio 1994 30.0 33.6 - 41.3 94.0 849 Electronics 1995 26.0 - - 27.0 93.4 861 1993 53.0 48.3 86.7 40.7 92.6 349 Communications 1994 35.0 46.1 - 36.0 93.1 375 Equipment 1995 37.2 - - 41.1 92.9 395 1993 23.7 40.5 59.2 27.1 93.7 2,168 Electronic 1994 22.6 38.0 - 26.7 93.4 2,197 Components 1995 15.3 - - 22.3 93.6 2,503 1993 34.2 23.2 100.0 5.0 62.5 8 Aircraft and 1994 30.4 54.8 - 1.3 60.0 10 Component Parts 1995 100.0 - - 29.3 80.0 15 1993 56.52 74.3 91.25 69.1 98.3 941 Electro-Optical and 1994 56.27 68.8 - 68.6 98.7 925 Optical Equipment 1995 58.17 - - 71.3 98.9 944 1993 100.00 100.0 100.00 100.0 100.0 113 Medical Instrument 1994 100.00 100.00 - 100.00 100.00 115 and Equipment 1995 100.00 - - 100.00 100.00 129 1993 100.00 100.00 100.00 100.00 100.00 80 Other Precision 1994 100.00 100.00 - 100.00 100.00 73 Equipment 1995 23.27 - - 46.28 98.71 77 Source: Small and Medium Enterprise Administration, White Paper on Small and Medium Enterprises in Taiwan, 1998. 12
  13. 13. When an innovator has an idea or a new technology, he or she often finds it difficult to get finance because such a project involves high risks. Moreover, for today’s knowledge-based, high-tech business, it often has little physical asset to be used as collateral for loans. Venture capital, then, is the financing window available for SMEs. Not only with capital but also with their investing knowledge and operating experience, venture capitalists pick up competent and high-payoff projects and at the same time, mitigate their risks. By nature, SMEs will receive the lion’s share of venture capital fund, because existing, well-established large companies are able to collect capital in the capital market and through regular bank loan options. Therefore, the performance of venture capital will be a window to observe the growth of technology-oriented SMEs. Taiwan’s venture capital industry was established in the early 1980s, as it was stipulated, mainly for the development of high-tech industry. Today, 94% of venture fund is invested in high-tech industry. In 1984, the first venture capital was jointly invested by Acer and Continental Engineering, both of which have been the super performers of their own industries in Taiwan. During the same year, Taiwan Semiconductor Manufacturing (TSMC), the first joint venture between the government, Philips Electronics and other private investors, was established with venture capital fund. Today TSMC has become the world’s leading IC foundry manufacturer. Renowned foreign venture capital firms were also invited to form joint ventures with domestic ones. Then the number of venture capital firms grew faster and faster, and so was the total capital collected (Table 0). Both indicate the success of the recipients of the capital and the screening capability of such a capital, not to mention the general environment in favor of such a development. By 1990, it had increased to 20 from 1 in 1984 and further to 110 in 1998. Over the fifteen years, a total of NT$66 billion (about US$2.6 billion) worth of venture money was invested, of which NT$15 billion (US$600 million) were earnings reinvested. The venture money has been invested in 900 domestic projects and 600 overseas projects, each sharing NT$46 million (US$1.9 million), and has thus induced a total capital formation of NT$560 billion (US$22.4 billion). Of course, when a successful venture capital recipient grew bigger and bigger, such as TSMC, it would and could not depend on venture capital for further funding. Instead, the capital market would be its main funding source. 13
  14. 14. Table 10 Growth of Venture Capital Firms in Taiwan 1984 1985 1986 1987 1988 1989 1990 Up to 1990 No. 1 1 1 3 3 4 7 20 NT$ billion 0.2 0.2 0.8 0.6 1.5 1.9 3.6 8.9 1991 1992 1993 1994 1995 1996 1997 1998 Up to 1998 2 2 3 1 6 13 25 48 120 1.6 1.2 1.8 1.1 4.0 6.8 17.1 23.8 66.4 Source: Taipei Venture Capital Association, Venture Capital Report, No. 19, 1998. The performance of Taiwan’s venture capital, in terms of earnings, has been impressive since its establishment in 1984. Except three out of the beginning four years when losses actually occurred, earnings per share, with the face value of NT$10, were around a quarter of one NT dollar each year between 1988 and 1993. And since 1994, annual earnings per share have grown to over one or even to two dollars. The top ten or twenty performers in the business must be extremely happy to enjoy their remarkable reward on risk-taking, judged by the magnitude of capital gains from the earnings. (Table 0) Table 12 Annual Earnings (NT$) per Share 1984 1985 1986 1987 1988 1989 1990 Average of Total 0.12 -0.66 -1.47 -1.23 0.26 0.24 0.04 Average of top 10 0.12 -0.66 -1.47 -1.23 0.26 0.28 -0.03 Average of top 20 0.12 -0.66 -1.47 -1.23 0.26 0.24 0.04 1991 1992 1993 1994 1995 1996 1997 Average of Total 0.30 0.25 0.30 1.33 2.00 1.57 1.81 Average of top 10 0.66 0.67 0.20 2.04 3.81 3.28 6.33 Average of top 20 0.30 0.30 0.32 1.48 3.03 2.50 4.34 Source: Same as above. 14
  15. 15. Sectoral composition shows how venture capital follows niche trend and helps develop niche industries. As indicated in Table 0, A total of nineteen industries received venture capital fund. To our surprise, the traditional industry still obtained a share of capital, though no tax incentive was provided for investment or innovations in this industry. The leading high-tech industries targeted were PC and peripherals, semiconductor, consumer electronics, communications, electro-optical, and software. The precision and automation and biotech industries seem to be on the rise, yet data for three years are too short to come out with any significant trend forecast. Table 14 Sectoral Distribution of Venture Capital NT$ million per firm 1995 1996 1997 Cumulative to 1997 PC & peripherals 30.40 30.52 21.57 26.7 Software 4.26 2.86 5.01 17.3 Consumer electronics 8.76 8.48 12.24 22.0 Semiconductor 22.92 27.83 15.77 24.7 Communications 7.39 8.75 4.64 17.2 Advanced Sensing 0.00 0.00 0.35 13.4 Pollution control engineering 0.35 0.80 0.00 20.5 Precision & automation 1.05 3.43 6.25 18.5 High materials 1.41 2.16 0.26 18.9 Specialty chemicals & 0.64 0.59 0.27 21.8 pharmaceutical manufacturing Medical 0.64 0.03 1.19 20.4 Aerospace 0.52 0.50 0.40 28.8 Resource development 1.00 0.00 0.05 51.5 Electro-optical 5.50 6.22 12.23 24.3 Biotech 0.20 0.34 2.64 31.6 Science & technology services 0.04 0.17 0.46 17.7 Other technology 1.82 0.94 7.18 34.2 Venture capital 2.23 1.74 3.27 29.8 Traditional industry 11.85 4.62 6.21 21.9 Total 100.00 100.00 100.00 23.7 Source: Same as above. 15
  16. 16. Table 15 Venture Capital and the Life Cycle of Companies % 1995 1996 1997 Up to 1997 Seeding 7.98 10.08 4.13 8.46 Start-up 13.31 17.80 24.07 15.92 Expansion 49.22 55.18 49.26 48.12 Maturity 24.24 16.22 21.24 26.20 Restructuring 5.24 0.72 1.31 1.31 (shakeout) Total 100.00 100.00 100.00 100.00 Source: Same as above. The life cycle of a company in terms of its technology development has a bearing on venture capital, and vice versa. Contrary to popular perception, venture capital plays only a minor role in funding basic innovation, i.e., at the seeding stage. About 9% of the capital accumulated up to 1997 went to the seedling stage, and 16%, to the start-up efforts of the company (Table 0). The majority (about 50%) of that money went to the next stage of a company’s life when it begins to commercialize its innovation, i.e., the expansion stage – in building fixed assets, working capital, manufacturing, marketing and sales. About 25% of venture money went to the maturity stage, the period when the company approached its peak. And very little (about 1%) ended up in the restructuring (or shakeout) stage. From the distribution among different stages of a company’s life, the major role of venture capital in high-tech SMEs is to identify winners and help them expand. It may be noted that venture capital is not a long-term capital, and shall quit from the successful investment and constantly looking for new ventures8. 4.2 Global logistics – a challenge for business of all sizes 8 Zider (1998) notes “Venture capital is not long-term money. The idea is to invest in a company’s balance sheet and infrastructure until it reaches a sufficient size and credibility so that it can be sold to a corporation or so that the institutional public-equity markets can step in and provide liquidity.” Zider estimates 80% of the capital goes to the expansion stage, implying that venture capital in Taiwan has been playing an equivalent, if not more active, role to help starting business. 16
  17. 17. Competition and the pursuit for growth force companies constantly looking for better business practices that improve efficiency. With the help of new technologies, the economic pressures and opportunities are driving rapid changes in logistic business – transportation, transshipment and warehousing of materials, components and finished goods. To be precise, two industries, electronic commerce (in particular commerce to commerce), and express package transportation, are giving wider variety of increasingly sophisticated logistics options to enable companies-in-association meet their production-transport-inventory needs. Moreover, when production fragmentation goes beyond national boundaries, global logistics becomes a main concern in business. How to reduce production cycle times throughout the value-adding chain of event in production, distribution and delivery of goods and services all become crucial. In line with globalization, consumer demand is becoming more sophisticated and differentiated, which make market adaptation increasingly important. As a result, the approach to global strategy has been changing. There is an increasing trend toward Build To Order (BTO), Just-In-Time management, Materials Resource Planning, and Total Quality Management. In the coming of this age of IT and speed, will SMEs survive? Taiwan’s manufacturing sector before the mid-1980s was comprised of SMEs mainly, larger firms, and foreign-invested firms. Original equipment manufacturing (OEM) was the feature of SME activities then. After the restructuring in the mid-1980s as we described earlier, SMEs grew to well master technology and became capable of undertaking original design manufacturing (ODM) while gauging the trend of outsourcing and downsizing of multinational companies. Since the early 1990s, via its development as a regional operations center, Taiwan’s capacity has extended beyond development and manufacturing of products to logistics. Chart 1 shows the lengthening value chain in Taiwan during the past decade or so. Having said that, we could draw the implications of global logistics for SMEs. Before the mid-1980s, MNCs based in Japan and the U.S. invested in and purchased finished products from Taiwan to take advantage of its low-cost skilled labor, while providing Taiwan with intermediates and raw materials. After the mid-1980s, most of the traditional production, which no longer enjoyed comparative advantage in Taiwan, 17
  18. 18. moved to Southeast Asia and China via outward investment. In this stampede, SMEs became transnational, providing intermediates and raw materials to the host countries of their overseas production and selling the finished goods to the U.S. buyers. Since the mid-1990s, however, time-defined competition has driven firms of all sizes and all nationalities to develop global logistic operations to keep their competitiveness. The survival technique of Taiwan firms, including SMEs, is to team up with a core company to form strategic alliance with MNCs with superior market and technology. The supply chain may be extended to firms in Southeast Asia and Mainland China at the same time. In this way, Taiwan forms a systematic synergy with Japan and U.S. MNCs and with ASEAN and Mainland China. What we see now is a lengthened supply chain, with Japan or the U.S. firms on the one end as the international marketer for Taiwan products made from materials and intermediates from other Asian countries on the other end. (Chart 2) The extension of the network since the mid-1980s reflects changing business operations due to changing technology, marketing skills, and time- defined competition. Table 17 International Procurement by MNCs US$ million 1996 1997 1998 U.S. 5,620 9,150 13,404 Japan 1,690 1,556 1,262 Europe 572 712 939 Source: Ministry of Economic Affairs. As part of global logistic operations, Taiwan has negotiated international procurement agreement with MNCs9, securing sales in the mid-1990s. (Table 0) In this respect, SMEs in Taiwan and overseas Taiwan-based SMEs also contribute to the new development. Table 0 tells us that SMEs in Taiwan have a role on a par with non- SMEs in large Taiwanese companies’ procurement, and a role less significant in foreign-based MNCs. Despite being diluted into the regional market, overseas Taiwanese SMEs still take part in the sourcing of large Taiwanese firms and MNCs. 9 MNCs that have strategic alliance with Taiwan firms include A&A, Actebis, Apple, Compaq, DEC, Dell, Fujitsu, Gateway, Hitachi, HP, IBM, ICL/WINTOP, Intel, NEC, Mitsubishi, Nokia, Philips, Sharp, Siemens, and Unisys. 18
  19. 19. At the same time, global logistics has changed the traditional practice of vertical integration from within a country to beyond country borders. For example, Taiwan have tremendous two-way flows of trade in semiconductor and office automation products with both ends of the industrial integration, namely Japan and the U.S. on the one hand and ASEAN and Mainland China on the other. (Table 0) Table 21 Taiwan-based SMEs and Procurement by Large Taiwanese Firms % of total procurement Domestic purchase from International purchase from SMEs Other sources Taiwan-based SMEs Other sources Tatung 45 55 12 88 Acer 52 48 10 90 Philips (Taiwan) 30 70 8 92 Motorola (Taiwan) 20 80 1 99 Source: Survey by Council for Economic Planning and Development. 5. Conclusion SMEs in Taiwan’s manufacturing sector have shown its resilience once again in the severe financial turmoil. Far more important, SMEs have not been absent in the growing high-tech or knowledge-based industries, which will be the backbone of Taiwan’s industry in the coming century. Furthermore, in the coming IT- and speed- driven age, the competitive edge of a company or an industry is no longer limited to cost only, but related to the capability of design, delivery and sourcing, both locally and overseas of the company or industry. Global logistics becomes a sharp weapon to penetrate to grow, or a technique to survive. SMEs have become an indispensable segment of the chain of such modern business operations. SMEs not only survive in the fading financial storm, but they will survive well in the 21st Century in Taiwan. 19
  20. 20. Table 22 Global Integration of Taiwan, 1998 US$ million Automatic data processing Semiconductor, ICs and micro- machines and accessories assemblies Imports from Exports to Imports from Exports to Total 5,102 22,050 16,258 10,971 U.S.A. 438 8,629 3,287 2,245 Japan 1,488 1,765 3,877 1,223 Hong Kong 106 1,790 681 2,786 Korea 817 128 1,604 587 Singapore 403 411 903 1,182 ASEAN* 1228 680 3,265 989 Malaysia 367 226 1,649 504 Philippines 366 311 1,192 226 Thailand 443 132 392 226 China 227 - 194 - * Including Malaysia, Indonesia, the Philippines, and Thailand. Source: Ministry of Finance, Monthly Statistics of Exports and Imports, Taiwan Area, the ROC, Jan. 1999. 20
  21. 21. Chart 1 Changes in Local Business Operations Industrial SMEs Organization Large Co’s MNCs Before the mid-1980s R&D Manufacturing Marketing OEM In the late 1980s and early 1990s R D M Marketing ODM After the mid-1990s R D M Logistics Mkt ODL/GL (original design logistics/global logistics) : Local operations 21
  22. 22. Chart 2 Global Logistics in Action Japan S Q I&M I&M Q Taiwan U.S. Q S I&M Q M ASEAN China I: Investment Before the mid-1980s M: Materials/Intermediates Late 1980s and early 1990s Q: Finished product/commodity After the mid-1990s S: Strategic alliance 22
  23. 23. References Chen, Po-chih. “Impact of the Southeast Asian Currency Crisis on Taiwan’s Industries and Policy Response” (in Chinese), presented at the 9th Seminar of High-ranking Bank Managers, organized by Banking Institute of Republic of China, December 1997. Taipei, Taiwan. (In Chinese) Council for Economic Planning and Development. 1992. “Bilateral Relations between Taiwan and ASEAN, ” an internal study. (In Chinese). Hu, Ming-Wen and Chi Schive. 1998. “The Changing Competitiveness of Taiwan’s Manufacturing SMEs,” Small Business Economics, 11:315-326, 1998. Ministry of Economic Affairs (MOEA). 1994. Manufacturing Investment Survey. Taipei, Taiwan: MOEA. (In Chinese) Schive, Chi and Sze-Hwa Wu. 1989. Determinants of Industries’ R&D – Analysis on the Emerging Automation Industry. A research prepared for Advisory Division of Science and Technology, Executive Yuan. Taipei, Taiwan. (In Chinese) Schive, Chi. 1995. Taiwan’s Economic Role in East Asia. Washington, D.C.: The Center for Strategic and International Studies. Small and Medium Enterprise Administration, Ministry of Economic Affairs. 1998. White Paper on Small and Medium Enterprises in Taiwan, 1998. Taipei, Taiwan: Small and Medium Enterprise Administration. (In Chinese) Wang, Jiann-Chyuan. 1998. SMEs Role in High-Tech Industry. A research prepared for Small and Medium Enterprise Administration, Ministry of Economic Affairs. Taipei, Taiwan. (In Chinese). Zider, Bob. 1998. “How Venture Capital Works,” Harvard Business Review, November-December 1998. 23