Why do many waves of innovation come to North America from Asia? Late Harvard Business School Professor Clayton Christensen reflected upon this question in a conversation with Shih Chintay, then dean of the National Taiwan Sport University College of Technology Management, in 2010.
From South Korea’s Kia Motors to Japan’s Nintendo, the continent is home to some of the world’s most innovative companies. But their innovations have done more than just fill the pockets of shareholders—they’ve contributed enormously to the economic growth of their respective regions. To illustrate, consider Taiwan’s transformation from a post-World War II aid recipient to the largest microchip supplier in the world.
Until the 20th century, the small, 14,000-square-mile island was at one point a refuge for those who fled the Chinese Civil war, but things began to change before the end of the century. Thanks to what’s known as the “Taiwan miracle,” Taiwan experienced unprecedented double-digit economic growth spurred by the growth of textile factories, footwear, and electronic appliances. Companies then switched to manufacturing semiconductors and electronic equipment, including radios, television sets, and computers. By the mid-1980s, Taiwan was one of the world’s most significant producers of computers.
Today, Taiwan remains one of the world’s economic powerhouses, boasting the 21st largest economy as of 2019. One reason for this is its commitment to innovation: that same year, it spent 3.5% of its GDP on Research and Development (R&D), putting it in the league of other innovative countries like Germany and South Korea.
Taiwan is globally revered as a leader in technological innovation and home to the world’s largest chipmaker, Taiwan Semiconductor Manufacturing Company, Limited (TSMC). As the go-to producer of chips to American companies such as Apple and Broadcom, TSMC is the world’s most valuable semiconductor company and the largest dedicated (pure-play) semiconductor foundry. It also hosts the biggest contract electronics manufacturer (Foxconn).
A model for other governments in growth economies
What was behind Taiwan’s dominant presence in technology and annual growth of 7.5% between 1981-1995? Significant credit goes to the Taiwanese government for creating an environment in which businesses could thrive. This is most evident in the establishment of Hsinchu Science Park, which the government set up in 1980 in order to promote and support research and innovation.
This industrial park expands to more than six locations and houses more than 530 companies, including the notable TSMC. In order to attract and incentivize businesses, it offers participating businesses an array of amenities, including capital raising assistance and access to a pool of high-quality talent. In addition, R&D expenses can be deducted from corporate income tax by up to 15% and more. As Hsu Yu-Chin, deputy minister at the Ministry of Science and Technology, stated in 2019, “Everything you need is right there: manufacturing, R&D facilities, and a strong talent pool from top universities.”
Forty-one years later, it seems clear that the continuing investment has paid off. One of the most impactful outcomes of establishing this park is the enormous wealth it has created for the employees, students, and families in its community. Stephen Su, the vice president of the Industrial Technology Research Institute, noted that in 2017, the average disposable income of Hsinchu households was about NT$1.28 million (42,112 USD), second only to Taipei City. In addition, monthly salaries in this area superseded the national average: NT$65,000 (2,139 USD) compared to NT$38,000 (1,250 USD). The impact of the park isn’t just felt by the nearby community, though; by 2020, Taiwanese semiconductor companies accounted for 63% of global foundry revenue. That same year, TSMC alone paid NT$66.19 billion (2.25 billion USD) to the Taiwanese government in taxes.
Hsinchu Science Park is just one example of an initiative spearheaded by the government to encourage innovation. In 2020, KPMG, one of the world’s reputable accounting firms, ranked Singapore as the leading global innovation hub due to the government’s friendly approach to breeding and investment in technology companies. For instance, that year, it launched the Research, Innovation, and Enterprise (RIE) Plan 2020, which allocated S$19 billion (14 billion USD) to be invested in the country’s R&D capabilities, enterprise innovation, and entrepreneurship.
Taking inspiration from nations like Taiwan and Singapore, governments in growth economies have a significant opportunity to spur innovations in their respective countries. The waves of innovation in growth economies like Vietnam and Rwanda are already rising. How might governments encourage these efforts? Whether that’s providing ecosystems with services such as providing tax incentives, offering subsidies, or simply reducing red tape, their efforts can contribute to the development of industries, the creation of millions of jobs, and a sustainable source of tax revenue.