The Strategy of Taiwans Latecomer Firms to Gain Competitive Advantage - Article Example

The Strategy of Taiwan’s Latecomer Firms to Gain Competitive Advantage Executive summary This paper critically examines and evaluates the various strategies used by Taiwan’s latecomer firms to overcome barriers to entry and gain competitive advantage. Taiwan is one of the four newly industrializing economies (NIEs) of East Asia that have rapidly grown over the past few decades to become some of the greatest economies in the region. Although the economic and industrial achievements in Taiwan are well documented, the strategies by which the country’s latecomer firms such as TSMC, Inventec and DynaLab have used to achieve their current competitive advantage is less understood. Some of the potential strategies include technology transfer strategies such as gaining tacit knowledge from other firms through the LLL model, linkage with other firms, formati and adoption of resource driven strategies among others. . The Strategy of Taiwan’s Latecomer Firms to Gain Competitive Advantage Introduction Taiwan together with South Korea, Singapore and Hong Kong form part of the four newly industrializing economies (NIEs) of East Asia that have rapidly risen over the past few decades to become major global economic powers. Despite being latecomers in the region, many firms in Taiwan have gradually developed their innovation capabilities within a short span of time to become major rivals to the well established multinational corporations (MNCs) from Japan, Europe and America. The spectacular success of the Taiwanese firms in overcoming latecomer disadvantages and catch up with early movers is largely attributed to their successful application of a mix of corporate strategies designed to enable them overcome entry barriers and gain competitive advantage (Mathews, 2002). As Asia continues to take over the global economy, there are some issues with regard to how the firms in this region are able to compete in the global market (Ernst & Kim, 2002b). Specifically, the firms that have entered the Asian market late have even more challenges with regard to catching up with those that are already established. These firms are called latecomers and have many challenges with regard to entry and how they are able to keep up not only in the global arena but also with the other giants in the local market who are already established. One such area that these firms seem to be lagging behind is the area of technology acquisition. Latecomers in the Taiwanese market have to deal with the fact that technology in this region has not matured like in the west. How these firms decide to use a specific strategy for transferring the technology is determined by the business strategy they use. The present research evaluates a number of strategies that may have been used by Taiwan’s latecomer firms to overcome barriers to entry and gain competitive advantage some of which include technology transfer strategies, re-innovation of business processes and standards, market niche exploration and resource driven strategies. 1. Externalized mode Technology Transfer Strategy External leveraging has been widely used by many Taiwanese companies to gain their competitive advantage. Although a few firms in the Taiwanese market use the internalized method to bring in technology, most have complied with the flow which has been set out by the government policy supporting externalization. The macroeconomic policy in Taiwan supports the externalized mode which is achieved through licensing, subcontracting and original equipment manufacturing arrangements. In using the externalized strategy, Taiwanese latecomer multinationals do not invest technology directly. Rather, they use subcontracting and licensing for technologies independent firms in the host countries (Lall & Teubal, 1998). One of the theories that can effectively be used to explain the success of the Taiwanese new comer firms in gaining a competitive advantage is the Learning, leveraging and linkage (LLL) framework. According to Mathews (2006), the companies such as TSMC, Inventec and DynaLab may have created their ownership advantages through their integrated links with foreign partner companies such as in the case of external leveraging of technology transfer and network alliances. For example, several Taiwanese companies such as Inventec, DynaLab and Taiwan Semiconductor Manufacturing Company (TSMC) have successfully utilized the OEM relationship for both resource and technology leveraging thereby enabling them to competitive advantage in the electronics industry. For example, an OEM supplier, TSMC has been able to secure contracting jobs from the TNCs and retail outlets of multinational corporations such as Dell, Helwett Packard (hp), Apple and Lenovo among others. This has been achievable since the Taiwanese government has invested heavily in domestic skills and capabilities, as well as, in building of domestic technological capabilities. Additionally, TSMC has been producing processors and chips for Apple’s Ipad and Iphone devices. In such cases, the latecomer Taiwanese firms are able to take advantages of this and have a way to acquire technology to keep up with the established firms. In addition, most of the multinationals scrambling for the Taiwanese market chooses to have some independence between the two regions and this also determines the technology transfer strategy they will use (Mathews & Cho, 1999). Taiwanese government uses the autonomous approach in building domestic technological capabilities by restricting FDI. Building linkages is another important concept that has been widely applied by Taiwanese firms in order to overcome entry barriers, competition and operational challenges. The strategy particularly involves establishing closer cooperation and coordination between the firms and other corporate organizations, manufacturing plants, research divisions among others. This is important in technology transfer and sharing of other tacit knowledge. On the other hand, the use of externalised mode of technology transfer as a corporate strategy has been evidenced by the company’s acquisition of manufacturing know-how and technology from its partnerships and alliances with well established MNCs from Japan, US and Europe. Similarly, DynaLab has also been able to gain competitive advantage through external technology leverage transfer resulting from its alliances with multinational companies such as Matsushita Advantages Learning opportunities As Mathews and Cho (2000) argue, with this strategy, the Taiwanese latecomer firms have more opportunities for learning and innovation. Generally, Taiwanese firms have adopted a double loop learning model where by the firms re-evaluate the variables of any given strategy in order to view the consequences from difference perspectives. While this process may be harder than the direct injection of technology through FDI, it gives these Taiwanese firms an opportunity to learn the technology, which is easy because technological capabilities have been developed in the market. Generally, these firms do not import resources such as the human capital to implement and manage the technology because such capital already exists in the local market. Regardless of the skills and technological support developed by the government, the latecomer firms will have to muddle through the process of acquisition of technology and this leads to slow pace of technology acquisition but at the end of the process. However, they benefit by learning the technology and developing their own manpower and expertise with regard to technology needed for their operation (Mathews, 2001). More local effort There are some advantages that have been derived from this. First, history has indicated that the Taiwanese latecomer multinationals that use this strategy have better chances of understanding the local market needs. This is because as Mathews (2002b) says, using the local human resources and other capabilities leads to a better understanding of the local market and the needs in the market. Long term development Taiwanese latecomer firms that use the externalized method may be slow in acquiring the technology, but the latecomer firms eventually become fully independent and they invent their own technology (Mathews, 2006a). This is better than the foreign direct investment strategy because this is able to make sure the latecomer firms can grow on its own and take advantage of the local market better than the mother firm can ever do. 2. Network Alliances Network Alliances is another important strategy that has been widely used by Taiwanese firms such as TSMC, Inventec and DynaLab to overcome their entry barriers, gain competitive advantage and adopt the smiling curve theory. The Latecomer firms in Taiwan were also able to gain competitive advantage through their ability to extract knowledge and technology from networks and alliances, made with various stakeholders at each end of the value chain. Taiwan's IT sector was particularly proficient in this respect as it was able to facilitate collaborative innovation in the form of R&D alliances driven in part by technological learning and upgrading (Oyelaran-Oyeyinka&Sampath, 2009). A prime example of these R&D alliances can be seen in the Taiwan Semiconductor Manufacturing Company (TSMC) which is a joint venture between the government of Taiwan, Philips Electronics N.V., and private investors. In its initial stages, Philips and RCA (now General Electric) "transferred key technology to TCMC... (that was).... vital to its establishment and modernization"(Tsai, 2002). The transferred knowledge from its largest clients enabled TSMC "to shorten its learning curve and achieve break-even in its second year of operation"(Tsai, 2002), thus allowing them to overcome their late entrance to the IT sector. This R&D alliance was instrumental in TSMC's path to becoming the largest commercial Integrated Circuit foundry in the world. Thus TSMC had created a competitive advantage for itself through R&D alliances driven by technological learning and upgrading. In addition, the alliances that Inventec Incorporated leveraged were paramount to its ability to gain competitive advantage. Today Inventec is one of the largest manufacturers of notebook computers, calculators, telephones and other electronic devices. However its development can be clearly linked to its acquisition of manufacturing know-how and quality control skills from its Japanese and Western OEMs. Through these alliances Inventec learnt to develop a high level of production skills which it then used as leverage to compete as an MNC. This "reverse leverage" is not uncommon in latecomer firms in Taiwan and has been a direct response to government intervention. The Taiwan government played a critical role in using leveraging of alliances with multinationals to systematically stimulate technology transfer (Rasiah, 2011). DynaLab's success can also be attributed to its leveraging of networks and alliances. During its start-up phase the company obtained contract manufacturing business from Japanese companies Sharp and Matsushita. From these initial contracts DynaLab was able to develop many contacts in Japan which has resulted in Japan making up a large amount of total sales. Thus, through networks and alliances, Taiwan's latecomer firms were able to gain competitive advantage. From a resource based perspective, the successful use of network alliances by the Taiwanese newcomer firms such as TSMC, Inventec and DynaLab may be explained using Mathews (2006) linkage, leverage and learning (LLL) theory. For example, it can be argued that the rapid expansion of the emerging Taiwanese latecomer firms as well as their ability to overcome entry barriers was due to their strategy of establishing linkages with well established MNCS thereby allowing them to leverage their resources and learn new technologies through imitating. For example, the Taiwanese latecomer firms have used these network alliances in a way that aids them to overcome the competition from the established firms. Some of the key advantages of network alliances to the Newcomer companies in Taiwan include ability to use the global value chain of their partners as well as sharing and transfer of advanced industrial technology including the low cost-mass production systems to the Taiwanese companies (Wilson, 2012). Finally, the LLL theoretical model also suggest that networking abilities of the latecomer firms in the emerging economies as was the case of TSMC, Inventec or DynaLab’s numerous joint ventures with foreign well established MNCs has been instrumental in enabling them to absorb, assimilate and adapt foreign technology thereby enhancing their competitive advantage. However, despite its numerous advantages, the strategy of establishing network alliances also comes with a few limitations. For example, the latecomer firms with stronger link to their mother firms make them less likely to be able to restructure their strategy to meet the market demands. This brings in a misalignment between the market needs in the local Taiwan market and the business strategy that the latecomer firm is using (Gibson, 2013). This happens when the latecomer firm is using the foreign direct investment strategy where the local latecomer firm is fed with almost all the resources it needs rather than the latecomer firm sourcing these resources locally. The resources in this case include technology and human resources. 3. Reverse Brain Drain Reverse brain drain is a critically important strategy that has also been used by many Taiwanese firms to gain competitive advantage. The strategy particularly involves a form of brain drain where skilled migrants move from more developed countries to a less developed country. In Taiwan’s case, reverse brain drain has largely been attributed to the huge numbers of returning Taiwanese professionals such as scientists, researchers and engineers who had gone to study in developed counties such as the US and Japan. For example, Morris Chang, the founder of Taiwan Semiconductor Manufacturing Corporation (TSMC) was himself an engineering student who return from the US to pioneer the company and this is a classic example of reverse brain drain. After its establishment, TSMC has continued to depend on the expertise from the both the returning students who undertook their studies in foreign countries as well as from the input from a transnational community who have migrated to Taiwan in the recent years. The company has continued to grow as one of the worlds top chip manufacturers due to its continued attraction of the experienced Taiwanese semiconductor managers and engineers from Silicon Valley (Mathews, John and Cho, 2000). On the other hand, the computer hardware (Inventec, Inc.) is also another remarkable example of the Taiwanese latecomer firms which have immensely depended on reverse drain for their corporate growth. For example, Inventec, Inc. has always depended on the expertise of foreign expatriates as well as students returning from their studies abroad for its rapid growth since its establishment in 1975. In addition, by forming partnerships with the established MNCs such as Helwett-Packard, Acer, Toshiba and Fujitsu-Siemens, Inventec, Inc has always sought to attract some of its experts from these companies. Finally, DynaLab has also tapped into reverse brain drain as a source of its skilled manpower which has fueled the growth to become a major electronics manufacturing industry. For instance, the company has always devised ways of attracting experienced personnel from the transnational community as well as the Taiwanese engineering and technology students who went to study in the United States and other technologically advanced countries. Some of the ways used by the company to tap into reverse brain drain include higher salaries and improving work conditions. According to Hobday (2003), these strategies have enabled the company to successfully lure increasing numbers of many Taiwanese educated in developed countries as well as non Taiwanese foreigners with the much needed technical expertise. These professionals often return home after gaining significant technical experience and this has been critical in the development and survival of the new comer firms in Taiwan. According to Gibson (2013), most of these latecomer firms already understand that competing with the established multinationals can be a challenge for them. In this case, they use the technical expertise resulting from the reverse brain drain gain a competitive advantage and overcome some of their entry barriers. Conclusion In conclusion, the corporate success of the latecomer firms in Taiwan is largely attributed to their effective application of various strategies some of which include technology transfer strategies such as gaining tacit knowledge from other firms through the LLL model, linkage with other firms, re-innovation of business processes, reverse brain drain standards and network alliances. Despite enormous competition from well established multinational corporations, the strategies have enabled these firms to overcome entry challenges and gain competitive advantage in an increasingly competitive environment. References Ernst, D. & Kim, L (2002a) ‘Global production networks, knowledge diffusion, and local capability formation,’ Research Policy. 31(8/9), pp. 1417–1430. Ernst, D. & Kim, L. (2002b) ‘Global Production Networks, Information Technology and Knowledge Diffusion,’ Industry & Innovation, 9(3), pp. 147–153. Gibson, M. (2013). Market Strategy for Latecomers. 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