Taiwan is the world’s leading manufacturer of one of the most crucial industrial technologies—semiconductors. Indeed, a single Taiwan-based firm, Taiwan Semiconductor Manufacturing Company, controls more than 60 percent of global capacity for the most advanced chips. But no economy is sustainable if it becomes over-reliant on a single industry, and that is why Taiwan’s leaders have made economic diversification their watchword. But through several administrations, led by both of Taiwan’s major political parties, these government-backed efforts have been both underfunded and too diffuse.
The good news is that Taiwan’s current administration under President Tsai Ing-wen has announced a raft of new initiatives, from the so-called Asian Silicon Valley initiative’s package of new investments and incentives to the 5+2 Innovative Industries Plan, which aims to build capability and capacity in several targeted industries, including biotechnology. But the government’s initial pledge to the Asian Silicon Valley project was just 11.3 billion New Taiwan dollars ($350 million), which pales in comparison to the island’s ambitious competitors, especially the public investments that have been made by Beijing, Seoul, and Tokyo. Worse, Taiwan faces structural challenges to its once-fulsome innovation advantage, including difficulties in transitioning its longtime focus on hardware into software and the integration of hardware and software into technologies and systems. And Taiwan has an insufficient pool of technical talent that is routinely poached by mainland Chinese companies that pay high salaries and offer professional incentives.
Still, Taiwan’s biggest challenge is, in some ways, its small size. With just 23.6 million people, its domestic market is simply not large enough to foster platform companies, which rely on economies of scale. The only way to compensate for this structural challenge is to internationalize by plugging into overseas customers, users, and markets across a wide array of sectors. To accomplish this, Taiwan can look to other small economies for models: Spotify was incubated in Sweden, and Israel and Estonia have become highly competitive global hubs for safer software that is not buggy or vulnerable to cyber attacks or hacking.
Taiwan, however, has struggled to scale and internationalize technology companies beyond semiconductors. So it needs to herd investments into the emerging industries that lie at the heart of the government’s ambitious but still mostly aspirational plans. One example is machine learning, where Taiwan faces acute problems with scale for data. Companies that build machine learning applications must exploit huge troves of data, which has given mainland Chinese, Indian, and U.S. companies a clear edge because of the sheer number of people within their populations whose data can be used to develop these applications and algorithms.
But while scale can be a critical determinant of industry dynamics and, ultimately, a country’s economic power, it is not the only factor. Trust can matter even more, especially in industries that rely on sensitive government or personal data, those that have dual-use implications and touch national security, and those in which governments and businesses aim to mitigate supply chain risks. Despite the unprecedented scale of China’s economy, which offers significant market advantages, Taiwan has the essential ingredient of trust that China lacks. Bluntly put, in many areas, Taiwan is trusted, while China-origin products, services, and applications are not. And this distrust is growing rapidly, with politicians in many advanced industrial economies now calling for greater efforts to “China proof” elements of their supply chains and business models.
Taiwan should leverage trust as its pivotal comparative advantage. Fostering trust may prove more important than government planning documents, aspirational targets, and pledges to throw more money at a list of emerging industries. Trust can compensate for the disadvantages of Taiwan’s small scale if its firms become a more trusted tester and vendor than their larger global rivals.
Take biopharmaceuticals. The coronavirus pandemic has exacerbated preexisting mistrust of China’s role in global supply chains for medicines and medical devices. The U.S. Food and Drug Administration, for example, has recently expressed reservations about the quality of Chinese clinical trial data. China will continue to exert tremendous economic gravity because of its huge market and massive support for research and manufacturing, but growing hesitancy around Chinese supply, technology, and data in Europe, Japan, and the United States has led some multinational companies to reduce their dependence and seek reliable alternatives.
China is losing trust, most notably in advanced industrial economies, on three key metrics: security vulnerabilities, protection of intellectual property, and supply chain bottlenecks.
First, government and corporate information officers have suggested that Beijing could compel even private Chinese suppliers to build backdoors into commercial information and communications technology and other engineered products, hypothetically allowing China’s security services to surveil users or sabotage critical infrastructure. U.S. policymakers have used these very concerns to rationalize a series of bans on telecom equipment made by Huawei and ZTE—a domestic effort that American policymakers subsequently took global by attempting to discourage allies and partners from purchasing those products.
These concerns stem, in part, from China’s Cybersecurity Law of 2017 that some argue “legally requires Chinese companies to turn over information and comply with China’s intelligence and security services.” Concerns also stem from close ties between private “national champion” technology firms and the Chinese government. Regulators view these as intrinsic security risks that cannot be mitigated in light of escalating strategic competition between China and the West.
This is precisely why Taiwan has an opportunity to leverage trust as a source of competitive advantage in sectors like secure software. Commercial software products often rely on complex and extensive open-source software repositories, but if even one of these repositories is vulnerable to cyber attacks, it could compromise every commercial product that uses it. High incidence of poorly written Chinese software, coupled with concerns that state actors could force companies to embed security backdoors into their products, demonstrates the opportunity for Taiwan to establish itself as a trusted source for software that is more secure and better tested. But to establish such a competitive advantage, Taiwan’s government will need mechanisms to compel local IT companies to track down security vulnerabilities and adopt tools that verify quality.
Taiwan has a particular edge because it could leverage trust in its data to help feed a next generation of machine learning algorithms—a sector with compounded annual growth rates projected to approach 40 percent over the next four years. Of course, machine learning is a challenge for Taiwan because of the need for a large quantity of data. But quality matters too, since some of these algorithms also require data that are reliable, accurate, secure, and on hand. And Taiwan has already demonstrated its excellence in this area: it has fostered data quality through robust data protection and privacy standards, coupled with trust in the Taiwan government’s publicly available, accessible, and easy-to-use datasets—for example, the national health system database. Taiwan is well-positioned to demonstrate its expertise in trusted data by piloting commercial products and services that leverage data quality, not just quantity.
Second, long-standing questions about integrity and enforcement in China’s intellectual property rights (IPR) regime has led a growing number of companies to look for more reliable partners. According to the International Property Rights Index, China’s IPR regime has consistently scored lower than Taiwan’s since 2009. Taiwan, meanwhile, has made steady improvements in IPR protection and enforcement. In August 2019, for example, Taipei debuted a new pharmaceutical patent linkage system that enabled patent holders to assert their rights against generic applicants in litigation.
Third, a growing number of governments fret that overreliance on a single China-based source for inputs (for instance, refined cobalt and nickel), finished goods (including biomedical equipment), and technologies (such as active pharmaceutical ingredients) could tempt Beijing to use quotas and export controls as a political weapon. Chinese suppliers are leading producers of many materials and components, from rare earth elements to electric vehicle battery components to solar panels. And U.S. policymakers are determined to use administrative levers and policy tools to encourage diversification and return some key supply chains to the United States.
Over the past twenty years, Taiwan has tried and failed to replicate its semiconductor success story in biotechnology and precision medicine. But by leveraging trust in data—an advantage Taiwan did not have two decades ago—it could now become a destination for clinical trials where companies can rapidly and safely test new therapeutics and diagnostic technologies. It could also leverage trust to achieve success in clean energy by attracting energy storage companies to test the viability of their products with a Taiwan-based partner, piloting technologies in the local market before scaling them up internationally.
Taiwan faces a world of intensifying competition, but it is well-positioned to use trust to its economic advantage in ways that few others can. Companies weighing where to invest want to be able to trust in good governance; trust in political, administrative, and regulatory transparency; and trust in the transparent collection, use, and management of high-quality, public sector data. Size and scale aren’t everything, and this is becoming more apparent as investors demand better practices from host governments and partner companies. That is Taiwan’s greatest competitive advantage—and one it should leverage to a much greater extent.