CLUSTERING AND THE DEVELOPMENT OF BIOTECHNOLOGY IN TAIWAN

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1 Paper presented at the Conference on Clusters, Industrial Districts and Firms: the Challenge of Globalization. Conference in honour of Professor Sebastiano Brusco Modena, Italy. September 12-13, 2003 CLUSTERING AND THE DEVELOPMENT OF BIOTECHNOLOGY IN TAIWAN L. W. Murray Alev M. Efendioglu School of Business and Management University of San Francisco 2130 Fulton Street San Francisco, CA USA (415) (415) (fax) ABSTRACT Taiwan is recognized as a country that has successfully targeted economic development and has employed economic clusters as one of the primary means of realizing agglomeration economies. It is the purpose of this paper to provide a descriptive report of the most recent activities taken by the government in pursuit of global market dominance via biotechnologies. Keywords: Taiwan, biotechnology, clusters, industrial districts, industrial parks, incubation, strategic targeting JEL - code:

2 Introduction Taiwan is recognized worldwide as a country that has successfully employed a national industrial policy of targeting economic development in order to achieve preeminence in global markets. Their successes in electronics manufacturing, steel production, chemicals, and flexible manufacturing systems have been well-documented. (Kuznets 1988; Auty 1997) In the early 1990s Taiwan s government identified biotechnology as one of the eight technologies of focus under the Science Technology Development Plan. Industrial parks, which had been used successfully to localize economic development in the past, are being established for biotechnology. Direct linkages between primary research undertaken by universities and government-owned non-profit research facilities, and private firms and programs for the indirect subsidization by government of investment expenditures and employee training were initiated. As a result, both the number of firms engaged in biotechnology development and the number of Taiwanese workers employed in this field increased dramatically. Little has been written about the recent specific activities undertaken by these firms, the forms of linkages employed, the resulting technology spillovers, and the forms of incentives given. It is the purpose of this paper to provide a descriptive report of these most recent activities; much of the information has been obtained by direct translation. Taiwan s Industrial Policies Stages of Development. Taiwan, as is also the case of South Korea, Hong Kong, and Singapore, employed a specialized version of what has been identified as the East Asian Model of Economic Development. (Rodrik, 1995; Gwynne, 1993; Terry, 1996) Kuznets (1988) determined that in the case of Taiwan the model evolved through four distinct stages: 1) Pre-conditioning (i.e., emphasis on primary import substitution policies) 2) Export-focused, labor-intensive manufacturing 3) Industry- and/or market-focused manufacturing; e.g., heavy and chemical industries 4) Firm-focused technologies for global market penetration and dominance In 1995, the Biotechnology Industry Enhancement Development Plan was adopted, whose purpose was to develop an international competitive biotechnology industry by establishing Taiwan as a bridge between R&D and commercialization and becoming an Asia-Pacific biotechnology center in the area of R&D, manufacturing and operations. The goals of the plan were to generate US$4.3 billion in investment and to create annual growth rate in revenue averaging 25% in five years, as well as to facilitate the establishment of five hundred biotechnology companies within ten years. The development strategy of the plan is to establish or improve biotechnology regulations, to further encourage investment by the private sector as well as technology transfer from academic and research institutions for commercialization of biotechnology products, to enhance biotechnology professional and expert training and recruitment, to build protection of intellectual property rights, to promote international mutual certification, to construct a biotechnology industrial information database, and to 2

3 begin the development of industrial parks to house the various organizations and institutions required. (Lin, 2002) In 1996, the government established the National Science and Technology Program in Pharmaceuticals and Biotechnology for the purpose of providing overall coordination and even more intensive focus. This plan required the coordinated efforts of Taiwan s Ministries of Education, Health, Environmental Protection, Agriculture, and Economic Affairs, and the National Science Council. (Lin, 2002) In Table 1 we show the number of biotechnology firms that have been established. 3

4 Table 1: Biotech Industry over Time Year Established Number of Firms Prior to s s s Total 143 Currently these plans have resulted in the mobilization of 1,600 professional biotech scientists, academics, and researchers. The 2001 Life Sciences budget for Taiwan was NT$10.69 billion, and in 2002 the government budgeted increases of an additional 60% for these purposes. (See Tables 2 and 3) Table 2: Taiwan's Expenditures for Life Sciences Five year Taiwan Life Science Research Budget Unit = 1 B dollar Academia Sincia NSC COA MOEA MOH Growth Rate % 13.70% 7.42% 29.26% NSC = National Science Council, COA = Council on Agriculture, MOEA = Ministry of Economic Affairs, MOH = Ministry of Health Source: Sun (2001) Table 3: Five Year Budget Forecast Year Field Total ( ) Average % Increase Public % Private % Non profit % Yearly Total % Source: Sun (2001) 4

5 Operationally, biotechnology innovations involve many different organizations at different stages of the innovative process. In Taiwan today, the activities require for basic research require that the efforts of six different governmental agencies, university researchers, and the National Health Research Institute be tightly coordinated. To extend the suitability of the innovation these same governmental agencies and universities are joined by specialized no n-profit organizations and private companies, all of which are incubated at specific locations. If the innovation is only regarded as successful if the final stage of development is the act of preparing the resulting products for sale in worldwide markets. To operationalize plans for biotechnology development six governmental organizations must be mobilized. Taiwan s Academic Sinica, which consists of six university-based life science research institutes, directs basic and applied research toward bio technology development goals, in agreement with the investment decisions made by the Executive Yuan. The National Science Foundation directs research funding towards desired goals. During , this organization spent NT$24.8 billion in direct support of biotech and pharmaceutical R&D. ( Statistical Overview, 2003) The Development Center for Biotechnology (DCB) is partially supported by the government on a contractual basis. It was established in 1984 as an autonomous R&D organization for the pur pose of promoting and upgrading the Taiwanese biotechnology industry. This Center plays a particularly important linking role, aligning the efforts of academic-based research with the efforts of private firms, and is largely responsible for technology transfer from the developing agency to private enterprise. It is also charged with importing biotechnologies and transferring them to domestic industries. (Development Center, 2003) Technology Parks, Zones, and Industrial Districts Taiwan s use of technology clusters has led to some spectacular successes in electronic component manufacturing, stell production, chemicals, and flexible manufacturing systems. During the 1990s it was decided to concentrate the location of the related non-profit organizatio n and biotechnology firms who were engaged in discovery, development, and/or commercialization of biotech products within specific areas (Ho, 2002). These areas include: 1. (North) Tapei NANKANG Software Park(Life Science Biotechnology)* 2. (Middle)** Chu pei Biomedical Park (Biomedical technology) 3. (South)** Tainan Biotechnology Industrial Park 4. (South)*** Southern Taiwan Agricultural Biotechnology Park * NANKANG Software Park biotechnology building has just been constructed. ** Chu Pei Biomedical Park and Tainan Biotechnology Industrial Park has not completed yet. *** The PingTung location is not the designated location for Southern Taiwan Agricultural Biotechnology Park according to Executive Yuan s decision in June (Liberty Times 2001) As shown in Maps 1 and 2, the current Taiwanese biotechnology companies are mainly located in the following areas. Taipei City Neihu Technology Park (Life Science Biotechnology) ( ) 5

6 Taipei NANKANG Software Park(Life Science Biotechnology) Taipei Shih Lin Industrial Park Taipei County Wu-Ku Industrial District ( Taipei Academia Sinca Hsinchu Science based Industrial Park. Taichung, Incubation Center of National Chung Hsing University. Tainan Science-based Industry Park Incubation Center Of National Dong Hwa University Others public or private industrial parks 6

7 Map 1 - Science and Industrial Parks in Taiwan 7

8 Map 2 - Industrial Parks in Taiwan Agricultural Biotechnology Park in Pingtung.) Taiwan, originally, spread its industrial zones throughout the country while concentrating its industrial parks around key transportation nodes and population centers. Of the 162 current biotechnology firms operating in Taiwan that have disclosed their primary operating address, 132 are located in the areas identified above. Seventy-two of these firms are located in Taipei, twelve in the Tainan, nine in Taichung, and twenty-seven in Hsinchu. Three of these centers/parks were on the west and one, Taitung, on the east side of Taiwan Island. (Since 2000 the government has shifted from also developing the east side of Taiwan back to only develop biotechnology on the west side of Taiwan. Thus, the major clusters are in Taipei, Hsinchu, and Tainan. In addition, the Executive Yuan has requested that the Ministry of Agriculture to reevaluate its decision to develop an Closely located, strategically arranged, and institutionally linked clusters have been successfully used by a number of countries as a means of operationalizing their economic development plans. (Shaver and Flyer, 2000) Taiwan has a particularly impressive record of successes from their industrial parks, zones, and areas. For example, the science park in Hsinchu was located adjacent to three major institutions: the Industrial Technology Research Institute, National Hsing Hua University, and National Chao Tung University. While the academic research from the Universities have provided the means for technological development, in congruence with the guidance of the Technology Research 8

9 Institute, the Universities have also provided the private firms that cluster closely to these institutions with a ready source of trained professionals. (Gwynne, 1993) Taiwan s government has played a significantly different role than that of the governments of South Korea, Singapore, and Hong Kong. Their role has been more supportive than interventionist; more cooperate rather than coercive. Historically, Taiwan developed a health disdain for the vagaries of monopoly power which caused them to devote greater efforts in support of new business ventures, and in support of small- and medium-sized firms. (Park, 1999) Economic clusters have been shown to be most effective in encouraging agglomeration economies. First postulated by Marshall (1890), further developed by Weber (1909), Isard (1956) and Myrdal (1957, and then linked directly to the theory of the international firm by Markusen (1995), these economies have been shown to strongly impact the potential for business firms strategic advantages. (Porter 1998a; 1998b) Public enterprises have been placed within these clusters to facilitate closer coordination and to insure that available resources are in place to help with the critical steps of technology transfer and commercialization. These organizations played a significant role in Taiwan s post-war development (Rodrik, 1995), but were substantially reduced in size and influence by the government in order to permit the private sector to effectively develop the technologies that were developed. For example, within capital goods industries the public enterprise share of manufacturing output fell from 43% to 15% in machinery and from 65% to 22% in metal products. (Schmitz, 1996) Clusters of firms in related industries have historically coalesced around a critical mass of business activity. (Bahrami and Evans, 1995, p. 64) These clusters have resulted in both internally-derived and externally-derived economies of scale, reduced the transactions costs of dealing with suppliers and customers, and are evidenced by extensive knowledge spillovers. (Braunerhjelm and Johansson, 2003; Mathieu and Gibson 1993, Brown 2003; Shaver and Flyer, 2000; and Krugman, 1991a and 1991b) Further, Stern, Bridgewater, and Wang (2003) speculate that clusters actually enhance the power of Quanxi (i.e., friendship with implications of a continual exchange of favors ) thereby providing social and cultural benefits from such location linkages. Finally, research has shown that technology clusters where the indigenous technologies are weakest and where capital, skilled manpower, suppliers and or distributors may be lacking in quantity and quality, clustering produces the greatest positive results. (Shaver and Flyer 2000) Thus, as an economic development tool employed by a country that is attempting to establish itself in a technology, clustering would appear to be an ideal solution. 9

10 Summary and Conclusions Taiwan s efforts and policies to develop its biotechnology industry, and its strategic use of clusters have been quite successful. Today there are over 160 private firms engaged in the development of biotechnology products in Taiwan today. These firms range in size from 3 to approximately 400 employees. Since 1979, when the government began to target the development of biotechnology industry, the number of biotechnology companies has increased at a compound rate of growth of 12.7%. ( New Industry, 2003) Almost all of these firms were established as small businesses, with 74% initially having fewer than 50 employees and 90% with initial capitalization of NT$500,000 or less. Over the years, there has been a major shift in the focus and firm concentration of this industry. 15 of the firms currently engaged in biotechnology were established prior to 1980 and were focused on traditional Chinese medicines. Since 1995, more than 300 biotechnology firms were established, with 115 of them continuing to be a part of this industry. Today, Taiwan s biotechnology firms primarily focus on developing medical devices, biologics and traditional Chinese medicines, with approximately 60% of these firms being primarily in one of these three endeavors. It is far too early to have definitive proof of the success of the economic clustering. Since biotechnology products take on the average of years from idea to commercialized product almost all of these firms are now operating within the product development stage. By 2005 it should be possible to begin to track the number of new patents awareded to firms within the cluster, changes in employment, revenues from the sale of newly approved biotechnology products, and changes in the firms investments in R&D to evidence the impact of the clustering on the development of this industry. 10

11 National Innovation Plan Flowchart Upper Level Mid Level Basic research Application R&D Lower Level Technology Development Commercialization Initiating Organization Academia Sinica Ministry of Education National Science Council Government Department Department of Health Council of Agriculture Ministry of Economics Affair, MOEA Executing Organization Academia Sinica Academic Research Institution All University with Life Science Department All University with Innovation and Incubation Center National Health Research Institute DCB Industrial Technology Research Institute, Biomedical Center Non -profit Animal Technology Institution of Taiwan Food Industry Research and Development Institute Pharmaceutical Industry Research and Development Institute New Biotechnology Companies Business Sector Traditional Industry National Business/Research Sun, Zhi Li. Building an Innovation System of Knowledge-based Economic Operations: Taiwan s Current Development Status and Strategy in Biotechnology Industry. Taipei, Taiwan: Taiwan Economics Research Institution, 2001.

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