An examination of Taiwan's innovation policy measures and their effects

Abstract

Much greater emphasis is now being placed upon innovation in recognition that it plays an increasingly important role in enhancing industrial technology, thus the governments of many countries are currently adopting specific strategies aimed at stimulating innovation within firms. Taiwan is no exception; however, since the industrial structure of Taiwan comprises predominantly of small and medium enterprises (SMEs), their willingness to engage in innovative activities remains rather low. Furthermore, smaller firms are usually deterred from innovating because of scale barriers in some industries, particularly in the high-tech industries. The government in Taiwan has implemented a number of policy measures in recent decades aimed at enhancing firms' innovative investment, with notable policy measures focusing on speeding up the development of the high-tech sector including: establishing the Hsinchu Science-based Industrial Park to provide an environment conducive to the high-tech industry; organising innovation alliances to spread out firms' R&D risks and secure first mover advantages; expanding the government–sponsored research institutes to serve as a technology transfer channel for the private sector; providing tax incentives to absorb some of the costs of firms' R&D activities; providing access to sources of venture capital. In this study, we examine the effects of policy measures on firm productivity at firm level, since these policy measures are aimed at boosting the innovative environment within industry as a whole, promoting innovative activities and further enhancing firm productivity. Based upon a fixed-effects model extended from the Cobb-Douglas production function, and a sample of 136 manufacturing firms listed in the Taiwan Stock Exchange during the period 1994–2000, the results demonstrate that government innovation policy has had a significant effect on productivity within firms.