Upgrading through innovation in a small network economy: insights from Taiwan's IT industry

Abstract

This paper analyzes the recent experience of Taiwan's information technology (IT) industry to explore the challenges and opportunities faced by a small economy that is deeply integrated into global networks of production and innovation. I introduce a conceptual framework to examine how specialization, learning (‘absorptive capacity’) and innovation enhance the potential for industrial upgrading. Finding the right balance between firm-level and industry-level upgrading and between domestic and international elements is a moving target and requires permanent adjustments to changes in markets and technology. Three findings distinguish this paper from prior work. First, absorptive capacity is critical for Taiwan's attempts to upgrade its IT industry through innovation. Second, Taiwanese firms now must increase R&D to avoid diminishing returns of network integration. Third, integration into diverse networks of production and innovation may well provide new lower-cost opportunities for ‘industrial upgrading through innovation’. ‘Technology diversification’, which combines incremental and architectural innovations, can serve as a complementary and arguably less costly option to ‘technology leadership’ strategies.