A decade of stagnation and financial crisis have discredited the heavy-handed industrial policies of Japan and Korea, particularly preferential allocation of capital to large companies. In contrast, the remarkable growth of specialized yet flexible computer and semiconductor firms in Taiwan has been supported by a very different type of industrial policy. Taiwan's "ITRI model" combines development initiative and engineering support from the quasi-governmental Industrial Technology Research Institute with commercialization by a mass of small to medium-sized firms in the adjacent Hsinchu Science-Based Industrial Park. The government provides technological support for both long-term development and specific innovative products, but it has exercised extreme restraint in the allocation of capital and sponsored the development of a thriving venture capital industry.
Some industries, however, have proved resistant to the ITRI model. A prime example is hard disk drives. Hard disks combine high barriers to entry and brutally short product cycles. Moreover, they lack the stable architecture underlying notebook computers or monitors. Even with help from ITRI, Taiwan's small firms proved unable to keep up with the rapid development and growing economies of scale in hard disks. However, when they failed at disk drives, they proved capable, with additional assistance from ITRI, of moving quickly to related products with much lower barriers to entry, such as CD-ROMs and CD-R disks and drives.
Not withstanding the limitations revealed by the hard disk case, Taiwan's ITRI model is likely to attract increasing attention from developing countries that recognize the dangers of the Korean approach, yet hope to improve their standing in the international division of labor.
