Commentary

How Taiwan’s businesses can foster real innovation

(CNA photos)

• Publication Date：07/15/2012
• Source： Economic Daily News

In a recent speech Morris Chang, chairman of Taiwan Semiconductor Manufacturing Company Ltd., said the most valuable commodity in the information age is not knowledge, but innovation.

He is not the first to have emphasized the importance of innovation. During the last few years, businesses in Taiwan have been faced with enormous challenges, but efforts to initiate change in the nation’s industrial structure have so far not been very satisfactory.

Thus many concerned observers have made suggestions on how to fix the nation’s industrial sector. These suggestions vary enormously; but all stress the need for innovation, just as Chang did in his speech. Being innovative, however, is easier said than done. Everyone knows the importance of innovation. But how is it to be achieved? Where is it to be found? These are the really critical questions.

On the whole, because of their limited resources and concerns over technological competitiveness, most manufacturers in Taiwan have practiced what can be called a “Speedy No. 2” policy. What this means is that they try to follow quickly in the footsteps of leaders in their respective industries; and by so doing they are able to grab a certain share of the market. But markets have become more mature, and differences between products are slighter than they used to be. This means that economies of scale and efficiency have gradually become the most important factors in deciding outcomes.

At the same time, the global movement toward lower prices has also helped make economies of scale more important than ever before. And as the trend of producing low-cost goods has become a tidal wave sweeping the entire globe, profits have been reduced further. Indeed, razor-thin profit margins have now become a living nightmare for many businesses. Thus a critical question facing many Taiwan businesses becomes: What should they do to free themselves from this kind of price-slashing innovation?

They need to improve quality and develop their core competencies, so that instead of always trying to lower production costs, they can create goods with added value. To do this, the following steps are required:

To begin with, large businesses should be encouraged to undertake innovation that increases product application and strengthens business models. This is innovation that leads to higher consumer perceived value. In fact, as markets become more mature, even large multinational corporations are faced with the difficulty that modular innovation does not result in any competitive advantage. They can acquire a competitive edge only by developing new markets, finding new applications for their products, and creating new service structures. In this regard, local companies have a lot of catching up to do.

As to the government’s role in all this, it should make a greater effort to support research and development, especially now that there is an economic downturn.

It should not only try to encourage businesses to achieve technological and product innovation, but also guide them in such a way that they are able to develop new applications and create new business modules based on the actual needs of the market.

In this way, innovation that was limited to the technological and product level will have wider influence and greater value, thanks to its joining forces with application and modular innovation—in what is known as systemic innovation. With this type of innovation, Taiwan companies will be able to enhance the value of the technological and product innovation experiences they have accumulated over the last few decades and create new perceived consumer value.

Next, networks that can create added value should be encouraged, for the future of industry lies in digitalization. In the coming era, only a few giant firms that straddle many sectors will have the wherewithal to innovate on their own; all other companies, especially small and medium enterprises, will be able to innovate only by pooling their efforts, by helping their customers and working together with them.

This is especially true today, after so many industries have been forced to restructure in the wake of the Great Recession, and when many new SMEs are expected to emerge. In such a scenario, the government can play the role of a third party whose purpose is to reduce transaction costs involving firms in different fields. By encouraging SMEs to network and cooperate, the government can help them complement one another and restructure—which will in turn increase their overall innovative effectiveness.

Finally, in this era of open innovation, an environment should be created whereby innovative resources can circulate and be joined together. As technology becomes more standardized and mature, the model of innovation has also changed, from closed innovation carried out by enormous, well-funded labs, to open innovation involving many parties, where patents are bought and sold, where collaborative R&D efforts, involving many different companies, are the norm.

With such open innovation, the business model determines the kinds of innovative resources that a company will seek from outside sources; it also determines which resources a company will provide to the market, so that other companies can exploit the full potential of these resources.

Objectively speaking, when it comes to innovation, many Taiwan companies are at a competitive disadvantage: They cannot devote as many resources to innovation as multinationals, and are hence in danger of losing out to their bigger rivals.

But with open innovation, local firms can combine their innovative resources and attract complementary innovative resources from the outside. In this way, as they grow and develop they will be able to carry out innovation that matches their business modular needs. (HZW)

(This editorial originally appeared in the Economic Daily News July 3, 2012).

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