The state-firm collaboration that led to the success of the East Asian firms dominating the global electronics market today are instructive for other countries today vying to capture, or re-capture, global market shares, say Reda Cherif, Fuad Hasanov and Gary Xie.
The global rush for semiconductors over the last two years has shown the significance of the sector, with chips powering a variety of products, from computers and cars to washing machines and watches. It has also shown the extent of the concentration of production in a handful of East Asian economies. Samsung Electronics in Korea, TSMC in Taiwan (China), Hitachi in Japan, and CSM in Singapore became major players in the global electronics market at some point despite their limited prior experience in this cutting-edge technology. TSMC and Samsung still dominate this market today. Their stories, in particular the type of state-firm collaboration that led to success, are instructive for other countries today vying to capture, or re-capture, global market shares in semiconductors, or for that matter, other sophisticated sectors.
In a study of these cases, Cherif, Hasanov, & Xie (2021) argue that the state played an important role to mobilise limited resources and support national electronics champions to leapfrog into the technological frontier at an early stage of development. Their experiences can be characterised by the 4A framework—ambition, autonomy, accountability, and adaptability.
First, the public sector provided the impetus, setting ambitious goals and designing concrete policies to support leapfrogging into the technological frontier. Firms received incentives, but in some instances were coerced, to organise, learn, innovate, produce, and export semiconductors. Eventually, these goals were embraced by the firms themselves to keep their competitive edge and excel. In Korea, since the early 1970s, Samsung, among other family-owned conglomerates known as chaebols that were traditionally focused on trading and construction, were directed toward electronics, benefitting from preferential treatment under the five-year plans. In contrast, TSMC, started as a relatively small firm focused on electronics, and its very creation in 1987 was the result of a spin-off out of a public research institute, benefitting from trained staff, financing, and capital equipment and technology transfers under its aegis. It was part of an ambitious effort that targeted the development of electronics as a top priority in the early 1970s.
Second, while the state set ambitious goals and put in place incentives, giving sufficient autonomy to firms was crucial to shield them from undue interference. The existence of overarching technocratic development institutions, such as Japan’s MITI or Singapore’s EDB, protected firms from interventions or abrupt policy changes. In the late 1970s, MITI set up a research consortium, including Hitachi and other leading electronics firms. The goal was to reach the frontier in Very Large-Scale Integration (VLSI) technology. While MITI set the agenda, financed and organised the consortium, participants were allowed extraordinary autonomy over research, staffing, and intellectual property. In Singapore, CSM, despite being a state-owned enterprise (SOE), was managed on a commercial basis and shielded by the EDB from political interference. The large share of foreign staff, as high as 60 per cent, as well as several foreigners on its board of directors from prominent technology multinational companies (MNCs) such as GE, Hitachi, and Motorola, allowed the company to be largely independent.
Third, incentives and support from the state were given conditionally on concrete and measurable market signals, especially from international markets. For example, Samsung was held accountable by the government for its export performance, in exchange for preferential treatment. Firms that exceeded their objectives were rewarded with subsidised credits, import licenses, and administrative support. In contrast, failure was met with revocation of trading licenses and other punishing measures. Only high-performing subsidiaries were allowed to survive, with failing units restructured or let go.
Lastly, firms had to display a lot of flexibility in the face of a changing environment. Adaptation took place organically to tackle emerging trends in international markets along with technology, demand, and the structure of value chains, in some cases beyond or in opposition to the orientation of the industrial policy of the day. Organisational restructuring such as decentralisation and coordination among units, operational autonomy with financial constraints, and a more meritocratic system helped firms innovate and find new markets. However, success was not guaranteed as illustrated by the example of CSM. Established in 1987, the same year as TSMC, CSM vigorously pursued ventures with MNCs. However, despite its initial success in the 1990s, the lack of scale and insufficient in-house R&D created big headwinds for CSM in the new environment of the 2000s, when fabrication technologies became much more complex and licenses much more costly. CSM was eventually sold off by the Singaporean government in 2010.
The 4A model has policy implications for both advanced and developing economies to help design planning institutions and support domestic industrial upgrading. The state-firm collaboration as exemplified by the 4A features—ambition, autonomy, accountability, and adaptability—is key to a successful industrial policy that promotes sophisticated export sectors. The lessons suggest that the state should be ambitious, pushing firms to export and innovate while giving them autonomy to achieve those goals. The support and autonomy must come with strict accountability, through enforcing intense domestic and international competition. More important, both the state and firms need to adapt quickly to changing circumstances to ensure long-lasting success.
The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.