Tue, Jul 13, 2004 - Page 8 News List

Innovation is essential to boosting profit levels

By Kung Ming-hsin

Taiwan's GDP per capita was US$3,897 in 1986. As the NT dollar appreciated, this figure grew about 2.4 times within a decade and reached US$13,073 in 1996.

It then fluctuated between US$14,000 and US$15,000, and last year's figure was US$12,725.

For years the GDP per capita in South Korea had been about US$2,000 lower than here. But last year, the figure exceeded US$12,000 and reached US$12,628 -- only US$97 lower than GDP per capita in Taiwan.

The fluctuations in GDP per capita, calculated in US dollars, are affected by factors such as exchange rates and prices of goods. The rapid growth of South Korea's GDP over the past two years correlated to increased prices and currency values. Looking back at Taiwan's situation, the NT dollar has dropped while most prices have been stagnant. But the growth rate of Taiwan's GDP was still higher than that of South Korea last year.

In terms of the nation's overall economy, stable prices are indeed a positive phenomenon. But it's abnormal to be unable to increase prices on products competing in the international market while our output is constantly increasing and added value remains stagnant. This situation more or less reveals that the manufacturing mode of this economy focuses on increasing quantity, not added value. The nation's contract manufacturing (CM) industry serves as an example.

Most people would agree that at a time when Taiwan is becoming a developed country, its industry must transform from investment-oriented to innovation-oriented. Technology research and development (R&D) is a key foundation for an innovative system. Judging from major technology indexes, Taiwan has already come out on top in most international rankings compared with South Korea. The problem is that the results of our technology R&D have not improved the added value of the industry.

Of course, we can intuitively claim that our technological innovation might be disconnected from the industry's needs. But could the problem also be that our industry has been tightly locked in by the close international manufacturing division of labor? If that is the case, any major innovative reforms will be ineffective. Even if manufacturing costs are reduced because of product innovation, the profits go to those international brands, not to their contractors.

The Taiwanese companies operating in China serve as an example. Apart from Taiwan's manufacturing companies seeking a "second spring," most Taiwanese companies invest there at the request of international brands. Once they relocate to China, the reduced costs will be deducted from their original payments. Thus the true beneficiaries are always those who dominate the division of labor, not the participants.

People often take an industry's use of Chinese resources as a measure to evaluate the future development of the sector. Such an observation is not only dangerous but also biased. In the past decade, Taiwan, Singapore and Hong Kong embraced Chinese resources the most. But their economic performance actually lags far behind that of smaller European economies. The reason is that those smaller European countries do not have an environment of cheap manufacturing costs, and can only innovate to boost value.

If the thinking in Taiwan's industry still focuses on saving manufacturing or transport costs -- a strategy which has been proven unable to increase added value -- it's certainly the government's undeniable responsibility to shift its rewards to enterprises that devote themselves to innovative R&D activities.

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