Industrial development theory argues that clustering helps small and medium enterprises to compete in global markets. But does it also help them to climb the value chain? Is globalisation increasing the importance of location or diminishing it?

A paper from the Institute of Development Studies puts the cluster theory to the test using as a test case the concentration of computer and related activities in Taiwan. Arguing the need to distinguish between production and knowledge systems and to analyse local clusters alongside global value chains, the paper shows that in the Taiwanese personal computer (PC) industry the importance of clustering has decreased in the production system but remains high in the knowledge system.

Taiwan entered the IT industry in the 1980s by producing monitors and terminals and assembling fake Apple II computers and IBM-compatible machines. By 2000 the industry’s total output (including offshore production) had reached US $47bn. Taiwan now plays an indispensable role in the global PC supply system. In a wide range of PC sub-products it leads the world – making more than half of all monitors, motherboards, scanners and notebook PCs.

Taiwan’s PC cluster lies in the small area between Taipei and Hsinchu. A large number of subcontractors are engaged in separate production stages of PCs and peripherals. While some high-value components and electronic parts are imported, the bulk is supplied by highly specialised, small, local enterprises. The industry has been able to grow quickly by securing contracts for original equipment manufacture (OEM) – a form of subcontracting under which the supplying firms make a whole product to a design specified by the buyer who then sells the product under the buyer’s brand name.

The paper shows that:

• Clustering has contributed to upgrading as the industry shifts from mature sub-products (such as monitors, motherboards, keyboards and mouse units) to notebook PCs, scanners and CD/DVD/RW-drives.
• Production is increasingly unclustered: most standardised sub-products are now produced offshore in mainland China while high-end production of notebooks remains in Taiwan.
• The well-developed subcontracting system which was key to Taiwan’s competitive edge in the 1990s is declining as production goes offshore.
• The short lifespan of product models in the PC industry (motherboards, for example, become out of date within six months) has required substantial in-house investment in research and development.
• Taiwan has experienced considerable functional upgrading from OEM to own design and manufacture (ODM) to Global Logistics.

Wider implications of the study of the Taiwanese PC cluster are that:

• decentralisation of production stages outside a cluster does not necessarily indicate the decreasing importance of location
• a cluster’s competitiveness is sustained by shedding simple production tasks elsewhere
• upgrading through global linkages necessitates establishing a local base for continuous innovation and development of a unique product/service mix
• qualitative transformation of linkages of the local producers with their global customers is critical to upgrading
• views on the importance of state support for the development of the PC industry differ a great deal.

Source(s):
‘Upgrading in the Taiwanese computer cluster: transformation of its production and knowledge systems’, Working Paper 186, Institute of Development Studies, by Chikashi Kishimoto, April 2003 Full document.

Funded by: FASID, Japan

id21 Research Highlight: 13 November 2003

Further Information:
Hubert Schmitz
Institute of Development Studies
University of Sussex
Brighton BN1 9RE
UK

Tel: +44 (0)1273 606261   
Fax: +44 (0)1273 621202 / 691647
Contact the contributor: H.Schmitz@ids.ac.uk

Institute of Development Studies (IDS), UK

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