Taiwan’s government is in the process of setting up a new digital ministry in order to spur the development of the digital industry, with the supposed aim of integrating the various digitalization strategies of multiple existing agencies and streamlining their implementation. Among Taiwan’s key digitalization strategies is the Digital Nation and Innovative Economic Development Program (DIGI+) 2017-2025, which aims to “drive [the] industry to adopt digital development,” “realize a fair and active internet society with equal digital rights,” and “bridge the digital divide in rural areas.”
However, while these objectives are commendable, Taiwan has its work cut out for it.
Does Taiwan’s Wealth Inequality Impede Digital Adoption?
For one, Taiwan still pales in comparison with the other advanced countries in terms of internet access – Taiwan’s mobile broadband subscriptions per 100 population ranked only 23rd globally in 2019 while fixed-broadband internet subscriptions per 100 population ranks 46th. The percentage of internet users among the adult population in Taiwan ranked 14th. This is by no means low – internet users comprise 92.8 percent of the population in Taiwan as compared to 95.9 percent in South Korea, 94.7 percent in the Netherlands, 89.7 percent in Germany, and 84.6 percent in Japan. But in Taiwan, the information and communications technology (ICT) sector ranks as the largest in the world as a share of GDP (and in fact saw the fastest growth in the value added to GDP between 2010 and 2017). In monetary terms, Taiwan also ranks as having the ninth largest ICT sector globally. In addition, Taiwan’s export market share in the computer, electronics, and optical industry ranks among the world’s largest as well (Taiwan’s exports comprise 5.58 percent of global exports, as compared with the United States’ 7.26 percent and South Korea’s 6.76 percent). That raises a question as to why there exists a disparity between Taiwan’s production capabilities versus individual access.
It can be argued that Taiwan’s high business ownership rate (the eighth highest in the world) coupled with one of the highest profit shares relative to GDP among advanced economies has resulted in Taiwan having one of the highest wealth inequalities among advanced countries (when not accounting for countries in the Nordics, Switzerland, and parts of Western Europe where wages are among the highest in the world and can better compensate for the effects of wealth inequality). In fact, the average profit in monetary terms in Taiwan is equivalent to South Korea, but wages in Taiwan are still almost only half those of South Korea.
Indeed, global studies have shown that countries with higher GDP per capita have higher adoption rates of new tech. While Taiwan’s economic growth and tech adoption were rapid in the latter half of last century, the question is whether Taiwan is starting to fall behind, given the widening wealth inequality and depressed wage share (among the lowest in the advanced countries). For example, McKinsey highlighted that “the adoption of digital technologies in Taiwan has been inconsistent,” and Taiwan is also lagging behind other advanced countries in terms of the adoption of digital cashless payment services, digital retail banking services, and digital wealth management.
The irony therefore is that Taiwan has been able to maintain its lead as one of the world’s largest semiconductor and ICT manufacturers, but barriers continue to exist in Taiwanese’s ability to access emerging tech. The inequality in internet access also impacts whether digital skills can be equitably acquired. Indeed, studies have found that lower income (in addition to older and less educated) Taiwanese have reduced opportunities to use the internet.
Is Taiwan’s Overreliance on Low Costs Impeding Innovation?
The World Economic Forum highlighted that industrial technology adoption is dependent on whether “local firms can invest to bring in technology from abroad or from other sectors or companies, and [whether] a country can exploit spillovers from the foreign direct investment (FDI) of international companies.” However, while Taiwan’s FDI flows into the country are actually among the highest in the world, and its electronic production has excelled in its upstream, it pales in comparison with its counterparts downstream. In other words, Taiwan’s businesses are topnotch at producing electronics products as intermediate inputs for the production of final goods in other countries, but they have not been able to compete at the level of producing final products for exports.
The economic value of Taiwan’s patented inventions as well as the originality (the extent to which inventions rely on diverse knowledge sources) and radicalness (the extent to which a patent cites technology classes beyond which it is classified) of Taiwan’s patents have also been ranked poorly as compared with other highly-innovative countries (with more than 200 patents). This suggests that Taiwan’s businesses have not been able to exploit the spillover effects from FDI the way Japan and South Korea have been able to do so, for example – Japan and South Korea rank second and fourth, respectively, in terms of upstreamness, and third and tenth respectively for downstreamness. Taiwan ranks first on upstreamness but last (20th) on downstreamness among the countries compared.
However, the dependence on contract manufacturing by the majority of Taiwanese firms means that Taiwan has had to be content with lower profits than other advanced countries more successful in downstream production, which therefore exacerbates Taiwan’s low-wage situation. Such a situation has perpetuated Taiwan’s wealth inequality and impacted on the ability for equitable digital access. There are long-term implications – several studies have found how low wages drive down the motivation to innovate, which could in part explain Taiwan having among the lowest employee entrepreneurship rate among advanced countries (with another factor being the hierarchical structure in Taiwan and other East Asian economies). On the contrary, higher wages could boost innovation “by forcing [companies] to abandon low-skilled labor” and pushing them to take on higher risks and use new technologies to transform.
An important question to ask therefore is whether the complacency among traditional Taiwanese businesses has impeded Taiwan’s technological evolution from manufacturing high-tech components toward developing new final products for exports. Indeed, historically, the adoption of new technologies has been faster in countries where the vested interests of current technology incumbents are weaker and their ability to lobby lawmakers to delay the adoption of new technologies has less sway. As an example, Taiwan’s semiconductor industry, which comprises 15 percent of Taiwan’s GDP, is still largely focused on small and medium enterprises (SMEs). While there is vertical and horizontal value-chain integration across the industry as a whole, the individual companies are mostly only capable of providing solutions at singular stages – unlike the majority of companies in South Korea, the United States and Germany, which have achieved full integration. Taiwan’s semiconductor companies are still SMEs more interested in being foundries to manufacture chips designed by other companies, and integrated device manufacturers like the Taiwan Semiconductor Manufacturing Corp (TSMC) and United Manufacturing Corp (UMC) are still the exception. This has led to the perception that Taiwanese manufacturers simply do not have the technological expertise to fill in the gap for South Korea, as seen when Japan imposed export controls on South Korea last July and had to turn elsewhere for high-end components and technologies.
The intense competition among Taiwanese SMEs has driven down prices, and the overreliance on low costs and wages (wages were stagnant for the large part of the 2000s in Taiwan) could have played a role as a distorting intervention that has propped up the inefficient sectors in Taiwan and resulted in less impetus for technological adoption. In the long run, this could result in Taiwan falling behind its competitors. A lag in new technology adoption between countries has been found to account for a substantial fraction of the per capita GDP disparities between developed and less developed countries. Also, since the early 2000s, Taiwan’s GDP per capita has seen slower growth than other advanced countries with similar GDPs per capita and remains the lowest among the Asian Tigers.
Consequently, the talk in Taiwan now has shifted to how it could try to develop low-cost innovation. While such a strategy might work as an interim measure due to the lack of similar high-tech manufacturing capacities in countries like Thailand and Vietnam, there is the question of when these countries will eventually catch up with such cookie-cutter innovation. In the end, Taiwan has squeezed itself into a corner and continues to bang its head against the wall with its refusal to recognize that its underlying structure needs change.
Taiwan’s Digital Transformation Requires a Shakeup from the Current Stagnation
Moving forward, if Taiwan is to succeed in its digital strategy, in “realiz[ing] a fair and active internet society,” and in promoting digital development among its industries under the DIGI+ plan, then there needs to be a fundamental mindset shift and a new approach toward investing in Taiwan’s industries and citizenry. Mark Lam, a visiting expert at the National Cheng Kung University (NCKU) focusing on sustainable development goals and innovation, made the point that Taiwan would need to abandon its blind focus on cost cutting and short-term gains, and to start paying its employees globally competitive wages, in order to reverse Taiwan’s wage and economic stagnation. Only then can Taiwan regain the comparative innovation edge it once had in the 1980s and 1990s – while Taiwan’s patent quality was able to catch up to the United States by the 1990s, even faster than South Korea. Taiwan has, however, since fallen behind.
Evan Feigenbaum, vice president for studies at the Carnegie Endowment for International Peace, has called for Taiwan to reorientate itself from the semiconductor industry, in order for Taiwan to “compete based on innovation rather than just continually moving up the value chain in legacy industries.” Lam is also calling for Taiwan to diversify its industries, such as moving into medical-related industries and sustainability industries. Indeed, the COVID-19 pandemic has awakened Taiwan to its potential of integrating digitalization into its pandemic response strategy. At a conference in October this year discussing the use of artificial intelligence (AI) in Taiwan’s pandemic response, Professor Chang Shan-chwen, a key member on the Central Epidemic Command Center (CECC) managing Taiwan’s COVID-19 response, revealed that Taiwan had not included digitalization as part of its pandemic response strategy prior to COVID-19. It was nonetheless very quickly able to do so thanks to its latent tech expertise, via the coordination of its Digital Minister Audrey Tang and with the help of companies like Taiwan AI Labs founded by Ethan Tu. Taiwan’s President Tsai Ing-wen last October also unveiled strategies to build up a comprehensive supply chain for green energy to turn Taiwan into a renewable hub – Taiwan is projected to become the largest offshore wind market in the Asia-Pacific by 2035. The question therefore is how to harness the tech expertise that exists in Taiwan to promote more diversified industrial development and upscale innovation.
Taiwan Needs a New Social Compact to Undergo Digital Transformation
Fundamentally however, Taiwan needs to stop putting businesses on a slow drip of prolonged depressed wages and costs, which has dampened their risk-taking spirit. There is therefore an urgent need to start implementing measures to push businesses to transform and evolve in their mindsets – businesses are not going to act if wages and costs continue to remain low, which provides no added impetus to innovate, diversify into other industries, or integrate digitalization into their processes. While Tsai and Vice President William Lai have both pointed to NT$30,000 as the optimal minimum wage, Taiwan’s minimum wage will still only be raised to NT$24,000 in 2021, which is 20 percent below this “optimal” level. Moreover, even as the government is planning for the setting up of a new digital ministry, Open Knowledge Taiwan Ambassador T. H. Schee highlighted how the process has been “extremely opaque” and that “public consultation has never been done, not even once.”
The way things work in Taiwan therefore needs change, and this needs to start all the way from the top. In fact, Taiwan needs to reimagine how it wants to continue to develop into the next lap. To this end, the Montreal Statement on Sustainability in the Digital Age provides a framework to follow – key to the Montreal Statement is that in order to leverage digital technologies to better the lives of people and the planet, there is an urgent need to seize this current moment, and to use the current conversation surrounding digitalization to build a new social contract focused on individual human and digital rights, and to build a just and equitable society. Importantly, and in line with this article, digitalization should aim to “bridge the digital divide by ensuring everyone has affordable access to reliable and secure internet services, […] and build capacity to enable equitable participation in the digital world.” Also, not only should Taiwan look at how to use digitalization to grow its industries, but Taiwan should also focus on environmental sustainability and to develop digital technologies in an environmentally responsible manner.
It would not be enough to appeal to the senses of the government or businesses to increase wages or reduce wealth inequality in order to promote greater digital access and integration. What is needed is a new envisioning of the pathway toward growth, so that it creates a new basis from which to promote more equitable policies to drive innovation. As Taiwan looks to set up a new digital ministry, developing a new vision grounded in an understanding of the current gaps in Taiwan’s industrialization and technological adoption, and how the stagnation is driven by the mollycoddling of businesses, would therefore help orient the objectives of Taiwan’s digital industry promotion and equitable access goals.
A previous version of this article misspelled the name of Taiwan AI Labs founder Ethan Tu.
Roy Ngerng is an assistant research fellow at the Risk Society and Policy Research Center, National Taiwan University. He researches on sustainable digitalization and foresight research for Taiwan’s 2050 future. He also writes on social protection issues.