Monday, November 12, 2007

The “Finnish phenomenon” and lessons for Taiwan's knowledge economic development

Global economic liberalization and increased convenience result in the convergence of commodity price, which reduces a country’s comparative advantage. This can also apply to high-skilled, strategic sectors—the convergence of skills among countries inevitably reduces wage differential and thus increases strategic sectors’ mobility. In other words, globalization is likely to accelerate the “hollowing out” of a country’s key economic sectors; this trend has spurred countries to respond.

Inspired by the 1996 OECD “Knowledge Economy” report, industrialized countries began to focus on knowledge-based economy, proposing blueprints that they believe would lead to greater economic development and growth. Developing countries also see opportunity in following such trend. They hope that a greater focus on knowledge-based economy will assist them in gaining competitiveness.

Taiwan’s path towards knowledge-based economy: Challenges

1. Threat from developed countries

Industrialized countries’ policy emphasis on knowledge-based economy has several effects. The most direct one would be growth in research and development expenditures (R&D); government spending on developing knowledge-related industries in turn spurred private investment on R&D as well. To prevent unwanted “spillover,” a significant portion of firms from advanced economies try hard to lobby their governments for greater intellectual property rights (IPR) protection—sometimes asking their governments to raise protectionist barriers. This emphasis over regulatory control also occurred at the international front. In addition, World Trade Organization’s Agreement on “Trade Related Aspects of Intellectual Property Rights” (TRIPS) signifies industrialized countries’ awareness of IPR’s impact on international trade.

Since industrialized economies have advantage in finance, marketing, information and other key global sectors, competition among these countries implies greater challenges for those like Taiwan. As we develop, we will face competitive pressure from firms in those countries as well as the technological barriers they impose.

2. Threat from China and other large developing countries’ technology and knowledge-based upgrade

Large developing countries’ abundant labor force allows them to become world’s largest labor-intensive manufacturing economies. The rise of these economies, however, has not only led to over-supply of labor-intensive commodities but protectionist responses from developed economies as well. As a result, these developing economies have joined the “knowledge-based economy” bandwagon, putting their efforts and resources on capital and advanced skill-intensive sectors.This trend also puts Taiwan at disadvantage.

Undoubtedly, Taiwan’s geographic proximity to China and China’s investment policies since 1980s (aimed to attract Taiwanese capitals to invest in China) have led to a hollowing out of Taiwanese industries. China’s economic ascendancy is likely to persist; as it aggressively acquiring experiences from foreign firms, China would rapidly develop into a high-tech, knowledge-based economy, which gives it greater ability to threaten Taiwan’s global economic position.

Maybe we should ask: What can we learn from developed countries’ experience with knowledge-based economy?

Global economic competition and developing countries’ efforts in establishing knowledge-based economy have prompted developed countries to come up with innovative responses. Since their experiences might serve as valuable lessons for Taiwan, it is useful to examine these countries’ industrial policies. The rest of this discussion will use Finland as an example.

Finnish government’s awareness of the “China Phenomenon” and looming threat from such trend prompted it to issue a report called “The National Knowledge Society Strategy, 2007-2015.” The theme of this policy report, “Only One,” reflects Finnish government’s belief that a uniquely-Finnish, irreplaceable knowledge-based economy is Finland’s only way to maintain its economic strength and leadership position.

According to this report, the key factors to build an “information society” are as follows: 1) an open and free society, 2) a good and safe living environment, 3) the opportunity to flexibly combine work, family and leisure times, and 4) continuous development of knowledge. Based on these key factors, the Finnish government proposed policy strategies such as reform of public service sectors, living standards improvement, and promotion of sustainable competitiveness in domestic enterprises.

In my view, Taiwan’s development of knowledge-based economy should embody the core strategic concepts mentioned above. Specifically, Taiwan should aim to become a society with knowledge-driven economy; such type of society has five characteristics: uniqueness; open social interactions; cultural and human-centric values; social welfare; innovation, free competition and equal development.

The aforesaid major aims and strategies should be the basis of Taiwan’s knowledge-based economic framework, which contains the following four elements:1) An institutional environment that generates positive incentives to create, expand and apply knowledge to economic activities,2) Citizens who are well educated and immersed in relevant skills,3) Efficient R&D institutes (including research institutes, universities, think tanks, consulting units, companies and related organizations), and4) Good information infrastructure.

To reiterate, Taiwan’s future policy should incorporate elements that reflect its unique characteristics. Such policy should strive towards the goal of good and quality living that takes Taiwanese citizens’ welfare and happiness into consideration. It is my belief that a brand-new way of thinking—an economy that is uniquely “Taiwanese,” human-centric, innovative and competitive—will help Taiwan in becoming a strong economic player in the global community.

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