__________________________________________________________________ Fu-Lai Tony Yu , Ho-Don Yan and Shan-Yu Chen Adaptive Entrepreneurship and Taiwan ’ s Economic Dynamics INTRODUCTION The economic success of Taiwan during the post-World War period is well known . Taiwan has been referred to by the World Bank in 1993 as one of the economies which contributes to “ East Asian Miracles .” Explanations on economic success of Taiwan are not lacking . 1 However , most of them utilize neoclassical Cobb-Douglas production function to explain Taiwan ’ s economic growth . Specifically , these studies , ignoring structural uncertainty and knowledge problems , never consider the role of entrepreneurship in economic development . Hence , these orthodox neoclassical studies have failed to provide us with a satisfactory explanation of the economic development of Taiwan . Entrepreneurship is often regarded as a locomotive of economic growth . A systematic investigation of the role of entrepreneurship in economic development is of utmost importance . Moreover , in explaining economic 1 For example , Kuo ( 1997 ) argues that the economic success of Taiwan is attributed to government policies including curbing hyperinflation of the early 1950s , utilization of US aid , land reform , trade strategies , creation of job opportunities , foreign direct investment , and policies on infrastructure . Shih ( 1994 ) argues that major factors contributing to Taiwan's economic development include the external environment , the colonial legacy , the development of East Asian developing economies , scholars largely refer to Schumpeter ’ s concept of entrepreneurship . Schumpeterian entrepreneurship has actually been a rare phenomenon in most developing countries , and even in many industrialized economies . The emergence of individuals with ‘ heroic entrepreneurial ’ character was not an essential condition for the development of dynamic Asian capitalist economies , since rapid growth in developing economies took place even without such entrepreneurs . Therefore , when examining the economic dynamism of Asian developing economies , no undue emphasis should be put on the Schumpeterian mode of entrepreneurship . Owing to this reason , this paper attempts to develop a theory of entrepreneurship which can explain the economic development of Asian latecomer economies . This theory of entrepreneurship should encompass elements such as adaptiveness to change , alertness to opportunities , incremental innovation and imitation which are the major characteristics of entrepreneurship in Asian learning economies . Fu-Lai Tony Yu , Ho-Don Yan and Shan-Yu Chen are professors in the Department of Economics , Feng Chia University , Taichung , Taiwan . Prof . Yan presented a preliminary version of this paper at the 31 st Annual Conference , Association of Private Enterprise Education , Las Vegas , April 2-4 , 2006 . The authors thank Dian Kwan for her proof-reading in this paper . role of the state and ethnic cleavage . __________________________________________________________________ Laissez-Faire 57

__________________________________________________________________ Against the backgrounds mentioned above , this paper has two objectives : Firstly , it will develop a theory of entrepreneurship which is able to explain economic dynamism of Asian latecomer economies in general and Taiwan in particular . Secondly , this paper will apply the theory of entrepreneurship developed in this paper to explain the economic dynamics of Taiwan . In particular , this research will examine the kinds of entrepreneurial strategies adopted by business people in Taiwan . Such strategies enable Taiwan ’ s firms to successfully compete and survive in the global markets . By using electronics industries as illustration , this study will shed light on the role that entrepreneurship plays in the economic transformation of Taiwan . STUDIES ON TAIWANESE ENTREPRE- NEURSHIP The significance of entrepreneurship in Taiwan ’ s economic dynamics is largely investigated by scholars in management or social science rather than by mainstream neoclassical economists . Numazaki ( 1997 ) describes six basic characteristics of “ Laoban ” ( entrepreneur-owner ) in Taiwan and analyzes the structural features of the Chinese family and Taiwan society that incubate entrepreneurship . In Numazaki ’ s view , the majority of Taiwan ’ s entrepreneurs were independent owner-managers of small and mediumscale firms . These entrepreneurs skillfully used personal networks for business purposes . Furthermore , Numazaki argues that it was the Chinese family and Taiwan society that gave birth to and cultivated entrepreneurship in Taiwan . The Taiwan society as a complex network of personal networks provided entrepreneurs a social context that suited their partnership-oriented and guanxi-oriented business activities . Shieh ( 1992 ) argues that the export-oriented industrialization of Taiwan is sustained through a network of contracting systems and a microentrepreneurial mechanism . The subcontracting system generates opportunities for workers in Taiwan to set up their own manufacturing firms . Taiwan ’ s electronics industry and its technological catching-up have been the interests of scholars of technology management ( Hobday 1995 ; Ernst 1998 ; Chang and Tsai 2002 ; Matthews 2001 , 2002 , 2004 ). In particular , Ernst ( 1998 ) tells the story of how small computer firms in Taiwan competed in international markets for computer-related products . In Ernst ’ s view , inter-organizational knowledge creation for small firms was facilitated by ( 1 ) active and continuously adjusted industrial development policies , and ( 2 ) learning and capability formation through linkages with large foreign firms . In a comparative study of Asian Newly Industrialized Economies and using electronics industry as an illustration , Hobday ( 1995 ) explores how small Taiwanese firms acquired technology , overcame the disadvantages of small scale and managed their way into international markets . Matthews ( 1997 , 2001 , 2002 , 2004 ), using Acer and other electronics firms in Taiwan as case studies , is able to show that latecomer firms “ can utilize the existing and latent inter-firm connections of the global economy to accelerate their global growth . By drawing themselves into such linkages , they can leverage entry into new markets far more rapidly than by following the stolid entry strategies of their multinational predecessors .” Despite contributions from scholars in political sciences , international business , and technology management , the study of the role of entrepreneurship in Taiwan ’ s industrial dynamics is still lacking . This __________________________________________________________________ Laissez-Faire 58

__________________________________________________________________ paper attempts to bring back entrepreneurship in understanding the economic development of Taiwan . In what follows , a theory of adaptive entrepreneurship applicable to latecomer economies will be formulated . The theory is illustrated by Taiwan ’ s electronics industry , with Acer as a case study . Policy implications will be given in the last section . ADAPTIVE ENTREPRENEURSHIP IN LATECOMER ECONOMIES This paper utilizes insights from the Austrian school of economics to develop a theory of adaptive entrepreneurship . Specifically , Israel M . Kirzner ’ s contribution to the concept of entrepreneurship is the main building block . In a seminal book , Kirzner ( 1973 ) argues that the role of entrepreneurs lies “ in their alertness to hitherto unnoticed opportunities .” Alertness implies that the entrepreneur possesses a superior perception of economic opportunity . It is like an “ antennae that permits recognition of gaps in the market that give little outward sign ” ( Gilad , Kaish and Ronen 1988 , p . 483 ). With their alertness , entrepreneurs can discover and exploit narrow profit margins . Adaptive entrepreneurship can be observed in many forms , including putting new ideas in use , modifying and perfecting original innovations , adding some product attributes and fitting a slightly different market , supplying something which is still lacking in the market , and serving the markets which pioneers have created but have not yet adequately serviced . Adaptive entrepreneurship is significant in the economic development of many Asian learning economies and therefore deserves a systematic scrutiny . only help us to understand economic progress of many developing economies , but also allow us to understand international development in the era of globalization . The notion of adaptive entrepreneurship in Austrian economics is associated with the subjectivist theory of knowledge . According to Kirzner ( 1985 ), knowledge can be classified into two types : ( 1 ) Technical knowledge involving skills in utilizing given physical resources . This type of knowledge can be obtained by deliberate search or via R&D . ( 2 ) Knowledge of opportunities which cannot be obtained by deliberate search but manifested in entrepreneurial capabilities . Economic growth can thus occur in two ways : ( 1 ) improvement in technical knowledge ( neoclassical studies largely focus on this aspect of research ), and / or ( 2 ) increased awareness of the availability of opportunities . Hence , economic growth occurs not only “ because of the availability of new opportunities , but because of expanded awareness of existing opportunities ” ( Kirzner 1985 , p . 74 ). Therefore , growth requires not only expanded productive possibilities , but also entrepreneurial alertness and discovery . In Kirzner ’ s view , entrepreneurship consists of the social integration of the innumerable scraps of existing information that are scattered throughout the globe . 2 The same entrepreneurial spirit also tends to stimulate the discovery or creation of entirely new information to satisfy consumers ’ preferences . Kirzner argues that the entrepreneurial process at this new level is what drives the capitalist system toward higher standards of achievement . 2 Hayek ( 1945 , p . 519 ) notes that “ the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate indi- A theory of entrepreneurship will not viduals possess .” __________________________________________________________________ Laissez-Faire 59

__________________________________________________________________ In the following sections , the industrial dynamics of Taiwan will be explained and illustrated by the concept of adaptive entrepreneurship manifested in “ guerrilla ” strategies , small scale enterprise , subcontracting , product imitation and regional arbitrage . TAIWAN AS AN ENTREPRENEURIAL SOCIETY For the past six decades since the end of Japanese colonization , Taiwan has created an environment where the entrepreneurial potential of its people can be fully realized . As a result , Taiwan is crowded with entrepreneurs and regarded by one scholar as a “ boss ” island ( Shieh 1992 ). 3 A Taiwanese joke can reflect this situation : if you throw a stone in the streets of Taipei , you are likely to hit a chairman of the board . With one company for every twenty people in Taiwan ( the highest density in the world ), the joke could almost be true . 4 To be sure , this “ army of ants ” has been the major contributor to its economic miracle ( Economist 1998 ). According to the Small and Medium Enterprise Administration ( SMEA ), in 2003 about 97 . 8 % of enterprises in Taiwan are small and medium-size enterprises ( SME ’ s ), and they make up 75 to 80 % of all employment and 47 % of the 3 Shieh ( 1993 ) asserts that “ bosses ” were the prime movers for Taiwan ’ s export-oriented industrialization and the development , which was made possible under the subcontracting network and micro-entrepreneurship . 4 According to the Small and Medium Enterprise Administration ( SMEA 2004 ), in 2003 there were 1 , 171 , 780 enterprises ( including large and SME ’ s ) in Taiwan . With a population of 23 million , every twentieth person economy ’ s GDP . Within the SME ’ s , 9 . 7 % of them last less than one year . 5 According to the Taiwan ’ s Industry , Commerce and Service Census ( 2002 ), between 1995 and 2000 the survival rate of these enterprises was 69 . 4 %. The ease of firms to establish and shut-down indicates the dynamism of entrepreneurship in Taiwan . Business Week ( 2004 ) claims that Taiwan , as a tiny island economy , has triumphed in the Information and Technology ( IT ) field , with outsized representation on Business Week ’ s IT 100 in 2004 . Within the IT 100 , fifteen companies are from Taiwan and their founders are genuine entrepreneurs . 6 They created 5 The definition of the SME ’ s of Taiwan is relatively strict compared to other countries . For manufacturing , construction , and mining and quarrying , these are companies with paid-in capital of NT $ 80 million or less , or with less than 200 regular employees ; for the rest of industries ( including agriculture , forestry and fisheries ; water , electricity and gas ; the commercial sector ; transportation ; warehouse and communications industry ; finance , insurance and real estate ; industrial and commercial services ; and personal services ) these are companies with sales revenue of NT $ 100 million or less , or with less than 50 regular employees ( SMEA , 2004 ). 6 The list of companies selected is based on the requirement of having revenues of at least $ 300 million , and then using four ranking criteria : return on equity and revenue growth ( which were given equal weight ), shareholder return and total revenues ( which were both weighted ). Within these 100 companies , Taiwan has 15 ( number in the parenthesis behind the company name is its ranking ) including , Quanta Computer ( 3 ), Hon Hai Precision Ind . ( 4 ), Compal Electronic ( 15 ), Asustek Computer ( 16 ), Au Optronics ( 17 ), Novatek Microelectronics ( 20 ), Lite-On owns a company . Technology ( 21 ), Acer ( 25 ), Mediatek ( 35 ), __________________________________________________________________ Laissez-Faire 60