Government s Role in Developing the Private Sector

Government's Role in Developing the Private Sector

Taiwanese government's success in grooming IC manufacturing industries is remarkable . Today, Taiwan's IC production is the fourth-largest in the world and the world's two largest IC fabs, TSMC an UMC, are in Taiwan. At the same time, the success in IC manufacturing has fueled the growth of other industries. Fabless IC design industry, where Taiwan is number two in the world, is one of them.

In the case of IC manufacturing, the Taiwanese government's direct involvement in kicking off the industry was crucial. Due to the capital- intensive nature of the IC manufacturing industry, many private investors did not want to invest in the industry, even when plants set up by ITRI were having yield rates better than those of their U.S. counterparts. It would be hard to imagine that any private entities would have wanted to invest in IC manufacturing in the late 1960s.

Hong Kong's capital market did not have the versatility of government financing, and its manufacturing industry took a different route, as explained below.

Case Study: Differing Government Capital Routes ” Contrast Hong Kong And Taiwan

The versatility of Hong Kong is similar to that of Taiwan. Mr. Lee Ka Shing, the richest man in Hong Kong, started his multibillion-dollar business enterprises from a small, humble plastic flower manufacturing plant. Subsequently, the tycoon made his fortune in the real estate boom in Hong Kong. Today, Mr. Lee's flagship company, Hutchison Whampoa, is an active player in property development, port operations, retail, manufacturing, telecommunications, and energy infrastructure development. In fact, in the 1960s and 1970s, Hong Kong companies demonstrated similar flexibility and versatility. Once it was one of the largest exporters of electronics, toys, and garments. However, ever since China opened up to the world in the late 1970s, Hong Kong's business community has seized the opportunity and moved most of the manufacturing activities into China to tap the country's low-cost labor. Manufacturing activities have virtually disappeared from the former British colony. Taiwan, on the other hand, is still prosperous with manufacturing activities today (although some of the labor-intensive industries have been relocated into China).

The main difference is that in Hong Kong, the British colonial government at the time chose not to interfere with the economic activities of the colony (as a matter of fact, for many years , Hong Kong was considered the freest economy in the world). Without the government's lead into the risky high-tech industries, the business community instead channelled its capital into the lucrative property and equity markets for quick profits.

The Evolving Role of Government Investment

However, the beauty of the whole episode was not how the Taiwanese government got involved at the beginning, but rather how the government withdrew from the industry when the industry reached its competitive maturity. In many countries , the governments are involved in spearheading new industries. In certain industries such as defense or education services, the governments' involvements are out of strategic considerations. In other industries, the governments ' involvements are out of economic and financial interests. If the government supports certain companies in order to nurture a particular industry, the government must learn when and how to reduce its involvement over the time and allow these companies to compete freely in the domestic market. Overinvolvement of the government in an industry may not make it efficient. The government-linked companies may succeed at the national level because of their link to the government. However, at the regional and international levels, those companies may not be able to compete efficiently because they no longer enjoy the privileges (such as priority to government contracts, etc.) they are used to in their own countries. Only companies that have emerged from domestic competition will have a good chance of success at the international market . Government's involvement in an industry may distort the competitive ground necessary for the natural selection process; hence, there is no guarantee that the best will emerge as victors.

The capital market seems to endorse such views. For Chinese companies listed as H shares in Hong Kong, investors are willing to pay a premium for successful private companies over successful state-owned enterprises. Many institutional investors believe that private enterprises (instead of state-owned enterprises) are going to drive of growth of China for the next few years.