Government's Role in Developing the Private SectorTaiwanese 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.
The Evolving Role of Government InvestmentHowever, 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. |