What the US can learn from Taiwan’s chip manufacturing success
Following the recent U.S. ban on microchips in China, the Biden administration launched CHIPS for America’s Funding Opportunities. The administration is seeking to revitalize the domestic semiconductor industry and restore US leadership in chip manufacturing. Like many recent administration actions, the Act is a form of industrial policy whereby the government imposes regulations or subsidies to support certain industries.
Why the US is pursuing an industrial policy, even after we’ve seen it failure countless times in Argentina, India, China and South Korea? The only place where government support for the chip industry hasn’t proved detrimental is Taiwan, a model for industrial policymakers. However, the role of industrial policy in Taiwan is often misunderstood. Taiwan’s ability to create cutting-edge chips was the result of unhindered entrepreneurship, not industrial policy. Unfortunately, the US is falling back, pursuing the other side of what made the Taiwanese successful.
Taiwan’s semiconductor industry did not emerge spontaneously. The state developed it through industrial policy in the 1960s to create jobs, acquire advanced technologies and strengthen security relations with the USA. The private sector was initially reluctant to invest in semiconductors due to capital intensive industry exists. As a result, the state acted as a venture capitalist and invested on behalf of the private sector. The government has provided research and development (R&D) funding, public infrastructure, tax incentives and subsidies to create an enabling environment for businesses to flourish. Generous government support launched the semiconductor industry and facilitated the recruitment of highly skilled and educated workers.
However, once semiconductors caught on in the private sector, the state accepted its changing role and reduced its support. By the 1990s, private investment exceeded government funding, and the government’s share of total semiconductor R&D spending fell from 44 percent to 6.5 percent in the period from 1990 to 1999. Companies relied less on the state and eventually became profitable enough to cover their capital costs and investments. The success of the Taiwan Semiconductor Manufacturing Company (TSMC) demonstrates this expansion from the state to the private sector, with the state’s share declining from 48 percent at its inception in 1987. approximately 6.4 percent from 2005 onwards. Over time, the reduction of the state’s share ensured that TSMC would not become dependent on industrial policy and remain competitive in the market.
Although TSMC is Taiwan’s leading chip manufacturing firm, the government has not given it preferential treatment and has allowed market mechanisms to drive business decisions. In 1990 the state didn’t help at TSMC or UMC (United Microelectronics Corporations) when both firms ran into financial difficulties, forcing them to adjust their business strategies to stay competitive. Adopting a “no insurance” approach meant that firms had to respond to market signals and bear the costs associated with their own decisions. This contributed to the creation of an entrepreneurial environment that prioritized consumer satisfaction over political goals.
Specialization and free trade have also played an important role in the success of Taiwanese semiconductors. Although the semiconductor manufacturing process is complex, it consists of three main steps: IC design, manufacturing and ATP – assembly, testing and packaging. With the help of the Taiwan government, TSMC was built as a “clean foundry” specialized in chip manufacturing, closely integrating with foreign countries such as the United States that specialized in chip design. The specialization has allowed TSMC to partner with industry leaders, creating Taiwan’s unique competitive advantage in chip manufacturing. While the government provided support for the industry, it trusted the experience and knowledge of firms to understand what the market required.
It would be a mistake to think that industrial policy contributed to Taiwan’s semiconductor success. The reality is that Taiwan simply used industrial policy to overcome high technological and financial barriers to entry in the early stages of the industry. Once these barriers were removed, the Taiwanese state embraced its changing role, favoring market mechanisms over centralized control. Ultimately, Taiwan’s strong industrial performance was not the result of strategic government planning, but of unhindered entrepreneurship and limited government intervention.
If the US government wants to realize the vision set out in the Chip Act, it must be wary of industrial policy. Taiwanese semiconductor companies have been successful not because of grants and subsidies, but because of their ability to innovate and respond to competitive market pressures.