What Permits Small Firms to Compete in High-Tech Industries? Inter-Organizational Knowledge Creation in the Taiwanese Computer Industry

This paper addresses a puzzle related to firm size and competition. Since Stephen Hymer´s pioneering contribution (Hymer, 1960/1976), theories of the firm implicitly assume that only large, diversified multinational enterprises can compete in industries that combine high capital intensity, high knowledge-intensity and a high degree of internationalization. Small firms, by definition, have limited resources and capabilities and are unlikely to possess substantial ownership advantages. They also have a limited capacity to influence and shape the development of markets, market structure and technological change. One would thus expect that they are ill-equipped to compete in a knowledge-intensive industry that is highly globalized. Taiwan’s experience in the computer industry tells a different story: despite the dominance of small- and medium-sized enterprises (SMEs), Taiwan successfully competes in the international market for PC-related products, key components and knowledge-intensive services. The paper inquires into how this was possible. It is argued that organizational innovations related to the creation of knowledge are of critical importance. Taiwanese computer firms were able to develop their own distinctive approach: due to their initially very narrow knowledge base, access to external sources of knowledge has been an essential prerequisite for their knowledge creation. Such “inter-organizational knowledge creation” (Nonaka and Takeuchi, 1995) was facilitated by two factors: active, yet selective and continuously adjusted industrial development policies; and a variety of linkages with large Taiwanese business groups, foreign sales and manufacturing affiliates and an early participation in international production networks established by foreign electronics companies. A novel contribution of this paper is its focus on inter-organizational knowledge creation. I first describe Taiwan´s achievements in the computer industry. The dominance of SMEs and their role as a source of flexibility is documented in part II. Part III describes some policy innovations that have shaped the process of knowledge creation. The rest of the paper inquires how inter-organizational knowledge creation has benefited from a variety of linkages with large domestic and foreign firms; I also address some industrial upgrading requirements that result from this peculiar type of knowledge creation.