Impacts of Globalization on Asian Developing Economies: Lessons from the Experience of Taiwan and South Korea

Wen-Heng Chao


Many Asian developing economies follow the path of Taiwan and South Korea (hereafter, Korea) to economic development. The “developmental state model” has spread over the entire Southeast Asia and China with some modifications. Though it is claimed that these countries possess the similar strong authoritarian regimes as Taiwan and Korea did, it is rarely noted that the external situation they faced in the 1990s was different from the one of the 1960s. The most salient external change during the past decade was globalization, which produced profound impacts on the state's policy capacity, financial stability, and production organization of economies. Consequently, the adoption and implementation of the developmental state model for the second tier NICs (newly industrializing countries) are subject to various effects generated by globalization.

The Asian financial crisis of 1997 offered an opportunity to re-examine the model of the developmental state. On the one hand, the crisis represented a challenge of globalization to the model, and on the other hand, the different impacts of the crisis on the East Asian development states also demonstrate that the globalization may bring different challenges to them, raising a question about what cause the different effects, given that they all adopt the developmental state model.

As forerunners of industrialization, the experience of Taiwan and Korea in coping with globalization can be good lessons for other Asian developing economies. By using the two countries as exemplars, this paper will examine the impacts of globalization on the developmental-state-type intervention and evaluate its influences on economic development.


During the past decades, Taiwan and Korea had built their economies into developmental machines through mobilizing available domestic resources to pursue the goal of economic growth. The growth was led by the states through allocating resources to the growth sectors and creating comparative advantages. (Johnson, 1982 Deyo ed., 1987 Wade, 1990 Amsden, 1989 Chu, 1987, 1989) As highly centralized, coherent bureaucratic bodies with various policy instruments at their disposal, they possessed enough strength to dominate the formation of national development interest and impose their will on social and economic actors. When the countries faced economic challenges, they also played the role of safeguard to absorb both internal and external shocks and control risks from global and domestic environments.

The heavy involvement of the states in economic development made the private sectors dependent on state protection and promotion. Though the states minimized possible negative effect brought on by external challenges, problems will emerge once the state is no longer strong enough to prevent the economy from external risks. Globalization, a phenomenon salient in the 1990s, is exactly playing the role of eroding state strength and undermining state control. In the increasingly borderless global marketplace, foreign factors can easily penetrate the state’s limitation and impose an impact on domestic economics through freer flows of capital and goods. State policies are gradually ineffective both on regulation of the highly mobile and uncontrollable external influence and on manipulation of domestic economies. This evolution implies that globalization is removing state protection, putting domestic economies under the strict test of external forces. As a result of this trend, the regulation of economic transactions across the globe needs to depend on super-national organizations, such as IMF (International Monetary Fund) and WTO (World Trade Organization). Therefore, the states more or less transfer their sovereign to these international organizations.

The entry of external forces will be easier and their influence will be more profound if production activities of economies are more integrated into the global network. These are the cases in Taiwan and Korea, whose connections with the global market have already been well established for several decades through both goods and capital exchanges. However, as the two countries used to benefit from both state intervention and an open, free international environment, it seems that the two elements are difficult to coexist under accelerating globalization of the 1990s. In this sense, globalization restricts the freedom of policy choices of the second tier NICs who are endeavoring to follow the footsteps of Taiwan and Korea.

In addition to the erosion of state strength, globalization brings two kinds of possible dangers particularly relevant to Taiwan and Korea. On the finance side, barriers to capital flows are tremendously lowered as a result of deregulation of financial markets and improvement in technology transactions. Capital, now with high mobility, is able to travel all over the world to look for best return. This trend strengthens the interconnection between national financial markets and increases volatility of national currency. Against this backdrop, sudden large amounts of capital inflows or outflows may occur if the conditions influencing the return to foreign capitals change or if external financial shocks trigger the fluctuation of national currency. This kind of capital flows is especially fatal to the countries with seriously flawed or malfunctioning financial system (e.g. high debt ratio), and may finally break the system or even the overall economy down.

On the production side, globalization brings different cost and benefit to the actors positioned in different places of the global division of labor. As clear winners and agents of globalization, multinational corporations (MNCs), usually head-quartered in industrialized countries, dominate technology, capital resources, and distribution channels of the global markets. They set their production facilities in multiple countries to efficiently exploit and coordinate different endowments and then minimize production and transaction costs. Globalization of production, symbolized by an increasing number of countries willing to integrate into the production chain, gives MNCs more leeway and options to design their strategies and therefore they own more leverages when bargaining with local governments or producers. Operating in imperfect markets characterized by oligopoly, they are relatively not threatened by the competition of latecomers because of the markets' high entry barriers. In addition, MNCs are also the most possible candidates who can fully exploit the advantages brought by freer flows of capital, goods, and personnel due to their capability in engaging global management.

On the other end of the global division of labor are a large number of developing country producers who undertake relatively low-skilled, standardized, and labor-intensive production based on subcontracting relationship with the MNCs. Their products are sent to the MNCs either for further processing or for sale in the global market under the MNCs’ trademarks. To those developing countries that have already been in the production chain such as Taiwan and Korea, globalization of production means a large-scale entry of new competitors. The latecomers from other developing countries possess the advantages they used to have and new advantages from the high availability of technology thanks also to globalization. Unless the two countries can upgrade themselves to gain another edge, the losing competitiveness may finally harm their economies and end the growth.

In this paper, I will examine the impacts of globalization on the efficacy of state intervention, the state-society relations, and the economic development in Taiwan and Korea. The special focus will be placed on comparing the differences in degree and type of the impacts. I will employ the Asian financial crisis as a case to demonstrate the challenge of globalization.


Since 1980s, the strength of the states in Taiwan and South Korea has been undermined due to both internal and external forces. Internally, democratization and pluralization of the society place pressure on the decision-makers of the states in a way that the state needs to take the interest of social groups into consideration, and to release the resource used to be under state’s control to the society. Externally, the efficacy of the state policy is subject to the impact and challenge of external forces, which are usually hard to predict and control by the state. As a result, the state autonomy and the efficacy of state control were not as strong as the one before the 1980s.

a. Government-business Relations

Government-business relations are a very important factor affecting the formation of economic policy and the efficacy of government intervention. It is necessary to explore the impact of globalization on the relations to understand how globalization imposed a profound influence on domestic economy. Globalization introduced various external actors, including international organizations and multinational corporations, into the equation between government and business and complicated their interactions. The tendency shows that foreign private actors may serve as better allies of local private actors than of local governments since they have a similar goal on lifting constrains from governments. On the other hand, the increasing importance of IGOs (intergovernmental organizations) unquestionably undermines governments' authority, but its relationship with governments may not be necessarily antagonistic. On many occasions, the rules set out by IGOs need a strong government to implement in the domestic arena, where IGOs are still unable to directly intervene.

The most salient case of this sort was the IMF's intervention in Korean restructuring during the Asian financial crisis. Although during the 1990s, Korean business gradually gained independence from government-controlled resources and their bargaining power increased as a result, the financial crisis revised this trend. The crisis seriously weakened the strength of Korean private sector and gave advantages to the government vis-à-vis the business. Since the financial resource, including the money from IMF bailout, hold by the government was the only available resource for the private sector during the crisis, the government obtained sufficient power to direct the action of private firms. Under the pressure of the IMF, the government stopped rescuing sick chaebols and allowed their bankruptcy. It is well known that free from bankruptcy and guaranteed government's rescue used to give chaebols leverages to discredit government's order. Without this guarantee, businesses have to exchange their compliance for the rescue when they face financial difficulty. The restructuring plan in reducing the size of chaebols also undermined chaebols’ influence in political and economic decision-making. In sum, the crisis and the IMF intervention moved the relationship between government and business in Korea toward the direction in favor of the government.

However, along with the gradual stabilization of Korean economics and chaebols’ operation back on the track, the government is expected to be more difficult to control chaebols. The sign has already shown by the slowing progress of the big deal plan after the successful merging of LG Electronics and Hyundai electronics and dismantling of the Daewoo group at the dawn of the crisis. Generally speaking, the corporate restructuring is successful in the smaller chaebols but experienced more difficulties when the government came to the big five.(Bridges, 2001) Especially, labors are gradually reluctant to the corporate restructuring because it will immediately reduce job opportunities. These facts illustrates that the government power over chaebols is fading as the crisis goes away. Chaebols may no longer be “too big to fail,” but their bankruptcy is still certain to produce social turmoil that the government will make effort to avoid.

In addition to international organizations, foreign investors are also entering Korean economic scene. The crisis made the Korean government relive its restraints on the entry of foreign investment. Foreign investors can purchase Korean companies through M&A, or invest in Korean stock market in a much easier manner. Foreign ownership in Korean listed companies jumped from 13% in 1996 to over 30% at end-2000. (Chopra, 2001) By 2000, foreign investors owned 55% of the shares of Samsung Electronics and 44% of Hyudai Electronics. Against Korean tradition, the rapid growth of foreign investment in Korean companies increases foreign intervention in the economic development, which is one of the situations that Korean was used to try to prevent it from happening.

Unlike Korea, Taiwan’s business has never grown strong enough to counter the power of the state. Although democratization in the 1980s did enhance the strength of the society as a whole, the increase in the business sector was only limited. This was because Taiwanese enterprises were generally small and fragmented. Except through occasional support from lawmakers in Legislative Yuan, there lacked an effective way for the business to organize, coordinate, and mobilize resources to claim the demand against the government. In Taiwan, it is much harder to form an anti-governmental alliance by enterprises than by other social interest groups.

Although the business sector was still not strong enough to counter the will of government, there did exist some businesses that have influence on the policy making. Especially, after the democratization of the president election, each candidate has his own supporting base from the business. When the candidate they supported got elected, the rewards included the power of lobbying the government on some specific policies. However, their influence only limited to the policies with narrow scope and limited effects. On important economic policy, the government can still easily get compliance and supports from the business sector through its various policy instruments.

By contrast, the power of social groups in Taiwan develops much faster. There are more and more demonstrations and protests by farmers and labors in the recent years. Some of them even generated deep impact on government economic policy. Take the most recent farmer protest for example. On November 23th 2002, around 100 thousand of farmers launched a large-scale protest against government reform on the credit departments of the farmers’ associations. These credit departments generally suffered very high non-performing loans, and the reform is believed to be a key point to improve Taiwan’s financial system. Nevertheless, farmers are not at the same position with the government since the reform will cut an important source of their finance. Finally, under the pressure of possible social turmoil, the government stopped the reform and the power of farmers finally prevailed. The causes of this protest are highly relevant to the external factors. The reform was built upon the lessons learned from the Asian financial crisis, and the protest was partly attributed to the increasing financial difficulty facing farmers after Taiwan’s accession to WTO.

On the other hand, the entry of various foreign actors did not contribute too much to the change of Taiwan's government-business relations. Two reasons can explain this intactness. First, foreign companies (MNCs) have entered Taiwan since 1950s and have tried to keep a balanced relationship between the government and business. The new comers of the 1990s did not attempt to break the balance. Second, the relatively small-sized businesses in Taiwan have less capability in obtaining foreign resources and in allying with foreign actors to counter government policy than is the case in Korea.

An emerging phenomenon that may become a major factor changing the nature of government and business dialogue in Taiwan is that the liberal concept is spreading over the society and is gradually dominating the value system in the several sectors of the society such as academia. This was partly because the government itself intentionally promoted this concept as a means to reduce social resistance to its agenda in the entry of WTO, and to satisfy its overseas audiences. However, the side effect is that the business, along with the academia, applied this concept to gain the support from the society against the government’s initiatives.

b. The Efficacy of State Control

The states in Taiwan and Korea carried out different functions than those of the industrialized countries. In addition to maintaining macroeconomic stability, they were involved in the guidance of economic development towards rapid growth. Therefore, they were characterized by a more intensive government intervention in the economy than industrialized countries. In order to pursue growth, they allocated capital resources to the selected growth sectors by means of credit control, subsidies, and tax-reduction, and maintained or created the advantages obtained from external exchanges through manipulation of exchange rates and maintenance of a low wage level.

The most serious challenge of globalization to state intervention is the weakening of the state’s control over capital allocation. Among major economic elements whose flows are freed by globalization, capital is the one enjoying highest mobility. Due to this mobility and high availability in the global arena, capital resources can be easily secured from the global market, making the ones controlled by the states relatively insignificant to private enterprises. Hence, to those countries that heavily depend on capital allocation as the major means to conduct intervention such as Korea, globalization of finance actually disarms the states' instrument to control the private sector. Thus, conglomerates in Korea can easily obtain alternative financial resources from global markets without depending on the supply from the government. The evidence can be found in the increase of the long-term external debt that is not guaranteed by the government. The ratio of the private non-guaranteed long-term debt to the total long-term debt sharply increased from 9.6 percent in 1970 to 48.7 percent in 1997. Different from the past, a reason of chaebols’ resorting to foreign financial resources is governmental limitation of their access to domestic credits. In order to curb chaebols’ expansion and pursue efficiency, President Kim Young Sam set quota for their domestic loans. The 30 largest chaebols could be only allowed a small percentage of the total bank loan (Wall Street Journal, April 29, 1996, A19). This policy did not really stop the increase of chaebols’ debt instead, it forced chaebols to turn to international markets to search for their financial input.

The Taiwan government does not have as deep involvement in credit allocation as the Korea government does neither does it intensively intervene in loan decision of banks. In Taiwan, only 9.5 percent of domestic credits were lent as policy loans by 1985, while in Korea, as high as 40.8 percent of domestic credits were allocated to specific borrowers through policy loans.[1] The major instrument employed by Taiwanese government on allocating capital resource is indirect subsidies on R&D and technology purchase in selected industries. Although the government still directly subsidizes firms' technology acquirement, the amount is by no means sizable. Between 1991 and 1997, the direct subsidies on all targeted industries amounted to 11.6 billion NT dollars, with an average of 1.7 billion NT dollars each year. Indirect subsidies on technology acquirement are undertaken by granting fund to research institutes, especially the Industrial Technology Research Institute (ITRI), to promote technological development in selected industries, and distribute the achievements to the firms in the concerned sectors. In 1996, for example, the government bestowed 40 billion NT dollars R&D fund on research institutes.

The relevant influences of globalization on this kind of intervention are twofold. First, because of the global spread of technology, it is relatively easy to obtain knowledge to develop a new technology by the private sector. Second, due to the increasing global competition, the key components of advanced products that Taiwanese government is eager to develop can be purchased at a low cost from the global market. It discourages firms from participating in research and applying the technology to start mass production of the components. Thus, the state’s interest to build self-reliant industrial ability conflicts with the firms’ interest in pursuit of profits. The lack of firms’ enthusiastic support for TFT LCD (thin-film transfer liquid crystal display) project of the ITRI was one typical instance of the conflict.

Although the government in Taiwan did not intensively involve in credit allocation, it did heavily intervene in the control of the capital flows to China. Due to the concern of hollow-out effects and other political reasons, the government set rigor criteria and procedure to screen the investment outgoing to China. The failure of this control is a typical case illustrating the government inability to manage the capital flows in the era of globalization. To avoid the government’s regulation, many companies did not send their investment through the official route set by the government instead, they invested in China through the intermediation of the third place, such as British Virgin Islands. Thus, the real amount of capital that Taiwan companies invest in China is triple that of official records.

Tax incentive used to be one of the most effective instruments employed by the Taiwanese government to attract domestic and foreign investments. However, this instrument became less effective in the late 1980s when production cost sharply increased and tax incentive was no longer favorable enough to offset the increasing cost. Its effectiveness is further challenged by the widespread of this measure to the other developing countries such as Southeast Asia and China. Therefore, if Taiwan’s tax incentive wants to be a strong instrument to attract investment, it needs to offer more favorable tax reduction rate than other developing economies. However, due to Taiwan’s concern about social equity, the reduction rate in Taiwan was generally not as favorable as other countries. Under globalization, capital can easily find the best places on tax reduction to invest if this is its major consideration.

The effectiveness of another important instrument, wage control, employed by the state to maintain cost-competitiveness, was also undermined by the changes of external and domestic conditions. The states used to artificially keep wage at a low level by controlling labor unions and the rise of consumer price (Kim, 1997), especially the price of necessity such as food. However, trade liberalization made the prices of the items that were artificially pressed down increase to their normal market value. For example, in Taiwan, the price of food has been one of the categories increasing fastest since trade and price liberalization took place in the mid-1980s. As shown by Figure 1, from 1985 to 2000, the increase of price on food reached 54.9%, second only to the increase on education and entertainment, which were also intentionally kept to a low level by the state for developmental purpose. Along with this increase, the state lost one of its powerful instruments on wage control.

This study on Taiwan and Korean experience gives the second tier NICs a signal that, under globalization, they are probably unable to adopt the same state-intervention strategies. Hence the developmental patterns and strategies of both countries may be no longer suitable in the newly globalized world, and a new strategy that can properly cope with globalization is needed for other industrializing economies.


As mentioned, globalization will bring challenges especially to the countries with a malfunctioning financial system or in the unfavorable places of the global division of labor. Different countries will be subject to different degrees of challenge, depending on their production or finance conditions. In this section, I will first identify different conditions of the two countries, and then see how these different models generate implications to Asian developing economies.

1. The Financial System

With regard to financial systems, Korea is notorious for the heavy debt burden of its companies. As shown by Table 1, before the crisis, the debt/equity ratio of the Korean firms was extraordinarily high. Between 1991 and 1996, the average ratio of Korean firms in manufacturing sector was more than triple that of Taiwan and almost twice that of the U.S. (Table 1). Compared with Japan, a country whose firms have a reputation of debt-financing, Korean counterparts were still 53 percent higher. The financial situation of the dominant economic players in Korea, chaebols, suffered even heavier debt burden than did average firms. The average debt/equity ratio of the top 30 chaebols was 403.8 percent, compared with 304.7 percent for the whole manufacturing sector. By the end of 1997, the top 30 chaebols bore W 357 trillion debt, equivalent to 85 percent of GDP, and about two-thirds of the debt was carried by top 5 chaebols (IMF, 1998). It indicates that Korean debt is also highly concentrated. (ibid.)

In terms of external debt, no matter what indicators we employ, Taiwan clearly did not have debt problems. In stark contrast, Korea had suffered chronic debt problems between 1967 and 1986. The total external debt of Korea amounted to $47 billion in 1985, equivalent to 50 percent of the GNP that year. The amount of the external debt also exceeded the total exports to a large degree. By 1986, due to the amelioration of current account deficit, the external debt stock began to decline. From 1988 to 1993, Korea experienced the tranquillity of the “golden six years” on the external debt problems with the debt/GNP ratio controlled to a historical low level.

In the 1990s, the threshold of turning debt problems into crises is tremendously lowered. The interconnection of financial markets in the 1990s generates many uncontrollable and unpredictable factors for countries’ financial stability. In the Asian financial crisis, for example, the contagion of exchange rate plunge in the region seriously weakened Korean capacity to repay the debt in dollars. Even though the debt ratio in 1997 was not as high as the ones in the early 1980s, under the catalysis of exchange rate plunge, a mild debt problem may be quickly transformed into a crisis. To avoid the possible crises brought by unexpected financial shocks, maintaining a sufficient amount of international reserves, at least large enough to cover debt service and short-term debt, becomes crucial. (Corsetti, et. al., 1998) Korea obviously did not adopt this insurance policy. As shown by Table 2, in the 1990s, both ratios of total debt to reserves and short-term debt to reserves are still very high. In 1997, the amount of total external debt was 6.7 times and the amount of the short-term debt was 2.6 times larger than that of the international reserves.

After the crisis, Korea has taken a series of measures to improve this situation, including lowering the debt ratio of chaebols, eliminating cross-debt guarantee, concentrating on core business, and purchase of non-performing loans, etc. The top four chaebols (excluding Daewoo) rationalized 94 affiliates (out of around 190) in 1999, and met government’s target of a 200% debt-equity ratio by end-1999. (Chopra et al., 2001). These measures plus the increasing domestic and international demand made Korea rapidly recover from the crisis. The growth rate of GDP jumped from –6.68% in 1998 to 10.89% in 1999, 9.32% in 2000, and 3.02% in 2001. The amount of bad loans as a percentage of total loans dropped from 12.9% in December 1999 to 5.01% in September 2001. The debt ratio in manufacturing sectors decreased from 400% in 1997 to 200% in 2000, and official foreign reserves increased from US$ 20 billion in December 1997 to US$ 116 billion in October 2002 (BOK data). Korea's total external liabilities decreased to US$ 129 billion in August 2002 from US$ 159 billion.

This seems give us an optimistic impression about the future of the Korean economic development. Nevertheless, looking at the profit rate of businesses, the records show that the profit rate was low or even negative during the recent years. The net profit of manufacturing sector has remained mostly negative since the financial crisis.(Yang, 2002) The lowered profits rates were especially serious for semiconductors, chemicals, and steel industries. (ibid.) The main reason of the low profit rates was the high interest payment. In 1999, nine of six large chaebols reported an interest-coverage ratio (operating income/interest expenses) of less than one, indicating that operating income was insufficient to cover their interest payment. (Chopra et al., 2001)

2. The production system

On the production side, a way to examine whether or not a country will benefit from globalization is to check the characteristics and capability of MNCs of that country. As mentioned, MNCs are the most capable actors to exploit the benefits of globalization. The research by Bennett Harrison shows that MNCs are the engine of economic growth under rapid globalization of world markets (Harrison, 1994). Taiwanese and Korean enterprises have actively sought multi-nationalization of their activities since the late 1980s (see Table 3) but in very different patterns and therefore own different capabilities to take advantage of the new global opportunities.

To explore into the investment patterns of the two countries, I break down two countries’ investments by area in Figure 3-1 and by industry in Figure 3-2. In terms of area, the majority of Taiwan’s investments went to China and Southeast Asia (52%), and the purpose of investing in these places are largely defensive: to avoid the increasing production costs for their labor-intensive goods (Lin, 1992: 19). Many small and medium enterprises have joined the rush of investment to China, making the amount per investment in China (US$550 thousand dollars) much smaller than the average (US$1,320 thousand dollars). To them, Mainland China is the sole place they have built their overseas facility. Although large in number, these MNCs have little significant meaning in enhancing Taiwan’s ability to cope with globalization. Unlike those in the developed countries, their investments were not for oligopolistic benefit as Hymer suggests, nor were parts of global strategies. Actually, these businesses were forced to move overseas, and the places to which they moved were limited to neighboring countries. Most of them still played the original role, that is, a subcontractor, and engaged in the original production business. They simply sub-subcontracted their orders received from the developed countries to the subsidiaries in China or Southeast Asia, or let these subsidiaries become independent subcontractors for low-end products.[2]

The foreign investments of Korean companies are more on a global basis with clear global strategies. They invest in multiple countries with multiple activities to exploit and coordinate different endowments to minimize transaction and production costs. Geographically, the investments spread all over the world and, functionally, they range from acquiring raw materials to market expansion. For example, in contrast to Taiwan, Korea invested a large amount in the OECD countries. The outward FDI to OECD countries is even more significant after the crisis. From 1997 to 2001, Korean investment in Asia only accounted for 33% of all outward FDI, while the investment in North America and Europe jumped to 45%. The purpose of these investments was not to reduce labor costs, and the invested activities were not only production. Instead, marketing and research were the major functions carried by these investments. As shown by Figure 3-2, the outward direct investments in Korea have an emphasis on marketing because a large portion of their investments was poured in the trade business. As Michael Porter observes:

Leading Korean groups are attempting to create internationally known brand names, establish foreign distribution organizations, and even build foreign plants, despite the fact that Korea's major advantage has been low labor costs. Taiwanese firms, in contrast, are pursuing more the pure OEM route. Many of Taiwan's exports are private-label goods even most of the leading Taiwanese companies have still made only nominal investments in developing foreign marketing channels of their own. (Porter, 1990: 680)

Many Korean conglomerates (chaebols) have already built selling networks worldwide thanks to the big trading companies of their groups. In addition to these networks, each major company in the groups also has its own global marketing channels. With these two outlets, chaebols can easily distribute their products overseas. In sum, in terms of global strategy, Korean MNCs are more prepared to grasp the fruits of globalization than their Taiwanese counterparts.

A country’s inward FDI is also an indicator of the impact of globalization. Given that the investing capital can freely look for its best return from the globe under globalization, the amount of inward FDI can show a country’s competitiveness. Larger amount of FDI inflows means that a country own stronger competitiveness that foreign investor would like to explore. The other important variable influencing the inflows of FDI is government restriction. Government restriction on the inflow of FDI reduced the opportunities of technology upgrade stimulated by foreign companies, and also the chance to attract more foreign capital.

Due to its economic nationalism and fear of foreign dominance, Korea had a strong tendency to refuse the entry of FDI. By contrast, Taiwan held a much more open attitude toward the inflows of FDI. In fact, many studies show that the technological development in Taiwan was benefited a lot from the presence of foreign companies. Table 4 shows that on average, inward FDI/GDCF (gross domestic capital formation) ratio in Taiwan was much higher than that in Korea. However, after the breakout of the financial crisis, Korea changed its strategy to actively absorb FDI. This makes the ratio of Korea increase rapidly from 0.7% of 1991-1994 to 13.6% of 1999-2000. The inflows of FDI after the crisis contributed to the successful recovery of the Korean economy. (Agami, 2002)

A third way to explore the possible responses of a country's producers to globalization is examining the mode of their business. Judged by the trend of concentration of the global electronics market, companies engaging in consumer markets have benefited more from globalization than have the ones in the OEM (original equipment manufacturing) markets. As shown by Table 5, the degree of market concentration in information industries is very high. The top five printer sellers even occupied as high as 73.5 percent of the market. Among these global oligopolists and also the greatest globalization beneficiaries in Table 5, all of them equip with strong marketing capability, and many of them own only global distribution channels and brand-names but lack production lines. How can those companies that merely rely on strong marketing power still successfully conquer new global markets? This is partly because accompanying the enlargement of the global markets, marketing costs (advertising and distribution), especially the costs on entry and startup, become increasingly high. The superior brand-images of the existing global marketing giants assist their products to be accepted by the customers of new markets. Many newly opened markets in the information industries were quickly occupied by them. In Romania, for example, IBM was the leading computer seller in 1996, and in Poland, Hewlett Packard secured 73 percent of the ink-jet printer market in 1997. In other words, globalization offers existing large firms more chance to bring their superior marketing capability into full play.

On the other hand, companies with only good production ability (e.g. OEM producers) need to be subject to frequent challenges of globalization. Except in some industries with high entry barriers such as semiconductors, OEM markets demonstrate a slower pace in the increase of concentration. Under the trends of global technology diffusion and ever-changing production conditions, it is relatively easy for a new OEM firm to enter the market and for competitors to take away the advantage on production of existing firms. Especially, the second tier NICs is rushing into OEMs business with a much lower labor cost, imposing a serious threat to current OEM producers.

In Taiwan, the personal computer industry had been recognized as one of the most successful industries in selling products with their own brand names, instead of OEM (Levy and Kuo, 1991). For example, in 1988, among the total personal computers exported by domestic firms, only 37 percent were through OEM, while the rest of them were through OBM (Original Brand-name Manufacturing). However, this situation tremendously changed during the 1990s. By 1997, at least 61 percent of Taiwanese export computers were sold on an OEM base. OEM sale further accounted for 70 percent of the export products of the entire information industry in the same year.[3] Acer, the leading and best-known computer company in Taiwan that has made enormous effort on own brand-name marketing, still relies on OEM production for about 50 percent of the total products. Mitac, a company comparable with Acer on many aspects, retreated from OBM business as numerous Taiwanese firms did. The percentage of the products under its own-brand name once reached 70 percent in 1990, but in 1997, it declined to only 30 percent.[4] This is a reversed trend to the evolution process of export industrialization in developing countries from OEM to OBM suggested by Gary Gereffi (Gereffi, 1995).[5] It indicates that Taiwan have encountered serious difficulty when they tried to market their own products and develop their own global strategies.

A significant disadvantage to Taiwan's OEM production mode and SME structure is that compared to Korea, Taiwan may encounter more competition from other latecomers such as the Southeast Asian countries and China in the global markets. According to a study (Chao, 2000), the export structure of Korea is less and less in common with other developing countries, and Taiwan's exports still overlap those of Southeast Asian countries and China to a large degree, meaning that there is much more possibility that Taiwanese firms may encounter competition from the firms of these countries in the global markets. As also shown by a survey conducted by the Taiwanese government in 1998, Mainland China was identified by Taiwan's exporters as the number one competitor, followed by domestic counterparts and Southeast Asia. (MOEA, 1998) This result contrasts with general impression that Taiwan and Korea are facing similar challenge from the Southeast Asian countries and China. In addition, since the majority of firms in the export sector of Taiwan adopted this mode, the economy will be impacted if MNCs change their global strategies. This is particularly possible under globalization since the MNCs of industrialized countries have more options to arrange for their production. They may rather set up their own subsidiaries to produce the components they need in the countries willing to offer favorable conditions such as Malaysia than purchasing them from Taiwanese suppliers.

In contrast to Taiwanese counterparts, Korean major electronics firms have experienced a rapid increase in OBM production during the 1990s, and by Mody’s words, they are “breaking out of international subcontracting relationships.” (Mody, 1990) In 1997, Samsung made 80 percent of its products under its own brand name, a sharp increase from 1993’s 55 percent.[6] LG Electronics, one of the major electronics firms with a high OEM ratio in Korea, reduced their OEM business from 52 percent to 40 percent between 1995 and 1997. Hyundai Electronics even attributes its success to the strife “from the start to develop technology on its own, without relying on OEM manufacturing.” (HEI, 1998) In the car industry, the story about the success of Hyundai Auto in building their brand image and marketing networks in the global oligopolistic car market has already been told. (Kim and Lee, 1994) Hyundai still maintains almost all the products sold under its own brand name. Another giant in Korean car industry, Daewoo Motor, which used to be an OEM subcontractor of GM, also turns the focus to OBM since 1992 when the relationship with GM was broken up. In general, Korean auto-makers have already been on the command height of the global production system. They subcontract various operations to its overseas subsidiaries and local factories according to its global strategy, and take responsibility for marketing and selling the final products with independent channels. As Porter posits, “Global strategies not only themselves create new sources of competitive advantage, but provide a better foundation for proactive innovation instead of passive response to foreign OEM customer requests.” (Porter, 1990: 680). As is well known, in the new global economy, a firm with less innovation ability will suffer huge disadvantage in international competitiveness.

However, conglomerates in Korea are not without disadvantage with respect to globalization. Though Korean conglomerates are benefited from its large size on overcoming the barriers in production, marketing, and R&D, their internal structure imposes an obstacle to effectively cope with globalization. Most of these activities are very costly and their budgets came from debt. As highly diversified and interconnected entities, conglomerates suffer the risk of overall breakdown triggered by one or some of their businesses' recession. This kind of chance effect is especially likely to occur in the era of globalization when market conditions are volatile.

3. The development of the new economy

In the era of globalization, the capacity of innovation becomes a crucial source of competitiveness, and strengthening the capacity is a necessary approach to cope with globalization. Innovation is also the most important element that should be pursued in the new economy. The other important element of the new economy, which is also a necessary instrument to survive globalization, is the application of information and communications technology (ICT). In this section, the development of two elements in Taiwan and Korea will be measured and compared.

Several indicators can be used to measure the capacity of innovation. For a long period of time, the R&D expenditure in Korea, no matter measured by amount or as a percentage of GDP, is higher than in Taiwan. As shown by Table 6, measured by amount, the expenditure in Korea is higher than that in Taiwan by about 80%, and measured by percentage of GDP, the number in Korea is also 25% higher than Taiwan. However, if we look into the composition of R&D, we can find that in the manufacturing sector, Taiwan invested more portions in high-tech industry than Korea. In fact, in 1999, Taiwan spent 58% of its total R&D expenditure in high-tech manufacturing, and there was 48% in Korea.

In terms of numbers of patents granted by the USPTO (United States Patent and Trademark Office), the performance of Taiwan is better than Korea. As shown by Table 7, in 2001, the number of patents granted to Taiwan was 6,545, ranking the fourth places of all countries, comparing to Korea’s 3,763 and the eighth place. However, the number of patents increased faster in Korea than in Taiwan. From 1990 to 2001, the average increase rate in Taiwan was 20.25%, while in Korea, it was 26.24%. According to an analysis by USPTO, in 1999, the major technological fields in which Taiwanese enterprises obtained the patents were semiconductor device manufacturing, electrical materials, static information storage and retrieval, and chairs and seats. For Korea, they were liquid crystal, cell, elements and systems static information storage and retrieval semiconductor device manufacturing dynamic magnetic information storage or retrieval. (Lin and Lin 2002)

With regard to the application of ICT, Korea is well known by its widespread of the use of the Internet. It has the largest portion of national population who are Internet users in the world, and also ranked the first place on the broadband households as a percentage of the total households. Tough Taiwan is also in the list of the first tier countries, but it still lags behind Korea. The percentage of the broadband users among population is 51.7% in Korea and 18.2% in Taiwan. This is partly attributed to the promotion of the Korean government since the financial crisis.

Compared to Taiwan, Korea spent more money on R&D, but most of then concentrated on the businesses that chaebols focus on. Judged by the wide range and variety of Taiwan’s patents, Taiwan’s R&D may cover different fields of industries. Though the quantity of patents is unable to totally represent competitiveness of a country, high number of patents did indicate a country’s innovative capacity. In addition, Korea’s advance in ICT application provides it with a solid foundation to cope with globalization. No matter in terms of production, marketing, or communication, the Internet is a necessary tool to extend business operation to the globe.


For other Asian developing economies, some lessons can be learnt from the experience of Taiwan and Korea. First, to those economies that attempt to pursue economic growth through building high ratios of debt, the case of Korea shows that in the era of globalization, the management of debt becomes increasingly difficult and a heavy debt burden may put the economies into the continuous threat of a possible financial crisis. Though before the 1980s, Korea did successfully avoid the attack of debt crises regardless of the high debt ratio due to its economic growth, a high growth rate has been already unable to guarantee the safety of economies in the current financial environment with high interconnection and volatility.

Second, globalization generates huge pressure on the effectiveness of intervention strategies of the traditional developmental state. Many policy instruments that used to be employed by Taiwan and Korea have already been not options for other Asian developing economies. Various global forces undermine, if not nullify, state capacity to manipulate domestic economies and narrow the freedom of governments' policy choice. A critical condition for the developmental state model, the strong state, is now not attainable in the developing economies. This is because the entry of many external actors, such as MNCs and IGOs, weakens state strength and grasps a significant part of the state's decision power. A number of important and far-reaching economic policies are actually made by powerful MNCs or IGOs.

However, this is not to say that the state is no longer able to design and implement economic strategies or create their own developmental paths neither does it mean that their destiny will be wholly determined by external elements. Though it is true that for many Asian developing economies, creating comparative advantage by the state is increasingly difficult, the state can still carry the traditional liberal function of correcting market failure and strengthening existing advantages. In this sense, the state can look for international cooperation to achieve the goal because international norm rewards this action. On the other hand, globalization also brings new benefit that Taiwan and Korea did not enjoy. That is, globalization increases available external resources, which can provide private actors with more choices. Under this circumstance, the role of the state should change from managing and dominating domestic resource allocation to assisting the private actors in obtaining external resources.

Third, the setback of Taiwan's companies from the OBM business implies that the Asian developing economies may also need to stay in OEM markets. The mass entry into OEM markets makes the players, new or old, face fierce global competition. This situation was different from the one of the 1960s in which Taiwan and Korea started their exporting business. During that time, the two countries were not seriously threatened by other developing countries in the international subcontracting business. Nevertheless, the latecomers enjoy an advantage that was not dreamed by the two countries in the 1960s. That is, the 1990s saw a considerable improvement in the availability of technology and knowledge, which makes leapfrogging in industrialization more possible.

In all, compared to the situation facing the two forerunners in the 1960s, accelerating globalization of the 1990s brings different cost and benefit to the latecomers' development. The new situations render the old strategies of the developmental state obsolete and force them to design a new model to cope with globalization. The new strategies should emphasize how to develop a healthy cooperative relationship with various foreign forces instead of adopting an exclusive manner.

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[1] The datum on Korea was average percentage between 1982 and 1986. The estimate on Taiwan is based on the data in Shaw, 1993.
[2] Author's interviews with numerous firms in Taiwan. August, 1998 February, 1999. However, Mainland China is increasingly becoming a part of globalization to some large companies.
[3] Data are based on MIC, ITIS projects, various years.
[4] The datum of 1990 is from Gereffi, 1998 the one of 1997 is from author's interview with the representative of Mitac.
[5] Gereffi set five levels for export industrialization: primary good export, export-processing assembly, component-supply subcontracting, OEM, and OBM. See Gereffi, 1995.
[6] Author's interview with the representative of Samsung, March, 1999.