Research Policy 33 (2004) 337–349

Taiwanese IT firms’ offshore R&D in China and the

connection with the global innovation network
Shin-Horng Chen∗
Chung-Hua Institution for Economic Research, 75 Chang Hsing Street, Taipei, Taiwan
Received 23 April 2003; received in revised form 11 August 2003; accepted 3 September 2003

Abstract
Although it is evident that technology is becoming increasingly globalized, resulting in the expansion of R&D international-
ization by firms, despite this discernible trend, the substantial body of literature in this area is based mainly on the experience of
the developed country. This paper aims to contribute to the understanding of this issue by examining the R&D internationaliza-
tion of a newly-industrializing country, Taiwan being a prime example, and its connection with the global production network.
We begin with an examination of the literature on R&D internationalization and globalization, based upon which we propose a
conceptual framework adapted from Dunning’s eclectic paradigm. In doing so, we set out to develop arguments based not only
on the reasons why cross-strait R&D internationalization may be undertaken by Taiwanese information technology (IT) firms,
but also the likely patterns of their R&D portfolios across the strait. Drawing on an original questionnaire survey and firm-level
interviews, the paper presents and discusses empirical data on the cross-strait R&D deployment of Taiwanese IT firms. It then
goes a stage further, using the ‘smiling curve’, to put forward a ‘holistic’ view of the cross-border innovation network in the IT
hardware industry, in order to determine what cross-strait R&D internationalization means to the global production network.
© 2003 Elsevier B.V. All rights reserved.
Keywords: R&D internationalization; Offshore R&D; Innovation system; Division of labor; Global production network

1. Introduction Paoli and Guercini, 1997; Cantwell and Santangelo,

It is self evident, from the depth of the literature
in this area, that technology is becoming increasingly
globalized (see, for example, Petrella, 1989; OECD,
1997; Patel and Pavitt, 1998; Guellec and van Pottels-
berghe de la Potterie, 2001; Kaufmann and Tödtling,
2001), resulting, as noted by Chiesa (1995) and
Panastassiou and Pearce (1994), in the proliferation of
offshore R&D by multinational corporations (MNCs).
Alongside the issue of technology transfer, technology
sourcing has also become an important issue in the
R&D internationalization of firms (De Meyer, 1993;
∗ Tel.: +886-22735-6006x514; fax: +886-22739-0610.
E-mail address: shchen@mail.cier.edu.tw (S.-H. Chen).
1999; Gerybadze and Reger, 1999; Zander, 1999) and
is also clearly of importance to inter-firm partnerships
(Delapierre and Mytelka, 1998). Within such a pro-
cess, firms can build up a sustainable competitive ad-
vantage based on knowledge, leveraging and aligning
both their internal and external networks on an inter-
national scale. This will arguably result in the reshap-
ing of the structure of the global innovation system
and the landscape of global technology. Nevertheless,
despite such a discernible trend, the substantial body
of literature on R&D internationalization understand-
ably has much to do with the developed country, with
very few exceptions (for example, Reddy, 2000).
The information technology (IT) industry has rep-
resented the primary driver of economic growth in

0048-7333/$ – see front matter © 2003 Elsevier B.V. All rights reserved.
doi:10.1016/j.respol.2003.09.003
338 S.-H. Chen / Research Policy 33 (2004) 337–349
Taiwan ever since the 1980s. Despite many countries
having experienced rapid development of their infor-
mation sector over the past two decades, Taiwan’s
information industry has outpaced the majority of its
international counterparts, at one time resulting in the
island being positioned as the world’s third largest pro-
ducer of information products. This position is, how-
ever, now being passed over to China, partly because of
the outreach of Taiwan-based firms into the mainland.
A characteristic feature of Taiwan’s information
industry, which has already been well-documented
(Hobday, 1995; Kraemer et al., 1996; Kim and Tunzel-
mann, 1998) is its local industrial clustering, a feature
which is often cited as the major source of Taiwan’s
success. Recent developments, however, have called
into question the extent to which local agglomeration
can adequately encapsulate the dynamics of Taiwan’s
information industry. It has been documented else-
where by the author (Chen and Liu, 2002a) that in
response to the formation of the global production
network, firms in the IT industry in Taiwan have gone
‘global’, evolving from pure manufacturers towards
‘integrated service providers’ and shouldering such
functions as supply-chain management, logistics op-
erations and after-sales services, particularly through
e-commerce applications (Chen, 2002). As regards the
outreach of these firms, starting from the late-1980s,
their outward investment had initially been directed
towards Southeast Asia, but this has shifted more re-
cently towards China; indeed, the electronics and elec-
trical appliances sector is now accounting for more
than 40% of Taiwan’s total outward investment and in
particular, of its outward investment into the mainland.
There has even been further relaxation by the Tai-
wanese government of the regulatory controls previ-
ously put in place by as a means of controlling outward
investment into China, with such relaxation aimed at
assisting notebook Taiwanese PC and IC foundry man-
ufacturers to gain a foothold in the mainland.1 This
gives rise to the important question of what kinds of
value-chain activities the Taiwan-based IT firms have
been performing in China, and in particular, to what
extent they are involved in R&D. This question is not
only important to Taiwanese government policy, but
1 Given the current situation of political confrontation across
the Taiwan Strait, the Taiwanese government has imposed certain
regulatory controls on cross-strait trading.
also has academic significance. Recent years have in
fact witnessed a wave of establishments of R&D facil-
ities in China by MNCs (Xue and Wang, 2001; Chen
et al., 2002; Walsh, 2003), particularly in Beijing and
Shanghai (Chen, 2003). High-profile examples at is-
sue include quite a number of MNCs in the IT sec-
tor, such as IBM, Microsoft, Motorola, Intel, Nokia,
etc. We are thus motivated to explore the extent to
which Taiwan-based IT firms have undertaken R&D
in China and to examine the patterns of their R&D
portfolios across the Taiwan Strait. Our main aim is
to draw attention to the phenomenon of R&D inter-
nationalization taking place between countries outside
of the developed world. Furthermore, we intend to go
a stage further in this paper, to discuss the ways in
which such R&D internationalization is connected to
the global production network.
Our analysis proceeds as follows. The next section
begins with an examination of the literature on R&D
internationalization and globalization, based upon
which we propose a conceptual framework adapted
from Dunning’s eclectic paradigm. In such a way, we
set out, not only to develop arguments as to why Tai-
wanese IT firms may be engaged in cross-strait R&D
internationalization, but also to examine the likely
patterns of their R&D portfolios across the strait. The
research methods used in the paper are described in
the subsequent section, followed by presentation and
discussion of the empirical data on the cross-strait
R&D deployment of Taiwanese IT firms. The penulti-
mate section goes on to use the ‘smiling curve’ to put
forward a holistic view of the cross-border innova-
tion network of the IT hardware industry, in order to
determine what cross-strait R&D internationalization
means to the global production network. The final sec-
tion provides some conclusions drawn from this study.
2. Conceptual framework
In the studies on R&D globalization, the bottom
line appears to be that although not yet truly global-
ized, R&D is currently undergoing a process of glob-
alization (Howells, 1990a, b, 1992) although progress
does vary considerably across sectors and countries
(Westney, 1990, 1993; Casson and Singh, 1993;
Dunning, 1994; Asakawa, 2001). A number of other
studies have also confirmed that this is an escalating
 S.-H. Chen / Research Policy 33 (2004) 337–349 339

trend (OECD, 1997; Patel and Pavitt, 1998; Cantwell
and Santangelo, 1999; Gerybadze and Reger, 1999;
Voelker and Stead, 1999; Patel and Pavitt, 2000;
Kumar, 2001; Guellec and van Pottelsberghe de la
Potterie, 2001) but despite this trend, the globalization
of R&D has largely been considered as a phenomenon
which is ‘developed country-centric’. Foreign-owned
affiliates, for example, accounted for around 70% of
the overall R&D in Ireland in (Kearns and Ruane,
2001), whilst for the OECD countries as a whole, by
1997, foreign corporations were responsible for over
10% of R&D.
However, Reddy (2000), amongst others, has re-
vealed a rising trend in the R&D operations of MNCs
within the developing world. The factors underlying
this trend, as highlighted by Reddy, are summarized in
Table 1. In specific terms, MNCs are themselves faced
with an increasing need to monitor and learn the new
global trends and hence to engage in multi-sourcing of
technology inputs, partly because of rising R&D costs,
the increasing demand for R&D personnel and a short-
age of R&D personnel in the industrialized countries.
Conversely, some, if not a great many, of the devel-
oping countries are able to provide an abundant sup-
ply of R&D personnel or skills, especially with regard
to the so-called ‘non-core’ R&D areas. This match
of supply and demand has been facilitated by fac-
tors such as improved information and communication

Table 1
The driving forces behind the R&D internationalization of MNCs
1970s 1980s and 1990s

Corporate R&D
Demand-side forces
Supply-side forces
External forces in the
business environment
Internal forces
Need for monitoring and learning new Need for monitoring and learning new
worldwide trends worldwide trends
Technology transfer abroad for cost-effective Need for multi-sourcing of technology inputs
production
Large local markets Improved information and communication
technologies
Proximity to production facilities Flexibility of new technologies to allows
de-linking of manufacturing and R&D
Comparative advantages of host economies
– Liberalization of economies worldwide
Homogenization of consumer preferences
worldwide
Emergence of regional markets
Increasing global competition
Science base of new technologies
– Rationalization of MNC’s operations leading
to specialization of affiliates
R&D Internationalization R&D Globalization

Internationalization of Corporate R&D

Demand-side forces
Supply-side forces
Source: compiled from Reddy (2000).
Need to enhance market share in local
markets abroad
Host government policies
Large and protected markets with unique
characteristics
Proximity to market and production
Shortage of R&D personnel in industrialized
economies
Increasing demand for R&D personnel
Increasing R&D costs
Availability of R&D personnel in some
developing economies
Low-level of wages of personnel and divisibility
of R&D into core and non-core activities
Changes in policy regimes, including IPR in
host economies
340 S.-H. Chen / Research Policy 33 (2004) 337–349
Fig. 1. R&D-related advantages of MNCs, Taiwan and China in the Dunning eclectic paradigm context.
technologies (Howells, 1992), the flexibility of new
technologies which allows de-linking of manufactur-
ing and R&D, and the comparative advantages of the
developing host countries.
For our empirical work, we propose a framework
for further analysis which is essentially based on
Dunning’s (1993) eclectic paradigm, with a strong
flavor of the evolutionary approach to technology
(Nelson and Winter, 1982), but which, in some cases,
also allows for leapfrogging competition. According
to Dunning, where firms possess advantages of own-
ership and internalization, and host countries enjoy
locational advantages, international production may
take place. In our view, Dunning’s paradigm can be
useful for analyzing the offshore R&D activities of
multinationals if one interprets ownership, internal-
ization and locational advantages in the context of
R&D, with these advantages being related mainly to
the technological routines and trajectories of the firms
and the host countries (Dosi, 1982). In short, what
a firm and an economy can do, or is about to do, is
linked strongly to their routines and previous bases.
However, in some cases, where technologies are
not characterized by incremental change, leapfrogging
competition may arise, which may allow the firm or
country concerned to bypass certain stages of the tech-
nological trajectory, or to jump straight into a new
generation of technology. A typical example at issue,
is the new industrial standard, TD-SCDMA, for third
generation mobile communications, which, despite the
low mobile phone penetration rate in the mainland, has
been proposed by China and accepted by the Interna-
tional Telecommunications Union. Another example
lies in the area of software, because new learners can
enter directly and learn the new version (or generation)
of software without the need to go through previous
versions. Those MNCs that are involved in offshore
R&D may therefore shift some part of their R&D op-
erations to a host country, according to the capabili-
ties and/or potential of the latter, whilst capitalizing
on the derived benefits by exploiting their own ad-
vantages of ownership and internalization. As a result
of such analysis, we may be able to explain not only
why R&D is internationalized, but also what types
of R&D are undertaken in the host countries. Fig. 1
itemizes some of the advantages that multinationals,
Taiwan and China may each possess in the Dunning
context.2
2 This framework was initially developed by the author (Chen
and Liu, 2002b) as a means of discussing international aspects of
Taiwan’s national innovation system, including foreign R&D fa-
cilities in Taiwan and the offshore R&D activities of Taiwan-based
firms. Given the wave of new establishments of R&D facilities
by MNCs in China (see for example, Xue and Wang, 2001; Chen
et al., 2002; Chen, 2003; Walsh, 2003), it would seem that a dis-
cussion of the roles played by MNCs remains instructive.
 S.-H. Chen / Research Policy 33 (2004) 337–349
In our opinion, the ownership advantages of MNCs
generally lie in their core technology and world-class
brand names. Their core technologies allow them to
set the agenda, at an international level, and influence
the way in which technology will progress, whilst their
world-class brand names enable them to gain direct
access to customers and marketplaces, which in turn
facilitate their initiation of concepts for product de-
velopment and the means of further exploiting market
potential elsewhere.
The internalization advantages of MNCs may
include systems integration capabilities, product plan-
ning capabilities, market access advantages and infor-
mation and communication networks. In particular,
with systems integration capabilities and information
and communication networks at their disposal, they
may be able to deploy core and non-core R&D across
boundaries, whilst maintaining control over the prof-
its generated during the whole process. Likewise, the
possession of product planning capabilities and mar-
ket access advantages means that MNCs have control
over the two ends of the ‘smiling curve’, and hence,
have the final say in the benefits derived from the
entire value chain they face.
With regard to Taiwan as a location for offshore
R&D by MNCs, we have to refer to the way in which
economic development has evolved on the island,
since it is well-known as a typical example of the
export-oriented industrialization paradigm. Although
this goes hand in hand with the process of migration
from labor-intensive sectors towards high-technology
and capital-intensive industries, Taiwan’s major sec-
tors are characterized by their vertical disintegration
and the pursuit of OEM/ODM contracts for brand
marketers, without direct access to the final market.
In terms of R&D, local firms may, in general, lack
systems integration capabilities and the ability to take
the initiative in product and technology development;
however, some of the industrial players may be posi-
tioned as ‘first-tier suppliers’, possessing innovation
capabilities in certain areas and industrial segments,
which could be considered as Taiwan’s main loca-
tional advantage in offshore R&D. In addition, the
last decade witnessed a wave of R&D investment
in China both from MNCs and from Taiwan-based
firms. Therefore, Fig. 1 goes a step further to analyze
the case where Taiwan-based firms engage in R&D
investment in China.
341
It is generally perceived that firms based in Taiwan
undertake more ‘D’ than ‘R’ and that they lack systems
integration capabilities. As a result, commercializa-
tion capabilities of the sub-system in certain areas may
be considered as their R&D ownership advantages.
However, their networking relationships with brand
marketers may be considered as their internalization
advantage on two counts. Firstly, although China is
emerging as a major electronics manufacturing base,
approximately two-thirds of Chinese exports are at-
tributable to Taiwan-based firms. Elsewhere, we have
argued that the restructuring of the global electronics
industry has led to the formation of the global pro-
duction network in which Taiwan-based firms have
begun to shoulder functions such as coordination of
cross-border supply chains and logistics, acting as in-
tegrated service providers and hence, an essential node
in the global value chain (Chen and Liu, 2002a; Chen,
2002). As a result, many world-class brand marketers
may be ‘anchored’ to Taiwan’s economy, especially
in terms of order placement. Secondly, in the process
of outreaching, Taiwan-based firms have scaled down
their local operations and handed over parts, or the
whole, of their manufacturing functions to offshore
sites, leading, in varying degrees, to the de-linking of
manufacturing and R&D. As long as their network-
ing relationships with brand marketers are secure, the
Taiwan-based firms remain in the driver’s seat in terms
of profit distribution within internal organizations, and
coordination of R&D and manufacturing. An addi-
tional internalization advantage that may be enjoyed
by Taiwan is ethnic links with China, particularly as
compared to MNCs; if Taiwan-based firms undertake
offshore R&D in China, the similarities in language
and culture between Taiwan and China may facilitate
knowledge communication and absorption between
the two parties.
It then comes down to the question of what loca-
tional advantages China may have that are capable of
attracting offshore R&D. A large pool of R&D person-
nel and market potential may be two obvious advan-
tages, but when discussing market potential, we have
to take into account the possibility of leapfrogging
development, since some proportion of the Chinese
population may wish to consume state-of-the-art prod-
ucts. In addition, the Chinese science and technology
system formerly placed relatively greater emphasis on
basic research, partly because of the defense race in
342 S.-H. Chen / Research Policy 33 (2004) 337–349
the cold war period. Moreover, as China is emerging
as an international manufacturing base, it may be in
the process of accumulating production-related R&D
and engineering support, which will also subsequently
become a locational advantage.
The essence of the above framework is that
R&D globalization may be better understood in a
‘multilateral’ rather than simply a ‘bilateral’ context.
This means that R&D undertaken by the three parties
in the individual locations may, to some extent, inter-
act, resulting in complex networking relationships.
3. Research methods
The empirical research for this paper draws on a
research project, undertaken by the authors, which
addressed the R&D deployment of Taiwan-based
IT firms within China (Chen et al., 2002).3 Both
an original questionnaire survey and semi-structured
firm-level interviews were conducted for the survey,
which was addressed to firms listed in the capital
market in the broadly defined IT sectors in Tai-
wan because they would arguably tend to be more
R&D-intensive and more internationalized. Our term
‘broadly defined’ IT industry, refers to the PC, IC,
software and optical-electronics sub-sectors, whilst
our use of the specific term R&D refers to those
activities that are eligible for the Taiwanese govern-
ment R&D tax credit scheme, since this does have
an official definition which is widely recognized and
understood throughout Taiwan.
It should be mentioned that the author is aware of
the Frascati Manual of the OECD, which categorizes
R&D into basic research, applied research, and ex-
perimental development. In the following analysis,
we may not follow the strict definition of the Fras-
cati Manual. In fact, UNCTAD (1999) has outlined
a wider spectrum of technology activities, which in-
clude blue sky and basic research, medium-term prod-
uct/process research, medium-term product/process
applied development, short-term innovation and pro-
totype development, significant adaptation and im-
provement to existing technologies, implementation
3 It is worth noting that China has major significance to this
paper, having become a major host for outward investment by
many Taiwanese IT firms.
and operationalization of new equipment, technol-
ogy and engineering support for manufacture, and
production-related skill and capabilities. Bearing in
mind the official definition of R&D in Taiwan, our in-
tensive analyses on the R&D portfolio across the Tai-
wan Strait somewhat refer to the above categorization.
The questionnaire was mailed to a sample of
600 firms in July 2002, with a total of 82 usable
survey responses subsequently being received, a re-
sponse rate of 13.67%. Although this is quite low,
the sample proved to be highly representative of the
well-established firms, which may help to strengthen
the validity of the survey and the subsequent anal-
yses. Apart from an examination of the background
information, the study surveyed the managing direc-
tor or R&D manager of each firm, who was asked,
where applicable, to identify the location of their
overseas R&D sites.4 In the case of offshore R&D
in China, the respondents were also asked to iden-
tify the pattern of the sources of technology of their
Chinese subsidiaries. Where their companies were
engaged in cross-strait R&D, the respondents were
also asked to assess the relative significance of a few
R&D activities on both sides of the Taiwan Strait.5
In total, twenty-one high-profile Taiwan-based IT
firms, or their Chinese subsidiaries, were interviewed
in order to elicit information that might meet any of
our research purposes or that might complement the
analyses of the survey results. Eight of the interviews
were undertaken in China; the remainder took place
in Taiwan.
4. The cross-strait R&D deployment of Taiwanese
IT firms
Recent years have witnessed a new phase of
cross-strait industrial interaction. The newly emerg-
ing geographical concentration of investment in the
Long River Delta by Taiwan-based firms suggests
that Taiwanese outward investment into mainland
China is becoming more technology-intensive and
4 As preliminary observations, we were able to prove with sta-
tistical robustness that larger firms tended to be more R&D in-
tensive, in terms of R&D personnel, and to possess more US and
European patents.
5 Semi-structured firm-level interviews were also conducted on
both sides of the Taiwan Strait.
 S.-H. Chen / Research Policy 33 (2004) 337–349
Fig. 2. Geographical distribution of offshore R&D by Taiwanese IT firms.
capital-intensive; indeed, in recent years, the elec-
tronics and electrical appliances industry has ac-
counted for approximately 40% of Taiwan’s annual
outward investment to China. There has also been
some cross-strait policy convergence in the attraction
of offshore R&D by MNCs as well as the promotion
of technological upgrading, which implies a rising
trend towards a cross-strait interaction in R&D and
technology.
There is a growing discernible trend towards the
deployment of R&D in China by MNCs; indeed, one
suburb of Beijing, Zhong Guancum, is emerging as
an example of foreign R&D clustering in the develop-
ing world (Reddy, 2000; UN, 2001). A study by Chi-
nese scholars revealed that up to July 1999, around
thirty-four foreign-owned R&D facilities had been lo-
cated in China, with eighteen of them being located in
Beijing (Transnational Corporation Research Center,
2001). The lion’s share is taken up by the informa-
tion technology, communications and electrical ma-
chinery industries, with their presence in China being
attributed mainly to factors such as the huge poten-
tial of the Chinese market, availability of local R&D
personnel, collocation of R&D and regional (or Chi-
nese) headquarters, and state policy6 . In addition, it
6 According to Walsh (2003), MNCs’ R&D activities in China
appear to have since the early-1990s evolved in three distinct,
though overlapping, stages, from the exploratory and strategic
partnership stage, the expansion of R&D stage, to the consolidation
of R&D stage. While the first stage was characterized by MNCs’
343
is evident that the China operations of Taiwan-based
firms have gone beyond manufacturing, moving in-
creasingly into R&D. As noted earlier, the survey re-
spondents were required to identify, where applicable,
the location of their overseas R&D facilities, and the
results showed that 39 out of 82 respondents (47.56%)
had conducted R&D activities in China, followed by
22 in the US (Fig. 2).
If we focus merely on those respondents engaged
in R&D efforts, this proportion rises to 67.24%, and
by implication, China had become the major target
for the offshore R&D of these Taiwanese firms’ in
quantitative, though not necessarily qualitative, terms.
Part of the survey elicits information on firms’ R&D
activities in China, with the respondents first being
asked to identify the major technology sources of their
subsidiaries located there. The distribution of the re-
sponses to this question is provided in Fig. 3, which
shows that ‘Support from the parent’ stood out as
the predominant technology source of Taiwan-based
firms’ subsidiaries in China, with almost 80% of re-
spondents ranking it as highly important. Second to
this was ‘local subsidiaries’ own R&D efforts’.
These two were followed, by quite a substantial
margin, by such sources as ‘joint efforts with local re-
search institutes’ and ‘joint efforts with local firms’. It
passive response to the governmental demands for local R&D
investment as pre-conditions for access to the domestic market,
the third (current) stage is marked by a more considered, strategic
approach to R&D investment in China.
344 S.-H. Chen / Research Policy 33 (2004) 337–349

Fig. 3. Technology sources of Taiwanese IT firms’ subsidiaries in China.

is therefore arguable that the Taiwan-based firms’ sub-
sidiaries, although heavily technologically reliant on
their parent companies, are also engaged in local R&D
which can by no means be regarded as negligible.
The respondents were also asked to assess the rel-
ative significance of a few R&D activities on both
sides of the Taiwan Strait; the results of this inquiry
are summarized in Fig. 4, which shows that basically,
in each type of R&D activity, Taiwan significantly
outweighs China. By counting the proportion of
respondents ranking Taiwan as ‘highly important’
and of ‘secondary importance’, we can argue that
Taiwan remains the major focus in these firms’ cross-
strait R&D operations, particularly in terms of the

Fig. 4. Relative significance of cross-strait R&D by Taiwan’s electronics firms.

 S.-H. Chen / Research Policy 33 (2004) 337–349
development of new products, the modification of
products, and new process technologies. Of equal
importance is the finding that quite a large proportion
of respondents expressed indifference towards both
Taiwan and China with regard to machinery design,
machinery duplication and environment-related R&D.
Part of this finding is consistent with the results gath-
ered from the firm-level interviews, discussed below.
With some of the Taiwanese IT firms having scaled
down, or even hollowed out, their manufacturing op-
erations in Taiwan and shifted them towards China
and elsewhere, it may in fact become necessary for
them to rely increasingly on their Chinese subsidiaries
to undertake manufacturing-related R&D. This seems
more likely in the case where the de-linking of R&D
and manufacturing is feasible (Reddy, 2000). In ad-
dition, global production networks in the IT industry
have come to resemble a ‘just-in-time’ (JIT) system
on a global scale, entailing the modularization of pro-
duction across different sites and borders (Angel and
Engstrom, 1995; Feenstra, 1998; Chen and Liu, 2003).
As a result, concurrent development and introduc-
tion of new products into the marketplace, facilitated
by the application of information and communication
technologies, may become the norm in the industry.
For example, Mitac, a leading PC producer based in
Taiwan, has set up a ‘collaborative product commerce’
(CPC) mechanism for online joint product design, in-
corporating an intra-link that enables its subsidiaries
and partners to use the same design tools for joint
product design and development. The process ranges
from product definition to product R&D and prod-
uct modularization, and not only helps to reduce the
R&D cycle time for Mitac and its partners, but is also
an essential element in the coordination of the sub-
sequent production, assembly, delivery and repair and
Table 2
The cross-strait deployment of R&D by Taiwan-based firms
Product Type
Market
Life Cycle
Attributes of R&D or technology Software and Hardware
R&D process
Source: compiled by author.
345
maintenance activities (Chen, 2002). In light of this, it
is no surprise to see that Taiwan-based IT firms have,
to a large extent, mandated their Chinese subsidiaries
to undertake certain elements of their R&D on their
behalf.
On the basis of firm-level interviews conducted
on both sides of the Taiwan Strait, it became possi-
ble to identify certain patterns of cross-strait R&D
deployment by some of the Taiwan-based IT firms
(Table 2). In essence, the cross-strait production net-
work is evolving alongside its global counterpart and
hence is becoming more complex; indeed, within
manufacturing, there are now new types of division of
labor, going beyond the former horizontal and vertical
dividing lines.
Based on the information obtained from the struc-
tured interviews, we were able to identify five types
of R&D portfolios across the Taiwan Strait. First
of all, where Taiwan-based firms’ production lines
are concentrated in China as well as other coun-
tries, product development is undertaken in Taiwan,
whilst engineering support and manufacturing-related
R&D is undertaken in China. This often entails the
de-linking of R&D and manufacturing. Secondly,
some Taiwanese firms outsource their software de-
velopment services from China partly because of the
leapfrogging potential of software. The third type
of portfolio involves a tendency for some Taiwanese
firms to perform their basic research in China, which
often involves collaboration with local universities
and/or research institutes. The fourth type has some
Taiwanese firms performing their upstream (core)
R&D (or R&D for products at the developmental
stage) within Taiwan, whilst their subsidiaries in
China carry out downstream (non-core) R&D (or
R&D for products at the mature stage). Finally, there
Taiwan China
Peripherals System-related
International market Domestic market
Development stage Mature stage
Hardware Software
Product and process R&D Basic research, verification and
fine-tuning of process
346 S.-H. Chen / Research Policy 33 (2004) 337–349
are also cases where Taiwanese firms perform R&D
in China for systems-related products, often modular
products for the local market, such as motherboards
for communications systems, whilst performing R&D
for peripherals, such as handset motherboards, in
Taiwan. In particular, one interviewee noted that the
company’s R&D activities were divided into five
stages; namely engineering sample (ES), engineering
valuation test (EVT), design valuation test (DVT),
production valuation test (PVT), and mass production
valuation test (MVT), with the first two stages being
conducted in Taiwan, with the remainder, all manu-
facturing process-related, being undertaken in China.
5. A holistic view of the global IT innovation
network
It is evident that R&D internationalization is in-
creasingly involving the developing country. This
arises not within a historical vacuum, but has much
to do with the increasingly obvious trend towards the
disintegration of manufacturing and innovation capa-
bilities on a global scale. These points are illustrated
vividly in the IT industry, and also in those areas in
which countries such as Taiwan are heavily involved.
In order to encapsulate these developments, we would
Fig. 5. The cross-border innovation network of the IT hardware industry.
like to go further, using the ‘smiling curve’ to put
forward a ‘holistic’ view of the cross-border inno-
vation network in the IT hardware industry (Fig. 5).
The smiling curve was first coined by Stain Shih, the
founder of the Acer Group, suggesting that in many
industries profitability at various stages of value chain
has come to follow a U-shaped curve high at the
upstream and downstream processes and low at the
midstream processes. Here we modify the smiling
curve a little bit by accommodating more upstream
activities of R&D or technology. The traditional view
of the division of labor between the developed and
developing countries tends to incorporate the di-
chotomy between ‘high-end’ and ‘low-end’ products
and functions; however, we argue that there are con-
siderable doubts as to the validity of such a linear
and core/periphery dichotomy with regard to R&D
internationalization across the Taiwan Strait.
As discussed above, the cross-strait IT production
network is evolving alongside its global counterpart,
and hence, is becoming more complex. There are now
new types of division of labor, going beyond the hori-
zontal and vertical division in manufacturing, includ-
ing: (i) technology: upstream versus downstream; (ii)
product: peripherals versus system-related products;
and (iii) market: the international market versus the
Chinese market. Within this process, the operations
 S.-H. Chen / Research Policy 33 (2004) 337–349
of Taiwan-based firms in China demonstrate a rising
trend towards localization, moving from the sourcing
of parts and components towards verification of man-
ufacturing processes, engineering support and even
software development. Moreover, on the other end
of the ‘smiling curve’, regardless of their nationality,
firms may be attracted by China’s huge market po-
tential to gain a market foothold through the widen-
ing of their value chains. This in turn may call for
all firms concerned to strengthen their R&D commit-
ment in China. On balance, when analyzing the trend
towards R&D internationalization, the role played by
countries such as Taiwan and China can no longer be
downplayed.
6. Conclusions
In light of the above findings, we are faced with
the fundamental question as to why it was that R&D
activities came to be involved so rapidly in Taiwanese
IT firms’ outreach into China, given that this outreach
trend has arisen only over the last decade. The answer
to this question may be found by referring to some of
the attributes of the global production network. First
of all, Taiwanese IT firms are generally characterized
by vertical disintegration and deeply involved in OEM
contracts for brand marketers; thus, their outreach
may have taken place by way of a chain reaction,
with the result that the electronic and electrical ap-
pliances sector now accounts for more than 40% of
Taiwan’s outward investment to China. In response to
this, quite a number of Taiwanese IT firms have now
scaled down their local operations and handed over
parts, or the whole, of their manufacturing functions
to their offshore sites in China and elsewhere. Sec-
ondly, following closely on from this, the de-linking of
manufacturing and R&D then becomes realistic, with
these Taiwanese firms relying increasingly on their
Chinese subsidiaries for production-related R&D and
engineering support. Thirdly, a distinctive feature of
the global production network is that ‘under one roof’
production has been replaced by cross-border mod-
ularized production. As a result, in order to pursue
the effective development of new generations or ver-
sions of products, concurrent development amongst
different sites may now become the norm. Fourthly,
there is a tendency for global production networks
347
to be incorporated within the mechanism of online
joint product design, as illustrated by Mitac’s ‘collab-
orative product commerce’, discussed above. Within
such a mechanism, not only can the R&D cycle time
be reduced for all the parties involved, but the syn-
chronization of the subsequent value chain, involving
production, assembly, delivery, and repair and main-
tenance, can also be facilitated.7 Fifthly, China has a
significant pool of low-cost R&D personnel and may
be able to exploit leapfrogging potential in specific ar-
eas, such as software. Finally, it hardly needs mention
that China has enormous inherent market potential,
particularly in areas such as communications.
What may also be of great importance is that not
only can it be determined, through both evidence
and conceptualization, that a significant number of
Taiwan-based IT firms have already given R&D man-
dates to their subsidiaries in China, but also that
certain patterns of cross-strait R&D portfolios seem
to be prevailing. For those Taiwanese firms with
R&D on both sides of the Taiwan Strait, their R&D
activities in Taiwan tend to focus more on product
development, new process technology and hardware,
whilst their activities in China relate more to man-
ufacturing R&D, software and even basic research.
On balance, our theoretical framework, adapted from
Dunning’s eclectic paradigm, seems to stand up to
empirical scrutiny, and what we have presented here
is not just the R&D internationalization of such a
newly-industrializing country as Taiwan, but also its
connections with the global production network.
Acknowledgements
Financial support from the Department of Industrial
Technology at Ministry of Economic Affairs, Taiwan
is gratefully acknowledged. An earlier version of this
paper was presented at the AT10 Research Conference:
Innovation and Promotion Policies for the Service Sec-
tor in Asia, held by the Nomura Research, Tokyo,
Japan, 20–21 February, 2003. The author has also ben-
efited from skillful assistance from Ms. Hui-Tzu Shih.
7 The latest stage of Taiwan’s Network Information Manage-
ment Initiatives, known as the ‘E Project’, in fact, involves online
cross-border and inter-firm joint R&D for the purpose of collab-
orative commerce.
348 S.-H. Chen / Research Policy 33 (2004) 337–349
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