Asian Politics & PolicyVolume 1, Number 4Pages 726738

Intellectual Property Rights

and Foreign Investment:
The Political Economy of Taiwans
Technology-Intensive Foreign
Direct Investment
_1150

726..738

Douglas B. Fuller
Kings College, University of London
This article employs Taiwans institutions for intellectual property rights (IPR) to explain
two aspects of Taiwans foreign direct investment behavior: the location of offshore sites
for Taiwanese research and development, and investment by Taiwanese venture capitalists. The article rst describes the evolution of Taiwans informal IPR practices that differ
from the ideal typical IPR regime supposedly required for economies as technologically
sophisticated as Taiwans. Essentially, Taiwan has developed informal practices to protect
corporate IPR that are centered on internal corporate mechanisms rather than external
formal legal mechanisms. Relying on these informal practices, the article discusses how
Taiwan has invested in technology-intensive activities in locations where IPR protection is
weak. This behavior stands in sharp contrast to the behavior of multinationals from the
Organisation for Economic Co-operation and Development countries.
Key words: intellectual property rights, political economy, R&D, Taiwan, technology, venture capital

Introduction

his article uses Taiwans institutions for intellectual property rights (IPR) to
explain two aspects of Taiwans foreign direct investment (FDI) behavior:
the location of offshore sites for Taiwanese research and development (R&D), and
investment by Taiwanese venture capitalists (VCs). The article rst describes the
evolution of Taiwans informal IPR practices that differ from the ideal typical IPR
regime supposedly required for economies as technologically sophisticated as
Taiwans (Dam, 2006). Essentially, Taiwan has developed informal practices to
protect corporate IPR that are centered on internal corporate mechanisms rather
than external formal legal mechanisms. The article then argues that these practices are conducive to operating in other environments where IPR regimes are

Intellectual Property Rights and Foreign Investment

727

incomplete according to the standards of most advanced economies. Taiwanese

technology-intensive rms are thus relatively more likely to invest in R&D activities in countries with relatively poor IPR regimes than technology-intensive rms
from other advanced economies. The article presents patent evidence comparing
Taiwanese and foreign multinational corporation (MNC) patenting behavior in
the developing world. Similarly, Taiwanese VCs are more willing to invest in
technology-intensive companies in economies with weak IPR regimes than VCs
from countries with rigorous IPR protection regimes. Here a case study comparing the investment choices in China of Taiwanese VCs to those of foreign investors demonstrates the technology-intensive bias of the Taiwanese.

Formal IPR and Informal Protection Mechanism

From Gwartney, Lawson, and Easterly (2006), one can see the improvements
and limits of Taiwans IPR regime. After a series of reforms to improve patent
rights were passed in 1994 (see Yang, 2008), Taiwans IPR system was considered
to still lag behind those of the large economies of the developed world (labeled
Large OECD in Table 1), but reasonably comparable with the other three East
Asian newly industrialized economies (NIEs) of that era (labeled East Asian 4 in
Table 1) and better performing than less developed economies of that time, such
as India, China, and the Philippines. As with most of the rms listed in Table 1,
Taiwans IPR system has improved over the intervening decade since 1995. The
gap with the developing economies has grown, but the East Asian 4, with the

Table 1. IPR Protection (10 = best, 1 = worst)

Country
USA
Germany
Singapore
U.K.
Japan
Hong Kong
Taiwan
South Korea
India
China
Philippines
Russia

Large OECD
East Asian 4
Developing

1995

2004

Average

Rank

Type

7.8
8
7.3
7.1
6.8
6.1
5.9
4.3
4.1
4.2
4
1.6

9
8.8
8.4
8.5
7.2
6.6
6.5
5.8
5
3.7
3
2.3

8.4
8.4
7.85
7.8
7
6.35
6.2
5.05
4.55
3.95
3.5
1.95

1
1
2
3
4
5
6
7
8
9
10
11

Large OECD
Large OECD
East Asian 4
Large OECD
Large OECD
East Asian 4
East Asian 4
East Asian 4
Developing
Developing
Developing
Transitional

1995

2004

Average

7.425
5.9
4.1

8.375
6.825
3.9

7.9
6.3625
4

Source: Gwartney et al. (2006).

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Asian Politics & Policy

exception of star performer Singapore, still lag behind the large developed
economies in their IPR protection as these economies also improved their IPR
regimes over the decade.
Interview data from ongoing research involving more than 400 interviews
conducted by the author in greater China, India, and the United States between
1998 and 2008 with foreign rms involved in the global information technology
industry and Taiwanese rms from a range of industrial sectors provide additional insight to the evolution of Taiwans IPR system. Although Taiwans legal
system for protecting intellectual property (IP) has evolved and strengthened
over time, rms with particularly vulnerable IP have also used informal measures internal to the rm to protect their IP. It was not so long ago that the rms
that led Taiwans technological development had to develop their own private
mechanisms to provide assurance to their customers that IP would not be stolen
(Fuller, 2008). Furthermore, the interviewed Taiwanese rms explained how they
honed internal corporate mechanisms in Taiwan to protect their IP. For example,
fabless design rms (rms that design chips but do not manufacture them
in-house) and software rms kept the workstations used to design proprietary
technologies in secure rooms that engineering staff could only enter by using
special electronic cards and passwords. And they did not stop there. The workstations had no USB ports and were Internet-disabled so that engineers could not
steal les through memory sticks or via the Internet. With the size of modern
integrated circuits (ICs) and software programs, no one engineer could memorize
sufcient digital data to steal signicant IP just by relying on their memory
(author interviews).
While foreign rms looked askance at investing in serious R&D and other
IP-generating activities in countries with poor IPR records, such as China (author
interviews; Walsh, 2003), Taiwanese rms were much more willing to invest in
IP-creating activities in countries with poor IPR records. This article demonstrates the greater willingness of Taiwanese rms to invest in poor IPR environments through two sets of data. The rst examines foreign and Taiwanese
patenting activity in China relative to patenting activity outside of China, particularly with reference to India. The comparison of R&D activities in India and
China is signicant because these are the two main sites for locating R&D in the
developing world (Asakawa & Som, 2008, p. 376).1 Thus, rms looking to place
R&D functions in the developing world generally move the functions to one of
these two Asian behemoths. The second set of data compares the investment
behavior of Taiwanese and foreign VCs in China.

Patenting: Taiwanese and Foreign Multinational

Corporations Compared
As part of the globalization of R&D documented by Reddy (2000), Taiwanese
rms as well as the typical MNCs from the Organisation for Economic Cooperation and Development (OECD) countries have over the last decade moved
R&D offshore to cheaper locations, such as the developing countries listed in
Table 1. Indeed, India and China have been favorite destinations for such R&Drelated FDI. However, in terms of IP-generating activities to these nations, there
is a great divergence in the behavior of MNCs. The Taiwanese rms strongly favor

Intellectual Property Rights and Foreign Investment

729

China, which has an IPR record of weak and declining protection. The MNCs
from the OECD favor India, which has substantially beefed up its IPR regime in
recent years. Indeed, India is closer to OECD member South Korea in the
strength of IPR regime than it is to China. Interviews with MNCs by the author
conrmed that the view of India as having a much stronger IPR regime than
China was widespread. Not one of the interviewed MNCs claimed that China
had equivalent or better IP protection than India, and the vast majority asserted
that Indias was much better. Even the Taiwanese rms, which overwhelmingly
favored China, pointed out the weakness of Chinas IPR regime. The interview
data suggested that MNCs perceived an even larger gap in IP protection performance between India and China than the data by Gwartney et al. (2006) suggests.
Field interviews with MNC R&D centers in China by Quan (2005) suggested
that MNCs deal with Chinas IPR regime by breaking R&D into discrete tasks
and outsourcing the noncritical ones to China. This argument actually ts well
with the idea that the Taiwanese would be more willing to move important R&D
activities to China because of Taiwans rened and experienced means of protecting IP beyond the simple method of divvying up the tasks and offshoring the
simple ones. This divergence in R&D practices should show up in the amount of
patents generated and where the lead inventor on the patent is located.
Given this background, this section uses patent data to test three hypotheses.
The rst hypothesis is that Taiwanese will create more patents in China than
MNCs will. The second hypothesis is that MNCs will create more patents in India
than Taiwanese rms. The third hypothesis is that the proportion of MNCs R&D
conducted in India will be higher than the proportion conducted in China.
The data used in this section are from the U.S. Patent and Trademark Ofce
(USPTO). The USPTO has compiled data on the active patentees from various
countries from 2003 to 2007 (U.S. Patent and Trademark Ofce, 2008). Active
patentees are dened as those with at least ve utility patents granted by the
USPTO within this period. Location is determined by the location of the lead
inventor listed on the patent. Thus, the USPTO reports look only at patents where
the important contribution comes from an inventor located within a given
country.
In China, the Taiwanese have been very active in patenting. Fourteen rms,
including two Taiwanese-invested China-based rms, SMIC and Grace, had ve
or more patents from 2003 through 2007. Furthermore, despite the small size of
Taiwans economy relative to the combined economies of the OECD countries
from which most MNCs hail, Taiwan has created more patents with the lead
inventor in China than MNCs have (see Tables 2 and 3), with 668 Taiwanese
patents compared to 447 MNC ones.
When one examines the proportion of patenting from China for the Taiwanese
and MNCs, the much greater willingness of the Taiwanese to make intensive use
of Chinas human resources to create technology is apparent. The overall rate of
lead inventor patents to worldwide patents created during the same time period
was 14.2% for Taiwanese rms and a mere 0.704% for MNCs. Thirteen of 14
Taiwanese rms had at least 1% of their lead inventor patents from China. Only
10 of the 21 MNCs did, and several of the results may have been biased in favor
of a higher proportion from China for the MNCs. For example, SAE Magnetics
was originally a Hong Kong rm. Subsequently, it was bought by a Japanese rm,

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Asian Politics & Policy

Table 2. Taiwanese U.S. Utility Patents From China, 20032007

Taiwan Firms

Lead Inventor Patents

Worldwide Patents

Proportion

Hon Hai
Hong Fu Jin
Fu Zhun
SMIC
Winbond
Asia Optical
Futaihong
Grace
FIH
Foxconn Technology
Inventec
Ben Q
Lite-On
VIA

393
72
44
38
23
18
17
15
11
8
14
5
5
5

2,073
117
80
38
335
88
20
15
15
101
317
454
275
762

0.1895803
0.6153846
0.55
1
0.0686567
0.2045455
0.85
1
0.7333333
0.0792079
0.044164
0.0110132
0.0181818
0.0065617

Total

668

4,690

0.1424307

Source: Authors analysis based on USPTO data.

Table 3. MNC U.S. Utility Patents in China, 20032007

MNC Name

Lead Inventor Patent

Worldwide Total

Proportion

Microsoft
SAE Magnetics
Intel
IBM
Molex
P&G
Great Neck
Siemens
Philips
GE Medical
Emerson Networks
GE
Nokia
Lifetime Products
Canon Kabushiki
Chevron
JDS Uniphase
Schlumberger
Arcsoft
COSCO Mgt.
ST Microelectronics

190
44
40
26
17
14
13
12
11
9
8
8
8
7
6
6
6
6
5
6
5

4,967
177
8,573
16,315
343
1,480
21
3,409
4,737
909
11
5,049
3,116
61
9,987
418
362
1,076
19
90
2,379

0.038252
0.248588
0.004666
0.001594
0.049563
0.009459
0.619048
0.00352
0.002322
0.009901
0.727273
0.001584
0.002567
0.114754
0.000601
0.014354
0.016575
0.005576
0.263158
0.066667
0.002102

Total

447

63,499

0.007039

Source: Authors analysis based on USPTO data.

Intellectual Property Rights and Foreign Investment

731

so the total patents should be those of the Japanese parent company. Likewise, the
U.S.-based Emerson Networks is a recent subsidiary of Emerson created when
Emerson bought Shenzhen-based Avansys in China. Thus, the patents for that
rm should perhaps be compared to those of the parent company rather than
those of the new subsidiary.
Turning to India, no Taiwanese rms were present among the active patenting
foreign rms. Field research in India by the author also found that the Taiwanese
were not even present in the elds in which they are successful technology
generators, such as semiconductors. Among the active patentees, Taiwanese rms
generated zero patents, whereas MNCs created 761 as shown in Table 4.
As for patents within MNCs, only six out of 24 MNCs in India had less than 1%
of their patents in this period from India. The proportion of patents from India
compared to worldwide patents was much higher for MNCs in India than in
China, 1.12% compared to 0.704%. As mentioned above, data for some of the
rms in the China data overstated the proportionality of their rms patents
coming from China. And if the anomalous case of Microsoft, which has a very

Table 4. MNC U.S. Utility Patents in India, 20032007

MNC

Lead Inventor Patent

Worldwide Patents

Proportion

TI
IBM
GE
ST Micro
Cisco
Broadcom
GE Medical
Honeywell
HP
Cypress
Intel
Freescale
Sun Microsystems
Unilever
Novell
ADI
Cirrus Logic
Cadence
National Semiconductor
Adobe
Microsoft
Diebold
Genesis
SAP

141
134
113
80
30
27
27
27
24
22
16
15
15
14
13
10
9
8
8
7
6
5
5
5

4,066
16,315
5,049
2,379
2,547
2,078
909
2,626
9,075
788
8,573
1,001
3,314
692
119
691
273
360
1,146
228
4,967
257
59
113

0.034677816
0.008213301
0.022380669
0.033627575
0.011778563
0.012993263
0.02970297
0.010281797
0.002644628
0.027918782
0.001866325
0.014985015
0.004526252
0.020231214
0.109243697
0.01447178
0.032967033
0.022222222
0.006980803
0.030701754
0.001207973
0.019455253
0.084745763
0.044247788

Total

761

67,625

0.011253235

Source: Authors analysis based on USPTO data.

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Asian Politics & Policy

weak presence in India and a strong presence in China, was excluded, the gap in
proportionality between India and China would be much higher. Furthermore,
the MNCs in India were all technologically intensive rms, i.e., rms involved in
high-technology sectors. A number of the MNCs patenting in China were relatively low-technology rms, such as Great Neck (saws) and Lifetime Products
(sporting equipment).
In sum, the patent data found all three hypotheses to hold true, and other
evidence also suggests that these patenting patterns hold true beyond these sets
of data collected by the USPTO.

Venture Capital in China: Comparing the Behavior of Taiwanese and

Foreign VCs
To acquire an understanding of venture capital investment in the technology
sector in China, the author conducted semi-structured interviews with venture
capitalists active in China with 22 foreign and domestic VC rms between 2003
and 2007. These interviews were quite evenly distributed, with nine domestic,
seven Taiwanese, and six foreign VC rms interviewed. Included in the Taiwanese sample were two VC rms founded by Taiwanese Americans. These two
rms were founded in the United States, but with extensive long-term experience
in investing in Taiwan, their practices and behavior were closer to that of
Taiwanese VCs than American ones. Additional data were provided by more
than 300 additional interviews with technology rms active in China and with
Chinese government ofcials and academics between 1998 and 2008 as part of
ongoing research on technological development in China. Interviews were conducted either in Mandarin Chinese or English (Fuller, 2009).2
In this section, venture capital is dened narrowly as the early stages of
equity investment as opposed to latter-stage mezzanine, turnaround, and
buyout investments typically associated with private equity investment in the
West (Ahlstrom, Bruton, & Yeh, 2007). Although the objective of the research
was to interview VCs and eschew investigating private equity rms, among
the domestic Chinese rms often little differentiation was made between these
two types of activities. Thus, the interview subjects included domestic rms
involved in private equity. Foreign investment rms that more closely
resembled private equity rms were excluded. Similarly, this study excluded
state-run incubators that undertook equity investments in their incubatees.
However, many of the ndings of the inefcacy of the state-run VCs apply to
the state-run incubators as well.
This case study of the venture capital industry found that the foreign VCs,
Taiwanese VCs, and domestic VCs differed dramatically in their investment
patterns. The Taiwanese VCs were the most successful in promoting technological development through their investments, and the domestic Chinese VCs were
the least successful in this endeavor. This typology departs from those typologies
based on formal organizational features of the VCs. For example, White and
his colleagues (2005) divided Chinas VCs into government rms, foreign
rms, corporate rms, and university rms. While these divisions do exist, they
do not all seem to be the relevant ones for explaining investment behavior in
technology-intensive sectors.

Intellectual Property Rights and Foreign Investment

733

The main nding was the dramatic difference in the number of investments
in technology-intensive start-ups among the three types of VCs. Technologyintensive start-ups aim to create products (both tangible and intangible) embodying a signicant amount of technology knowledge and skills. These rms depend
on their technical skills to differentiate their products in order to ensure rm
survival and success. Given that China is still a developing country, these technical skills are not necessarily cutting-edge ones, but given prevailing wage rates
they do not have to be. However, these rms are worthless without their core
engineering teams. Contrasting with these technology-intensive rms were
start-ups trying to compete on their business models or service ideas. These
technology-light rms were not trying to compete on the basis of the strength of
their technical teams, but rather had other strategies for rm survival. On the one
hand, there were commercially oriented start-ups trying to be rst to market with
a certain business model or service new to China or at least slightly differentiated
from what was already on the market. On the other hand, there were start-ups
trying to survive by take advantage of connections to the state to feed at the
trough of state procurement.
Several general criteria were used to differentiate the technology-intensive
rms from technology-light rms. Firms were considered technology-intensive
rms if they created new tangible products in-house, with production (as
opposed to sales or other ancillary functions) requiring the employment of
university-educated engineers as the majority of employment measured in terms
of either total wages or total employment headcount. Fabless IC design houses, of
which there are many VC-invested ones in China, are an example of this type of
rm. Firms creating new intangible products broadly dened to include design
services for others with the same employment prole as above were also considered technology-intensive. Software service rms are one example of this type of
rm. Although there is a common misperception that software service rms are
not technology-intensive, the experience of India, where offshoring of this type
of work has a relatively long history, suggests that these rms have technical
skills as an essential component of their business survival and success (Dossani
& Kenney, 2007). Firms considered to be technology-light met neither of the
above criteria, either by not producing technology-based products and services at
all, or by not using sufcient engineering resources relative to the rm in doing
so.
The research for this article did not involve investigating every target rm
invested in by one of the interviewed VCs to see if they matched these criteria.
Rather, the determination of whether the invested rm was technology-intensive
was made by judging whether the target rm matched the prole of rms likely
to meet the above criterion. Thus, a VC-invested call center would not t either of
the above proles of technology-intensive rms, as a large body of engineers
would not be necessary to service calls. On the other hand, a VC-invested fabless
design house would t the prole of a technology-intensive rm given the high
likelihood of the rm employing large numbers of engineers (relative to the
number of the rms employees) to produce its products. These proles are not
simply based on some assumed deductive logic but on empirical observations of
Chinese technology rms, based on the more than 300 interviews within the
technology sector mentioned at the start of this section.

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Asian Politics & Policy

Table 5. Technology-Intensive Investments

Type of Venture
Capital Firm
Number of
Technology-Intensive
Investments
Total Number of Investments

Taiwaneseinvested

Foreigninvested

39

44

64

166

Domestic
Chinese
16

130 (230*)

Source: Author interviews.

The information about which target rms VCs invested in was drawn from the
interviews as well as from an update, conducted on May 1 and 2, 2008, that
searched the Web sites of the VCs for the foreign and the domestic VCs. The VCs
with which the author had most recently conducted interviews, all of which fell
into the Taiwanese category, were not updated at this time. The number of
technology-intensive rms in which the rms had invested for each category of
VC is presented in Table 5. The Taiwanese were most oriented toward investing
in technology-intensive rms, the foreign VCs were moderately interested, and
the domestic VCs were the least interested in making such investments. For the
domestic Chinese VCs, the number in parentheses in the total row represents an
additional estimate of 100 additional non-technology-intensive, even noncommercially viable investments that an interview subject claimed one municipalitycontrolled fund had made through six state-run VC rms.
The foreign VCs and Taiwanese VCs both drew on international capital rather
than domestic Chinese capital for their funds and sometimes from the very same
countries because the transnational ethnic Chinese networks in which the
Taiwanese VCs were embedded had close connections with the biggest source
of venture capital, the United States (Saxenian, 2006). Nevertheless, there was a
very important distinction between the two types of rms. The foreign rms not
embedded in the transnational ethnic Chinese networks did not have a lot of
exposure to investing in markets where the formal protection of property rights,
IP rights in particular, has been poor, whereas the Taiwanese VCs had extensive
exposure to such markets (Saxenian & Li, 2003).
From operating in Taiwan, the Taiwanese VC rms were able to learn about
informal mechanisms to protect their own IP and, more important, the IP of their
invested rms. Thus, they were much more willing to invest in technologically
intensive rms than those foreign VCs still relying on formal legal regimes to
protect property rights in countries where the formal regimes were weak. What
has been somewhat true for Taiwan has been even truer for China. Chinas record
of IP protection has been dismal given the failings of its formal legal regimes, as
seen in Table 1. Thus, only VCs comfortable with dealing in such an uncertain
legal environment would invest in rms where IP creation was a major part of the
business.
Therefore, it is not surprising to nd that the Taiwanese VCs demonstrated a
propensity to invest in rms that wanted to compete in terms of technology

Intellectual Property Rights and Foreign Investment

735

creation, occasionally even on globally new technologies, in China despite its poor
legal environment. While these rms did not reject investment in service-oriented
rms that were technologically light, they put at least an equal or even stronger
emphasis on investing in technology-creating rms. One VC even described this
as the two-less strategy, referring to fabless design houses and wireless technology. The latter often meant wireless services, but there was some distinction as
the Taiwanese were more willing to consider investing in rms creating wireless
equipment than were the other foreign VCs, which were mainly interested in
investing in wireless services. These Taiwanese VCs claimed to have made similar
investments in earlier years in places like Taiwan when the conventional wisdom
was that Taiwan was too far behind technologically and too lawless in terms of
IP protection to progress successfully and protably in technology creation. They
tended to view China as having a very similar environment to Taiwan and the rest
of emerging Asia in the 1980s and 1990s. In other words, they believed that
whatever institutional obstacles China presented to technology development
could be overcome. Furthermore, the interviewed Taiwanese VCs mentioned the
use of the same informal mechanisms to protect IP mentioned in the introduction
of this article mechanisms that were originally developed in Taiwan.
In contrast to the Taiwanese, the foreign VCs were mainly interested in
technology-light service-oriented ventures where they could see an existing large
market in China currently or in the very near future. These VCs did not typically
invest in IC design rms or other types of technology creation because they were
concerned about IP theft, and they were skeptical that anyone could make the
returns they desired in such endeavors using less than cutting-edge technology
on par with Silicon Valley.
The skepticism about returns on less-than-cutting-edge technology was the
reverse image of the Taiwanese VCs condence in this model of realizing
respectable returns from investing in precisely this trailing technology. This
discrepancy suggests that the experience of different routes to success characterized by cutting-edge Silicon Valley versus trailing-edge Taiwan might also have
inuenced the investment patterns of the two types of rms. However, the
difference in managing IP protection is sufcient to account for the investment
differences and has the advantage of utilizing metrics regarding the strength of IP
regimes that came from outside the interview data.
Domestic VC rms suffered from the general maladies affecting the domestic
Chinese nancial system: China suffers from a severe misallocation of nancial
resources due to a state-dominated system riddled with noneconomic motivations in allocating credit (Fuller, 2005; Huang, 2003; Steinfeld, 1998; Yusuf,
Nabeshima, & Perkins, 2006). Many of the domestic VC rms were effectively
under the authority of state organizations. These political organizations naturally
had many noneconomic objectives that they expected their subsidiary organizations to pursue. These rms tended to be investment vehicles for larger state
projects or state-sponsored rms, many of which suffered from all the classic
maladies of soft budget constraints (Fuller, 2005; Steinfeld, 1998).
Of the two domestic private VC rms interviewed, one generally stayed away
from the real business of venture nancing. It shied away from nancing earlystage rms because of the perception that these investments were too highrisk. Given their lack of links with the state-run banking sector, with its bias

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Asian Politics & Policy

against private enterprises (Huang, 2003), this difdence to invest in technologyintensive sectors was typical (Fuller, 2005; Gregory, Tenev, & Wagle, 2000).
The other chose to try to follow the lead of foreign VCs and invest where these
VCs invested. Indeed, the two domestic rms that managed to actually do some
investment in potentially promising start-up rms rather than state-funded
projects followed this strategy. They decided to follow the investment lead of
various foreign, including Taiwanese, VCs in order to resolve the self-identied
problem of being inexperienced venture investors. Through this mechanism,
they could rely on the better selection and monitoring skills of the foreign VCs.
However, these two rms tended to invest in technology-intensive rms at the
same rate as the foreign, rather than Taiwanese, VCs; i.e., 25% of their portfolio
consisted of technology-intensive rms.
Furthermore, the other rm that employed this follower strategy clearly had
political interference guiding some of its investment choices. The rm was set up
by a central government ministry, but with a twist on the usual bureaucratic
state-run venture rm. The appointed head decided to try to make a viable
commercial rm. so he recruited a team of venture capitalists who had extensive
VC experience outside of China. However, despite recruiting a team that
resembled the typical Taiwanese VCs management team, the ministry-led rm
had to invest in a number of noncommercial state projects, such as science parks
and other noncommercial projects that were never designed to be protgenerating enterprises.

Conclusion
A plausible counterargument to the IPR institutional differences argument
made here would be that the Taiwanese invest in Chinese-speaking regions and
foreign rms invest in English-speaking ones. However, there are a number of
reasons to question this counterargument. First, it does not explain the differences made after investing. The MNCs still come to China on a large scale even
if they shy away from technology-generating activities. Indeed, FDI from the
OECD countries as a whole in China dwarfs Indias total cumulative FDI from all
sources (Naughton, 2007, p. 413; United Nations Conference on Trade and Development, 2007, p. 267). When one compares MNCs and Taiwanese just within
China, the Taiwanese pursue more technology-intensive activities even when
there is a substantial foreign presence, such as the major presence of MNCs and
foreign VCs in China. The presence of foreigners in areas like venture capital
suggests that the language issue is overcome (usually by hiring bilingual ethnic
Chinese to manage the operations), but the persistent difference in investing
behavior remains. Second, given the large amount of brain circulation from China
to the West and back again (Saxenian, 2006), coupled with English being spoken
only by a minority of people in India, the supposed English language gap is not
as large as it seems. Indeed, one could argue that given its much larger stream of
returnees from the West than India has (Saxenian, 2006), China is more likely
to reap opportunities cooperating with MNCs to create technology than India,
yet the evidence shows otherwise. Finally, Taiwanese rms have a signicant
research presence in North America and Europe, so language constraints do not
seem to be very serious in R&D.

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737

What draws Taiwan to mainland China is the opportunity for institutionalcum-cost arbitrage. Given that the main choices for R&D investment in the
developing world are India and China, the ability of the Taiwanese to conduct a
broad scope of R&D in China whereas the foreign MNCs are unable or unwilling
to do so presents the Taiwanese with lucrative arbitrage opportunities. Competition among MNCs is driving up wages for technologists in India very quickly
(Dossani, 2007; author interviews). By avoiding competing with MNCs for
Indias technologists and turning to a pool of technical talent with fewer MNC
competitors in China, the Taiwanese are able to save money through their superior knowledge of the institutional practices necessary to conduct R&D in China.
A similar story applies for the venture capital case. Taiwans VCs are benetting from avoiding competition with the MNCs. In this instance, it is not because
the MNCs are not conducting the same general activity in China (venture
capital), but because the foreign VCs pursue a very different strategy that leads to
quite different investment targets. Neither Taiwanese nor foreign VCs are very
active in investing in such technology-intensive start-ups in India because the
Indian start-ups tend to be focused on services and rely much more on internal
funding due to the low cost of starting these service rms (author interviews).
Given Taiwans prominence in investing in technology-intensive activities in
China, should one then expect rms from other countries with poor IPR regimes
to be able and willing to invest in technology-promoting activities in China? In
principle, one should expect this. However, the realities of the world are that there
are only a handful of countries that have the technology to invest and historically
relatively poor IPR regimes, principally the East Asian NIEs. Singapore needs to be
discounted because of its quite strong IPR regime (see Table 1) and the relative
dominance of the MNCs in its own R&D activities (Wong, 2007, p. 156). In effect,
local rms in Singapore are weak and peripheral players in the technology sector,
so they are not going to be investing in technology activities abroad. Hong Kongs
technology sector is very weak (Baark, 2008), so it too can be discounted from
playing a role in spurring technology in the developing world.
This process of elimination leaves South Korea as the last viable candidate.
South Korea does invest in both India and China, but South Korea did not show
up on either the patent data or the data on VCs. From interviewing South Korean
rms in India and China, I found that they appear to be keeping most of their
R&D at home, which corresponds very well with their complete absence from the
patent data. One reason South Korea may not be trying to take advantage of
institutional arbitrage the way the Taiwanese are is that South Korea has tended
to have a much more concentrated economy than Taiwan, with more large rms
and fewer start-ups. With this less entrepreneurial environment, perhaps corporate controls and long-term employment have been enough to keep South
Koreans from leaking information to other rms. Thus, South Korea has not
needed to develop IP-protecting skills. Another explanation for South Korea not
following the Taiwanese pattern is that the South Korean rms are simply taking
a much slower approach to the globalization of R&D than their OECD and
Taiwanese counterparts, regardless of their approach to IP protection. The fact
that South Korean rms are moving very slowly to shift R&D resources to India
and China suggests a generally more cautious approach to the globalization of
research.

738

Asian Politics & Policy

Notes
1
2

The developing world in this denition excludes the now wealthy East Asian NIEs.
This section draws heavily on Fuller (2009).

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