MACQUARIE GRADUATE SCHOOL OF MANAGEMENT

MGSM WORKING PAPERS IN MANAGEMENT

National Innovative Capacity in East Asia***

Mei-Chih Hu** and John A. Mathews*

Macquarie Graduate School of Management
Macquarie University

MGSM WP 2005-9
April 2005

***Accepted for publication in Research Policy

Disclaimer
Working Papers are produced as a means of disseminating work in progress
to the scholarly community, in Australia and aboard. They can not be
considered as the end products of research, but a step towards publication in
scholarly outlets.
Mei-Chih Hu & John A. Mathews
Research Office
Macquarie Graduate School of Management
Macquarie University
Sydney NSW 2109
Australia

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MGSM WP 2005-9
National Innovative Capacity in East Asia
Mei-Chih Hu & John A. Mathews
Correspondence to:
Professor John Mathews

* Dr John A. Mathews
Professor of Strategic Management
Macquarie Graduate School of Management
Macquarie University
Sydney NSW 2109, Australia
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** Dr Mei-Chih Hu
PhD in Management
Macquarie Graduate School of Management
Macquarie University
Sydney NSW 2109
Email mhu000@student.mq.edu.au

ii

Abstract
The innovative capacity of a country is the basic driving force behind its
economic performance; it provides a measure of the institutional structures and
support systems that sustain innovative activity. Recent work, such as that by
Furman, Porter and Stern (FP&S) frames a concept of national innovation
capacity measured by patenting rates, and estimates its institutional sources for
a group of 17 OECD countries. In this present paper, we extend and modify the
FP&S approach by applying it to five latecomer countries from East Asia,
none of which was included in the FP&S study. First, we reproduce the FP&S
methodology in relation to the five East Asian countries, gathering comparable
data over a comparable (but truncated) time period. While our results are in
broad agreement with the findings of FP&S, we document some important
differences for latecomer East Asian economies: a smaller number of national
factors matter, and there seems to be an important (though subtle) role for
public R&D expenditure. These findings have important implications for
successful catchup strategies. We supplement these aggregate findings with
firm- and institution-level data from Taiwan, where the breakthrough to
innovation has arguably proceeded farther than in any other East Asian country.
In these ways, we shed light on the process through which a latecomer country
is able to close the gap with the more developed countries, by channeling
resources towards the raising of its innovative capacity.

Keywords: national innovative capacity; innovative performance; East Asia;

patents

iii

1. Introduction
Innovation is widely regarded as the central process driving economic growth and
the competitiveness of nations. But it takes a long time for a country to reach the
technological frontier where innovation becomes a principal driver. In the case of
the outstanding latecomer economies of the 19th century, Germany and the US, it
took from 50 to 100 years for these countries to catch up with and overtake the
leader, the UK. In the 20th century, first Japan has caught up with the leaders, and
in the postwar period, the outstanding cases have been those of the East Asian
Tiger economies, Korea, Taiwan, Hong Kong and Singapore described by the
World Bank as the East Asian Miracle (World Bank 1993). Given that these East
Asian countries have perfected world-class production systems, the issue arises: to
what extent have they been able to shift from from imitation to innovation (Kim
1997b).
Innovation in the case of latecomer countries needs to be understood in a
way that is rather different from innovation in the case of leaders. The lead
countries are interested in maintaining their lead through new-to-the-world
innovations, in products, or processes or abstract knowledge generally (such as the
human genome). For the latecomer countries whose primary strategic goal is to
catch up, innovation means new-to-the-country innovation, which involves the
management of accelerated diffusion of technologies from advanced to catchup
countries (Amsden 1998; Hobday 1994; Mathews 2001).
One of the clearest indications of innovation performance is the rate of
take-up of patents issued by the US Patent and Trademarks Office (USPTO). Here
it is found that East Asian firms and institutions have made astonishing strides in
recent years (Hu and Jaffe 2001; Jung and Imm 2002). Taiwan in particular has
risen to third highest in the world in terms of per capita take-up of USPTO patents
over the past five years (1997-2001). Accordingly, in this paper we analyze the
patenting performance of five East Asian countries in terms of their uptake of
patents from the USPTO. In order to do so, we utilize a methodology recently
introduced by Furman, Porter and Stern (2002) (FP&S), applied to a panel of 17

OECD countries with data covering the period from 1973 to 1996. This study
excluded all East Asian countries apart from Japan. Our study is thus at once a
primary investigation of the innovative capacity of five East Asian countries, and
an extension of the FP&S approach to a set of countries not previously included in
their analysis.
In this study we build a dataset that is comparable to that employed by
FP&S for the OECD countries, from primary sources available from the individual
countries and from international sources. We then utilize this dataset to
demonstrate that the principal relationships identified and estimated by FP&S in
OECD countries carry over to the five East Asian countries but with some
differences in emphasis that are entirely to be anticipated in examining the
innovative capacity of countries either still in, or recently emerged from, a catchup,
latecomer phase. In such a phase, technology transfer and management of diffusion
(new-to-the-country innovation) is relatively more important than new-to-theworld innovation. We find that latecomer countries are much more focused in
their development of the institutional foundations of national innovative capacity,
and more targeted in their reliance on certain industrial sectors for innovative
activity and patenting (such as IT and electronics). We examine these issues in
aggregate across our five sample countries, and also in greater depth in the case of
one of the countries, namely Taiwan, where we examine patenting activity at the
level of the firm and institution.
Our paper engages with two quite distinct kinds of literatures. On the one
hand, there is the literature on East Asian industrial development and technological
upgrading, which has emphasized capture of technologies by East Asians as a
process of moving from imitation to innovation but has not necessarily
considered the next step in this process, namely that which takes countries to the
point where innovation rates can be captured in terms of patenting within the
USPTO. On the other hand, there is the literature on national systems of
innovation, where the bias of scholarship has been towards the developed
countries, and towards new-to-the-world innovation. We see the novelty of our
paper as straddling these literatures, and demonstrating, firstly, that there is a real

innovative tendency at work in the East Asian countries and not just an increase in
the propensity to patent and secondly, that the systems of innovation in the catchup countries of East Asia differ in significant ways from those demonstrated for the
advanced OECD countries.
On the first point, our principal finding -- apart from the striking increases
in patenting rates themselves -- is the demonstration that the recent increases in
patenting rates in East Asia, particularly in Taiwan, are accompanied by an
increase in R&D expenditure. We interpret this to mean that there is a real increase
in innovative activity, and not just in a propensity to patent. This stands in
marked contrast with the findings for the US or OECD countries generally, where
it has been found that the ratio of the number of patented inventions to real R&D
expenditure or to numbers engaged in science and engineering, have generally been
in decline since the 1960s (Evenson 1993).
On the second point our principal finding is that in latecomer countries, in
addition to the significance of private R&D in accounting for much of the
innovative capacity (as found in FP&S), there is also a significant effect of public
R&D expenditure; this latter emerges as an important determinant of the degree of
specialization of the East Asian countries. We interpret this as a significant
difference in the kind of innovative system developed in a latecomer country
seeking to catch-up from that in an advanced country. The role of public R&D
expenditure can be seen both as a source of innovative capacity in itself, and as a
guide to steer the utilization of limited resources in latecomer countries.
The paper is organized as follows. First, by way of preliminaries, we
discuss the role of patent statistics (in terms of quantity and quality) as indicators of
innovation, and the experience of East Asian countries in this regard, bearing in
mind some of the caveats involved in utilizing this measure of innovation. Then we
introduce the concept of national innovative capacity (NIC) and trace its origins to
three streams of literature (as done by FP&S) but add a fourth stream for latecomer
countries, where NIC must rest on new to the country innovation rather than new to
the world improvements. In this setting we frame six research questions that guide
our study and differentiate it from that conducted by FP&S. We then introduce our

own dataset, laboriously collected from the individual countries, and our measures
of the principal categories to be employed, and in Section 4 we demonstrate
continuities between our data and results and those obtained by FP&S. Our
distinctive results are reported in Section 5, where we extend the FP&S
methodology for measuring NIC by including a variable public R&D not
included in the OECD study, and examining its impact. Then in Section 6 we
provide insights into the strategies involved in public R&D and patenting by one of
the five countries concerned, namely Taiwan, based on our own case interviews
with firms and agencies in the country, and on analyses from independent data
sources (such as CHI Research Inc). This case study reinforces the overall findings
of our analysis, as well as providing institutional and strategic detail that gives
enhanced insight into the strategies employed by latecomers. We summarize our
findings in Section 7, where again we emphasize the differences found between the
approach to innovation taken by latecomer countries in East Asia and the approach
of the leading OECD countries.

2. Use of Patent Statistics as Indicators of Innovation and the

Experience of East Asia
While technological innovation cannot be precisely measured, patenting
rates have long been considered a well-grounded proxy for the level of innovation
(Schmookler 1966; Soete and Wyatt 1983; Griliches 1990; Trajtenberg, 1990;
Dosi, Pavitt and Soete 1990; Eaton and Kortum, 1996, 1999; Kortum, 1997;
Kanwar and Evenson 2001; Jones 2002; Furman, Porter and Stern 2002;
Hagedoorn and Cloodt 2003). When patents cause sources bias, the advantage
associated with using international patents are described in many prior studies (e.g.
Soete and Wyatt, 1983 and FP&S, 2002). In addition, a strong link between foreign
patent grants and domestic R&D investments as well as foreign patents and
international trade and foreign investments demonstrates the important variables
like foreign patenting and international trade (Soete, 1987). While researchers such
as Nelson and Pack (1995) and Bell and Pavitt (1993) have emphasised
involvement in global production networks as an important source of knowledge

for outstanding export performance in late industrializing countries, several studies

have also explored the relationship and importance of differences in technology
interaction with international trade performance (e.g. Dosi, Pavitt and Soete, 1990).
These support the relationship between innovation activity and its outstanding
export performance for East Asian latecomer countries.
Scholars associated with the NBER have developed methodologies for
studying the flow of knowledge, from one country to another, utilizing patent
statistics. In particular data from patents taken out in the USPTO by both American
and foreign firms enables researchers to trace the influence of knowledge spillovers
and degrees of specialization associated with industrial clustering (Jaffe and
Trajtenberg 1998). Studies have utilized such USPTO patenting activity to examine
the experience of a specific institution such as biological resource centres (Furman
and Stern, 2002), an individual country such as Israel (Trajtenberg 1999), and
international knowledge flow as in the case of Taiwan and South Korea (Hu and
Jaffe, 2001) or the case of Singapore (Hu, 2003). Many have argued that only
certain types of innovation can be measured (Arundel and Kabla, 1998; Griliches,
1990; and Mansfield, 1986), and that many important innovations are not patented
(e.g. food and tobacco) while some patents are awarded for very modest
discoveries (e.g. basic metal and automotive). However, patents can be an
appropriate indicator in the context of high-tech sectors.
Since patents can vary enormously in their importance or value, simple
patent counts are unlikely to totally capture the innovative output of companies
(see for example Trajtenberg, 1990; Jaffe et al., 1993; and Jaffe and Trajtenberg,
2002). The alternative is patent citations rate, which is recognised as a sharper
indicator of innovation and is often used to measure the impact of knowledge flow
(see the NBER studies). While innovative performance (e.g. patenting rate) in East
Asian countries mostly emerged in the 1990s (particularly in the second half of the
1990s), the measurement of innovation using citations as indicators would create a

truncation problem.1 Thus we utilize the more traditional measure of innovation in

terms of patenting rates.
With all their deficiencies, then, patenting rates, and particularly data
concerning what the USPTO calls utility patents (which represent real
inventiveness, rather than repeat patents and other noise in the data for patents
overall) represent a uniform and time-robust measure of innovative output with an
immediate economic significance: the time and trouble involved for firms to seek
patents within the USPTO system filter out trivial or idiosyncratic innovations. The
US market is widely recognized as the largest and the most technologically
advanced in the world and the US patent statistics are more reliable indicators
because of the common screening procedures imposed by the USPTO (Pavitt,
1988). Furthermore patenting in the US is in itself an important technological
achievement for East Asian firms, and one that has a substantive significance as
well as providing a measure of innovative capacity.
By the most conservative measure, namely accumulated total of utility
patents taken out in the USPTO over the past quarter century (from 1975 to 2001),
the G7 countries do as well as expected. The US is far in the lead, with close to 1.4
million patents accumulated, followed by Japan, with nearly half a million, and
then Germany, UK and France and Canada. Switzerland has historically done well,
particularly because of its pharmaceutical firms, as well as Italy and Sweden. But
even on this measure two East Asian countries have penetrated this listing, namely
Taiwan and Korea, which now rank 8th and 12th respectively in the world in terms
of patents accumulated. This indicates that they are now to be considered as much
innovators as imitators.
The specific experience of East Asia in patenting with the USPTO is shown
in Table 1, as compared with G7 countries and a reference group of comparable
countries, including Finland, Israel, Ireland and Spain. Table 1 reveals just how
rapid has been the rise of East Asia as an innovative force. In terms of utility
patents taken out in the US over the past five years, per capita, Taiwan now ranks

Older patents would have received a higher fraction of the total number of eventual
citations, whereas for more recent patents would have lower (Jaffe and Trajtenberg, 2002).

third in the world behind the US and Japan, with 17.2 patents per head over the
period 1997-2001; Korea ranks as number 8, with 6.6 patents per head per year
over the same period, while Singapore is rising fast. All five countries in East Asia
show the highest annual growth rates in the world, all exceeding 20% per year
(final column). These data reveal the extent to which the East Asian countries have
been making the shift from imitation to innovation, and making it very quickly,
particularly over the most recent period 1997-2001.
Table 1 about here
If we look at the firms and institutions involved, we gain a clearer idea of
what has been happening in these latecomer catchup countries. Figure 1 shows the
worlds Top 12 firms in terms of their patenting activity: each of the top 12
recorded on average more than 1,000 patents per year, with IBM a long way in the
lead. It is interesting to note that of the Top 12, three are US firms, no less than
eight are Japanese, while the Korean firm, Samsung, has penetrated to the top
echelons. Indeed, Samsung registered the highest growth rate, increasing the
number of its patents at just over 25% per year over the past five years.
Figure 1 about here
An even clearer picture of what drives the performance of Korean,
Taiwanese (and Singaporean) firms is revealed in Table 2, which shows the
number of patents taken out in each of the five years 1997 to 2001 by East Asian
organizations (both firms and institutions) and the totals. Almost all of these firms
and organizations operate in the electronics, IT, communications and particularly
the semiconductor sectors. These are the advanced sectors where the East Asian
firms have been making their mark, driving the overall totals reported in Table 1
and Figure 1. Korea has been much more focused and concentrated in its patenting
activities than other East Asian countries. In Korea, the top five chaebol account
for a large proportion of patents overall (69%) from 1997 to 2001, whereas in

Taiwan, the top five firms and organizations are all concentrated in the
semiconductor sector, but they account for a smaller proportion overall (27.1%).
Thus patterns established in the realm of production appear to be carried across to
the sphere of innovation.
Table 2 about here
What is clear is that all of these firms and organizations have identified the
winning of patents in the USPTO system as a critical driver of international
innovative performance, and are building their knowledge management capabilities
as they deal with ever-expanding international patent portfolios. In addition to
providing companies like Samsung, TSMC and UMC with the knowledge
represented by the patents, this practice has numerous other benefits, not the least
of which is the capacity to engage in mutual patent recognition practices with
leading established firms, whereby each firm recognizes the others patents and
agrees not to sue for patent infringement (Hall and Ziedonis 2001). This is one of
the critical but hidden features in the growth of firms.2
These raw data demonstrate the performance of innovation activity in the
East Asian latecomer countries, as measured by patenting rates at the USPTO. We
now turn to the analysis of these data, to gain a feel for what drives the innovative
capacity of these catchup countries. Our principal tool in so doing is the concept of
national innovative capacity.

3. The concept of National Innovative Capacity and latecomer catchup

innovation

For example, it was its joint venture at first with Philips that enabled TSMC to get started, with
absorption of technology, but also it was Philips patent portfolio that protected TSMC from patent
infringement suits early in its career. The Korean companies took longer to learn this, and suffered
severely in the 1980s from patent infringement suits, particularly from IBM and TI. It is this experience
above all that helps to explain the dedication of Samsung et al to the continuing acquisition of USPTO
patents.

National innovative capacity (NIC) may be broadly defined as the

institutional potential of a country to sustain innovation. It has been investigated by
numerous scholars, at least since Suarez-Villa (1990) formulated a clear definition
of the concept and a measure of it in terms of patenting rates. The notion can be
formulated at regional and other subnational levels (Neely and Hii, 1999). Thus the
capacity to innovate is not concerned with any single aspect of innovation
performance, but with the sources of its sustainability.
The most recent formulation of the concept, by Furman, Porter & Stern
(2002) (FP&S) traces three main sets of ideas that converge on NIC. The first is
endogenous growth theory, and specifically the idea of the knowledge production
function (Romer 1990; Jones 1995; Jones 2002). Second, there is the notion of the
national innovation system (NIS), and the linked idea of a technological system,
where the key idea is the interaction of disparate elements to build innovative
capacity over time. In the NIS literature (Nelson 1988; 1993; Lundvall 1988) it is
institutions such as innovating firms, public R&D institutions (PRIs) and
universities that interact in a systemic way, providing complementary services to
each other, that is seen to work to build innovative capacity overall. Third, there is
the Porter notion of national competitiveness, and its grounding in the interaction
between several factors, such as the rivalry between national firms, the level of
demand of local industries, the clustering of local and supporting industries, and
factor (input) conditions (Porter 1990; 1998) where again it is the intensity of
these conditions, and their interaction, that is held to accentuate the
competitiveness of firms in international competition.
FP&S (2002) presented an integrated framework of a national innovation
system, where the determinants of innovative capacity in the OECD countries were
revealed in a comparative static fashion through regression analysis. The FP&S
study tracks a dynamic process of building innovative capacity using international
patenting, taken as the number of patents granted from the US Patent and
Trademark Office (USPTO), as a single measure of innovation. Consistent with
work in the area by such scholars as Jones (1998) they adopted a log-log
formulation of the following kind:

L j,t = YEAR YEARt + country Cj + INFL Xj,tINF + CLUSL Yj,tCLUS

+ LINKL Zj,tLINK + L HAj,t + L A j,t + j,t

(1)

In the equation, L stands for the logarithm, stands for the production of
innovation, YEARt stands for year-specific technology shock, Cj for countryspecific technology shock, HA for human capital and financial resources as R&D
inputs, A for cumulative technological sophistication, XINF for resource
commitments and policy choices, YCLUS for cluster- specific environment for
innovation, ZLINK for the quality of linkages between innovation infrastructure and
the environment of cluster- specific innovation, and finally for the sources of
error.
3.1 National innovation capacity in latecomer countries
In latecomer countries, the issue faced is catch-up with the advanced countries,
rather than the promotion of innovation through private-sector R&D expenditure.
We thus expect the system of innovation in latecomer countries to vary in
accordance with this different emphasis. The very term latecomer first
introduced by Gerschenkron (1962) in his studies of 19th century patterns of
industrial catch-up by Germany and Russia implies that a different strategy is
being pursued from that utilized by countries that are already developed. It implies
that latecomers have to utilize the advantages that are available to them such as
the ability to tap into advanced sources of management, organization and
technology, with lower costs than their advanced competitors.
The East Asian latecomer countries perfected a model of industrialization
based on export activity and linkage with advanced firms in the advanced
countries, through Original Equipment Manufacturing (OEM) relationships
(Hobday 1994; Goh 1996; Kim 1997a; 1997b; Mathews and Cho 2000). Their
success was based on building mass production systems where there was a bias
towards industrial upgrading, achieved through the linkages within global value
chains as well as through domestic pressures (Amsden and Chu 2003; UNIDO

10

2002). But these successful systems have experienced two kinds of pressure, both
from newer, low-cost competitors in China or in SouthEast Asia, and from the
advanced firms growing more protective of their technology as they find East
Asian firms closing the gap. Thus the East Asians have been confronted with the
necessity to build national innovation systems of their own particularly in the
field of process innovation.
We now focus our discussion on six research questions that will serve to
guide our study and to capture the systemic differences that we may expect to find
between the national innovative capacity (NIC) of latecomer countries generally,
and the NIC of individual OECD countries.
Research questions
1. Latecomer countries will be expected to focus their innovative activity on fewer
national variables than advanced (OECD) countries, and in particular may be
expected to place most reliance on the world stock of technological knowledge (as
held for example in the form of patents at the USPTO). Thus the latecomer East
Asian countries might be expected to demonstrate that if patent stock is the
independent variable, then patenting rates at the USPTO will be influenced by
fewer national variables than for OECD countries (giving less emphasis, for
example, to private R&D funding and to R&D personnel levels).
2. Latecomer countries will be expected to demonstrate greater targeting of
industrial sectors on which they may concentrate their innovating activity in
particular on high-tech sectors such as electronics (IT and semiconductors),
mechanical and chemical engineering. These have certainly been the sectors that
have led the catchup industrializing efforts in East Asia (but not in other
industrializing countries such as Latin America). Thus we should expect to find
patenting rates by East Asian countries at the USPTO more highly focused on
certain sectors where production systems have already been highly developed.

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3. Latecomer countries will tend to rely more on public R&D expenditure than on
private R&D expenditure in the early stages of their industrial development, where
public R&D can boost the overall infrastructure development; Suarez-Villa and
Hasnath (1993) postulated and measured such a role for public infrastructure
development. In particular, in East Asia, where targeting of industrial sectors has
characterized the development process, we would expect to find the impact of
specialization to be more pronounced in the presence of public R&D.
4. Intellectual property held by advanced countries can act both as a means to
promote latecomer industrial development (through licensing of technologies to
latecomers) and as a barrier (where high royalty charges are imposed on licensees,
or patent infringement cases are brought). Strong IP protection in the latecomer
country can be expected to have a neutral, or even negative, effect on innovation, at
least in the countrys early years. We seek a clarification of this issue through our
case study research on Taiwan.
5. Latecomer countries will be expected to exhibit real innovation in these
targeted sectors, and not just an increased propensity to patent as measured by a
relationship between increased patenting rates and increased levels of R&D
expenditure. Although we do not conduct a time-series analysis in this study, we
would expect to find such a relationship in our case study of Taiwan.
6. Given the diversity of approaches to innovation to be found in latecomer
countries, there is no reason to expect to find convergence in patenting activities
amongst a sample of such countries such as those in East Asia. On the contrary,
we would expect to find countries experimenting with different strategies of catchup, with Korea relying more on large firms, and Taiwan on newly-established
firms, and Singapore on established multinationals as demonstrated for the
semiconductor sector by Mathews and Cho (2000). So we would not pose an
expectation of convergence as one of our research questions in this study.

12

These research questions will guide our study of national innovative capacity of
latecomer countries and help to differentiate it from results found for advanced
countries, such as through the study by FP&S of OECD countries. Our aim is to be
able to demonstrate the continuities between NIC in advanced and latecomer
countries, as well as the differences as summarized in these six research questions.
We do so in the setting of the specific experience of five East Asian countries, all
of which have experienced rapid industrialization over the course of the past
quarter century.

4. Data and Measures Used in This Study

In order to compare the patterns of development and policy implications of
National Innovative Capacity between latecomer countries and their initial
knowledge sources (e.g. OECD countries), this study tries to align the same data
sources and bases with the National Innovative Capacity research work for OECD
countries by FP&S (2002). Taking the FP&S formulation as a given, we have
extended its application by applying it to the innovation experience of five East
Asian countries, namely Taiwan, Korea, Singapore, Hong Kong and China. The
difficulty in doing so is that some of the sources of data used in this study are
necessarily incomplete. Not until two decades ago, did the industrial development
of East Asian latecomer countries attract global attention. Hence, some official
economic data and indicators are not complete until the 1990s (e.g. R&D
expenditure by the private sector and academic sector), particularly for the cases of
Hong Kong and China. However, it is widely recognized that this was the time
when developing countries were creating their national systems of innovative
capacity. Moreover, the data sources utilized in this study do not align exactly with
the data on OECD countries in FP&S (2002). 3 These scholars sourced some data
3

For example, in order to eliminate the difference of purchasing power in the five East
Asian countries and make the data comparable to the OECD countries, this study utilizes the
method of Purchasing Power Parity (PPP) to convert the data from various sources into PPPadjusted US dollars, following the relevant year-base in the study by FP&S (2002); and the
variables in the World Competitive Report for these latecomer countries are only available from
1988. There is a different Likert scale in each year so we transform the different Likert scores into

13

from the OECD Science & Technology Indicators, where the data is available for
OECD members only. The difficulty is that East Asian Newly Industrialising
Economies (NIEs) are not members of the OECD (with the exception of Korea
from the late 1990s), nor of the APEC or ASEAN international associations.
Fortunately, the relevant data can be extracted from other reliable sources, such as
the Asian Development Bank and countries official statistics, along with
necessarily estimation in some unavailable data years.4
Our data set, covering the required variables, is as shown in Table 3.
Broadly, our variables and definitions are identical to those utilized in FP&S,
subject to the alternative data sources used as spelt out in Table 3. However we add
a further variable, namely PUBLIC R&D FUNDING, considering the significance
of this for latecomer countries. Hence we split R&D EXPENDITURE into (1) its
public component, (2) its private component PRIVATE R&D, and (3) an academic
component UNIV R&D. We analyze the impact of public R&D below.
Table 3 about here
The results established by FP&S reveal that the variation in NIC between
OECD countries is influenced by different levels of R&D inputs (R&D manpower
and expenditure) associated with differences in R&D productivity and policy
choices (e.g. extent of IP protection and openness to international trade), R&D
expenditure by the private sector, the degree of technological specialization, the
share of R&D undertaken in the university sector, and the knowledge stock in the
form of accumulated patents. They further found that downstream measures of
competitive performance such as the share of high-tech products in exports are also
impacted by the components of NIC; and that there has been convergence in these
a 1-10 score. The missing data before 1988 is not interpolated because it is recognised that the
1990s is the most crucial development stage of national innovative capacity in the latecomer
countries.
4
For example, for those FTE S&T data unavailable in Singapore, Hong Kong and China
before 1985, we use the same growth percentage of FTE researchers, 77%, as in Taiwan and Korea
in the same years; for those data unavailable in total R&D expenditure, such as before 1981, Taiwan
data is estimated by the average increasing rate, 16.4%, from 1981 to 2000. The same estimated
approach is applied to Singapore data before 1991 (17.4%), Hong Kong data before 1995 (19.4%)
and China data before 1987 (17.4%).

14

variables within OECD countries particularly over the course of the past decade.
The framework to be utilized is illustrated in Figure 2, where pubic R&D funding
is added as a necessarily supplementary for the East Asian latecomer countries.
Figure 2 about here
A brief explanation of the variables utilized, and their significance, follows.
Common innovation infrastructure
Without skilled R&D and management labour to facilitate absorptive
capacity, growth and assimilation of external knowledge is unlikely to be effective
in these latecomer countries. Hence, we include population (POP), each countrys
number of full-time-equivalent scientists and engineers (FTE S&E) and total R&D
expenditures (R&D EXPENDITURE) in HA (human capital and financial resources
for R&D activities).
Cumulative knowledge stock
A nations ability to develop an absorptive capacity relies heavily on
previous investment. The initial investment allows them to make better
technological choices and to exploit new opportunities better (Cohen and Levinthal,
1990). Therefore, we employ GDP PER CAPITA and PATENT STOCK as
variables of knowledge stock because they reflect the potential and direct capacity
to support knowledge accumulation.5
Resource commitments and policy choices
Some policy choices are considered as affecting a countrys innovative
environment, including the countrys openness to international trade and
investment (OPENNESS), its regime for the protection of Intellectual Property
Rights (IP) and the strength of its antitrust law (ANTITRST). Those are the

As distinct from FP&Ss approach in measuring PATENT STOCK at a depreciated rate of

30% per year, we use a measure that is not depreciated over time.

15

dimensions used to measure the competitiveness of a country in the IMD World

Competitiveness Report.6 We also include ED SHARE, the percentage of GDP
spent on secondary and tertiary education, to measure the impact of human capital
investment on international patenting.
Considering PUBLIC R&D FUNDING as an indispensable variable for
East Asian latecomer countries, we add it into the measure of innovative
infrastructure as a supplementary variable, which is omitted in the examination of
OECD countries. When state intervention and the public sector have a central role
in creating, maintaining and developing the national innovation system, the public
sector can work as a regulator in order to create a dynamic industrial environment
where private firms may flourish (Gregersen, 1992). In latecomer countries, the
public sector can play a significantly larger role, as identified first by Gerschenkron
(1962) in his study of 19th century patterns of latecomer industrial catchup. The
same patterns can be discerned in the East Asian NIEs. In order to advance overall
industrial R&D and provide strategic direction, public funding in latecomer
countries takes a great deal of the proportion of total R&D expenses, at least in the
early stages of development. For example, in Taiwan the government funded
institutes such as the Industrial Technology Research Institute (ITRI) or the
Institute for Information Industry (III) are seen as the appropriate sites for
fundamental and applied research in industry and as agencies for the management
of technology diffusion.
The decline of government funds for R&D and other economic activities is
a trend common to all major industrial nations (Hu and Shin, 2002). However, state
involvement may be seen as facilitating the success of the catch-up strategy in
these East Asian countries by guiding and allocating the limited resources into the
strategic industries where technological advance and knowledge diffusion are
critical (Hobday, 1994; Goh 1996; Mathews 2001; Amsden and Chu, 2003).

These variables in various issues of the World Competitiveness Report for these latecomer
countries are only available from 1988. There is a different Likert scale in each year so we
transform the different Likert scores into 1-10 score. The missing data before 1988 is not
interpolated because we recognize that the 1990s is the most crucial development stage of national
innovation capacity in the latecomer countries.

16

Environment for innovation in industrial clusters

Apart from the special role of Public R&D in latecomer countries, we
expect the environment for innovation to include private R&D expenditure, as well
as specialization in common with the results for OECD countries. We measure
the effect of PRIVATE R&D on national innovation capacity, shown as a
percentage of total R&D EXPENDITURE. But a sectoral effect is also important.
Therefore we utilize another important measure of industrial clustering,
SPECIALIZATION, which captures the nations relative specialization in three
important technological sectors (namely chemicals, electrical and mechanical), and
which has been examined and shown to have considerable impact on the whole
economy (Patel and Pavitt, 1994; Ellison and Glaeser, 1997), is also included.
Technology specialization is defined as a focus on fields with frequent reference
that generate inter-and intra-industrial knowledge flows and therefore reinforce the
strength of an industrial cluster.7
The linkages between innovative infrastructure and cluster-specific innovation
In latecomer countries which focus on catch-up and industrial practice,
many fields of academic science are expressly applications orientated. The very
names material science, computer science, industrial engineering,
technology management, and even applied foreign languages signal fields of
inquiry closely linked to particular practical problems. These formulations not only
train people for work in industry, but also develop the scientific foundations of
industrial technologies. Therefore, we employ the share of total R&D
EXPENDITURE spent on universities (UNIV R&D $) to measure this contribution.
Financial institutions and the way firms are governed and controlled profoundly
influence the technical activities. However, venture capital (VENTURE CAPITAL)
should be regarded as another factor promoting innovation in industrializing East
Asia.

The USPTO has developed a deliberate patents classification system that consists of 400 or
so main patent classes, and over 150,000 patent subclasses. We follow the measure of
SPECIALIZATION (i.e. on Mechanical, Chemical and Electrical classes) as developed by Ellison
and Glaeser (1997) and adopted by FP&S.

17

5. National Innovative Capacity of Five East Asian Countries

We now proceed to give the empirical results of our study. The descriptive
statistics utilized in our analysis, summarizing the experience of the five countries
concerned over the period 1975 to 2000, and used in the analysis, are listed in
Table 4.
Table 4 about here
5.1 Innovative Output: International Patents
The change in innovative output of international patents (PATENTS) is defined
as the number of utility patents granted to inventors from a country by the USPTO
in a given year. The number of patents assigned to a country in a given year
(PATENTS), as averaged over the 25-year period, is 413 (with S.D. of 932). Patent
uptake has dramatically increased over time, particularly since the mid- 1990s,
achieving a summit in the final year of the sample with the average level of
PATENTS rising from 9 in 1975, to 214 in 1990 and 1699 in 2000. Remarkably,
Taiwan was ranked as the fourth in the USPTO when South Korea was ranked as
the eighth, in 2000, as discussed above.
We construct the country-level measures of differences in the factor inputs
of innovation across countries in terms of total PATENTS, PATENTS granted per
million persons, and PATENTS PER R&D EXPENDITURE respectively. Figure 3
demonstrates divergences in R&D productivity, captured as PATENTS PER
10,000 FTE S&E. As with FP&S, three significant features spring to notice. First,
all five countries had a similarly low level of international PATENTS production
and innovation at the beginning of the sample period. Second, Taiwan pulled ahead
of the other four countries in terms of PATENTS and productivity of R&D inputs
(i.e. human capital and $ capital inputs) in the second half of the 1990s. Third,
there is a noticeable dispersal over time between countries, particularly as between
Taiwan and Korea. This is very different from the FP&S finding of convergence in

18

OECD countries; it implies a distinctive development pattern of national

innovation in the latecomer countries.
Figure 3 about here
5.2 Determinants of National Innovative Capacity
Like FP&S, we conduct our analysis in stages, examining first the crosscorrelations to establish which variables have independent effects; then conducting
the major regressions to discover which features of the NIC have most impact on
patenting rates. We further interrogate the data for measures that we would expect
to be more prominent in latecomer countries than in advanced countries, in
particular examining the enhanced impact of specialization when combined with
public R&D.
According to the FP&S analysis, OECD countries have five highly mutual
correlated elements: namely, population (POP); full-time equivalent science and
technology workers (FTE S&E); total R&D expenditure (R&D EXPENDITURE);
GDP per capita; and the total patents issued (PATENT STOCK). By contrast,
pairwise correlation in the case of East Asian latecomer countries indicates that
only two components are highly correlated to a significant degree with each other:
PATENT STOCK and R&D EXPENDITURE. 8 This is plausible, since at an early
stage of development there is no reason to expect population or GDP to be
correlated with innovative capacity (think of China!). We therefore evaluate the
individual relationships between each of these components of NIC and PATENTS.
It is found that PATENT STOCK and R&D EXPENDITURE explain 91.4% and
63.8% of the variance in PATENTS respectively, and the coefficients are around
1.1, providing a modest effect on national innovation output.
Our main results are reported in Tables 5 and 6. In Table 5 we investigate
the effects of NIC variables in moderating the variance of patenting with GDP/POP
(representing potential knowledge availability). In Table 6 we repeat the analysis

We define the components as having a highly correlated relationship when Pearson

Correlation r>=0.5 (Pallant, 2001).

19

utilizing patent stock (representing accumulated knowledge capacity) as proxy for

knowledge stock. Both Tables report the impact of each variable on national
innovative capacity in the sample of East Asian latecomer countries, measured in
the form of a series of models. The OECD study by FP&S did not utilize a category
of public-sector R&D spending, and so its potential impact on NIC was not
evaluated. But in the case of latecomer countries, such as our five countries from
East Asia, the impact of public R&D cannot be ignored. As previously mentioned,
PUBLIC R&D FUNDING plays an indispensable role in the earlier stage of
economic development for latecomer countries. Therefore, we investigate its
impact when included as a separate item in the regressions of the log of patents on
the logs of components of NIC. In this way we extend the work reported by FP&S
into new territory. The new regressions are reported in Columns 5.5 and 6.4, basing
on two different knowledge stock representatives.
Table 5 about here
Endogenous growth
The first regression (Column 5.1) evaluates the national ideas production
model that was suggested by Romer (1990) and Jones (1995). We find that
PATENTS is increasing with the log of GDP (3.78) and log of FTE S&E (1.33).
This may be interpreted to mean that a 10% rise in GDP accompanies a 37.8%
increase in international patenting rate, and a 10% rise in R&D manpower is
associated with 13.3% increase in international patent output. By contrast, FP&S
found that a 10% rise in GDP is associated with an approximate 10% increase in
international patenting rate; i.e. the impact of GDP is 2.7 times weaker for OECD
countries than in the case of our latecomer countries. We see this as a highly
significant finding, and interpret it to mean that the endogenous growth model
seems to apply with even greater force in latecomer countries than in advanced
countries, particularly when the economy of latecomer countries is on the upward
position of the production possibilities frontier. This is indeed plausible, since
latecomers are so dependent for their development on the existing stock of
knowledge. The negative coefficient associated with population (POP), -2.446,

20

after controlling for the level of GDP and FTE S&E, implies that the lower level of
GDP PER CAPITA reduces innovative outputs, again, responding to the argument
of endogenous growth theory.
Common innovation infrastructure
Column 5.2 includes all variables of common innovation infrastructure and
year fixed effect (along with 5.3 and 5.4) in order to control for the variation from
changes in the annual rate of patenting. The first thing to note is that the coefficient
of GDP increases by 150%, from 3.78 to 9.45, and moreover the sum of the
coefficients on log R&D$ and log FTE S&E is comparable to the individual
coefficient on log FTE S&E in 5.1. This demonstrates that there is no difference
whether we focus on an individual variable or include both variables (e.g. FTE
S&E in 5.1 or FTE S&E and R&D$ in 5.2) in their effects on innovation activity
a finding in common with that for the OECD countries (and one with policy
implications for government). Log of total R&D $ enters with a significant
coefficient, 2.382, corresponding to the suggestion of endogenous growth theory:
the level of inputs devoted to R&D is one of the critical factors in determining
innovative output.
However education investment (ED SHARE) does not express its
contribution to latecomer countries innovation output, over the period 1975-2000,
perhaps implying that the returns of education investment are reflected in the
promotion of overall productivity of labor, rather than directly contributing to
international patenting activity. Not surprisingly, the intellectual property (IP)
protection regime has an insignificant effect and actually has a negative
relationship associated with PATENTS output. This indicates that the policy
regarding IP does not emerge fully until the late 1990s in latecomer countries and
is consistent with anecdotal evidence that IP protection harms catch-up.9
Industrial specialization

For example, some latecomer countries, like Taiwan, have paid large technology licensing
fees each year to advanced countries, particularly to the U.S and Japan.

21

Column 5.3 includes all variables of the three sources of NIC: common
innovation infrastructure, cluster-specific innovation environment and the quality
of linkages. We control for log R&D$ and log FTE S&E in order to explore the
impact of economy-wide factors on national R&D productivity. Again, the major
impact in column 5.3 is that of log GDP (8.081), following by SPECIALIZATION
(4.298), which is consistent with the highly skewed patenting practices noted
above, with most emphasis on the electronics, semiconductor, IT and
communications sectors. Minor effects are found from log of FTE S&E (0.038),
ED SHARE (0.046) and OPENNESS (0.034). These findings explain 99.8% of the
variance in patenting across the different countries. It is noted that total R&D
EXPENDITURE and UNIV R&D $ have negative coefficients while PRIVATE
R&D FUNDING still retains a positive coefficient. In our model, total R&D
EXPENDITURE is composed of PUBLIC R&D, PRIVATE R&D and UNIV R&D
FUNDING. This may imply that the effect of PRIVATE R&D FUNDING is
increasing in the latecomer countries, but PUBLIC R&D $ is dramatically
decreased in the 1990s and UNIV R&D $ is mostly aimed at rapid economic
return, namely applied R&D, rather than basic R&D as in OECD countries.10
While incorporated country fixed effects, our findings are consistent with
the view that countries that become more specialized become more innovative.
Compared with the OECD countries, a single S.D. increase in SPECIALIZATION
(0.03) in latecomer countries is associated with a 13% increase in the patenting rate
(PATENTS) by a country, compared with an 8% increase for OECD countries;
while a 1% increase in PRIVATE R&D FUNDING is associated with 0.4%
increase in PATENTS compared with 1.4% for OECD countries. Thus we find that
the impact of SPECIALIZATION (focus on three dominant classes of patents) on
the patenting rate in the latecomer countries is more pronounced than is found in
the OECD countries, while the impact of private sector R&D is less pronounced,

10

Our findings are consistent with the view that PUBLIC R&D FUNDING and PRIVATE
R&D FUNDING need to be taken into account in the same regression, as the sum of the means of
these two variables is above 80%.

22

lending further support to the idea that latecomers target certain specific sectors,
first for production and export, and then for innovation. The patenting statistics
reveal these sectors to be electronics (particularly semiconductors), IT and
communications. As in the OECD countries, VENTURE CAPITAL does not show
its impact, which is consistent with the interpretation that VC operates on new-tothe-country innovation.
Restricted focus of NIC in East Asian countries
Our preferred model (i.e. where every variable has a positive contribution
to innovative activity) in column 5.4 differs from the preferred model found by
FP&S. Our preferred model includes only three variables with statistical
significance, namely SPECIALIZATION (3.070), FTE S&E (0.368) and
PRIVATE R&D (0.011), each of which has a quantitatively important impact. The
preferred model excludes IP and ED SHARE. The variable SPECIALIZATION
emerges as that with the biggest impact as in OECD countries - but with a more
pronounced magnitude of effect than in the OECD countries. This is an interesting
divergence between the NIC found for advanced countries and that found for
latecomers and a finding that has implications for the development strategy to be
pursued in latecomer countries, as we discuss below.
Impact of public R&D expenditures
When PUBLIC R&D FUNDING is added into our preferred model, the
result is similar to the previous model in Column 5.4. Entering at the 10%
significance level and improving the explanation of overall variation on
PATENTS, PUBLIC R&D FUNDING (0.007) shows a conservative influence
toward international patenting. Perhaps this demonstrates the inefficiency of
PUBLIC R&D FUNDING in the current stage of economic development in
latecomer countries, which was shown to be dramatically decreasing from the mid1990s.
Table 6 about here

23

We now turn to the analysis utilizing patent stock in the countries

concerned, as proxy for accumulated knowledge. In Table 6 we analyze the NIC
variables using patent stock as the knowledge stock, again following the procedure
of FP&S. Patent stocks provide a more direct measure of knowledge stock on
which a country draws for its innovative activity.
Impact of international patent stock
Table 6 controls for year and country effects to reduce the specific
heterogeneity of technological knowledge among countries. When PATENT
STOCK substitutes for GDP/POP as knowledge stock, the coefficient of log
PATENT STOCK (1.144) in latecomer countries is similar to that in the OECD
countries. The impact of FTE S&T (0.194) is smaller than in Column 5.1, again
consistent with the same finding for the OECD countries.
In column 6.2, the coefficient of R&D EXPENDITURE is reduced from
2.38 (in 5.2) to 0.85, which is a 64% reduction. This may be interpreted to mean
that in latecomer countries, R&D EXPENDITURE in the earlier years is mostly
aimed at industrial upgrading and export production, rather than focused on
innovation activity, which becomes important only in the 1990s. Notably, the
variable IP turns positive (even if still statistically insignificant) in using PATENT
STOCK as knowledge stock, indicating a weak effect of the IPR system on
technology knowledge management.
More interestingly, our preferred model (Column 6.3) in using PATENT
STOCK as knowledge stock greatly reduces the coefficient (and significance level)
of SPECIALIZATION (the coefficient is reduced from 3.070 to 1.553), the largest
contributor to international patenting in column 5.4. This may be interpreted as
further evidence of the importance of the (international) stock of patents in
latecomer countries, in having the power to moderate the impact of specialization.
This also indicates that innovation activity in latecomer countries is concentrated
on certain high-tech industries (e.g. electronics, IT and communications), which

24

lead national industrial development as a whole.11 We also find that ANTITRUST

becomes a negative coefficient when other variables maintain a similar magnitude
(except for SPECIALIZATION).
Public R&D expenditure and industrial specialization
The role of PUBLIC R&D FUNDING is greatly reinforced when we use
PATENT STOCK as knowledge stock, as reported in Column 6.4. The impact of
SPECIALIZATION rises (with a coefficient of 3.272, compared with a coefficient
of 1.553 when public sector R&D was not included as a separate variable (in
column 6.3)). Thus the effect of specialization on patenting rates is enhanced by
110% when the variable PUBLIC R&D FUNDING is added into the model. This
result indicates that the effect of SPECIALIZATION in East Asian latecomer
countries is highly dependent on cumulative knowledge capacity (e.g. PATENT
STOCK) along with PUBLIC R&D FUNDING.
We suggest that this is perhaps the most significant finding of our study.
Note that PUBLIC R&D FUNDING only shows its significant impact on
SPECIALIZATION, by taking PATENT STOCK (as in Column 6.4) rather than
GDP per capita (in Column 5.5) as knowledge stock.12 This corresponds to the
efforts of external technology acquisition, where the goal of PUBLIC R&D in these
latecomer countries tends to increase the level of innovation (particularly in the
high-tech industry) as measured by PATENT STOCK, rather than to increase
overall national welfare as measured by GDP Per Capita.
5.3 Comparison of NIC in Latecomer Countries with the Case of OECD Countries
Our main results in Tables 5 and 6 demonstrate the fact that the innovation
activity in latecomer countries is concentrated on three measures, namely R&D
inputs (i.e. FTE S&E), cluster-specific innovation environment
(SPECIALIZATION and PRIVATE R&D $) and accumulated knowledge capacity
11

This suggestion is further strengthened by the impact of PATENT STOCK (1.278) on

innovative activity, which is 1.67 times greater than in the OECD countries (again because of the
effect of specialization).
12
We acknowledge that the instability of coefficients might possibly reflect multicollinearity,
where follow-up work would be needed to settle remaining uncertainties.

25

(i.e. PATENT STOCK). The accumulated knowledge capacity refers to

accumulated knowledge worldwide: it is the pool of knowledge from which all
latecomer countries draw in order to accelerate their catchup. This finding, which
we elaborate in the case study of Taiwan below, is markedly at odds with those for
advanced countries where national innovation capacity is built on more diverse
sources. National innovation capacity in latecomer countries, by contrast, is built
on more limited and focused sources in order to accelerate the process of catch-up.
However, the framework as a whole has remained significant, suggesting that there
are characteristic development patterns of national innovation capacity in latecomer
countries, and also responds to the suggestions by FP&S, namely (1) the level of
R&D inputs is a critical factors in determining a nations level of visible innovation
and (2) more delicate measures of the national innovation environment
significantly impact on R&D productivity.
In contrast to the finding of OECD countries, the coefficients of the year
dummies in Table 5 (GDP per capita as knowledge stock) increase over time,
implying that average R&D productivity in latecomer countries has been increasing
since 1975. In other words, resource inputs in the latecomer countries have been
raising the marginal productivity of innovation (in terms of GDP per capita) over
time. In order to test whether our results are affected by any particular country, we
utilize a Taiwan dummy variable as well as year dummy variables. The effects of
the inclusion of these dummy variables may be contrasted between Table 5 and
Table 6, when we use two different variables (GDP per capita and patent stock) to
represent knowledge stock in our preferred model. In Table 6, the coefficient of the
year dummies declines over time (as in the OECD countries), whereas the Taiwan
dummy exerts a significant negative impact on PATENT innovation, implying the
important contribution of Taiwans PATENT in R&D productivity of East Asian
latecomer countries.
Some studies have demonstrated declines in the magnitude of year fixed
effects in the OECD countries imply innovation in the advanced countries is
becoming a fished out of the pond effect (Jones, 1995; and FP&S, 2002). Our
model demonstrates this effect still holds tightly in the latecomer countries as the

26

innovation activity (in terms of PATENT) in latecomer countries are derived from
those advanced countries existing knowledge, in which also allows a huge variety
of process innovations (or new-to-the-country) to be generated (and so that
increase the innovation level in terms of GDP per capita).
We now summarize our findings on the NIC of East Asian latecomers,
emphasizing the differences we found between the latecomers and the OECD
countries. In general, the contribution of each determinant of national innovation
capacity in OECD countries is greater than in latecomer countries, except for the
case of SPECIALIZATION. This is a plausible departure, since the latecomer
countries concentrate their innovative efforts so closely on electronics,
semiconductors, IT and communications. Note in particular the point made above,
that when the variable, PUBLIC R&D FUNDING, is added into the model of
latecomer countries, the effect of SPECIALIZATION is enhanced by 110% to
reach the same level of contribution as in OECD countries. In the case of the
OECD countries, their national innovative capacity is found to depend broadly on
the strength of each nations common innovation infrastructure (e.g. R&D
manpower, R&D spending, IP protection and openness to international trade), the
environment for innovation in a nations industrial clusters (e.g. PRIVATE R&D
FUNDING and SPECIALIZATION), and the strength of linkages between these
two (e.g. the share of academic sectors R&D performance). By contrast,
innovation activity in our latecomer sample is more reliant on three measures, the
accumulated knowledge capacity (e.g. PATENT STOCK), the strength of a
nations common innovation infrastructure (e.g. R&D manpower), and clusterspecific innovation (e.g. SPECIALIZATION and PRIVATE R&D$) along with
PUBLIC R&D FUNDING.
In order to test the role of PUBLIC R&D and explicitly measure the
differential impact of PUBLIC R&D FUNDING in these latecomer countries, we
highlight the differences between the 1980s and the 1990s respectively, along
with a dummy variable. It is found that PUBLIC R&D FUNDING reaches a
significant level in the 1980s and loses its importance in the 1990s, indicating that
PUBLIC R&D plays an indispensable role in the early stage of industrial

27

development in latecomer countries and changes its role from innovation

infrastructure to a function of linkages between common innovation infrastructure
and industrial cluster when the development of industry has accumulated a certain
level of technology capability in the 1990s. Despite the decreasing rate over the
years, PUBLIC R&D FUNDING is still playing an indispensable role in
facilitating a national cluster innovation environment in latecomer countries.
We also performed the same robustness check as carried out by FP&S and
explored the robustness including country-specific fixed effects.13 GDP PER
CAPITA becomes of statistical and quantitative significance, suggesting that the
level of innovative outputs is sensitive to the level of GDP PER CAPITA within a
country (GDP PER CAPITA is insignificant in our preferred model as a whole is
because the huge population in China). SPECIALIZATION also has a significant
impact on national innovation capacity (its coefficient increases by 98.8%
compared with that in Column 6.4). Since the same variable exerts only a 29.4%
increased effect in OECD countries, our result indicates that the impact of
SPECIALIZATION on innovation outputs is more sensitive in a given latecomer
country than that in an advanced country.

6. Case Study: Taiwan

We now illustrate and elaborate these results in the specific instance of Taiwan,
which has arguably been the East Asian country that has made most progress in
shifting from imitation to innovation (as measured in terms of patenting). The case
study for Taiwan traces the process of building up the national innovative capacity,
exploring the role of IP and the impact of PUBLIC R&D in achieving its leverage
effect.
As the US is the global critical and cutting-edge market, the outstanding
performance of Taiwans semiconductor and IT-related industries in the USPTO
has become an essential driver of Taiwans internal technology knowledge flow.
The practice of Taiwan firms is to patent first in the Taiwan Intellectual Property
13

The Table can be supplied on request.

28

Office (TIPO), and then to choose relevant patents that call for the trouble and
expense of patenting in the USPTO. The patenting activity in the TIPO reveals the
extremely strong focus on electronics and IT as in the USPTO, in which all the top
eight private firms are in this sector. The other two are public-sector organizations,
the Industrial Technology Research Institute (ITRI) and the National Science
Council (NSC) that patent across a broader range of industrial sectors.
Figure 4 about here
The striking feature of the patenting activities in the TIPO is the high level
of patenting by foreign firms, as revealed in Figure 4. Patenting by foreign
inventors highlights a nation's attractiveness as a market for new technologies, and
patent activity by resident inventors provides a measure of productivity for a
nation's science and technology human resources (Rausch, 1995). Taiwans
Intellectual Property Office (TIPO) has classified patents into three categories:
Invention, New Utility, and New Design, where the criteria of Invention in the
TIPO are equivalent to those of Utility in the USPTO. As invention patent is
defined as the highest level of innovation, Taiwanese inventors took 27% of total
awarded patents in 2002, rising from just 5% in the 1980s. The percentage is rising
but still relatively much lower than that of the foreign inventors which took over
73% in 2002 and as much as 95% in the 1980s and the early-1990s; in terms of
New Utility and New Design patents, where there can be an emphasis on process
innovations, the reverse is the case.
When we look more closely at the level of the firms involved, further
striking features are revealed, that shed light on the macro-trends revealed in our
analysis above. We conducted interviews in September 2003 with several of
Taiwans leading firms, in the semiconductor sector, as well as with public-sector
organizations including TIPO, III and ITRI. The case of Taiwans leading
semiconductor firm, the pur foundry Taiwan Semiconductor Manufacturing
Corporation (TSMC), is striking as shown in Table 7 and Figure 5.

29

Table 7 about here

Figure 5 about here
TSMC was founded in 1986 and has become Taiwan's largest IC company
and the world's largest dedicated integrated circuit foundry. Table 7 shows that
TSMCs dramatic increase in patenting rate is correlated with the companys
increase in R&D expenditure and its employment of professional manpower. This
is an important finding that reinforces the overall results in Section 4, namely that
the essential drivers of national innovative capacity in latecomer countries are
derived from specialisation in the high-tech industry, R&D expenditure and
manpower. Note too the finding that TSMCs royalty income is relative small
whereas royalty payments are still relatively high indicating that Taiwan is still a
learning economy, and still in a process of catchup.14
Table 7 and Figure 5 also indicate that while R&D expenditure gradually
increased, the number of TSMCs US patents awarded declined in 2002 for the first
time since the company was established. We interpret this to mean that TSMC has
been concentrating on improving the quality and effectiveness of its patents, rather
than simply the quantity. This is consistent with our finding that TSMC is
aggressively upgrading the effectiveness of its in-house IP management as a result
of a series of patent infringement disputes, and putting effort into encouraging
R&D engineers to engage in patenting activity (for example, through the Employee
Stock Option Program, ESOP).15
Note how TSMC, even as a foundry (and thus having no proprietary
products) has still been burdened with considerable royalty payments (of the order
of NT$ 6,232 million in 2002, approximately US$186 million, see Table 7) which
has sharpened its propensity to build its own patent portfolio in line with many
other semiconductor firms, as revealed in the study by Hall and Ziedonis (2001).
14

There was a big jump in all categories in 2000, when TSMC acquired the semiconductor
operations of the TSMC-Acer Manufacturing Corp joint venture.
15
ESOP is a flexible system and ties employees performance to rewards. The remuneration
package allows the firm to reward employees when they are doing well and enhances the
employees sense of belonging by giving them a stake.

30

But whereas Hall and Ziedonis (2001) found no evidence amongst US firms of a
link between enhanced patenting rates (what they called patent portfolio races)
and R&D expenditure, the link is clearly established for a latecomer firm like
TSMC, which may correspond to the suggestion by Lanjouw and Schankerman
(1999): the quality of patenting by firms exhibits a more stable relationship to
firms R&D expenditure.
Quantity of patents is one index of innovative capacity, but the quality of
the patents filed is another, and potentially of greater long-term benefit to a
country. We found evidence in our interviews in Taiwan that firms like TSMC
have been reviewing their patenting processes in the past year, and have been
paying more attention to the quality of the patents filed. This is corroborated by
striking evidence from the patents database firm, CHI Inc. (the firm that supplied
the data on which the FP&S analysis is conducted). CHI Research define patent
quality in terms of a Current Impact Index (CII) which measures the impact of
patents taken out over the previous five years in terms of their current rate of
citation, which therefore avoids the truncation problem in using citation rate. The
CII is calculated as the number of citations in a given years of all patents filed in
the previous five years, compared with the average across all patents in the
USPTO16
Table 8 about here
As shown in Table 8, the leading countries in terms of the quality of their
patents within the USPTO in 1995 were the U.S. (1.12), Japan (1.02) and Taiwan
(1.01). But by the year 2000, Taiwan had emerged as the worlds leader in terms of
patent quality, with a CII of 1.25, followed by the U.S. (1.15) and Israel (1.01).
This striking result reflects the quality of the patents taken out by Taiwan firms in
the years 1995-1999. The Table reveals that in the field of semiconductors and
electronics, Taiwan firms and organizations account for no less than 11.3% of the
16

To take an example, a Current Citation Index (CII) value of 1.0 represents the average. A
value of 2.0 would indicate twice the frequency of citation (and hence twice the quality of the
patents over the previous 5-year period; whereas a value of 0.25 would indicate a citation
frequency of only 25% of the average across all patent classes. The number of classes considered is
30.

31

world patent stock in those sectors. Thus the latecomer status of Taiwan is reflected
in both the frenzied pace of its patenting, in the quality of the patenting, and in the
almost complete focus on certain critical sectors such as semiconductors where the
country has sought to establish global production and trade leadership. These are
patterns to be expected of the innovative capacity of a latecomer country like
Taiwan, but not of a developed country within the OECD thus further
emphasizing the differences between our study and that of FP&S.
However, two caveats are in order. First, although the Taiwan patenting
rates look high, they are concentrated in a specific sector -- namely
semiconductors. In world terms, this sector has also demonstrated high rates of
patenting (Hall and Ziedonis, 2001). Taiwan would thus lose its distinctiveness if
one normalised its patenting rate against the semiconductor trend worldwide. But
this point echoes the key finding in the empirical results: the national innovative
capacity relies heavily on the strategic SPECIALIZATION industry (which is the
most significant driver of NIC for latecomers). Second, the Taiwan citation rate
may include high levels of self-citation, i.e. one patent citing earlier patents by the
same company. In this context it would be worthwhile to explore the possible
differences in citation rates between Taiwans public and private sectors, when the
patent citation associated with knowledge diffusion could be geographically
localized. It is known that corporate patents are more often self-cited and selfcitations are more often localized (Jaffe et al. 1993).
To summarize our findings on Taiwan, we wish to highlight the features
that emerged in our analysis of the five countries innovative capacity. We noted
above that, in contrast with the experience of the OECD countries, the latecomers
from East Asia focused their innovative activities on three key factors, namely on
building cumulatively their R&D manpower; in targeting certain industrial sectors
and specializing their innovative activities in these sectors; and in promoting public
R&D as a means of enhancing national innovative capacity.
In the case of Taiwan these features are captured by examining the role of
the public sector R&D agency, the Industrial Technology Research Institute (ITRI).
ITRIs patenting activity has been significant, in both the USPTO and the TIPO, as

32

described above. A summary of its R&D expenditures, and patenting rates over the
years 1995 to 2002, is given in Fig 6.
Figure 6 about here
While the public sector plays the role of leading and guiding Taiwans
industry, ITRIs patenting activity has given a significant impetus to IP
development in the private sector. Not only has ITRI been an important foundation
for the innovative capacity of Taiwan, in terms of its building of what must be
termed technological capabilities in strategically chosen sectors such as
semiconductors, electronics and IT, but also in terms of its efforts to diffuse such
capabilities to the private sector, through such institutions as targeted R&D
consortia (Mathews 2002). There is a high turnover of ITRI technical staff, with
much of the staff transferring to Taiwans private sector, thus again revealing how
the cumulative buildup in full-time equivalent R&D staff translates across to
innovative capacity in the private sector.
Since the 1990s, IP protection is the worldwide trend and highly related to
the sustainability of a company or an industry. Patent portfolio and analysis play a
critical role in exploring patent mapping and IP management. Quality patents,
therefore, have become the goal of patenting strategy for ITRI to utilize and
leverage IP value, and in order to acquire multiple effects of IP utilization. This
trend is reflected in the sharp rise in the quality of Taiwans patents, as reported by
the CHI database.
Recent developments in the ITRI (and III) sponsored R&D consortia are of
relevance to a discussion of strategic management of IP, in that consortia have been
formed as patent pools in order to provide Taiwan firms with collective defense
against infringement suits of the kind described for TSMC above. To the year
2002, ITRI has formed six new companies by means of utilising patent portfolio.
Two developments demonstrate ITRIs strategic utilization of its patent portfolio.
The first development of note is the Taiwan TFT-LCD Association, representing
all the important firms in Taiwans recently emerged flat panel display industry

33

based on TFT-LCD technologies. In the 1990s, Taiwan's fledgling TFT-LCD

companies acquired technologies needed in panel production directly from
Japanese companies so as to become capable of mass production as soon as
possible. The capability of mass production makes Taiwan a significant player in
the TFT-LCD industry following a series of aggressive investment in 1999, and
this has led to numerous patent infringement claims from Japanese and Korean
leading companies, such as Sharp and Samsung, and resulting higher royalty
payments to be met by Taiwan firms. Now ITRI had accumulated several hundred
patents relating to TFT-LCD technologies, and so in 2002 it selected a portfolio of
232 patents and assigned them to seven TFT-LCD companies for the purpose of
defense and negotiation. This is seen as a way to develop a stronger position in
patent negotiations, and take the lead in developing new technologies and setting
standards.
A second case is the spin-off biotech firm Phalanx Biotech Chips Company,
which was formed with technology transferred from ITRI, along with a set of
patents that might stand it in good stead in any future patent infringement suit
launched by foreign competitors in the field of DNA chips. The technology
characteristics of biotech chips rely on the complementarity of inter-industry
technology (ITRI, 2002). In order to form a strong competitive patent portfolio,
Phalanx was established in 2002, under the combination of biotech, electronics,
optoelectronics and information technology areas, and collected 41 domestic and
international patents. The patent portfolio provides an incentive for the Biotech
Chips R&D Alliance, which unifies Taiwans biotech companies in technology,
manpower, finance, and intellectual property. This too provides an example of the
strategic management of IP in Taiwan, which is now seen to be a key contributor to
the enhancement of the countrys innovative capacity (Liu 2001).
Taiwans successful diffusion of technology from public institutions (mainly
ITRI) has been achieved whilst maintaining a high level of R&D in the private
sector, and a rather high degree of support from national technology policy and
trade and research associations. Now, apart from the cutting-edge technology,
Taiwans IPR organizations and public institutions are also committed to training

34

programs in Intellectual Property management, including aspects such as law,

patent engineering, licensing and negotiation. These efforts demonstrate the
strategic role that IP management comes to play in the building of national
innovative capacity in latecomer countries such as Taiwan.

7. Discussion and Concluding Remarks

Both our quantitative empirical results and our qualitative case studies in
Taiwan produce the finding that while the process of building national innovative
capacity in latecomer countries is comparable to that followed in more advanced
countries, yet it is distinctive in ways that illustrate the strategies that need to be
pursued by latecomers in order to catch-up with the technological leaders.
There is a core finding common between the OECD and latecomer
countries, namely that variations in the rate of patenting across countries is
accounted for by four variables: patent stocks, levels of R&D manpower, R&D
expenditure by the private sector, and industrial specialization in electrical,
mechanical and chemical engineering fields. The distinctive process of building
national innovation capacity in latecomer countries, and its divergence from the
patterns found for the OECD countries, is also demonstrated. In the OECD
countries studied by FP&S and others, more broadly-based variables are closely
associated with variations in the rate of patenting, namely GDP per capita, total
R&D expenditure, intellectual property protection, public expenditure on higher
education and funding on academic R&D. We found these variables to have less of
an impact in the case of latecomer countries. The most important point of variance
is the impact of public R&D expenditure, guiding and utilizing the limited
resources in latecomer countries, reinforcing incentives of national innovative
capacity (e.g. SPECIALIZATION) and still playing an indispensable role in
facilitating a national cluster innovation environment in latecomer countries.
Our results raise two interesting issues. In the first place, IP, in practice, is
found to have a negative impact on latecomers national innovation capacity as
contrasted with the case for more advanced countries where IP institutions are

35

highly correlated with international patenting activity. The effect of IP thus appears
to vary according to a countrys level of industrial, technological and economic
development (Lall, 2003). Not until the second half of the 1990s, does the
importance of IP emerge in latecomer East Asian countries. In the early stage of
specializing on OEM business, latecomers simply ignore the costly R&D and IP
issues. When these latecomer countries catch up and keep pace with advanced
countries, IP starts to attract attention. However, the evidence that a strong IP
policy will stimulate greater technology transfer and suggest a positive correlation
with economic development over the long term has been put forward by some
cross-country econometrics (Maskus, 2000). When technology purchasing becomes
one of the primary ways to acquire the key technology within R&D outsourcing
and involves a fee or a royalty as a proportion of sales, its usage is connected
closely with the range of intellectual property. Another important contribution of
this study is that while public-sector R&D has exerted a significant effect on
patenting rates, which reinforces its claim to be considered as part of the innovative
capacity of a latecomer country, the case of Taiwan provides evidence that the
effect continues: the efforts of the public R&D sector in utilizing and leveraging
diverse IP resources with the aim of facilitating the knowledge flow and
overcoming the disadvantages of second movers, as exemplified in the transfer of
IP to spinoff enterprises such as Phalanx and to consortia such as the Taiwan TFTLCD Association.
Secondly, the variable PUBLIC R&D FUNDING greatly strengthens the
contribution of the most important determinant (i.e. SPECIALIZATION) in our
preferred model. Note that this effect will only be registered where a latecomer
country is pursuing a targeted strategy of catch-up as in east Asia. If no targeting
is taking place (i.e. the government is not playing a leadership role) then PUBLIC
R&D FUNDING will have lessof an impact. While the decline of government
spending in R&D relative to private spending is an unavoidable trend, what is of
over-riding importance is not the amount of public R&D funding per se, but the
allocation and emphasis of innovative activities, which provides incentives in
fostering national innovative clusters such as private R&D and the pattern of

36

specialization (as found by our empirical results). While the evidence shows that
involvement in global production networks is an important source of knowledge for
successful late industrializing countries, this is critical especially for a knowledgeintensive and highly globalized high-tech industry. In such industries clusters of
local capabilities have to be closely connected with international production
networks in order to remain abreast of knowledge currents through a variety of
multinational linkages. Regardless of whether one agrees with the interpretations in
this study, these empirical regularities exist and must be accounted for.
The detailed case study of Taiwan provides some support for our empirical
results, where the distinctive process of building national innovative capacity in
latecomer countries, as divergent from the patterns for the OECD countries, is also
demonstrated. Latecomers from East Asia have focused their innovative activities
on three key factors, namely on cumulative building of their R&D manpower; in
targeting certain industrial sectors and specializing their innovative activities in
these sectors; and in promoting and effecting public R&D as a means of enhancing
national innovative capacity. These features are revealed in the case study of
Taiwan, by examining the role of the public sector R&D agency, the Industrial
Technology Research Institute (ITRI), and the private sector. While ITRIs
patenting activity has been significant, Taiwans knowledge diffusion pivot,
semiconductor and electronics industries, are essentially built on the leverage effect
from ITRI, including diffusion of R&D manpower and technology.
Another aspect of the Taiwan case is that the increase in patenting rates
reflects a genuine increase in innovative capacity a point that cannot be sustained
in the case of the advanced countries, where much of the recent increase in
patenting rates is tactical (or strategic) in nature, and does not necessarily reflect
enhancements in innovative capacity (Hall and Ziedonis 2001). Thus the reliance
on patenting rates as a proxy for innovative activity works well for the latecomer
country Taiwan, whereas it is less well-defined in some of the advanced countries.
A final contribution of this study is that it raises new questions. Why are
some latecomer countries more innovative than others? How does the involvement
of the public sector relate to the performance of national innovative capacity?

37

When will IP turn to a significant and positive effect on innovation activity of

latecomer countries, and to what extent will that affect national innovative
capacity? While the reliance on patenting rates as a proxy for innovative activity
works well for the latecomer country such as Taiwan, one should consider whether
the high level of patent self-citation biases the assessment of national innovative
performance. Future research on these questions and others will lead to a better
understanding of how national innovative capacity is established in latecomer
countries.

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43

Table 1. Country statistics: Averages for 5- and 30-year periods (Utility Patent Only)
Country

Patents per year

1968- 1992- 199797
97
2001

Patents per capita

1968- 1992- 199797
97
2001

Success rate
1968- 199297
97

G7
USA
44850 56683 79717 15.5
21.5
28.6
58.9
52.2
Japan
11216 22433 29949 10.3
17.9
23.7
55.5
57.9
Germany 5806
6895
9387
9.2
8.4
11.4
59.5
59.8
France
2432
2881
3662
4.3
5.0
6.2
66.5
61.9
UK
2492
2427
3469
4
4.2
5.9
53.5
50.2
Canada
1380
2119
3121
4.9
7.2
10.2
50.7
49.3
Italy
855
1215
1548
1.7
2.1
2.7
54.1
58.3
Reference group
Israel
183
400
757
4.2
7.2
12.4
42.2
40.5
Finland
181
370
609
4.2
7.2
11.8
48.6
51.3
Ireland
31
60
101
1
1.7
2.7
43.0
48.8
Spain
92
152
237
0.3
0.4
0.6
42.8
46.0
East Asian 5
Taiwan
437
1535
3778
2.3
7.3
17.2
35.5
39.3
Korea
267
1134
3113
0.7
2.5
6.6
37.3
39.0
Hong
31
72
162
0.6
1.2
2.3
40.3
38.7
Kong
Singapore 16
59
174
0.6
1.7
4.4
40.2
41.5
China
19
52
108
0
0
0
36.5
40.6
Source: USPTO; World Development Indicators database, 2003
Note: (1) The data for Germany include Germany west only before 1990.

19972002

Annual growth rate

1968- 1992- 199797
97
2001

53.2
61.5
59.3
60.4
50.6
48.6
61.5

4.9%
8.6%
2.7%
16.4%
2.7%
6.5%
4.4%

7.9%
6.5%
4.3%
3.7%
6.7%
7.5%
4.5%

9.7%
10.2%
13.0%
8.5%
10.8%
11.2%
9.2%

37.1
47.0
36.1
49.3

12.5%
11.4%
11.9%
10.0%

15.4%
10.0%
7.1%
12.0%

17.3%
13.6%
18.9%
12.7%

45.7
56.1
42.6

26.2%
39.1%
14.2%

21.4%
36.1%
23.0%

27.8%
20.4%
35.6%

33.3
32.8

44.9%
-

26.2%
12.4%

33.7%
34.3%

44

Table 2. Top patenting firms and institutions: Taiwan, Korea, Singapore, China,
1997-2001
1997

1998

1999

2000

2001

Taiwan
UMC
149
174
266
430
584
TSMC
130
218
290
385
529
ITRI
153
218
208
198
221
VISC
53
120
112
131
112
Winbond
24
59
115
115
126
Mosel15
32
38
66
68
Vitelic
Korea
Samsung
584
1,305
1,545
1,441
1,450
Electronics
Hyundai
154
212
242
294
533
Electronics
LG
113
215
229
220
248
Electronics
Daewoo
215
319
273
120
54
Electronics
LG
119
235
311
255
42
Semicond.
ETRI
58
120
130
124
72
KIST
29
44
41
35
35
Singapore
Chartered
30
39
44
79
135
China
WSMC
0
0
6
61
37
Source: USPTO: Patenting by Geographic region (state and country), breakout by
count, 1997-2001 utility patent grants by calendar year of grant.
Note: Company is included only for the total patent number more than 100.

Total 19972001
1,603
1,552
998
528
439
219
6,325
1,435
1,025
981
962
504
184
327
104
organization

45

Table 3 Data Sources of Variables and Measures

Variable
Full variable name
Innovation Output
Patents
International
Patents
Patents/Million International
POP
patents per million
persons
Common Innovation Infrastructure
GDP per
GDP per Capita
Capita
Patent Stock

POP

Stock of
international
patents
Population

Definition and Measure

Source

FP&Ss Source

Patents granted in USPTO to the

USPTO
country j in year (t+3)
Patents divided by million persons in Asian Development
the population
Bank

CHI US patent
database
CHI US patent
database

Gross domestic product in

Asian Development
Bank
thousands of PPP-adjusted 1997
US$
Cumulative patents from 1973 to (t- USPTO
1)

World Bank

CHI US patent
database

Population (millions of people)

Asian Development
Bank

Aggregate
employed S&T
personnel
Aggregate R&D
expenditure

Full-time equivalent scientists and

engineers in all sectors

Countries official
statistics*

R&D expenditures in all sectors in

millions of ppp-adjusted 1997 US$

Countries official
statistics*

Openness

Openness to
international trade
and investment

IMD world
Competitiveness
report

IP

Strength of
protection for IP

ED Share

Share of GDP
spent on higher
education
Stringency of
antitrust policies

Average survey response by

executives on a 1-10 scale
regarding relative openness of
economy to international trade and
investment
Average survey response by
executives on a 1-10 scale
regarding relative strength of IP
Public spending on secondary and
tertiary education divided by GDP

IMD world
Competitiveness
report
Countries official
statistics*

IMD world
Competitiveness
report
World Bank

Average survey response by

executives on a 1-10 scale
regarding relative strength of
national antitrust policies

IMD world
Competitiveness
report

IMD world
Competitiveness
report

R&D expenditures funded by

industry divided by total R&D

Countries official
statistics*

OECD science
and technology
indicators

Relative concentration of Innovative

output in chemical (E), electrical (F),
and mechanical (G) in USPTO
patent classes

USPTO Patent
Author
Technology
computation
from USPTO
Monitoring Division
(formerly TAF Branch)

FTE S&E

R&D
Expenditure

Antitrust

Environment for industrial cluster

Private R&D Percentage of R&D
funding
funded by private
industry
expenditures
Specialization E -G concentration
index

Quality Linkages
University
Percentage of R&D
R&D
performed by
Performance university
VC
Strength of venture
capital markets

R&D expenditures performed by

universities divided by total R&D
expenditures
Average survey response by
executive on a 1-10 scale regarding
relative strength of venture capital
availability
Downstream related outcome factors
Journals
Publications in
Number of publications in
academic journals international academic journals,
using 1981 journal set
GDP
Gross domestic
Gross domestic product in billions
product
Of PPP-adjusted 1990 US$
Labour
Labour force
Number of full-time equivalent
persons employed in the labour

Countries official
statistics*
IMD world
Competitiveness
report

National Science
Board
Penn World Tables
Penn World Tables

OECD science
and technology
indicators
OECD science
and technology
indicators
OECD science
and technology
indicators
IMD world
competitiveness
report

OECD science
and technology
indicators
IMD world
Competitiveness
report

CHI database of
science citation
index
Penn World
Tables
Penn World
Tables

46

Capital

Capital

Market Share Market Share

force
Non-residential capital stock in
billions of PPP-adjusted 1990 US$
Share of exports in high-tech
industries (among 5 economies)

Penn World Tables

National Science
Board

Penn World
Tables
National
Science
Foundation

*: Taiwan: National Science Council, various years; Directorate General of Budget, Accounting and Statistics (DGBAS); Ministry of Finance, various years.
South Korea: National Statistical Office, various years; The Bank of Korea, various years.
Singapore: Department of Statistics (DOS), various years; Economic Development Board (EDB), various years.
Hong Kong: Census and Statistics Department (C&SD), 2001-2003 issues.
China: National Bureau of Statistics (NBS), various years.

47

Table 4 Descriptive Statistics

Variable
N
Mean
S.D.
Innovative output
PATENTS
129
413.45
932.65
Common innovation infrastructure
GDP/POP
130
7229.61
4489.67
PATENT STOCK
130
1737.66
4182.36
POP
130
232.49
434.75
FTE S&E
80
86012.75
136244.03
R&D EXPENDITURE
76
4383.21
4979.97
OPENNESS
60
6.81
1.13
IP
55
5.93
1.29
ANTITRUST
55
5.32
1.32
PUBLIC ED $
52
2.62
1.65
PUBLIC R&D FUNDING 68
33.35
17.72
Cluster-specific innovation environment
PRIVATE
R&D 71
49.79
24.01
FUNDING
SPECIALIZATION
130
0.20
0.03
Quality of linkages
UNIV R&D $
51
15.73
17.52
VENTURE CAPITAL
60
5.98
1.46
Downstream outcome factors
JOURNALS
70
2784.46
2536.64
GDP
130
441.72
783.36
LABOUR
130
1.34E+08
256848975.94
CAPITAL
48
117064.42
79833.66
MARKET SHARE
95
20.00%
8.31%
Note: R&D EXPENDITURE = PUBLIC R&D FUNDING + PRIVATE R&D $ + UNIV R&D $

48

Table 5 Determinants of National Innovation Capacity (GDP/POP as knowledge

stock)
Dependent variable = ln (PATENTS)i, t+3
Idea
production
function
(5.1)

Common innovation infrastructure

3.778***
A
L GDP
(0.054)
L GDP PER
A
CAPITA
-2.446***
A
L POP
H
(0.078)
1.325***
A
H
L FTE S&E
(0.036)
HA

L R&D $

XINF ED SHARE
XINF IP
XINF OPENNESS
XINF ANTITRUST
XINF

Common
innovation
infrastructure
(5.2)

National
innovative
capacity:
including all
variables (5.3)

9.446***
(0.077)

8.081**
(0.120)

-6.442***
(0.003)
-1.197
(0.012)
2.382***
(0.045)
-0.252***
(0.001)
- 0.085
(0.038)
0.104
(0.059)
0.051
(0.047)

National innovative
National
innovative
capacity: preferred
capacity: preferred model (5.4) with
model (5.4)
PUBLIC R&D
FUNDING
(5.5)

0.007
(0.085)

0.191
(0.060)

-5.519**
(0.023)
0.038
(0.012)
-0.235
(0.045)
0.046
(0.001)
-0.023
(0.024)
0.034
(0.036)
-0.006
(0.037)

0.368**
(0.005)
0.121
(0.038)

0.326*
(0.004)
0.175
(0.035)

0.030
(0.034)
0.006
(0.051)

0.022
(0.025)
0.003
(0.046)
0.007*
(0.008)

0.004
(0.049)

0.011***
(0.007)

0.012***
(0.003)

4.298***
(0.003)

3.070***
(0.006)

3.060***
(0.004)

-0.011*
(0.090)
-0.058*
(0.070)

0.003
(0.054)

0.005
(0.017)

-0.141**
(0.044)
0.411
(0.147)

-0.099
(0.025)
0.575
(0.103)

0.097***
(0.003)
1.242
(0.000)

0.095***
(0.003)
1.216***
(0.127)

-125.488
(0.180)
0.958

-186.386***
(0.008)
0.998

PUBLIC R&D
FUNDING

Cluster-specific innovation environment

YCLUS

PRIVATE R&D
FUNDING

YCLUS SPECIALISATION

Quality of linkages
ZLINK UNIV R&D $
ZLINK

VENTURE
CAPITAL

Controls
Year fixed effects
Taiwan dummy
Constant
R2

-5.346***
(0.011)
0.743

-105.042(0.000)
0.993

-121.315***
(0.068)
0.995

49

Adjusted R2

0.733

0.934

0.995

0.991

0.993

Number of Observations

122

121

118

121

118

* = P<0.1, ** = P<0.05, *** = P<0.01

Numbers in brackets refer to standard error.

50

Table 6
Determinants of National Innovation Capacity (patent stock as knowledge stock)
Idea
Production
Function
(6.1)

Common
innovation
infrastructure
(6.2)

National
innovation
capacity:
preferred
model
(6.3)

National innovation
capacity: preferred mod
(6.3) with PUBLIC R&
FUNDING (6.4)

1.268***
(0.008)
-0.462***
(0.003)
0.846***
(0.001)
-0.093***
(0.006)
0.016
(0.021)
0.022
(0.047)
0.029
(0.039)

1.278***
(0.016)
0.231*
(0.098)
0.186**
(0.001)

1.276***
(0.036)
0.280*
(0.094)
0.181
(0.001)

0.032
(0.009)

0.022
(0.005)

-0.010
(0.012)

0.003
(0.007)
0.007
(0.008)

0.010***
(0.009)
1.553*
(0.065)

0.013**
(0.011)
3.272***
(0.008)

0.003
(0.047)

0.005
(0.032)

-0.040***
(0.000)
0.019
(0.008)
-0.332***
(0.002)
0.995
0.992
121

-0.043***
(0.035)
0.073**
(0.006)
-0.352***
(0.007)

Common innovation infrastructure

A
HA

L
PATENT
STOCK
L FTE S&E

HA

L R&D $

XINF

ED SHARE

XINF

OPENNESS

XINF

IP

XINF

ANTITRUST

XINF

PUBLIC
FUNDING

1.144***
(0.006)
0.194***
(0.012)

R&D

Cluster-specific innovation environment

YCLUS
YCLUS

PRIVATE
R&D
FUNDING
SPECIALIZATION

Quality of linkages
ZLINK

UNIV R&D$

Controls
Country fixed effects
Year fixed effects

Insignificant
Significant

YEAR
Taiwan dummy
0.941
R2
0.938
Adjusted R2
Number of Observations
125
* = P<0.1, ** = P<0.05, *** = P<0.01
Numbers in brackets refer to standard error.

-0.051***
(0.000)
-0.040***
(0.002)
-0.400***
(0.002)
0.989
0.984
122

0.993
122

51

Table 7 The Operation Facts in TSMC 1995 to 2002

Year R&D
Net Sales Professional Patent
Royalty
expenditure
(NT$
Manpower* Awarded in Income
(NT$ million) million)
the USPTO (NT$
million)
1995 748
28766
1834
25
1996 1494
39400
2287
74
1997 2505
43936
2881
127
1998 3246
50233
3197
213
8
1999 2391
73131
3469
288
64
2000 5131
166228
6988
383
24
2001 10649
125888
6608
527
55
2002 11725
160961
7456
444
204

Royalty
Expense
(NT$
million)
637
1032
2477
3715
6232

Source: TSMC Annual Report, various years.

Note: * Professional manpower includes R&D engineers and managers.

52

Table 8 Taiwans US Patents Performance in CHIs 30 Technology Areas*

Technology Areas

1991-1995
Patent
numbers
(1)

1996-2000 Growth rate

Patent
between (1)
numbers
and (2)
(2)

1995
Global
Share of
Patents

2000
Global
Share of
Patents

1995 CII
(Cited from
1990-1994)

2000 CII
(Cited from
1995-1999)

01 Agriculture
02 Oil & Gas, Mining
03 Power Generation &
Distribution
04 Food & Tobacco
05 Textiles & Apparel
06 Wood & Paper
07 Chemicals
08 Pharmaceuticals
09 Biotechnology
10 Medical Equipment
11 Medical Electronics
12 Plastics, Polymers &
Rubber
13 Glass, Clay & Cement
14 Primary Metals
15 Fabricated Metals
16 Industrial Machinery
& Tools
17 Industrial Process
Equipment
18 Office Equipment &
Cameras
19 Heating, Ventilation,
Refrigeration
20 Misc. Machinery
21 Computers &
Peripherals
22 Telecommunications
23 Semiconductors &
Electronics
24 Measurement &
Control Equipment
25 Electrical Appliances
& Components
26 Motor Vehicles &
Parts
27 Aerospace & Parts
28 Other Transport
29 Misc. Manufacturing
30 Other
All Patents

92
7
57

152
18
141

66.01
176.92
145.72

1.05
0.08
1.39

1.28
0.00
2.77

1.19
0.00
1.11

1.56
1.22
1.01

51
225
191
68
12
7
102
5
91

116
660
616
218
52
47
239
27
215

127.95
193.51
222.69
220.32
317.74
554.17
135.17
446.00
136.56

1.17
3.46
3.77
0.28
0.08
0.19
1.11
0.22
0.65

2.11
4.82
6.07
0.55
0.20
0.32
1.23
0.40
0.88

1.12
1.46
0.92
0.72
0.00
0.53
0.71
0.44
0.66

1.12
1.57
1.18
0.69
0.42
0.39
0.77
0.36
0.83

19
18
45
406

35
20
160
1138

83.16
12.72
252.98
180.55

1.34
0.64
1.29
2.46

1.30
0.31
2.87
4.08

1.01
1.61
1.11
0.95

1.28
1.48
0.97
1.32

149

420

181.07

1.40

2.33

1.16

1.07

165

507

207.09

1.14

1.83

0.69

0.78

62

91

45.97

1.93

1.55

0.78

0.73

288
138

739
876

156.56
537.09

2.06
0.71

3.25
1.45

1.06
0.60

1.13
0.83

109
237

682
3375

523.60
1,325.73

0.58
3.87

1.43
11.35

0.90
1.86

0.70
1.61

127

400

214.80

0.75

2.15

0.63

0.80

485

1772

265.26

3.19

7.33

1.01

1.23

235

380

61.49

1.67

1.82

1.08

0.76

7
182
480
475
4534

17
386
1081
926
15502

137.14
112.02
125.30
94.78
241.94

0.46
4.73
2.24
4.09
1.60

0.54
4.70
2.47
5.18
2.98

0.85
2.50
0.98
1.12
1.01

0.46
1.51
1.06
0.98
1.25

* Utility patents only

Source: CHI Research Inc., Taiwan Economic Research Yuan (2002 Economic Report) and
calculated by the author.

53

EC
N

C
an
on

Total 1997-2001

CAGR 1997-2001

Source: USPTO: Patenting by Geographic region (state and country), breakout by

organization count, 1997-2001 utility patent grants by calendar year of grant.

54

CAGR

30%
25%
20%
15%
10%
5%
0%
-5%

So
Sa ny
m
su
ng
M
ot
or
ol
To a
sh
ib
a
Fu
jit
M
su
at
su
sh
ita
Lu
ce
nt
H
ita
ch
M
i
its
ub
is
hi

Top 12 Patenting Organizations

in the USPTO, 1997-2001

16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
IB
M

Patents Number

Figure 1 Top 12 patenting organizations, 1997-2001

Figure 2 The Conceptual Framework of National Innovative Capacity

Resources commitments
and policy choices
Capital and labour resources

Public
R&D
Openness
IP
Higher
Education
Antitrust

Population

FTE
S&E

Concentration
of technology

Private R&D
funding

R&D $

Linkage
Strength of a
nation's common
innovation
infrastructure
Patent
stock

* R&D expenditure by university

* The strength of venture capital

The environment
for innovation in
industrial cluster

GDP per
capita

Knowledge stock

National Innovation Capacity

Journals

GDP

Labour

Market
share

Non-resident
Capital

Downstream effects of national innovation capacity

Source: Adapted from FP&S (2002)

55

Figure 3

Patents Per 10,000 R&D workers

International Patents per 10,000 FTE S&E

900
800
700
600
500
400
300
200
100
0
1975

1980
Taiwan

1985
S. Korea

1990
Singapore

1995
Hong Kong

2000
China

Source: USPTO.

56

Figure 4
Domestic and Foreign Patent Granted in the Taiwan's
IPO -- Invention Type
100
80
60
40
20
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Domestic%

Foreign %

Source: Taiwan Intellectual Property Office, www.tipo.gov.tw

57

Figure 5

14000

600

12000

500

10000

400

8000

300

6000

case

NT$million

TSMC's R&D Expenditure and Innovation Performance -1995 to 2002

200

4000

100

2000
0

0
1995

1996

1997

1998

1999

2000

2001

2002

Year
R&D expenditure (NT$million)

Patent Awarded in the USPTO

Source: TSMC Annual Report, various years.

Figure 6

25,000

250

20,000

200

15,000

150

10,000

100

5,000

50

case

NT$million

ITRI's R&D Expenditure and Innovation Performance -1995 to 2002

0
1995

1996

1997

1998

R&D expenditure (NT$ million)

1999

2000

2001

2002

Patent Awarded in the USPTO

Source: ITRI Annual Report, various years.

58