Do small countries like Taiwan still have a competitive edge, as large economies such a China and India rapidly rise in times of progressing globalization? And what are the competitive advantages of being small?

In an exclusive interview with CommonWealth Magazine, Finnish-born innovation and competitiveness expert Dr. Dan Steinbock, author of The Mobile Revolution, shared his insights on how small countries can take advantage of globalization to boost their competitiveness.

Steinbock, who was in Taiwan to discuss the latest mobile technology trends with Taiwanese network operators, is convinced that “the base for prosperity is not productivity, but innovation,” and that the key for survival amid growing global competition is the ability to translate innovative technologies into new enterprises.

Steinbock, who presently teaches at Harvard Business School’s Institute for Strategy and Competitiveness (ISC) alongside management guru Michael E. Porter, has written extensively on innovation strategies and global competitiveness. The author of more than ten books including The Nokia Revolution and Wireless Horizon, he is also ICT (information and communications technologies) director at the India, China and America Institute, a leading U.S. think tank.

Following are excerpts from the interview:

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Q: You have done a lot of research on countries with innovation-based economic development such as Finland, but also on emerging economies such as India and China. Where do you see Taiwan’s competitive advantage?

A: Based on figures by the United States Patent and Trademark Office (USPTO), Taiwan ranks fourth in terms of patenting... Of course, innovative capacity has to do with a lot more than just patenting. But I think it is quite remarkable that Taiwan has been so good in technology innovation. I think that’s a great asset to the country... Finland, Sweden... I believe they would be ranked 12 or 14...

The situation in Taiwan is also better than in the Nordic countries, not just because you have a bigger base, but because you have more companies, and in a way, you have more talent. In Finland, if you look at patenting figures, Nokia may account for 40 to 50 percent of the patents, and that makes you concerned if one company is so dominant in one country...

What’s clear here is that the innovative potential of Taiwan is quite great. But can one find ways to translate it to competitiveness and to prosperity? These are, of course, the critical issues... Ultimately, the key story is not just the factor that Taiwan is five times bigger than Finland, it is really the factor that you have more companies in the world of technology innovation that are very highly regarded worldwide. The question is, can they diversify into industry segments that demonstrate very high growth potential... translating it into productivity, into competitiveness?

The Three Keys to Successful Innovation

Q: What are the keys for translating innovative technologies into productivity and a motor for economic growth?

A: In the WEF (World Economic Forum) indicators, Japan is at the top in terms of innovation. If you look at patenting, the United States is at the top. So you ask yourself, how can it be that Japan is at the top of the innovation curve, but is not the most competitive economy? The reason often has to do with the fact that you can be very good with technology development, but what about entrepreneurialism, what about raising your capital?

I think that Americans have been extremely successful with new entrepreneurship. Google, Yahoo, YouTube, MySpace – they seem to come up with new things very fast. The reason is that there is this fast interplay between technology development that translates into new enterprises, which then find capital to grow fast, through venture capital.

So the question is, even if you have great technology innovation, what about your entrepreneurialism? I would say there are really these three critical players: The first is technology innovation or development. Second comes entrepreneurialism. And third, what is the degree of new enterprise formation? In Japan, that has been relatively low on a worldwide basis. A lot of companies in Japan are big corporations that were born many decades ago. It is bad for a country if you can’t revive and renew your competitive base, your competitive advantage.

Q: What do think about Taiwan’s innovation environment?

A: I took a quick look at some entrepreneurial indicators and they indicate that Taiwan could improve. Technology innovation does not easily translate into commercialized leadership... It’s not enough to have that technology innovation if you can’t commercialize it...

In America, it works, because you have that connection. Someone comes up with an innovative technology, then you create a firm around it, it starts expanding. It might be a search engine as Google initially was, but then it goes to other areas. Somebody throws in money, because you need to grow very fast. If you don’t have those three, it won’t work. You need all of them.

Small countries benefit the most from globalization, because now they have something to give. My hunch is that perhaps in the case of Taiwan, the technology innovation is there, but the degree of new enterprise formation might indicate that you need more entrepreneurialism, more incentives for entrepreneurs...

That is what I think could be so beneficial for Taiwan finding ways to translate the manufacturing capabilities that in the past were based on cost advantages into services... It means that you are developing business models that are not so quickly commodified.

Q: Taiwan’s market is small, so won’t it be more and more difficult to build a good business environment amid globalization?

A: You may feel that Taiwan’s market is a very small base, but think of the Fins – 2.5 million people. From their point of view, Taiwan is a big market – five times bigger, twice as big as Sweden, and bigger than all Nordic countries together. You may see this as a hindrance, but for Nordics this is something to be envious about... I know that there are some concerns in Taiwan, but from the Nordic point of view you are closest to the greatest growth market in the world (China) right now that will have sustained growth power, assuming you have a stable environment, for years to come.

I think that you have benefits that Nordic countries can only dream of – culture, language and other communalities with China. Think of Finland. We have one of the largest growth markets right across the border, but we don’t have the same history, we don’t have the same language, we don’t have the same culture. Although the Fins are very attracted to the Russian market, it’s hard to create a role in those production networks that are being created in Russia.

Small countries benefit the most from globalization, because now they have something to give. Their exports account for more than 40 percent of GDP, while for the United States it is something between 10 percent and 20 percent... Small economies need free trade. That’s a lifeline for a country like Finland, for a country like Singapore, and a lifeline for a country like Taiwan.

You really have to develop the mindset of change, but it’s not easy. Even in Finland you have some people who feel that globalization is very bad for the country, who feel protectionist, and others who feel it is morally wrong. But I think that the overall consensus is that globalization is very important and that it’s a lifeline for small countries. Take a company like Nokia [or] Ericsson – they get more than 90 percent of their revenue outside their home base. Where would they be without free trade? And it’s the same for Taiwan...

Innovation authority Dan Steinbock: “You have to constantly be on your toes. People who today are your servants, will tomorrow be your masters.”

Q: What are the opportunities of small countries in a globalized economy?

A: The consumption patterns in Japan tend to anticipate more the international trends than perhaps those in the U.S. or elsewhere. So even if you have a smaller base like in Taiwan, that’s not the key issue. The key issue is, do you have needs in Taiwan that anticipate user needs elsewhere?

When GSM was born in northern Europe, since the Fins and Swedes pioneered it initially over there, the Finnish and Swedish users were the early adopters. But now you have early adopters in Shanghai, [and] especially in Hong Kong. Nokia had the N-Series launch in Taiwan.

The question is not so much the smallness of the user base, but whether the consumption patterns in Taiwan are something that anticipates the needs of bigger markets. Are those markets global markets, so if people here use mobile devices, is that something that anticipates reactions in Europe or the U.S. or even regionally? Is the Taiwanese way of using mobile phones something that anticipates trends in China? If that’s the case, then what happens in Taiwan is almost like a test laboratory for China.

And there’s another example. The Fins have a hard time with the fact that you here in Taiwan have Skype coming from Estonia. How did it happen? Because the Fins were offshoring their IT. The Fins were a major player in nurturing and cultivating the Estonian IT and mobile players. Since the Estonians did have a flat-rate tax, they were able to attract American investors, which the Fins couldn’t do with their system, not to that extent. So now you have Estonians becoming world-class players. It’s a small country, less than one million people. Of course, Taiwan would be a dream for them.

China and India: Opportunity Rather than Threat

Q: Do you view the rise of China and India as a threat to smaller countries?

A: I think it’s an opportunity and don’t see it as a threat per se... I think you need an increasingly international mindset... When I am in New York, Helsinki, Shanghai, Canton or Beijing or London, Paris and I would ask government leaders or senior executives, they would all agree that the rise of China and India is a magnificent opportunity that some consider a threat and some consider an opportunity. But when you ask them how you want to cope with that, they all say we will have to move higher in the value-added chain. But then you start wondering, how much more space is there in the value-added chain, and how do you do it? But then, there aren’t really too many alternatives.

The old idea that China is all about cost advantage, the world factory, I think will still apply for many years to come.

But we already see that there are certain areas in the Chinese industries where companies are getting closer and closer to the cutting edge. You have the wonderful example of Lenovo, a company that is globally ambitious, that provides inspiration to other Chinese players.

You have to constantly be on your toes. People who today are your servants, will tomorrow be your masters. So in this situation, if you operate in those areas where Chinese companies are becoming increasingly innovative and you use them as a cost-advantage base, that won’t work anymore. What is the solution? The only solution is to look at what is unique to your country, what is unique to Taiwan, what is the value proposition of Taiwan that is different from, say, Hong Kong, Singapore and (South) Korea – the other so-called tiger economies. How can the Taiwanese contribute to the power dynamics of China, while taking advantage of it, so that it is mutually beneficial? If it is not mutually beneficial, one party will suffer... My feeling is that taking into consideration Taiwan’s past, technology innovation and great manufacturing capabilities, these are drivers that are going to last for some time to come, but now you really have to find ways to go to the second stage... to find ways to increasingly get into services.

I think this is a redefinition that will involve all countries in the world... I think you really have to look at where this came from. Some people talk about the BRICS (Brazil, Russia, India, and China). But because Brazil was a market economy in the past, I would rather talk about Russia, China and India, because the entry of the former Soviet Union, the entry of China and India into the global labor force is something new. That means that the neighboring areas are the first to experience it.

Just as Finland has to redefine itself in terms of its neighbors, Sweden and Russia and the Baltic countries. The Baltic countries now have very rapid growth – a lot of investment is going into Estonia – and Russia, Russia is growing with leaps... despite perceived impressions of instability.

You have to constantly be on your toes. People who today are your servants, will tomorrow be your masters.

Transcribed by Susanne Ganz

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Chinese Version: 小國的創新競爭力