Taiwan: How to Reboot the Dragon

There is some fear in Taiwan that Ma's opening to China will accelerate a hollowing out of the island's economy by encouraging companies to move there, costing jobs. Ma's policy team, though, argues closer ties will boost the economy overall because it makes it easier for executives to keep the most advanced parts of their businesses — the high-salary R&D and management divisions — at home. San says the government's vision is to turn Taiwan into an operations center for Chinese industry by supplying technical and manufacturing expertise. There are some early indications Ma's strategy might work. Sun Ta-wen, chairman of circuit-board-parts maker Taiflex Scientific in the southern city of Kaohsiung, had planned to shift more production to China to improve efficiency, despite his fear that his company's intellectual property would be stolen. But better transport links have cut shipping costs and reduced travel time, so Sun has decided to keep his advanced R&D and manufacturing operations in Taiwan and is even investing $10 million in a new factory in Taiwan, his third on the island. "We're going to make our fortune in China, but bring it back to Taiwan," Sun says.

Spreading the Workload
The offices that house the administrators of the Hsinchu Science and Industrial Park are, perhaps fittingly, dilapidated compared with the shiny high-rises and modern factories surrounding it. When the boxy building first opened in 1980, the same year as the park, its first officials were key players in developing Hsinchu into the premier center for Taiwan's electronics industry. Today, though, the idea that a bunch of bureaucrats can engineer industrial progress seems as out-of-date as the tattered furniture in the office's dark hallways. Read "Taiwan Scores Invite to WHO Meeting."

But don't tell that to Paul Wu, the park's director of investment services. He and his colleagues are scheming to make Hsinchu as important to Taiwan's future as it has been to its past by attracting companies in cutting-edge industries such as alternative energy. Not far away, the government this year opened a new park for biotechnology and other medical-business start-ups. "This is the time for the park to transform from old-fashioned capital-intensive industries to intellectual-based ones," Wu says.

Similar efforts are being made across the island. In Kaohsiung, the government in 2008 opened a software park to spur tech start-ups alongside the city's traditional export factories. Nationally, Ma's administration has targeted six "flagship" industries for investment and development: biotech, health care, high-end agriculture, tourism, green energy, and creative and cultural businesses such as traditional arts and pop music. The government intends to support these sectors by providing financing, improving the capabilities of state research institutes and other measures. "We are keenly aware these industries in five to 10 years will be the major industries of the world," Ma recently told TIME.

Wanted: Eureka Moments
The key to the government's grand plans is fostering innovation. Though its companies and research centers have been adept in past decades at advancing manufacturing systems and paying catch-up with the West, they haven't proven as capable of breaking new ground. To remain competitive, Taiwan has to develop its own technology, not just manufacture technology products.

There are moves afoot to bring about this crucial change. Taiwan's vaunted Industrial Technology Research Institute (ITRI), a state-funded think tank housed on a landscaped campus near Hsinchu, produced many critical breakthroughs since its founding in 1973. But ITRI's future may lie within the center's Creativity Lab. At its entryway is a collection of odd video games developed at the lab, including one that allows visitors to interact with a digitally generated infant. Inside, researchers dress in blue jeans and polo shirts instead of the usual white coats, and converse in a room with movable walls. ITRI's managers encourage its Ph.D.s to spend time in the lab to help them develop new ideas. Last year, the lab launched what it calls "playful villages," discussion groups in which the researchers can meet and chat about their own special interests. "It's not that hard to get people to be more creative, given the right atmosphere," says the Creativity Lab's general director, Hsueh Wen-jean. "The idea was to create an environment without borders, to explore the love within themselves to be creative." Read "China Mobile to Buy Stake in Taiwan Telcom."

Whether such efforts can truly work may determine the fate of Taiwan's economy. "The old model is a top-down approach," says ITRI president Johnsee Lee. "The innovation economy has to be more bottom-up. It needs more talent." Morris Chang says Taiwan lacks that talent, because the country's education system stresses rote learning, resulting in "very little independent thinking and very little creativity." Chang also points out that Taiwan has to contend with a greatly changed international environment. "China wasn't in the picture 30 years ago, neither was India," Chang says. "You have a big competitor that can do the basic stuff at least as well as you can, but they can do it more cheaply." His conclusion: "The next transformation is going to be very hard," he says. Even with its history of beating the odds, Taiwan may be facing its stiffest challenge yet.

— with reporting by Jiyeon Lee / Seoul and Natalie Tso / Taipei

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