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What Permits Small Firms to Compete in High-Tech Industries? - Inter-Organizational Knowledge Creation in the Taiwanese Computer Industry

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This paper addresses a puzzle related to firm size and competition. Since Stephen Hymer´spioneering contribution (Hymer, 1960/1976), theories of the firm implicitly assume thatonly large, diversified multinational enterprises can compete in industries that combine highcapital intensity, high knowledge-intensity and a high degree of internationalization. Smallfirms, by definition, have limited resources and capabilities and are unlikely to possesssubstantial ownership advantages. They also have a limited capacity to influence and shapethe development of markets, market structure and technological change. One would thusexpect that they are ill-equipped to compete in a knowledge-intensive industry that is highlyglobalized.Taiwan’s experience in the computer industry tells a different story: despite the dominanceof small- and medium-sized enterprises (SMEs), Taiwan successfully competes in theinternational market for PC-related products, key components and knowledge-intensiveservices. The paper inquires into how this was possible. It is argued that organizationalinnovations related to the creation of knowledge are of critical importance. Taiwanesecomputer firms were able to develop their own distinctive approach: due to their initiallyvery narrow knowledge base, access to external sources of knowledge has been an essentialprerequisite for their knowledge creation. Such “inter-organizational knowledge creation”(Nonaka and Takeuchi, 1995) was facilitated by two factors: active, yet selective andcontinuously adjusted industrial development policies; and a variety of linkages with largeTaiwanese business groups, foreign sales and manufacturing affiliates and an earlyparticipation in international production networks established by foreign electronicscompanies.A novel contribution of this paper is its focus on inter-organizational knowledge creation. Ifirst describe Taiwan´s achievements in the computer industry. The dominance of SMEs andtheir role as a source of flexibility is documented in part II. Part III describes some policyinnovations that have shaped the process of knowledge creation. The rest of the paperinquires how inter-organizational knowledge creation has benefited from a variety oflinkages with large domestic and foreign firms; I also address some industrial upgradingrequirements that result from this peculiar type of knowledge creation.

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Dieter Ernst

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