The Institute Behind Taiwan’s Chip Dominance—Asterisk

TSMC (and most of Taiwan’s chip industry) spun out of one government research institute. How did ITRI implement one of the most successful industrial policy programs of all time?

In 1973, Taiwan was a humble middle-income country. Its GDP per capita, adjusted for purchasing power and inflation, was $8,000 — on par with Nicaragua or Bangladesh today. Its main exports were cheap consumer electronics and textiles, and “Made in Taiwan” branding was a symbol of low cost rather than technological sophistication. The country was trying to attract foreign investment in electronics manufacturing, but its industry was still concentrated in the low-value-added stage of the supply chain. But 1973 was the year that Taiwan set itself on a path to become something more. 1973 was the year that Taiwan established the Industrial Technology Research Institute.<br>ITRI is an applied R&D lab, founded to rapidly elevate Taiwan’s technological capabilities, particularly in electronics.1<br>In addition to conducting research, ITRI acquired technology from abroad, trained Taiwanese firms to use it, and even provided services to firms directly — with the ultimate goal of making Taiwan a global leader in the electronics industry.<br>It succeeded, to say the least.<br>ITRI started with a shoestring budget of NT$210 million ($16 million today) and 400 employees, of whom only 10 had PhDs.2<br>It became one of the highest-return research initiatives in history. ITRI was responsible for creating multiple billion-dollar companies — including the legendary TSMC— and driving Taiwan to produce 60% of the world’s chips today.<br>How did it do it?

Cristiana Couceiro

History

In the early 1970s, Taiwan had a foothold on the bottom end of the value chain. Because of the country’s low wages and duty-free “export processing zones,” Western companies had already started to outsource the assembly of electronics to Taiwan. The result was a large industry of Taiwanese firms that were subcontractors for Western electronics companies, doing commodity manufacturing with no advantage other than low labor costs.<br>The vision for transforming Taiwan’s economy from low-tech to high-tech came from Sun Yun-suan 孫運璿, the Minister of Economic Affairs. Sun had trained as an engineer in the U.S. at the Tennessee Valley Authority, a New Deal-era project to modernize the Tennessee Valley through large-scale investments in infrastructure and electricity. There, he witnessed the TVA’s success in modernizing a poor and agrarian region — proof that economic and technological growth could come from the government taking on ambitious projects normally reserved for industry. When Sun became a government minister in Taiwan, he advocated for a public research institute to advance Taiwan’s industrial capabilities. In 1973, under his leadership, three existing research labs were merged to form ITRI.<br>In 1974, ITRI achieved its first major strategic success. One morning in a Taipei breakfast shop, seven men formulated a blueprint for Taiwan's semiconductor industry. One of them was Pan Wen-yuan 潘文淵, a Chinese-American engineer and former lab director at the Radio Corporation of America, then a leading chip manufacturer. Pan drew up a plan for ITRI to license RCA’s chip technology to develop Taiwan’s chip manufacturing capabilities. Sun agreed to spend $10 million on the deal — a large commitment for the nascent institute. As part of the agreement, ITRI sent a team of engineers to RCA’s facilities across the U.S. for a one-year training course on chip design, manufacturing processes, quality control, and other key elements. After returning to Taiwan, they set up a demonstration factory in 1977 to produce chips with RCA’s technology. Within six months, the factory was producing chips according to RCA’s specifications, with a 70% yield rate — even better than the 50% yield in RCA’s own factories in America.3<br>By 1978, Taiwan was producing over a million chips annually with RCA technology, mainly for electronic watches.<br>With the proof that Taiwanese factories could produce chips themselves, ITRI made plans to commercialize their new capacity. Scaling up the demonstration plant’s operations required private capital, as well as a dedicated corporate strategy — and ITRI was still just a research lab. So in 1980, ITRI spun out its first company, United Microelectronics Corporation. To kickstart UMC’s operations, ITRI gifted the demonstration plant to the new company, along with instructions for chipmaking and key engineers. With this running start, UMC became Taiwan’s most profitable company by 1985 (and is worth $20 billion company today). It was a remarkable success for an enterprise that was started directly by the government. This spinoff approach would go on to become a hallmark of ITRI’s strategy — the lab would spawn nine more companies over the next 20 years.4

By far the most important of these spinoff companies would be ITRI’s next child....