Discovering the Hidden Developmental State in the Neoliberal Market: Capability Building and Innovation in Taiwan

Globalization in the development context is often considered an opportunity for developing countries fueled by market expansion and transnational production networks led by multinationals (MNCs). Contrary to the earlier late-industrializers that arose by import substitution industrialization, the current neoliberal growth is driven by foreign direct investment (FDI) and open market strategies with free trade agreements sought by both developing and developed countries. These phenomena underlie the market-triumph thesis and the withering away of industrial policies and state intervention in the global south. Despite liberalization in trade and investment, however, cross-sectoral transformation and upgrading remain limited and globally uneven. At the industry level, linkages to MNCs do not generate learning or upward mobility, and many late developers remain stuck in the lower end of the value chains. This raises the research question: What explains broad-based entrepreneurship and development?

Contrary to a view of incompatibility between open markets and regulations, this paper shows that responding to the trade-related quality regulations imposed by core countries like the US and those of the EU has been essential in building the technological capability of manufacturers and enabling them to upgrade, innovate and succeed in the global market. Moreover, instead of a withering away of the developmental state , the state continued to be prevalent in the economy via various indirect mechanisms, such as setting standards and export promotion by responding to international quality standards and building external economies, as opposed to the conventional understanding of industrial targeting and picking national champions.

Through an in-depth qualitative case study of Taiwan’s quest for export diversifications and industrial upgrading, the article reveals the specifics of unacknowledged but widely practiced institutional innovations such as the loosely coupled Taiwanese para-state agencies in facilitating learning and capability building by constructing cross-cutting ties among firms from different production networks for learning and innovation. The paper concludes with conceptualizing the development strategies in the new economy.