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VentureCapitalinthe‘Periphery’:TheNewArgonauts,GlobalSearch,andLocalInstitutionBuilding

ARTICLE·SEPTEMBER2008

DOI:10.1111/j.1944-8287.2008.00001.x

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The New Argonauts: Global Search and Local Institution Building∗

AnnaLee Saxenian University of California, Berkeley

Conference on Capitalism and Entrepreneurship

Center for the Study of Economy & Society Cornell University

September 28-29, 2007

The emergence of technology entrepreneurship and innovation outside of the

advanced core of the world economy is one of the most striking features of contemporary

capitalism. Israel and Taiwan, both small, peripheral agricultural economies in the

postwar period, became home to dynamic clusters of entrepreneurial experimentation in

the 1980s and 1990s. Today Taiwan’s specialized producers define the state-of-the-art

logistics and flexible manufacturing of low-cost, high quality electronic systems. Israel,

with a population of just over six million, is home to more than a hundred internet

security and software-related technology companies listed on NASDAQ, more than any

other country outside North America.

Clusters of technology entrepreneurship have emerged more recently in poor

developing economies like China and India. The vitality of urban hubs like Bangalore

and Hangzhou challenges many of our assumptions about institutions and growth. Aside

from trade liberalization, these nations lack most of the institutions economists view as

∗ Many ideas in this paper are products of a conversation with Charles Sabel and Yevgeny Kuznetsov about diaspora networks and development. They deserve lots of credit, and perhaps even co-authorship in a subsequent version (assuming they are willing.)

pre-conditions for growth: the rule of law, secure property rights, good corporate

governance, flexible labor markets, transparent capital markets, and so forth.

The evidence from these cases suggests that creating an environment for

entrepreneurial success is less dependent on the “right” national institutions than on the

development of search networks, at both the global and the cluster-level. The unrelenting

pace of change and innovation in today’s global economy means that firms and other

organizations need to routinely search outside of familiar domains for models of best

practice, adapt them quickly to the local context, and continually revise in light of

performance and changing external standards.1 Much has been written about the

competitive advantages of the networks within clusters that facilitate collaboration and

learning between firms and institutions as well as between public and private sectors.

This paper demonstrates the growing importance of external, or global, search

networks that allow the same actors to monitor and learn from alternative practices, even

at great distances. It focuses on highly-skilled diaspora networks as one variant of a

global search network, and illustrates their central role in creating a context for

entrepreneurial development in their home countries.2 The focus is first-generation

immigrant professionals in US technology industries who have contributed to the

development of centers of entrepreneurship and technology growth in: Taiwan and Israel,

as well as (more recently) in India and China. The paper refers to the members of these

networks as the new Argonauts, a reference to Jason and the Argonauts who centuries

ago sailed in search of the Golden Fleece, to underscore their wealth-seeking, rather than

purely altruistic, motivations. 1 Sabel (2005) argues that search routines offer an alternative to the decomposition of tasks as a solution to the problem of bounded rationality in the networked organization. 2 Thanks to Kuznetsov and Sabel (2007) for introducing this idea.

2

The new Argonauts are ideally positioned—as both insiders and outsiders—to

search beyond normal domestic routines and to identify new models from global best

practice, in this case primarily from Silicon Valley, as well as to contribute to the

adaptation and redesign of firms and institutions in their home countries. This paper

focuses on the Argonauts’ contributions to the development of domestic venture capital,

arguably the most important institution supporting technology entrepreneurship. Venture

capital is itself a powerful search network: investors support a diverse portfolio of

entrepreneurial experiments and combine hands-on monitoring and mentoring with

market selection; this institutionalizes a continuous and rigorous process of new market

identification, selection, replication, and adaptation, as well as learning and the

accumulation of knowledge.

Discussions of the role of diasporas in development have proliferated in the past

decade. Section II reviews this literature briefly to claim that their most enduring

contributions to their home countries are not direct transfers of technology or skill, but

participation in the process of external search and institutional reform. The heterogeneity

of the diaspora, the national economy, and its institutions, mean that the process of

reform and economic transformation is incremental, and typically starts with micro-level

reform.

Section III illustrates this argument with the example of the creation of the

venture capital industry in Taiwan, which triggered dynamic entrepreneurship-led growth

in a cluster. The following section (IV) distinguishes external search networks from both

local networks (purely tacit knowledge) and modular global production networks (fully

3

explicit knowledge.) The final section draws conclusions for the growth of

entrepreneurship as well as the future of global search networks.

II. Diasporas and development

Scholars have increasingly identified diasporas as a significant force for economic

development, and policy-makers have aggressively mobilized their overseas communities

to tap this potential.3 The interest in disaporic contributions to development is not new,

however the recent research and policy has focused attention on the highly-educated

migrants who have long been viewed as a serious loss to poor economies (the brain

drain.) Today’s falling transportation and communication costs allow these migrants to

interact and collaborate with their home country counterparts more extensively than was

feasible in earlier eras of immigration; and a small but growing number of migrants have

become fully “transnational”— holding dual citizenship and maintaining residences in

both their home and their adopted countries.

Unlike earlier research that focused on flows of remittances or direct investment

from the diaspora (which can provide a stable source of finance and alleviate poverty, but

typically have limited long term impact) the recent literature suggests that highly-

educated migrants can alter the development trajectory of a poor country through the

diffusion of knowledge and/or technology transfers. The new development opportunities

arguably lie in the opening up of the global economy and the shift from brain drain to

“brain circulation” among a potentially influential group.

3 See, for example, Brinkerhoff (2006), Kapur and McHale (2005), Kuznetsov (2006), Lowell and Gerova (2004), Lucas (2005), Saxenian (2006.)

4

The most direct mechanism for transferring knowledge to the home country

would be for these highly educated migrants to return to their home countries. Yet in

spite of the aggressive recruitment efforts of home country policy-makers, and some

evidence of rising return in places like India and China, there is no evidence that rates of

return have increased substantially among highly educated migrants to the US and other

advanced economies. Moreover the brain drain has not abated, except in small countries

that have experienced rapid growth, such as Taiwan.4

There is evidence of a “diaspora effect” in scientific collaboration. Scholars have

documented that knowledge, as measured by patent citations and co-authorship, flows

disproportionately among members of the same ethnic community, even over long

distances (Kerr 2007; Jin, Rousseau, Suttmeier, and Cao 2007; Agrawal et al 2004.)

Efforts to demonstrate that diaspora scientific collaboration contributes to

economic growth in the home economy remain unconvincing, however, in the absence of

a clear causal connection to the transfer of technology to firms and other actors in the

home economy. Researchers have also found that ethnic networks in the US increase

trade with the home country, suggesting that a diaspora can help to reduce informational

and reputational barriers to trade (Kapur 2001; Rauch and Trindade 2002; Lucas 2005.)

Similarly case studies suggest that diaspora members can help direct corporate

investments or contracts toward their home country. These remain isolated findings, with

no evidence that they have transformed development trajectories.

In short, in spite of the outpouring of research in the past decade, the evidence

that diaspora networks (as “knowledge networks”) have a positive impact on economic 4 Ironically there is now concern in policy circles in Taiwan that they have lost the “bridge” to Silicon Valley as a result—at least implicitly recognizing the importance of the diaspora as a search network.

5

development is limited. Moreover the most significant findings from both the quantitative

studies and the extensive case study research come from a small number of Asian cases,

particularly China and India (Lucas, 2005; Lowell and Gerova, 2004). As critics point

out, there are many more cases of failed attempts to mobilize diaspora contributions to

development, from Armenia to Argentina, which remain unexplained in the current

framework.

The experience of the new Argonauts suggests that we need to fundamentally

refocus the debate. The increased salience of diaspora networks to economic

development does not lie in direct economic impacts, whether through technology

transfer or knowledge networks, but rather in their contributions, often incremental, to the

transformation of private and public sector organizations. While these changes cannot be

easily quantified, over time they have the potential to contribute to creating an

institutional context that, with time, supports self-sustaining growth.

The current discussions are limited because the macro-level focus of most

research on diaspora contributions overlooks the heterogeneity of both public and private

sectors (Kuznetsov and Sabel 2007.) The literature treats the diaspora, the national

economy, and its institutions as unified, homogeneous entities; yet the reality is far more

varied. The new Argonauts are only part of the diaspora, their expertise is in specific

industries, and they collaborate with particular agencies or policymakers. This

differentiation means that economic and institutional change begins in certain locations

and/or domains, and advances through partial and incremental (micro-level) reforms that

only with time aggregate into larger scale transformations.

6

We know, for example, that growth tends to occur in sub-national spatial

agglomerations, or clusters. Despite evidence of the uneven geographic concentration of

diaspora activities in a handful of provinces or regions in India and China, for example,

their real impact is not accurately reflected in national aggregates. A diaspora is also far

from a unified whole. The recent focus on highly-educated diaspora networks implicitly

recognizes that this is an elite group, in a privileged positioned to contribute to the home

country. There are other sources of differentiation that can be critical to their willingness

or ability to collaborate with one another or home country counterparts as well: linguistic,

occupational, religious, and generational. First generation immigrants for example

normally work with ease in the institutions and environment of their home country and

have friends, family, and colleagues. The second or third-generations, even if they speak

the language, often have greater difficulty.

The public sector itself is also highly differentiated: it is typically a multi-layered

assemblage of entities and actors, operating at different geographic levels and in different

domains, and with highly varied goals, interests, and resources. Like the economy, the

government can be decomposed into parts, some of which are more amenable to reform,

more appropriate points of leverage for outside groups like diaspora networks.

Dis-aggregation allows closer insight into the process of economic

transformation, with a focus on the firm and/or the cluster, where initial changes are most

likely to start. A small example from India illustrates a micro-level search, or matching,

process; it also suggests that how these micro-level searches can aggregate. In the early

1990s India was regarded with great suspicion by many US firms because of its

reputation for shoddy, low quality goods. An Indian engineer from the Software

7

Engineering Institute (SEI) at Carnegie-Mellon University traveled to Bangalore to speak

at software firms about Institute’s recently introduced Capability Maturity Model (CMM)

for software engineering process improvement. Many firms immediately picked up the

idea and began to sponsor conferences and consultations on the topic. By the end of the

decade virtually all large Indian software companies had adopted the CMM quality

certification model, and had has more SEI-CMM Level V (the top level) certified

companies than any other country in the world. Today India is recognized for high

quality software development processes.

The development of a globally competitive software services and technology

industry in Bangalore involved a multiplicity of similar micro-level searches, both within

the cluster and externally. In this case the best practice in software engineering processes

was transferred to Indian firms as soon as it was developed, allowing Indian firms to

move quickly to the cutting edge. At any given moment these changes may look

incremental, and there is no guarantee that they will continue, but when taken

cumulatively, they have the potential to alter the institutional fabric of the economy.

IV. Diaspora networks and entrepreneurship in the periphery

The collaboration of the Overseas Chinese diaspora with Taiwan’s government

officials and entrepreneurs in the creation of a venture capital industry exemplifies the

contribution of global search to domestic institution building. It also highlights the

heterogeneity of government and economy; the process of reform was initiated by an

entrepreneurial ex-Finance minister who leveraged both the search capabilities and the

8

political influence of the diaspora to mobilize support for initiatives that were strongly

opposed by older-line policymakers and traditional industries in Taiwan.

The establishment of venture capital marked was a critical turning point for

Taiwan because it insured that a few isolated, initial entrepreneurial successes were

followed by growing investment and collective learning in the electronics-related

industries, and ultimately the creation of a “critical mass.” In this case, a diaspora search

network composed of a mix of public and private sector actors based on the US and

Taiwan provided a model of leading edge practice that contributed to a process of

“metaphoric” learning in the sphere of economic development.

In the 1970s Taiwan was a poor, agricultural nation and its economy was

controlled by a mix of state-owned enterprises (in financial and strategic industrial

sectors) and highly risk-averse family-owned and run businesses.5 The country was home

to low-end labor-intensive calculator and electronic component manufacturing, mainly

for foreign firms, and it was notorious for the failure to enforce intellectual property

rights (which allowed engineers in the early 1980s to reverse engineer and produce

“clones” of the IBM PC and Apple’s MAC.) Few would have predicted at the time that

entrepreneurs in this peripheral economy would compete in the most technologically

advanced sectors of the world economy. Yet by the end of the 1990s Taiwan was a

leading center of technology entrepreneurship; today its specialized semiconductor and

computer related firms define the state-of-the-art logistics and manufacturing of low-cost,

high quality electronic systems.

Scholarly accounts of the growth of Taiwan’s technology sector typically focus

on a foresighted development strategy that included transfer of leading edge 5 Taiwan’s per capita GNP in 1962 was US $170, on par with Zaire and the Congo.

9

semiconductor technology, establishing the Industrial Technology Research Institute

(ITRI), a public-private research agency, etc. (Amsden ; Mathews ; etc.) Yet they leave a

puzzle. How did domestic policymakers design precisely the institutions required to

support dynamic technology entrepreneurship and growth in a highly competitive global

economy—particularly when many other nations, often far better endowed, tried and

failed to develop venture capital and technology industries?

This was not a planned process. Tens of thousands of Taiwan’s most talented

university students pursued engineering graduate degrees in the US in the 1960s and

1970s. A majority took jobs in the US after graduation because the professional and

economic opportunities in regions like Silicon Valley far exceeded anything available in

Taiwan at the time. Policymakers complained bitterly about these losses and even sought

to control them. None foresaw that the brain drain might become an asset.

As outsiders in Silicon Valley these immigrant created technical associations and

alumni networks that allowed them to find one another, as well as to stay in touch with

their counterparts at home. Some participated in government policy discussions or gave

talks at universities and technical conferences, but few considered returning home

permanently industries.

Taiwan’s personal computer industry was small and fragile in the early 1980s, in

spite of sizable public investments in higher education and technology research, and a

handful of returning entrepreneurs. The Hsinchu Science Park opened in 1980, but was

unable to find tenants in spite of efforts to lure multinationals, including those run by

Chinese.

10

The turning point came when Kuo-Ting Li, a former Minister of Economic

Affairs who is now widely regarded as the architect of Taiwan’s technology strategy,

aligned with a group of successful diaspora members to establish a venture capital

industry in Taiwan. They had a clear model to follow, but no blueprint or plan for how to

adapt it Taiwan’s economic and institutional context. This search network ultimately

succeeded in the design and implementation of a program in the face of strong opposition

from government officials and industrialists with strong economic self-interest.

K.T. Li visited Silicon Valley regularly during the 1970s to meet with Chinese

engineers and seek their advice on strategies to make Taiwanese industry more globally

competitive. He was especially impressed with the local venture capital industry and the

institutional support that it created for entrepreneurship. In the early 1980s, long before it

was fashionable elsewhere, Li convinced the Ministry of Finance of the need to provide

funding for research-intensive production and promote the development of a public

capital market. In 1982 Li introduced legislation to create, develop, and regulate venture

capital in Taiwan, including comprehensive tax incentives and financial assistance.

Such policy may seem uncontroversial today, but the concept of venture capital

was foreign to Taiwanese practice, in which family members closely controlled all of the

financial affairs of a business. Li faced significant resistance from traditional industry as

well as senior policymakers like Dr. Ramo, a technological consultant of Executive

Yuan, who argued that Taiwan lacked the capabilities to develop a venture-capital

industry.

The policy measures and regulations that Taiwan ultimately adopted were

fundamentally shaped by Overseas Chinese engineers, many of whom were based in

11

Silicon Valley. The Ministry of Finance, for example, hired US-educated engineers to

develop a plan for the creation and organization of private industrial investment

companies in Taiwan. They concluded that Taiwan should import the venture capital

model from the US. At the same time Taiwan’s Minister of Economic Affairs, Li-Te Hsu,

and the CEO of Acer, Stan Shih (himself a technology entrepreneur) also visited the U.S.

to learn about the institutions and systems of venture capital. With a small group of

domestic supporters the diaspora played a crucial role in mobilizing broader political

consensus for government promotion of venture capital. An IBM executive based in

Silicon Valley, Ta-Lin Hsu, for example, used his status as an outside expert to promote

the new policy measures by contacting key individuals in different governmental units.

The supporters provided many reasons to introduce the venture-capital

mechanism to Taiwan. They argued that rather than trying to replicate the high level

technological innovation of places like Silicon Valley, Taiwan should exploit its own

strengths: a supply of relatively low cost, high skilled engineers. In this view, Taiwan

would position itself to develop commercial applications based innovations from the US.

Lower skill, mass production could be carried out elsewhere. Li envisioned the Hsinchu

Science-based Industrial Park (HSIP) as the place for Taiwanese entrepreneurs to

undertake this commercialization and as a place to develop a bridge between domestic

and foreign companies. The availability of venture capital would be the key determinant

of success in this strategy.

Policymakers also recognized that the conservatism of Taiwan’s established

financial institutions was a major hindrance to the incubation of high technology

ventures. Most financial institutions at that time were commercial banks, which provided

12

only mortgage or debt financing. The risk-averse attitude of the government officials who

managed the public “Development Fund” and other financial incentive programs limited

the ability of these capital sources to spawn risky technology enterprises. A private

venture-capital industry would provide an important capital source for such high-risk but

potentially high reward ventures.

In addition Taiwan’s businesses were overwhelmingly (95%) small- and medium-

sized enterprises and most were family-run businesses that lacked incentives to adopt

modern management techniques. Policymakers believed that a venture capital industry

could help promote the introduction of modern financial and management skills by

institutionalizing the separation of ownership and control. Finally, they saw that the

introduction of the venture capital mechanism would entail the development of a public

capital market that provided an exit option for venture capital investments.

Recognizing that Taiwan lacked the relevant institutional know-how to start a

venture capital industry, domestic policy-makers organized collaborations with large US

financial institutions to facilitate the transfer of relevant financial and managerial

expertise. They also sent individuals to the US to be trained in managing a venture capital

business and introduced a series of initiatives to encourage domestic firms to enter the

industry.

Under K.T. Li’s guidance, the Ministry of Finance created significant tax

incentives to encourage the establishment of a venture capital industry: 20 percent of the

capital invested in strategic (technology-intensive) ventures by individual or corporate

investors was tax-deductible for up to five years. The Ministry also offered substantial

matching funds through a “Seed Fund” with NT$800 million from the Executive Yuan

13

Development Fund. In addition regulation governing Security and Exchange was

modified to support the development of a public capital market.

The domestic computer company Acer founded Taiwan’s first venture capital

firm in 1984 as a joint venture with the old-line Continental Engineering Group. However

there were initially no followers. Faced with the challenge of raising capital from

Taiwan’s risk-averse financial and industrial communities, K.T. Li invited the Overseas

Chinese community to establish venture capital businesses in Taiwan. Ta-Lin Hsu, who

had been a key senior policy adviser and STAG member since the 1970s, set up

Hambrecht & Quist Asia Pacific in 1986. Hsu reports that it was not easy to raise the

initial $50 million fund. In particular Li “twisted lots of arms” to raise $21 million (51

percent) from leading Taiwanese industrial groups such as Far East Textile, President

Enterprises, and Mitac. The balance (49 percent) came from the government.6 The first

general manager in H&Q Asia Pacific’s Taipei office, Ding-Hua Hu, was a classic

returnee to Taiwan. After earning a PhD in engineering at Princeton, Hu returned in the

1970s to play a lead role in building Taiwan’s semiconductor industry as the first general

director of the Electronics Research and Service Organization and as a Professor of

Electrical Engineering at the elite Chiao Tung University.

In 1987, two other Overseas Chinese engineers, Peter Liu and Lip-Bu Tan,

responded to Li’s invitation as well, establishing Taiwan’s second U.S.-style venture

fund, the Walden International Investment Group (WIIG) as a branch of the San

Francisco–based Walden Group. Both H&Q Asia Pacific and WIIG (along with Peter

Liu’s spin-off firm, WI Harper) were able to raise capital for Taiwanese funds with

6 Interview with Ta-lin Hsu, San Francisco, CA, June 1, 1997.

14

relative ease from the networks of Overseas Chinese in Silicon Valley who were familiar

with venture capital.

It was only after these investments showed returns—after companies like Acer

and the returnee company, Microtek, were publicly listed on the Taiwan Stock Exchange

in the late 1980s—that that the venture capital industry in Taiwan took off. The “Seed

Fund” with matching grants for venture investments was depleted and the Executive

Yuan committed a second fund of NT$1.6 billion that was also allocated quickly.

Domestic IT firms began to create their own venture funds, including D-Link, Macronix,

Mosel, Taiwan Semiconductor Manufacturing Company (TSMC), SiliconWare, UMAX

Data Systems, UMC, and Winbond. Old-line firms in traditional industries like

petrochemicals that had been reluctant earlier to get involved in the “new economy” also

began investing in technology-related venture funds and businesses.

The emergence of Taiwan’s venture capital industry and the early successes of

venture-backed startups attracted growing numbers of Overseas Chinese to return from

the U.S. to start businesses. Miin Wu, a Stanford graduate who worked in Silicon Valley

for over a decade before returning in 1988 to start Macronix International, one of

Taiwan’s first semiconductor companies, in Hsinchu Science Park with funding from H

& Q Asia Pacific is well-known example. The availability of venture capital also

transformed the Hsinchu Science Park from its original role as an export processing zone

into a fertile environment for the growth of indigenous technology firms. By 1996 over

2,500 engineers and scientists had returned to work in the Science Park and 40% of the

203 companies based in the park were started by returnees. The industry remained highly

localized as it grew, with the personal computer industry in greater Taipei region and

15

semiconductor and component firms in Hsinchu, creating a corridor roughly the same

size as the Silicon Valley cluster.

The availability of venture capital in the 1980s distinguished Taiwan from the rest

of Asia at a time when capital was available in the region only to large corporations with

ties to governments or to wealthy families. One measure of the success of Taiwan’s

venture capital industry is the performance of venture funded firms in public capital

markets. Ten of the 32 new ventures started in the Hsinchu Science Park in 1996 received

funding from local venture funds. By 1998 over 130 venture-funded companies were

listed on the Taiwan Stock Exchange and some 40 were listed on NASDAQ.

Taiwan’s policymakers and entrepreneurs clearly learned from the Silicon Valley

model; some even believed that they were replicating that model. However in solving

their domestic economic development problem, by adapting venture capital to the

domestic context, they not only created a significantly different variant in Taiwan (with

distinctive institutions and industrial specializations) but also transformed Silicon Valley

in the process.

IV. Global search networks and cross-regional collaborations

The new Argonauts have influenced policy in other developing nations,

identifying and adapting best practices and models from Silicon Valley to their home

countries. The coalition of policymakers and overseas entrepreneurs and engineers that

created Israel’s venture capital industry in the early 1990s faced considerable opposition,

and the first effort to institutionalize venture capital failed (Inbal) before they found a

form that worked for their environment (Yozma.) The Indian and Chinese diaspora

16

networks have participated in the creation of institutions for venture capital in their home

countries as well (Saxenian, 2006.) Each has transformed not only domestic institutions

but also altered the development trajectory for those that came before.

While diaspora networks are a highly visible example of global search networks,

other search networks can play a similar role of providing “out of the box” and non-

routine solutions to domestic problems. The supplier development program in Ireland, for

example, is a joint efforts of MNC buyers and small and medium-sized suppliers, aided

by government program, to upgrade SME’s quality and timeliness of delivery (Kuznetsov

and Sabel 2007). In developing economies, these programs typically require government

involvement to create incentives for private sector participation.

The growing importance of external search networks in the process of

decentralized co-development reveals the limits of the “communities of practice”

associated with geographically-rooted clusters or industrial districts in today’s innovative

and global churn (Brown and Duguid 2002; Wenger and Lave 1991.) The dominance of

tacit knowledge in a cluster limits actors to searching within their areas of shared

understandings, leaving them potentially vulnerable to disruption by external innovations.

The competitive challenge facing the Italian industrial districts appears to be related to

the failure of some communities to search outside of their own knowledge base—at a

time when lower cost competition from China and elsewhere in the developing world

poses a powerful threat.7

7 Sammara and Belussi (2006) compare adaptation in two districts that devolved production and conclude that Monteebelluna, which moved personnel, subcontractors, and other resources to Romania remains vital, while the struggling district ceded the entire low end of manufacturing.

17

These search networks also differ from the hierarchical networks associated with

modularization and global production systems.8 Modular networks represent an opposite

extreme because they require fully explicit knowledge, or the formalization of system-

level knowledge. The reliance on explicitly specified, standard technical interfaces and

components facilitates the external, global search that is not possible in locally-rooted

clusters. But it also exposes actors to the risk of lock-in to product architecture and

interface standards that can become barriers to subsequent innovation (e.g. the modularity

trap.) This explains why the network effects from a first-mover advantage that should

create “winner take all” outcomes, are often undermined by “disruptive” technologies.9

Sabel and Zeitlin (2004) note:

…stabilization of technical interface standards is a two-edged sword. Some standardization is obviously necessary to allow specialists to focus on the complex subsystems in which they have distinctive capabililies. But too much standardization can just as obviously become a barrier to systematic innovation and lock component manufacturers into a potentially obsolete product architecture.

Moreover the model of modular networks, with a relatively stable and hierarchical

production chain dominated by global flagship producers, dramatically underestimates

the potential for engineering improvements and innovation at all levels of the supply

chain. There is little room in this model for indigenous entrepreneurship and innovation

outside of the core—which is just what we have seen in places like Taiwan in recent

decades.

Open or external search networks represent an intermediate form between the

tacit networks of industrial districts and the fully explicit networks of modular production

systems. Members of these networks contribute, through intensive information exchange 8 Langlois (2002) and Sturgeon ( ) 9 Sabel and Zeitlin on modularity (2006)

18

and comparisons, to the construction of shared, domain-specific, understandings and

languages (or interpretations) that allow them to search for new models, even in distant

localities, and to collaborate in incorporating these new possibilities into existing

practice. In other words, once tacit knowledge becomes sufficiently explicit, it is possible

to develop joint solutions to problems through systematic comparison and “metaphoric”

learning. This requires common interfaces and sufficient standardization to allow for

transparent exchange, but sufficient openness to allow innovative collaboration—even

redefinitions of the interfaces.

The “pragmatist” principles that make tacit knowledge sufficiently explicit to

facilitate collaboration across geographic and organizational boundaries help explain the

diminishing distinction between core and periphery.10 To follow the case of Taiwan: once

venture capital was in place, the pace of entrepreneurship increased, particularly after the

first enterprises went public on the Taiwan Stock Exchange, making their founders

wealthy.

The new start-ups were highly specialized—and as anticipated by K.T. Li, and

they focused on commercialization of technologies developed in the U.S. Hsinchu-based

firms focused on perfecting volume production of electronic systems components that

used leading-edge technologies, ranging from specialty semiconductors, networking

equipment, and scanners to computer displays, power supplies, and so forth. This

required partnerships between technologists in Silicon Valley and component producers

in Taiwan—and often collaboration in the co-design of products. These rich exchanges

10 The original source on “pragmatist” mechanisms such as benchmarking, simultaneous engineering, and ‘root cause’ error detection and correction is Helper, Macduffie, and Sabel (2000.) They focus on the institutionalization of the search for routine-breaking practices, or the ‘routine questioning of routines.’

19

supported creation of the shared language and metrics that supported a proliferation of

cross-regional collaborations.11

Firms in the Hsinchu/Taipei region did not compete head-on with Silicon Valley

producers, as Japanese semiconductor producers did in the 1980s. Instead they defined

complementary specializations that allowed the two regions to co-evolve in a mutually

beneficial process of reciprocal innovation. In the early 1990s Taiwan became a highly

efficient and flexible producer of low cost integrated circuits, components, and

motherboards—and left new product definition, high-end design, and equipment

manufacturing to Silicon Valley. Producers in both regions benefited from distinctive but

complementary capabilities that allowed them to deepen their specialized expertise, in

part by recombining it with that of other specialists.

The network structures that support vertical specialization and co-design and/or

co-production proliferate opportunities for entrepreneurship. The fragmentation of the

semiconductor industry is a good example of this process: In the 1970s the independent

device manufacturers (IDM) designed, developed, manufactured, assembled, marketed

and distributed semiconductors within the corporation. Today there are multiple

independent specialists in each of these stages of production, and a variety of new niche

markets emerging at the interstices: in addition to the hundreds (thousands) of chip

design firms, for example, there are now scores of firms that produce intellectual property

components that go into the designs of the chips. Likewise there are not only chip

manufacturing foundries (that specialize only in manufacturing) but also “design

foundries” with deep expertise in complex fabrication technologies as well as design. As 11 Today’s digital technologies and web-based platforms facilitate the nearly instantaneous exchange of large amounts of information and permit continuous, real-time collaboration across great distances.

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these niche producers deepen their own capabilities in collaboration with other

specialists, they enhance the capabilities of the entire system.

In sum the producers in the Silicon Valley and Hsinchu/Taipei regions continued

to transform one another—and their industrial specializations and capabilities—in the

1980s and 1990s. The boundaries between firms, industries, and regional economies

blurred as specialization of production, co-design of products, and rapid recombination

generated new technologies, new products and processes, and new industries. These

regions and their industrial capabilities have continue to evolve as new producers in new

locations, from China to Israel, engage in joint innovation across long distance and

continually reconfigured supply chains.

V. Conclusion

The growth of technology entrepreneurship in formerly remote locations like

Taiwan resulted from institutional innovation, in this case the development venture

capital industries. The new Argonauts served as external search networks, providing their

knowledge of global “best practice” for receptive policymakers and entrepreneurs in their

home countries. One of the scarce resources in developing economies is the ability to

identify and/or locate partners with non-routine “out-of-the-box” solutions, or even

partial solutions, to domestic problems. Diaspora networks bring not only the language

and cultural know-how, but contextual knowledge that helps them to identify appropriate

solutions negotiate home country economy and institutions (underemployed skill,

research capabilities, promising firms and/or clusters, agencies or local governments open

to reform, etc.) Their personal connections (e.g. with classmates from elite universities,

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colleagues from military service, etc.) facilitate the process of identifying collaborators

and establishing trust; and the ease of communication and information exchange within

these networks accelerates learning about new practices and models.

The new Argonauts do not simply transfer practices or institutions like venture

capital directly to their home countries. While search networks can facilitate the

identification of non-routine models, the adopter must improvise to adapt a practice or

model developed in one context to the invariably different institutional context elsewhere.

The example of Taiwan illustrates the complexity of creating a new financial institution

like venture capital, a process that required close knowledge of existing domestic actors,

institutions, and interests, as well as the willingness to experiment to develop a system

that works within the new context. As a result the final outcome never looks like a replica

of the original.

The rise of entrepreneurship in advanced and developing economies is also,

importantly, a result of the vertical specialization of production. The breakup of the

modern corporation creates possibilities for entrepreneurs to identify promising market

niches and opportunities at any point along the supply chain. As these specialists emerge

and develop search routines to identify potential new partners and engage in co-design,

they have the potential to generate a proliferation of experiments and unanticipated cross-

fertilizations—over time developing entirely new products and industries. Taiwan’s

producers, for example, have applied their specialized design and manufacturing

expertise to the miniaturization of laptops and PDAs, as well as the integration of

cameras into cell-phones, thus pushing the redefinition of the boundaries of once distinct

industries.

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The process of development involves linking, or bootstrapping, micro-level

searches and institutional successes to create networks and clusters that cross industries

and sectors, and eventually achieve critical mass at a broader scale. There is no

predetermined model or set of institutional prerequisites for development; nor is there a

single actor with sufficient understanding of the economy and its institutions to identify

the “best” pathway to growth. The implication of this discussion is that development is a

process of experimentation and learning; policymakers and firms that develop search

networks can help identify partners and facilitate the micro-level innovations in

organization and production that over time cumulate into larger scale transformations.

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