What Taiwan can Teach India About Building World-Class Firms | Chang-Tai Hsieh | Ep 30 | Growth is Good

Growth Is Good

Professor Chang-Tai Hsieh joins Rahul Ahluwalia to discuss the mechanics of successful industrial policy, using Taiwan's semiconductor rise

Key takeaways

• Taiwan's success was driven by the Industrial Technology Research Institute (ITRI) acting as a hybrid of Bell Labs and venture capital.
• A critical component of successful industrial policy is an accountability mechanism where projects must prove commercial viability through customers.

Main topics

• Industrial Policy Accountability
• Taiwanese Semiconductor Industry

Notable quotes

There's no cheap talk. You either make a product or you provide a service that somebody's willing to take out money from their wallet and pay.

Conclusion

Successful industrial policy requires moving beyond subsidies toward c

Transcript preview

Speaker 1 (0:01) We just privatized Air India, which was the Indian government's airline, I think two or three years ago after it was nationalized in the 1980s. So for 40 years, we kept sinking taxpayer money into it, saying we just have to do it. And most countries fail this test. You Speaker 2 (0:21) do things, you spend the people's money. And then the question is, how Speaker 1 (0:26) do you Speaker 2 (0:27) know that your project, what you spent on, is actually something that you should be spending on. Speaker 1 (0:33) Taiwan figured out a way to discipline their industrial policy, but most countries don't, right? Because it's much worse than that. Speaker 2 (0:41) If you offer subsidized R &D services and it's cheap, everybody's going to love you. Speaker 1 (1:03) Hello everyone, welcome back to another episode of Growth is Good. I'm really excited to have with us Professor of Economics at the University of Chicago, Changtai Sher with us. He's had a long and distinguished career. I'll put more details about that in the show notes. Let's get right to it. Welcome Professor Sher, thank you so much for being with us. Yeah, Speaker 2 (1:20) thanks for having me here. Speaker 1 (1:22) So I'll start the same way I always start this show, by asking you what is your personal connection to economic growth? How did you... understand that it is a thing? What is the most visceral association you have with the concept of economic growth? How do you explain it to people? Speaker 2 (1:39) I mean, my personal connection is that, so let me just say something about myself. So I was born in in the early 1970s. Then Speaker 2 (1:55) My family, when I was two, we moved to Singapore and we were there for three years. And then we were in Iran for four years. So we lived in Iran for four years. And then 1979 came and we had to leave. And then my family moved to Paraguay, which is where I think about if somebody asked me where I grew up, that's my answer. I grew up in Paraguay, so my schooling was in Spanish. And I lived there until I graduated from high school. Then I came to the U.S. And then it was, just thinking about your question, that... Speaker 2 (2:36) It was so obvious that it was the central question, right? It's so obvious that just looking around you, like looking around in Iran as a kid or looking around in Paraguay, that that was a central defining issue of any society, which is, you know, and all the questions, all the struggles revolved around that, which is that Is your society growing or your society is not growing? And then in the places that I grew up, these were all societies that were not growing. And all the problems, all the issues, all the debates, all the struggles was about that. What was about sort of the absence of growth. Speaker 1 (3:27) So there's no, Speaker 2 (3:28) it's always, you know, it literally is the question that I've been thinking about since. You Speaker 1 (3:35) were young. And did it strike you first when you moved to the US and saw how different it was? Or even in Paraguay, was it just evident? No, Speaker 2 (3:44) no, you understood it. Speaker 2 (3:48) Maybe I will say that it's also the power of TV right in the party that I you know I somebody has to do a study on how Transform transformative it is because it sort of gives you a vision Maybe it's all completely unrealistic, but it's a vision of what and I'll turn life what an alternative society could be right So the answer your question the way the kids I wasn't that surprised I it was you know, you know, just it's It's what I've seen already, not in real life, but sort of that cultural domination by the U.S. media. I guess there are parts of it here, too, in India. Of course. So Speaker 1 (4:31) then you moved to the U.S. and you started a very, very successful career in economics. And did you always just, therefore, focus on growth? Because most of your papers have something to do with... growth, whether it's the misallocation of capital, whether it's the life cycle, literature. I think Speaker 2 (4:53) that economics is a far broader field. So I would say that my approach, I think that of the core of what I've done is on economic growth. Speaker 1 (5:03) But, Speaker 2 (5:03) you know, sort of the beauty of, say, of being an academic is that you can work on whatever strikes you as interesting. So basically, you can do whatever you want. So I've just done, pushed on issues and topics that I think are important. And even if they're not important, it's just whatever fascinates me just personally. Speaker 1 (5:34) Right. So if you just follow that a little bit, right? So when you take the question of growth and when you think about countries that have done very well. Your country of birth, smaller countries around that, East Asia more generally, right, in northern East Asia in particular, has done very well on this growth thing. And you have written about it as well, one of your early papers, when you jumped into the whole Krugman debate. Speaker 1 (6:05) What has both your work and your reflections on all of this on East Asia, what is your summary of what really worked, what didn't work, what was going on in that miraculous growth story really in East Asia? Speaker 2 (6:23) I mean, that's a big question. Yeah, you Speaker 1 (6:26) can break it up as you like. And we can hit parts that come up later, later. Speaker 2 (6:35) So maybe to be specific, when I was in college, when I was 20, I will say that when I was 20, I was... Speaker 2 (6:50) Tired of taking classes Like any good Speaker 1 (6:55) 20 year old Speaker 2 (6:56) So I took a year off I took a year off so I left school for one year and I went to Taiwan It was a place that I didn't really know and part of it was about exploring the place and learning about a place and I found a job in Taiwan so Speaker 2 (7:15) this organization called the Industrial Technology Research Institute. And I learned a lot from being there. So the Industrial Technology Research Institute, if you've looked at the history of Taiwan, it was essentially the body that was the central arm of Taiwan's industrial policy at the time. Speaker 2 (7:43) For example, if you look into the history of say Taiwan semiconductor Taiwan semiconductor was created by the Industrial Technology Research Institute So when people talk about industrial policy in Taiwan You want to understand it. You got to understand that body, right? so Speaker 2 (8:05) What was it? What was industrial technology research? It was maybe the best way to describe it is that it was a combination of Bell Labs, meaning that it was a body of applied research, combined with Speaker 2 (8:28) with the venture capital Speaker 1 (8:29) firm. Speaker 2 (8:30) It was that. That was the central element of industrial policy. Let me describe to you sort of what their operating model was. And understanding the model, I think, helps give you a framework to think about maybe, I think that there's a debate about industrial policy here. But then to think about what is it that you've got to be thinking about, right? Their business model was the following. That is, there's a bunch of things, there's a bunch of industries, there's a bunch of firms with these capabilities that we would love to create. would love to create. What do we need in order to get there? Well, we Speaker 1 (9:15) need Speaker 2 (9:15) to have an organization that has the capabilities of doing that. So how are you going to create those capabilities? Well, you've got to figure out sort of the knowledge of how to do that. That was the Bell Labs part of it. Speaker 2 (9:37) So for example, in terms of there was the decision made in the late 1970s and early 1980s to create a semiconductor industry. So they put together a team of scientists and they put together a plan of this group of scientists. They were going to figure out and acquire the knowledge and the skills. So an important part of it was that they... entered into an agreement with, what's the name of the company? RCA. There was a contract that was signed. Don't remember the exact amount. And then they sent a team of about 25 young scientists and engineers to train at RCA for... Speaker 2 (10:25) One or two years, right? There's a fabulous documentary on like telling the story of this group. Then they came back and they came back and then the goal was to create a new semiconductor company, Speaker 1 (10:39) right? Speaker 2 (10:40) But this is when the venture capital arm came in. So this was a body that was government funded, Speaker 1 (10:48) but Speaker 2 (10:49) the goal was always that we were going to create teams that would acquire this technology or the knowledge and then eventually the goal was that this problem whatever project they were working on had to be commercially viable. Speaker 1 (11:08) So Speaker 2 (11:08) the goal was that there has to be a point in which whatever project we're working on, we've got to be able to spit it out as a private company. That was the goal. That one of these companies became Taiwan Semiconductor. So Taiwan Semiconductor was in the gestation stage for maybe three years, and then in 1988, they spun it out as a private company. And initially, I mean, for a while, the company struggled. Speaker 1 (11:45) And Speaker 2 (11:46) for example, their facilities, they didn't really have any facilities of their own. So they basically rented the semiconductor fab of the industrial technology research institute until they got enough money and then they built one of their own. But let me just get you to think about it, which is... What do you have here, right? You had a system in which it wasn't just a wish list, it wasn't just project, but you also had in place a mechanism for accountability. Which is you do things you spend the people's money and then the question is how do you know that you are when you're that your project what you spent on is actually something that you should be spending on Speaker 1 (12:40) and Speaker 2 (12:40) the way that they structured it was that the way that we know whether what we do is worthwhile is if You can actually is if you can create a company and this company actually has clients that are willing to pay for their product Right, right, and Speaker 1 (12:59) I would say that I have never in my Speaker 2 (13:02) life seen anybody who's talked about industrial policy think about the Accountability part right which is how do you know that you are not completely wasting your money? Speaker 1 (13:16) That's the exact question that was circling around in my mind. Speaker 2 (13:19) How Speaker 1 (13:20) did it happen here? Well, Speaker 2 (13:21) I mean, it was very much an explicit part of the design, which is the way that we're going to put in place an accountability mechanism is that every project has to be a company. And then there's no other way. There's no what I'm going to call the typical institutional or politicians. trick or trick of saying of just talking oh this is a great project or let's let me issue a report or let me have a study by a distinguished committee of people and