Research Policy 34 (2005) 1322–1349

National innovative capacity in East Asia

Mei-Chih Hu ∗ , John A. Mathews
Macquarie Graduate School of Management, Macquarie University, Sydney, NSW 2109, Australia

Received 27 October 2003; received in revised form 17 October 2004; accepted 18 April 2005
Available online 16 September 2005

Abstract

The innovative capacity of a country is the basic driving force behind its economic performance; it provides a measure of the
institutional structures and support systems that sustain innovative activity. Recent work, such as that by Furman, Porter and Stern
(FP&S) frames a concept of national innovation capacity measured by patenting rates, and estimates its institutional sources for a
group of 17 OECD countries. In this present paper, we extend and modify the FP&S approach by applying it to five “latecomer”
countries from East Asia, none of which was included in the FP&S study. First, we reproduce the FP&S methodology in relation
to the five East Asian countries, gathering comparable data over a comparable (but truncated) time period. While our results are
in broad agreement with the findings of FP&S, we document some important differences for latecomer East Asian economies: a
smaller number of national factors matter, and there seems to be an important (though subtle) role for public R&D expenditure.
These findings have important implications for successful catch-up strategies. We supplement these aggregate findings with firm-
and institution-level data from Taiwan, where the breakthrough to innovation has arguably proceeded farther than in any other
East Asian country. In these ways, we shed light on the process through which a latecomer country is able to close the gap with
the more developed countries, by channeling resources towards the raising of its innovative capacity.
© 2005 Elsevier B.V. All rights reserved.

Keywords: National innovative capacity; Innovative performance; East Asia; Patents

1. Introduction the technological frontier where innovation becomes

Innovation is widely regarded as the central process
driving economic growth and the competitiveness of
nations. But it takes a long time for a country to reach
∗ Corresponding author. Present address: Feng Chia University,
Taichung, Taiwan.
E-mail addresses: mchu@fcu.edu.tw (M.-C. Hu),
john.mathews@mq.edu.au (J.A. Mathews).
URL: http://www.gsm.mq.edu.au/facultyhome/john.mathews/index.
html.
a principle driver. In the case of the outstanding late-
comer economies of the 19th century, Germany and the
US, it took from 50 to 100 years for these countries to
catch-up with and overtake the leader, the UK. In the
20th century, first Japan has caught up with the leaders,
and in the postwar period, the outstanding cases have
been those of the East Asian “Tiger” economies, Korea,
Taiwan, Hong Kong and Singapore, described by the
World Bank as the “East Asian Miracle” (World Bank,
1993). Given that these East Asian countries have per-

0048-7333/$ – see front matter © 2005 Elsevier B.V. All rights reserved.
doi:10.1016/j.respol.2005.04.009
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
fected world-class production systems, the issue arises:
to what extent have they been able to shift from “from
imitation to innovation” (Kim, 1997b).
Innovation in the case of latecomer countries needs
to be understood in a way that is rather different from
innovation in the case of leaders. The lead countries
are interested in maintaining their lead through “new-
to-the-world” innovations, in products, or processes
or abstract knowledge generally (such as the human
genome). For the latecomer countries whose primary
strategic goal is to catch-up, innovation means “new-
to-the-country” innovation, which involves the man-
agement of accelerated diffusion of technologies from
advanced to catch-up countries (Amsden, 1998; Hob-
day, 1994; Mathews, 2001).
One of the clearest indications of innovation perfor-
mance is the rate of take-up of patents issued by the
US Patent and Trademarks Office (USPTO). Here, it is
found that East Asian firms and institutions have made
astonishing strides in recent years (Hu and Jaffe, 2001;
Jung and Imm, 2002). Taiwan in particular has risen to
third highest in the world in terms of per capita take-up
of USPTO patents over the past 5 years (1997–2001).
Accordingly, in this paper we analyze the patenting per-
formance of five East Asian countries in terms of their
uptake of patents from the USPTO. In order to do so, we
utilize a methodology recently introduced by Furman
et al. (2002); Furman, Porter and Stern (FP&S), applied
to a panel of 17 OECD countries with data covering the
period from 1973 to 1996. This study excluded all East
Asian countries apart from Japan. Our study is thus at
once a primary investigation of the innovative capac-
ity of five East Asian countries, and an extension of
the FP&S approach to a set of countries not previously
included in their analysis.
In this study, we build a dataset that is comparable
to that employed by FP&S for the OECD countries,
from primary sources available from the individual
countries and from international sources. We then
utilize this dataset to demonstrate that the principle
relationships identified and estimated by FP&S in
OECD countries carry over to the five East Asian coun-
tries, but with some differences in emphasis that are
entirely to be anticipated in examining the innovative
capacity of countries either still in, or recently emerged
from, a catch-up, latecomer phase. In such a phase,
technology transfer and management of diffusion
(“new-to-the-country” innovation) are relatively more
1323
important than “new-to-the-world” innovation. We
find that latecomer countries are much more focused
in their development of the institutional foundations of
national innovative capacity, and more targeted in their
reliance on certain industrial sectors for innovative
activity and patenting (such as IT and electronics).
We examine these issues in aggregate across our five
sample countries, and also in greater depth in the case
of one of the countries, namely Taiwan, where we
examine patenting activity at the level of the firm and
institution.
Our paper engages with two quite distinct kinds of
literatures. On the one hand, there is the literature on
East Asian industrial development and technological
upgrading, which has emphasized capture of tech-
nologies by East Asians as a process of moving from
‘imitation’ to ‘innovation’ but has not necessarily
considered the next step in this process, namely that
which takes countries to the point where innovation
rates can be captured in terms of patenting within
the USPTO. On the other hand, there is the literature
on national systems of innovation, where the bias of
scholarship has been towards the developed countries,
and towards ‘new-to-the-world’ innovation. We see the
novelty of our paper as straddling these literatures, and
demonstrating, firstly, that there is a real innovative
tendency at work in the East Asian countries and
not just an increase in the ‘propensity to patent’,
and secondly, that the systems of innovation in the
catch-up countries of East Asia differ in significant
ways from those demonstrated for the advanced OECD
countries.
On the first point, our principle finding, apart from
the striking increases in patenting rates themselves,
is the demonstration that the recent increases in
patenting rates in East Asia, particularly in Taiwan,
are accompanied by an increase in R&D expenditure.
We interpret this to mean that there is a real increase
in innovative activity, and not just in a ‘propensity
to patent’. This stands in marked contrast with the
findings for the US or OECD countries generally,
where it has been found that the ratio of the number
of patented inventions to real R&D expenditure or to
numbers engaged in science and engineering, have
generally been in decline since the 1960s (Evenson,
1993).
On the second point our principle finding is that in
latecomer countries, in addition to the significance of
1324 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
private R&D in accounting for much of the innovative
capacity (as found in FP&S), there is also a significant
effect of public R&D expenditure; this latter emerges
as an important determinant of the degree of special-
ization of the East Asian countries. We interpret this
as a significant difference in the kind of innovative
system developed in a latecomer country seeking to
catch-up from that in an advanced country. The role of
public R&D expenditure can be seen both as a source
of innovative capacity in itself, and as a guide to
steer the utilization of limited resources in latecomer
countries.
The paper is organized as follows. First, by way of
preliminaries, we discuss the role of patent statistics
(in terms of quantity and quality) as indicators of
innovation, and the experience of East Asian countries
in this regard, bearing in mind some of the caveats
involved in utilizing this measure of innovation.
Then, we introduce the concept of national innovative
capacity (NIC) and trace its origins to three streams of
literature (as done by FP&S) but add a fourth stream for
latecomer countries, where NIC must rest on new-to-
the-country innovation rather than new-to-the-world
improvements. In this setting we frame six research
questions that guide our study and differentiate it
from that conducted by FP&S. We then introduce our
own dataset, laboriously collected from the individual
countries, and our measures of the principal categories
to be employed, and in Section 4 we demonstrate conti-
nuities between our data and results and those obtained
by FP&S. Our distinctive results are reported in Sec-
tion 5, where we extend the FP&S methodology for
measuring NIC by including a variable “public R&D”
not included in the OECD study, and examining its
impact. Then in Section 6 we provide insights into the
strategies involved in public R&D and patenting by one
of the five countries concerned, namely Taiwan, based
on our own case interviews with firms and agencies
in the country, and on analyses from independent data
sources (such as CHI Research Inc.). This case study
reinforces the overall findings of our analysis, as well
as providing institutional and strategic detail that gives
enhanced insight into the strategies employed by late-
comers. We summarize our findings in Section 7, where
again we emphasize the differences found between the
approach to innovation taken by latecomer countries
in East Asia and the approach of the leading OECD
countries.
2. Use of patent statistics as indicators of
innovation and the experience of East Asia
While technological innovation cannot be precisely
measured, patenting rates have long been considered
a well-grounded proxy for the level of innovation
(Schmookler, 1966; Soete and Wyatt, 1983; Griliches,
1990; Trajtenberg, 1990; Dosi et al., 1990; Eaton and
Kortum, 1996, 1999; Kortum, 1997; Kanwar and Even-
son, 2001; Jones, 2002; Furman et al., 2002; Hage-
doorn and Cloodt, 2003). When patents cause sources
bias, the advantage associated with using international
patents are described in many prior studies (e.g. Soete
and Wyatt, 1983 and Furman et al., 2002). In addition, a
strong link between foreign patent grants and domestic
R&D investments as well as foreign patents and inter-
national trade and foreign investments demonstrates
the important variables like foreign patenting and
international trade (Soete, 1987). While researchers
have emphasized involvement in global production
networks as an important source of knowledge for
outstanding export performance in late industrializ-
ing countries, several studies have also explored the
relationship and importance of differences in technol-
ogy interaction with international trade performance
(e.g. Dosi et al., 1990). These support the relationship
between innovation activity and its outstanding export
performance for East Asian latecomer countries.
Scholars associated with the NBER have developed
methodologies for studying the flow of knowledge,
from one country to another, utilizing patent statistics.
In particular data from patents taken out in the USPTO
by both American and foreign firms enables researchers
to trace the influence of knowledge spillovers and
degrees of specialization associated with industrial
clustering (Jaffe and Trajtenberg, 1998). Studies have
utilized such USPTO patenting activity to examine the
experience of a specific institution, such as biological
resource centres (Furman and Stern, 2002), an indi-
vidual country, such as Israel (Trajtenberg, 1999), and
international knowledge flow as in the case of Taiwan
and South Korea (Hu and Jaffe, 2001) or the case of
Singapore (Hu, 2003). Many have argued that only cer-
tain types of innovation can be measured (Arundel and
Kabla, 1998; Griliches, 1990; Mansfield, 1986), and
that many important innovations are not patented (e.g.
food and tobacco) while some patents are awarded for
very modest discoveries (e.g. basic metal and automo-
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
tive). However, patents can be an appropriate indicator
in the context of high-tech sectors.
Since patents can vary enormously in their impor-
tance or value, simple patent counts are unlikely to
totally capture the innovative output of companies (see,
for example, Trajtenberg, 1990; Jaffe et al., 1993; Jaffe
and Trajtenberg, 2002). The alternative is patent cita-
tions rate, which is recognized as a sharper indicator of
innovation and is often used to measure the impact of
knowledge flow (see the NBER studies). While inno-
vative performance (e.g. patenting rate) in East Asian
countries mostly emerged in the 1990s (particularly
in the second half of the 1990s), the measurement of
innovation using citations as indicators would create
a truncation problem.1 Thus, we utilize the more tra-
ditional measure of innovation in terms of patenting
rates.
With all their deficiencies, then, patenting rates, and
particularly data concerning what the USPTO calls
“utility patents” (which represent real inventiveness,
rather than repeat patents and other “noise” in the data
for patents overall) represent a uniform and time-robust
measure of innovative output with an immediate eco-
nomic significance: the time and trouble involved for
firms to seek patents within the USPTO system filter
out trivial or idiosyncratic innovations. The US market
is widely recognized as the largest and the most tech-
nologically advanced in the world and the US patent
statistics are more reliable indicators because of the
common screening procedures imposed by the USPTO
(Pavitt, 1988). Furthermore, patenting in the US is in
itself an important technological achievement for East
Asian firms, and one that has a substantive signifi-
cance as well as providing a measure of innovative
capacity.
By the most conservative measure, namely accu-
mulated total of utility patents taken out in the USPTO
over the past quarter century (from 1975 to 2001), the
G7 countries do as well as expected. The US is far in
the lead, with close to 1.4 million patents accumulated,
followed by Japan, with nearly half a million, and then
Germany, UK and France and Canada. Switzerland has
historically done well, particularly because of its phar-
maceutical firms, as well as Italy and Sweden. But even
1 Older patents would have received a higher fraction of the total
number of eventual citations, whereas for more recent patents would
have lower (Jaffe and Trajtenberg, 2002).
1325
on this measure two East Asian countries have pene-
trated this listing, namely Taiwan and Korea, which
now rank 8th and 12th, respectively, in the world in
terms of patents accumulated. This indicates that they
are now to be considered as much innovators as imita-
tors.
The specific experience of East Asia in patenting
with the USPTO is shown in Table 1, as compared
with G7 countries and a reference group of comparable
countries, including Finland, Israel, Ireland and Spain.
Table 1 reveals just how rapid has been the rise of East
Asia as an innovative force. In terms of utility patents
taken out in the US over the past 5 years, per capita,
Taiwan now ranks third in the world behind the US
and Japan, with 17.2 patents per head over the period
1997–2001; Korea ranks as number 8, with 6.6 patents
per head per year over the same period, while Singa-
pore is rising fast. All five countries in East Asia show
the highest annual growth rates in the world, all exceed-
ing 20% per year (final column). These data reveal the
extent to which the East Asian countries have been
making the shift from imitation to innovation, and mak-
ing it very quickly, particularly over the most recent
period 1997–2001.
If we look at the firms and institutions involved,
we gain a clearer idea of what has been happening in
these latecomer catch-up countries. Fig. 1 shows the
world’s top 12 firms in terms of their patenting activity:
each of the top 12 recorded on average more than 1000
patents per year with IBM a long way in the lead. It is
interesting to note that of the top 12, three are US firms,
no less than eight are Japanese, while the Korean firm,
Samsung, has penetrated to the top echelons. Indeed,
Samsung registered the highest growth rate, increasing
the number of its patents at just over 25% per year over
the past 5 years.
An even clearer picture of what drives the perfor-
mance of Korean, Taiwanese (and Singaporean) firms
is revealed in Table 2, which shows the number of
patents taken out in each of the 5 years 1997–2001
by East Asian organizations (both firms and institu-
tions) and the totals. Almost all of these firms and
organizations operate in the electronics, IT, commu-
nications and particularly the semiconductor sectors.
These are the advanced sectors where the East Asian
firms have been making their mark, driving the overall
totals reported in Table 1 and Fig. 1. Korea has been
much more focused and concentrated in its patenting
 1326
Table 1
Country statistics: averages for 5- and 30-year periods (utility patent only)
Country Patents per year Patents per capita Success rate Annual growth rate (%)

M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349

1968–1997 1992–1997 1997–2001 1968–1997 1992–1997 1997–2001 1968–1997 1992–1997 1997–2002 1968–1997 1992–1997 1997–2001
G7
USA 44850 56683 79717 15.5 21.5 28.6 58.9 52.2 53.2 4.9 7.9 9.7
Japan 11216 22433 29949 10.3 17.9 23.7 55.5 57.9 61.5 8.6 6.5 10.2
Germany 5806 6895 9387 9.2 8.4 11.4 59.5 59.8 59.3 2.7 4.3 13.0
France 2432 2881 3662 4.3 5.0 6.2 66.5 61.9 60.4 16.4 3.7 8.5
UK 2492 2427 3469 4 4.2 5.9 53.5 50.2 50.6 2.7 6.7 10.8
Canada 1380 2119 3121 4.9 7.2 10.2 50.7 49.3 48.6 6.5 7.5 11.2
Italy 855 1215 1548 1.7 2.1 2.7 54.1 58.3 61.5 4.4 4.5 9.2
Reference group
Israel 183 400 757 4.2 7.2 12.4 42.2 40.5 37.1 12.5 15.4 17.3
Finland 181 370 609 4.2 7.2 11.8 48.6 51.3 47.0 11.4 10.0 13.6
Ireland 31 60 101 1 1.7 2.7 43.0 48.8 36.1 11.9 7.1 18.9
Spain 92 152 237 0.3 0.4 0.6 42.8 46.0 49.3 10.0 12.0 12.7
East Asian 5
Taiwan 437 1535 3778 2.3 7.3 17.2 35.5 39.3 45.7 26.2 21.4 27.8
Korea 267 1134 3113 0.7 2.5 6.6 37.3 39.0 56.1 39.1 36.1 20.4
Hong Kong 31 72 162 0.6 1.2 2.3 40.3 38.7 42.6 14.2 23.0 35.6
Singapore 16 59 174 0.6 1.7 4.4 40.2 41.5 33.3 44.9 26.2 33.7
China 19 52 108 0 0 0 36.5 40.6 32.8 – 12.4 34.3
Source: USPTO; World Development Indicators database, 2003. Note: (1) The data for Germany include Germany west only before 1990.
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349 1327

Fig. 1. Top 12 patenting organizations, 1997–2001. Source: USPTO: patenting by geographic region (state and country), breakout by organization
count, 1997–2001 utility patent grants by calendar year of grant.

activities than other East Asian countries. In Korea,
the top five chaebol account for a large proportion of
patents overall (69%) from 1997 to 2001, whereas in
Taiwan, the top five firms and organizations are all con-
centrated in the semiconductor sector, but they account
for a smaller proportion overall (27.1%). Thus, pat-
terns established in the realm of production appear to
be carried across to the sphere of innovation.
What is clear is that all of these firms and orga-
nizations have identified the winning of patents in
the USPTO system as a critical driver of interna-
tional innovative performance, and are building their
knowledge management capabilities as they deal with
ever-expanding international patent portfolios. In addi-
tion to providing companies like Samsung, TSMC and
UMC with the knowledge represented by the patents,
this practice has numerous other benefits, not the least
of which is the capacity to engage in mutual “patent
recognition” practices with leading established firms,
whereby each firm recognizes the other’s patents and

Table 2
Top patenting firms and institutions: Taiwan, Korea, Singapore, China, 1997–2001
1997 1998 1999 2000 2001 Total 1997–2001
Taiwan
UMC 149 174 266 430 584 1603
TSMC 130 218 290 385 529 1552
ITRI 153 218 208 198 221 998
VISC 53 120 112 131 112 528
Winbond 24 59 115 115 126 439
Mosel-Vitelic 15 32 38 66 68 219
Korea
Samsung electronics 584 1305 1545 1441 1450 6325
Hyundai electronics 154 212 242 294 533 1435
LG electronics 113 215 229 220 248 1025
Daewoo electronics 215 319 273 120 54 981
LG semiconductor 119 235 311 255 42 962
ETRI 58 120 130 124 72 504
KIST 29 44 41 35 35 184
Singapore
Chartered 30 39 44 79 135 327
China
WSMC 0 0 6 61 37 104
Source: USPTO: patenting by geographic region (state and country), breakout by organization count, 1997–2001 utility patent grants by calendar
year of grant. Note: Company is included only for the total patent number more than 100.
1328 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
agrees not to sue for patent infringement (Hall and
Ziedonis, 2001). This is one of the critical but hidden
features in the growth of firms.2
These “raw data” demonstrate the performance of
innovation activity in the East Asian latecomer coun-
tries, as measured by patenting rates at the USPTO. We
now turn to the analysis of these data, to gain a feel for
what drives the innovative capacity of these catch-up
countries. Our principle tool in so doing is the concept
of national innovative capacity.
3. The concept of national innovative capacity
and latecomer catch-up innovation
National innovative capacity may be broadly
defined as the institutional potential of a country to sus-
tain innovation. It has been investigated by numerous
scholars, at least since Suarez-Villa (1990) formulated
a clear definition of the concept and a measure of it in
terms of patenting rates. The notion can be formulated
at regional and other subnational levels (Neely and Hii,
1999). Thus, the capacity to innovate is not concerned
with any single aspect of innovation performance, but
with the sources of its sustainability.
The most recent formulation of the concept, by
Furman et al. (2002) (FP&S) traces three main sets
of ideas that converge on NIC. The first is endogenous
growth theory, and specifically the idea of the “knowl-
edge production function” (Romer, 1990; Jones, 1995,
2002). Second, there is the notion of the national inno-
vation system (NIS), and the linked idea of a techno-
logical system, where the key idea is the interaction
of disparate elements to build innovative capacity over
time. In the NIS literature (Nelson, 1988, 1993; Lund-
vall, 1988), it is institutions, such as innovating firms,
public R&D institutions (PRIs) and universities that
interact in a systemic way, providing complementary
services to each other, that is seen to work to build
innovative capacity overall. Third, there is the Porter
2 For example, it was its joint venture at first with Philips that
enabled TSMC to get started, with absorption of technology, but also
it was Philips’ patent portfolio that protected TSMC from patent
infringement suits early in its career. The Korean companies took
longer to learn this, and suffered severely in the 1980s from patent
infringement suits, particularly from IBM and TI. It is this experience
above all that helps to explain the dedication of Samsung et al. to the
continuing acquisition of USPTO patents.
notion of national competitiveness, and its grounding
in the interaction between several factors, such as the
rivalry between national firms, the level of demand of
local industries, the clustering of local and supporting
industries and factor (input) conditions (Porter, 1990,
1998), where again it is the intensity of these condi-
tions, and their interaction, that is held to accentuate
the competitiveness of firms in international competi-
tion.
Furman et al. (2002) presented an integrated frame-
work of a national innovation system, where the deter-
minants of innovative capacity in the OECD countries
were revealed in a comparative static fashion through
regression analysis. The FP&S study tracks a dynamic
process of building innovative capacity using interna-
tional patenting, taken as the number of patents granted
from the US Patent and Trademark Office, as a single
measure of innovation. Consistent with work in the area
by such scholars as Jones (1998) they adopted a log–log
formulation of the following kind:
LÀj,t = δYEAR YEARt + δcountry Cj + δINF LXj,t
INF
+δCLUS LYj,t
CLUS
+ δLINK LZj,t
LINK
A
+λLHj,t + ϕLAj,t + εj,t (1)
In the equation, L stands for the logarithm, À stands
for the production of innovation, YEARt stands for
year-specific technology shock, Cj for country-specific
technology shock, HA for human capital and financial
resources as R&D inputs, A for cumulative techno-
logical sophistication, XINF for resource commitments
and policy choices, YCLUS for cluster-specific environ-
ment for innovation, ZLINK for the quality of linkages
between innovation infrastructure and the environment
of cluster-specific innovation, and finally ε for the
sources of error.
3.1. National innovation capacity in latecomer
countries
In latecomer countries, the issue faced is catch-up
with the advanced countries, rather than the promotion
of innovation through private sector R&D expendi-
ture. We thus expect the ‘system’ of innovation in
latecomer countries to vary in accordance with this
different emphasis. The very term ‘latecomer’, first
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
introduced by Gerschenkron (1962) in his studies of
19th century patterns of industrial catch-up by Ger-
many and Russia, implies that a different strategy is
being pursued from that utilized by countries that are
already developed. It implies that ‘latecomers’ have to
utilize the advantages that are available to them, such
as the ability to tap into advanced sources of manage-
ment, organization and technology, with lower costs
than their advanced competitors.
The East Asian latecomer countries perfected a
model of industrialization based on export activity
and linkage with advanced firms in the advanced
countries, through original equipment manufacturing
(OEM) relationships (Hobday, 1994; Goh, 1996; Kim,
1997a,b; Mathews and Cho, 2000). Their success was
based on building mass production systems where
there was a bias towards industrial upgrading, achieved
through the linkages within global value chains as well
as through domestic pressures (Amsden and Chu, 2003;
UNIDO, 2002). But these successful systems have
experienced two kinds of pressure, both from newer,
low-cost competitors in China or in South East Asia,
and from the advanced firms growing more protective
of their technology as they find East Asian firms clos-
ing the gap. Thus, the East Asians have been confronted
with the necessity to build national innovation systems
of their own, particularly in the field of process inno-
vation.
We now focus our discussion on six research ques-
tions that will serve to guide our study and to capture
the systemic differences that we may expect to find
between the national innovative capacity of latecomer
countries generally, and the NIC of individual OECD
countries.
3.2. Research questions
1. Latecomer countries will be expected to focus their
innovative activity on fewer national variables than
advanced (OECD) countries, and in particular may
be expected to place most reliance on the world
stock of technological knowledge (as held for exam-
ple in the form of patents at the USPTO). Thus, the
latecomer East Asian countries might be expected
to demonstrate that if patent stock is the indepen-
dent variable, then patenting rates at the USPTO will
be influenced by fewer national variables than for
OECD countries (giving less emphasis, for exam-
1329
ple, to private R&D funding and to R&D personnel
levels).
2. Latecomer countries will be expected to demon-
strate greater targeting of industrial sectors on which
they may concentrate their innovating activity, in
particular on high-tech sectors, such as electronics
(IT and semiconductors), mechanical and chemical
engineering. These have certainly been the sectors
that have led the catch-up industrializing efforts in
East Asia (but not in other industrializing countries,
such as Latin America). Thus, we should expect
to find patenting rates by East Asian countries at
the USPTO more highly focused on certain sectors
where production systems have already been highly
developed.
3. Latecomer countries will tend to rely more on public
R&D expenditure than on private R&D expendi-
ture in the early stages of their industrial devel-
opment, where public R&D can boost the overall
infrastructure development; Suarez-Villa and Has-
nath (1993) postulated and measured such a role
for public infrastructure development. In particu-
lar, in East Asia, where targeting of industrial sec-
tors has characterized the development process, we
would expect to find the impact of specialization
to be more pronounced in the presence of public
R&D.
4. Intellectual property held by advanced countries can
act both as a means to promote latecomer industrial
development (through licensing of technologies to
latecomers) and as a barrier (where high royalty
charges are imposed on licensees, or patent infringe-
ment cases are brought). Strong IP protection in the
latecomer country can be expected to have a neu-
tral, or even negative, effect on innovation, at least
in the countries early years. We seek a clarifica-
tion of this issue through our case study research on
Taiwan.
5. Latecomer countries will be expected to exhibit
‘real’ innovation in these targeted sectors, and not
just an increased ‘propensity to patent’ as measured
by a relationship between increased patenting rates
and increased levels of R&D expenditure. Although
we do not conduct a time-series analysis in this
study, we would expect to find such a relationship
in our case study of Taiwan.
6. Given the diversity of approaches to innovation to
be found in latecomer countries, there is no reason
1330 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
to expect to find convergence in patenting activities
amongst a sample of such countries, such as those in
East Asia. On the contrary, we would expect to find
countries experimenting with different strategies of
catch-up, with Korea relying more on large firms,
and Taiwan on newly established firms, and Singa-
pore on established multinationals, as demonstrated
for the semiconductor sector by Mathews and Cho
(2000). So, we would not pose an expectation of
convergence as one of our research questions in this
study.
These research questions will guide our study of
national innovative capacity of latecomer countries and
help to differentiate it from results found for advanced
countries, such as through the study by FP&S of OECD
countries. Our aim is to be able to demonstrate the
continuities between NIC in advanced and latecomer
countries, as well as the differences as summarized in
these six research questions. We do so in the setting of
the specific experience of five East Asian countries, all
of which have experienced rapid industrialization over
the course of the past quarter century.
4. Data and measures used in this study
In order to compare the patterns of development
and policy implications of national innovative capacity
between latecomer countries and their initial knowl-
edge sources (e.g. OECD countries), this study tries to
align the same data sources and bases with the national
innovative capacity research work for OECD countries
by Furman et al. (2002). Taking the FP&S formula-
tion as a given, we have extended its application by
applying it to the innovation experience of five East
Asian countries, namely Taiwan, Korea, Singapore,
Hong Kong and China. The difficulty in doing so is
that some of the sources of data used in this study
are necessarily incomplete. Not until two decades ago,
did the industrial development of East Asian latecomer
countries attract global attention. Hence, some official
economic data and indicators are not complete until the
1990s (e.g. R&D expenditure by the private sector and
academic sector), particularly for the cases of Hong
Kong and China. However, it is widely recognized
that this was the time when developing countries were
creating their national systems of innovative capacity.
Moreover, the data sources utilized in this study do
not align exactly with the data on OECD countries in
Furman et al. (2002). 3 These scholars sourced some
data from the OECD Science and Technology Indi-
cators, where the data is available for OECD members
only. The difficulty is that East Asian Newly Industrial-
ising Economies (NIEs) are not members of the OECD
(with the exception of Korea from the late 1990s),
nor of the APEC or ASEAN International Associa-
tions. Fortunately, the relevant data can be extracted
from other reliable sources, such as the Asian Devel-
opment Bank and countries’ official statistics, along
with necessarily estimation in some unavailable data
years.4
Our data set, covering the required variables, is as
shown in Table 3. Broadly, our variables and defini-
tions are identical to those utilized in FP&S, subject to
the alternative data sources used as spelt out in Table 3.
However, we add a further variable, namely PUBLIC
R&D FUNDING, considering the significance of this
for latecomer countries. Hence, we split R&D EXPEN-
DITURE into: (1) its public component, (2) its private
component PRIVATE R&D and (3) an academic com-
ponent UNIV R&D. We analyze the impact of public
R&D below.
The results established by FP&S reveal that the
variation in NIC between OECD countries is influ-
enced by different levels of R&D inputs (R&D man-
power and expenditure) associated with differences in
R&D productivity and policy choices (e.g. extent of IP
3 For example, in order to eliminate the difference of purchasing
power in the five East Asian countries and make the data comparable
to the OECD countries, this study utilizes the method of purchasing
power parity (PPP) to convert the data from various sources into PPP-
adjusted US dollars, following the relevant year-base in the study by
Furman et al. (2002); and the variables in the World Competitive
Report for these latecomer countries are only available from 1988.
There is a different Likert scale in each year so we transform the
different Likert scores into a 1–10 score. The missing data before
1988 is not interpolated because it is recognized that the 1990s is
the most crucial development stage of national innovative capacity
in the latecomer countries.
4 For example, for those FTE S&T data unavailable in Singapore,
Hong Kong and China before 1985, we use the same growth percent-
age of FTE researchers, 77%, as in Taiwan and Korea in the same
years; for those data unavailable in total R&D expenditure, such as
before 1981, Taiwan data is estimated by the average increasing rate,
16.4%, from 1981 to 2000. The same estimated approach is applied
to Singapore data before 1991 (17.4%), Hong Kong data before 1995
(19.4%) and China data before 1987 (17.4%).
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349 1331

Table 3
Data sources of variables and measures
Variable Full variable name Definition and measure Source FP&S’s source
Innovation output
Patents International patents Patents granted in USPTO to the USPTO CHI US patent database
country j in year (t + 3)
Patents/million International patents Patents divided by million persons Asian Development Bank CHI US patent database
POP per million persons in the population
Common innovation infrastructure
GDP per capita GDP per capita Gross domestic product in Asian Development Bank World Bank
thousands of PPP-adjusted 1997
US$
Patent stock Stock of international Cumulative patents from 1973 to USPTO CHI US patent database
patents (t − 1)
POP Population Population (millions of people) Asian Development Bank OECD science and
technology indicators
FTE S&E Aggregate employed Full-time equivalent scientists and Countries’ official OECD science and
S&T personnel engineers in all sectors statisticsa technology indicators
R&D Aggregate R&D R&D expenditures in all sectors in Countries’ official OECD science and
expenditure expenditure millions of PPP-adjusted 1997 US$ statisticsa technology indicators
Openness Openness to Average survey response by IMD world IMD world
international trade and executives on a 1–10 scale competitiveness report competitiveness report
investment regarding relative openness of
economy to international trade and
investment
IP Strength of protection Average survey response by IMD world IMD world
for IP executives on a 1–10 scale competitiveness report competitiveness report
regarding relative strength of IP
ED share Share of GDP spent Public spending on secondary and Countries’ official World Bank
on higher education tertiary education divided by GDP statisticsa
Antitrust Stringency of antitrust Average survey response by IMD world IMD world
policies executives on a 1–10 scale competitiveness report competitiveness report
regarding relative strength of
national antitrust policies
Environment for industrial cluster
Private R&D Percentage of R&D R&D expenditures funded by Countries’ official OECD science and
funding funded by private industry divided by total R&D statisticsa technology indicators
industry expenditures
Specialization E-G concentration Relative concentration of USPTO Patent Author computation from
index Innovative output in chemical (E), Technology Monitoring USPTO
electrical (F), and mechanical (G) Division (formerly TAF
in USPTO patent classes Branch)
Quality linkages
University Percentage of R&D R&D expenditures performed by Countries’ official OECD science and
R&D performed by universities divided by total R& D statisticsa technology indicators
performance university expenditures
VC Strength of venture Average survey response by IMD world IMD world
capital markets executive on a 1–10 scale regarding competitiveness report competitiveness report
relative strength of venture capital
availability
Downstream related outcome factors
Journals Publications in Number of publications in National Science Board CHI database of science
academic journals international academic journals, citation index
using 1981 journal set
GDP Gross domestic Gross domestic product in billions Penn World Tables Penn World Tables
product Of PPP-adjusted 1990 US$
1332 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349

Table 3 (Continued )
Variable Full variable name Definition and measure Source FP&S’s source
Labour Labour force Number of full-time equivalent Penn World Tables Penn World Tables
persons employed in the labour
force
Capital Capital Non-residential capital stock in Penn World Tables Penn World Tables
billions of PPP-adjusted 1990 US$
Market Share Market share Share of exports in high-tech National Science Board National Science
industries (among 5 economies) Foundation
South Korea: National Statistical Office, various years; The Bank of Korea, various years. Singapore: Department of Statistics (DOS), various
years; Economic Development Board (EDB), various years. Hong Kong: Census and Statistics Department (C&SD), 2001–2003 issues. China:
National Bureau of Statistics (NBS), various years.
a Taiwan: National Science Council, various years; Directorate General of Budget, Accounting and Statistics (DGBAS); Ministry of Finance,

various years.

protection and openness to international trade), R&D
expenditure by the private sector, the degree of tech-
nological specialization, the share of R&D undertaken
in the university sector, and the knowledge stock in
the form of accumulated patents. They further found
that downstream measures of competitive performance
such as the share of high-tech products in exports are
also impacted by the components of NIC; and that
there has been convergence in these variables within
OECD countries particularly over the course of the past
decade. The framework to be utilized is illustrated in
Fig. 2, where pubic R&D funding is added as a nec-
essarily supplementary for the East Asian latecomer
countries.
A brief explanation of the variables utilized, and
their significance, follows.

Fig. 2. The conceptual framework of national innovative capacity. Source: Adapted from FP&S (2002).
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
4.1. Common innovation infrastructure
Without skilled R&D and management labour to
facilitate absorptive capacity, growth and assimilation
of external knowledge is unlikely to be effective in
these latecomer countries. Hence, we include popula-
tion (POP), each country’s number of full-time equiva-
lent scientists and engineers (FTE S&E) and total R&D
expenditures (R&D EXPENDITURE) in HA (human
capital and financial resources for R&D activities).
4.2. Cumulative knowledge stock
A nation’s ability to develop an absorptive capac-
ity relies heavily on previous investment. The initial
investment allows them to make better technological
choices and to exploit new opportunities better (Cohen
and Levinthal, 1990). Therefore, we employ GDP PER
CAPITA and PATENT STOCK as variables of knowl-
edge stock because they reflect the potential and direct
capacity to support knowledge accumulation.5
4.3. Resource commitments and policy choices
Some policy choices are considered as affecting a
country’s innovative environment, including the coun-
try’s openness to international trade and investment
(OPENNESS), its regime for the protection of intellec-
tual property rights (IP) and the strength of its antitrust
law (ANTITRST). Those are the dimensions used to
measure the competitiveness of a country in the IMD
World Competitiveness Report.6 We also include ED
SHARE, the percentage of GDP spent on secondary
and tertiary education, to measure the impact of human
capital investment on international patenting.
Considering PUBLIC R&D FUNDING as an indis-
pensable variable for East Asian latecomer countries,
we add it into the measure of innovative infrastruc-
5 As distinct from FP&S’s approach in measuring PATENT
STOCK at a depreciated rate of 30% per year, we use a measure
that is not depreciated over time.
6 These variables in various issues of the World Competitiveness
Report for these latecomer countries are only available from 1988.
There is a different Likert scale in each year so we transform the dif-
ferent Likert scores into 1–10 score. The missing data before 1988
is not interpolated because we recognize that the 1990s is the most
crucial development stage of national innovation capacity in the late-
comer countries.
1333
ture as a supplementary variable, which is omitted in
the examination of OECD countries. When state inter-
vention and the public sector have a central role in
creating, maintaining and developing the national inno-
vation system, the public sector can work as a regulator
in order to create a dynamic industrial environment
where private firms may flourish (Gregersen, 1992). In
latecomer countries, the public sector can play a signif-
icantly larger role, as identified first by Gerschenkron
(1962) in his study of 19th century patterns of late-
comer industrial catch-up. The same patterns can be
discerned in the East Asian NIEs. In order to advance
overall industrial R&D and provide strategic direction,
public funding in latecomer countries takes a great deal
of the proportion of total R&D expenses, at least in the
early stages of development. For example, in Taiwan
the government funded institutes, such as the Industrial
Technology Research Institute (ITRI) or the Institute
for Information Industry (III) are seen as the appro-
priate sites for fundamental and applied research in
industry and as agencies for the management of tech-
nology diffusion.
The decline of government funds for R&D and other
economic activities is a trend common to all major
industrial nations (Hu and Shin, 2002). However, state
involvement may be seen as facilitating the success of
the catch-up strategy in these East Asian countries by
guiding and allocating the limited resources into the
strategic industries where technological advance and
knowledge diffusion are critical (Hobday, 1994; Goh,
1996; Mathews, 2001; Amsden and Chu, 2003).
4.4. Environment for innovation in industrial
clusters
Apart from the special role of Public R&D in late-
comer countries, we expect the environment for inno-
vation to include private R&D expenditure, as well as
specialization, in common with the results for OECD
countries. We measure the effect of PRIVATE R&D
on national innovation capacity, shown as a percentage
of total R&D EXPENDITURE. But a sectoral effect is
also important. Therefore, we utilize another important
measure of industrial clustering, SPECIALIZATION,
which captures the nation’s relative specialization in
three important technological sectors (namely chemi-
cals, electrical and mechanical), and which has been
examined and shown to have considerable impact on
1334 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349

the whole economy (Patel and Pavitt, 1994; Ellison Table 4

and Glaeser, 1997), is also included. Technology spe- Descriptive statistics
cialization is defined as a focus on fields with fre- Variable N Mean S.D.
quent reference that generate inter- and intra-industrial Innovative output
knowledge flows, and therefore reinforce the strength PATENTS 129 413.45 932.65
of an industrial cluster.7 Common innovation infrastructure
GDP/POP 130 7229.61 4489.67
4.5. The linkages between innovative PATENT STOCK 130 1737.66 4182.36
POP 130 232.49 434.75
infrastructure and cluster-specific innovation
FTE S&E 80 86012.75 136244.03
R&D EXPENDITURE 76 4383.21 4979.97
In latecomer countries, which focus on catch-up and OPENNESS 60 6.81 1.13
industrial practice, many fields of academic science IP 55 5.93 1.29
are expressly applications orientated. The very names ANTITRUST 55 5.32 1.32
PUBLIC ED $ 52 2.62 1.65
“material science”, “computer science”, “industrial
PUBLIC R&D FUNDING 68 33.35 17.72
engineering”, “technology management”, and even
“applied foreign languages” signal fields of inquiry Cluster-specific innovation environment
PRIVATE R&D FUNDING 71 49.79 24.01
closely linked to particular practical problems. These SPECIALIZATION 130 0.20 0.03
formulations not only train people for work in industry,
Quality of linkages
but also develop the scientific foundations of indus-
UNIV R&D $ 51 15.73 17.52
trial technologies. Therefore, we employ the share VENTURE CAPITAL 60 5.98 1.46
of total R&D EXPENDITURE spent on universities
Downstream outcome factors
(UNIV R&D $) to measure this contribution. Finan- JOURNALS 70 2784.46 2536.64
cial institutions and the way firms are governed and GDP 130 441.72 783.36
controlled profoundly influence the technical activi- LABOUR 130 1.34E+08 256848975.94
ties. However, venture capital (VENTURE CAPITAL) CAPITAL 48 117064.42 79833.66
should be regarded as another factor promoting inno- MARKET SHARE 95 20.00% 8.31%
vation in industrializing East Asia. Note: R&D EXPENDITURE = PUBLIC R&D FUND-
ING + PRIVATE R&D $ + UNIV R&D $.

5. National innovative capacity of five East
Asian countries
We now proceed to give the empirical results of our
study. The descriptive statistics utilized in our analy-
sis, summarizing the experience of the five countries
concerned over the period 1975–2000, and used in the
analysis, are listed in Table 4.
5.1. Innovative output: international patents
The change in innovative output of international
patents (PATENTS) is defined as the number of util-
7 The USPTO has developed a deliberate patents classification sys-
tem that consists of 400 or so main patent classes, and over 150,000
patent subclasses. We follow the measure of SPECIALIZATION
(i.e. on mechanical, chemical and electrical classes) as developed by
Ellison and Glaeser (1997) and adopted by FP&S.
ity patents granted to inventors from a country by the
USPTO in a given year. The number of patents assigned
to a country in a given year (PATENTS), as averaged
over the 25-year period, is 413 (with S.D. of 932).
Patent uptake has dramatically increased over time,
particularly since the mid-1990s, achieving a summit
in the final year of the sample with the average level
of PATENTS rising from 9 in 1975 to 214 in 1990 and
1699 in 2000. Remarkably, Taiwan was ranked as the
fourth in the USPTO when South Korea was ranked as
the eighth, in 2000, as discussed above.
We construct the country-level measures of differ-
ences in the factor inputs of innovation across countries
in terms of total PATENTS, PATENTS granted per
million persons, and PATENTS PER R&D EXPENDI-
TURE, respectively. Fig. 3 demonstrates divergences in
R&D productivity, captured as PATENTS PER 10,000
FTE S&E. As with FP&S, three significant features
spring to notice. First, all five countries had a sim-
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
Fig. 3. International patents per 10,000 FTE S&E. Source: USPTO.
ilarly low level of international PATENTS produc-
tion and innovation at the beginning of the sample
period. Second, Taiwan pulled ahead of the other
four countries in terms of PATENTS and productiv-
ity of R&D inputs (i.e. human capital and $ capital
inputs) in the second half of the 1990s. Third, there
is a noticeable dispersal over time between countries,
particularly as between Taiwan and Korea. This is
very different from the FP&S finding of convergence
in OECD countries; it implies a distinctive develop-
ment pattern of national innovation in the latecomer
countries.
5.2. Determinants of national innovative capacity
Like FP&S, we conduct our analysis in stages,
examining first the cross-correlations to establish
which variables have independent effects; then con-
ducting the major regressions to discover which fea-
tures of the NIC have most impact on patenting rates.
We further interrogate the data for measures that we
would expect to be more prominent in latecomer coun-
tries than in advanced countries, in particular examin-
ing the enhanced impact of specialization when com-
bined with public R&D.
According to the FP&S analysis, OECD countries
have five highly mutual correlated elements, namely
population (POP); full-time equivalent science and
technology workers (FTE S&E); total R&D expen-
diture (R&D EXPENDITURE); GDP per capita and
the total patents issued (PATENT STOCK). By con-
trast, pair-wise correlation in the case of East Asian
latecomer countries indicates that only two compo-
nents are highly correlated to a significant degree with
1335
each other: PATENT STOCK and R&D EXPENDI-
TURE. 8 This is plausible, since at an early stage of
development there is no reason to expect population or
GDP to be correlated with innovative capacity (think of
China!). We, therefore, evaluate the individual relation-
ships between each of these components of NIC and
PATENTS. It is found that PATENT STOCK and R&D
EXPENDITURE explain 91.4 and 63.8% of the vari-
ance in PATENTS, respectively, and the coefficients
are around 1.1, providing a modest effect on national
innovation output.
Our main results are reported in Tables 5 and 6.
In Table 5, we investigate the effects of NIC vari-
ables in moderating the variance of patenting with
GDP/POP (representing potential knowledge availabil-
ity). In Table 6, we repeat the analysis utilizing patent
stock (representing accumulated knowledge capacity)
as proxy for knowledge stock. Both tables report the
impact of each variable on national innovative capac-
ity in the sample of East Asian latecomer countries,
measured in the form of a series of models. The OECD
study by FP&S did not utilize a category of public
sector R&D spending, and so its potential impact on
NIC was not evaluated. But in the case of latecomer
countries, such as our five countries from East Asia,
the impact of public R&D cannot be ignored. As pre-
viously mentioned, PUBLIC R&D FUNDING plays
an indispensable role in the earlier stage of economic
development for latecomer countries. Therefore, we
investigate its impact when included as a separate item
in the regressions of the log of patents on the logs of
8 We define the components as having a highly correlated relation-
ship when Pearson Correlation r ≥ 0.5 (Pallent, 2001).
 1336
Table 5
Determinants of national innovation capacity (GDP/POP as knowledge stock)
Dependent variable = ln (PATENTS)i, t+3

Idea production Common innovation National innovative National innovative National innovative
function (5.1) infrastructure (5.2) capacity: including all capacity: preferred capacity: preferred model
variables (5.3) model (5.4) (5.4) with PUBLIC R&D
FUNDING (5.5)
Common innovation infrastructure
A L GDP 3.778*** (0.054) 9.446*** (0.077) 8.081** (0.120)

M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349

A L GDP PER CAPITA 0.007 (0.085) 0.191 (0.060)
HA L POP −2.446*** (0.078) −6.442*** (0.003) −5.519** (0.023)
HA L FTE S&E 1.325*** (0.036) −1.197 (0.012) 0.038 (0.012) 0.368** (0.005) 0.326* (0.004)
HA L R&D $ 2.382*** (0.045) −0.235 (0.045) 0.121 (0.038) 0.175 (0.035)
XINF ED SHARE −0.252*** (0.001) 0.046 (0.001)
XINF IP −0.085 (0.038) −0.023 (0.024)
XINF OPENNESS 0.104 (0.059) 0.034 (0.036) 0.030 (0.034) 0.022 (0.025)
XINF ANTITRUST 0.051 (0.047) −0.006 (0.037) 0.006 (0.051) 0.003 (0.046)
XINF PUBLIC R&D 0.007* (0.008)
FUNDING
Cluster-specific innovation environment
YCLUS PRIVATE R&D 0.004 (0.049) 0.011*** (0.007) 0.012*** (0.003)
FUNDING
YCLUS SPECIALIZATION 4.298*** (0.003) 3.070*** (0.006) 3.060*** (0.004)
Quality of linkages
ZLINK UNIV R&D $ −0.011* (0.090) 0.003 (0.054) 0.005 (0.017)
ZLINK VENTURE −0.058* (0.070)
CAPITAL
Controls
Year fixed effects −0.141** (0.044) −0.099 (0.025) 0.097*** (0.003) 0.095*** (0.003)
Taiwan dummy 0.411 (0.147) 0.575 (0.103) 1.242 (0.000) 1.216*** (0.127)
Constant −5.346*** (0.011) −125.488 (0.180) −186.386*** (0.008) −105.042 (0.000) −121.315*** (0.068)
R2 0.743 0.958 0.998 0.993 0.995
Adjusted R2 0.733 0.934 0.995 0.991 0.993
Number of observations 122 121 118 121 118
Numbers in parenthesis refer to standard error.
* P < 0.1.
** P < 0.05.
*** P < 0.01.
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349 1337

Table 6
Determinants of national innovation capacity (patent stock as knowledge stock)
Idea production Common innovation National innovation National innovation
function (6.1) infrastructure (6.2) capacity: preferred capacity: preferred model
model (6.3) (6.3) with PUBLIC R&D
FUNDING (6.4)
Common innovation infrastructure
A L PATENT STOCK 1.144*** (0.006) 1.268*** (0.008) 1.278*** (0.016) 1.276*** (0.036)
HA L FTE S&E 0.194*** (0.012) −0.462*** (0.003) 0.231* (0.098) 0.280* (0.094)
HA L R&D $ 0.846*** (0.001) 0.186** (0.001) 0.181 (0.001)
XINF ED SHARE −0.093*** (0.006)
XINF OPENNESS 0.016 (0.021) 0.032 (0.009) 0.022 (0.005)
XINF IP 0.022 (0.047)
XINF ANTITRUST 0.029 (0.039) −0.010 (0.012) 0.003 (0.007)
XINF PUBLIC R&D 0.007 (0.008)
FUNDING
Cluster-specific innovation environment
YCLUS PRIVATE R&D 0.010*** (0.009) 0.013** (0.011)
FUNDING
YCLUS SPECIALIZATION 1.553* (0.065) 3.272*** (0.008)
Quality of linkages
ZLINK UNIV R&D $ 0.003 (0.047) 0.005 (0.032)
Controls
Country fixed Insignificant
effects
Year fixed Significant −0.051*** (0.000) −0.040*** (0.000) −0.043*** (0.035)
effects
YEAR −0.040*** (0.002) 0.019 (0.008) 0.073** (0.006)
Taiwan −0.400*** (0.002) −0.332*** (0.002) −0.352*** (0.007)
dummy
R2 0.941 0.989 0.995
Adjusted R2 0.938 0.984 0.992 0.993
Number of 125 122 121 122
observations
Numbers in parenthesis refer to standard error.
* P < 0.1.
** P < 0.05.
*** P < 0.01.

components of NIC. In this way we extend the work
reported by FP&S into new territory. The new regres-
sions are reported in columns 5.5 and 6.4, basing on
two different knowledge stock representatives.
5.2.1. Endogenous growth
The first regression (column 5.1) evaluates the
national ideas production model that was suggested
by Romer (1990) and Jones (1995). We find that
PATENTS is increasing with the log of GDP (3.78)
and log of FTE S&E (1.33). This may be interpreted
to mean that a 10% rise in GDP accompanies a 37.8%
increase in international patenting rate, and a 10% rise
in R&D manpower is associated with 13.3% increase
in international patent output. By contrast, FP&S found
that a 10% rise in GDP is associated with an approxi-
mate 10% increase in international patenting rate, i.e.
the impact of GDP is 2.7 times weaker for OECD coun-
tries than in the case of our latecomer countries. We
see this as a highly significant finding, and interpret
it to mean that the endogenous growth model seems
to apply with even greater force in latecomer countries
than in advanced countries, particularly when the econ-
omy of latecomer countries is on the upward position
of the production possibilities frontier. This is indeed
plausible, since latecomers are so dependent for their
1338 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
development on the existing stock of knowledge. The
negative coefficient associated with population (POP),
−2.446, after controlling for the level of GDP and FTE
S&E, implies that the lower level of GDP PER CAPITA
reduces innovative outputs, again, responding to the
argument of endogenous growth theory.
5.2.2. Common innovation infrastructure
Column 5.2 includes all variables of common inno-
vation infrastructure and year fixed effect (along with
5.3 and 5.4) in order to control for the variation from
changes in the annual rate of patenting. The first thing to
note is that the coefficient of GDP increases by 150%,
from 3.78 to 9.45, and moreover the sum of the coeffi-
cients on log R&D $ and log FTE S&E is comparable
to the individual coefficient on log FTE S&E in 5.1.
This demonstrates that there is no difference whether
we focus on an individual variable or include both vari-
ables (e.g. FTE S&E in 5.1 or FTE S&E and R&D $
in 5.2) in their effects on innovation activity, a find-
ing in common with that for the OECD countries (and
one with policy implications for government). Log of
total R&D $ enters with a significant coefficient, 2.382,
corresponding to the suggestion of endogenous growth
theory: the level of inputs devoted to R&D is one of the
critical factors in determining innovative output.
However, education investment (ED SHARE) does
not express its contribution to latecomer countries’
innovation output, over the period 1975–2000, per-
haps implying that the returns of education investment
are reflected in the promotion of overall productivity
of labor, rather than directly contributing to interna-
tional patenting activity. Not surprisingly, the intel-
lectual property protection regime has an insignificant
effect and actually has a negative relationship asso-
ciated with PATENTS output. This indicates that the
policy regarding IP does not emerge fully until the
late 1990s in latecomer countries and is consistent with
anecdotal evidence that IP protection harms catch-up.9
5.2.3. Industrial specialization
Column 5.3 includes all variables of the three
sources of NIC: common innovation infrastructure,
9 For example, some latecomer countries, like Taiwan, have paid
large technology licensing fees each year to advanced countries, par-
ticularly to the U.S and Japan.
cluster-specific innovation environment and the qual-
ity of linkages. We control for log R&D $ and log
FTE S&E in order to explore the impact of economy-
wide factors on national R&D productivity. Again, the
major impact in column 5.3 is that of log GDP (8.081),
following by SPECIALIZATION (4.298), which is
consistent with the highly skewed patenting practices
noted above, with most emphasis on the electron-
ics, semiconductor, IT and communications sectors.
Minor effects are found from log of FTE S&E (0.038),
ED SHARE (0.046) and OPENNESS (0.034). These
findings explain 99.8% of the variance in patenting
across the different countries. It is noted that total
R&D EXPENDITURE and UNIV R&D $ have nega-
tive coefficients while PRIVATE R&D FUNDING still
retains a positive coefficient. In our model, total R&D
EXPENDITURE is composed of PUBLIC R&D, PRI-
VATE R&D and UNIV R&D FUNDING. This may
imply that the effect of PRIVATE R&D FUNDING
is increasing in the latecomer countries, but PUBLIC
R&D $ is dramatically decreased in the 1990s and
UNIV R&D $ is mostly aimed at rapid economic return,
namely applied R&D, rather than basic R&D as in
OECD countries.10
While incorporated country fixed effects, our find-
ings are consistent with the view that countries that
become more specialized become more innovative.
Compared with the OECD countries, a single S.D.
increase in SPECIALIZATION (0.03) in latecomer
countries is associated with a 13% increase in the
patenting rate (PATENTS) by a country, compared
with an 8% increase for OECD countries; while a 1%
increase in PRIVATE R&D FUNDING is associated
with 0.4% increase in PATENTS compared with 1.4%
for OECD countries. Thus, we find that the impact of
SPECIALIZATION (focus on three dominant classes
of patents) on the patenting rate in the latecomer coun-
tries is more pronounced than is found in the OECD
countries, while the impact of private sector R&D is
less pronounced, lending further support to the idea
that latecomers target certain specific sectors, first for
production and export, and then for innovation. The
patenting statistics reveal these sectors to be electron-
10 Our findings are consistent with the view that PUBLIC R&D
FUNDING and PRIVATE R&D FUNDING need to be taken into
account in the same regression, as the sum of the means of these two
variables is above 80%.
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
ics (particularly semiconductors), IT and communica-
tions. As in the OECD countries, VENTURE CAP-
ITAL does not show its impact, which is consistent
with the interpretation that VC operates on new-to-the-
country innovation.
5.2.4. Restricted focus of NIC in East Asian
countries
Our “preferred model” (i.e. where every variable
has a positive contribution to innovative activity) in
column 5.4 differs from the preferred model found by
FP&S. Our preferred model includes only three vari-
ables with statistical significance, namely SPECIAL-
IZATION (3.070), FTE S&E (0.368) and PRIVATE
R&D (0.011), each of which has a quantitatively impor-
tant impact. The preferred model excludes IP and ED
SHARE. The variable SPECIALIZATION emerges as
that with the biggest impact, as in OECD countries,
but with a more pronounced magnitude of effect than
in the OECD countries. This is an interesting diver-
gence between the NIC found for advanced countries
and that found for latecomers, and a finding that has
implications for the development strategy to be pur-
sued in latecomer countries, as we discuss below.
5.2.5. Impact of public R&D expenditures
When PUBLIC R&D FUNDING is added into our
preferred model, the result is similar to the previous
model in column 5.4. Entering at the 10% significance
level and improving the explanation of overall varia-
tion on PATENTS, PUBLIC R&D FUNDING (0.007)
shows a conservative influence toward international
patenting. Perhaps this demonstrates the inefficiency
of PUBLIC R&D FUNDING in the current stage of
economic development in latecomer countries, which
was shown to be dramatically decreasing from the mid-
1990s.
We now turn to the analysis utilizing patent stock
in the countries concerned, as proxy for accumulated
knowledge. In Table 6, we analyze the NIC variables
using patent stock as the knowledge stock, again fol-
lowing the procedure of FP&S. Patent stocks provide
a more direct measure of knowledge stock on which a
country draws for its innovative activity.
5.2.6. Impact of international patent stock
Table 6 controls for year and country effects to
reduce the specific heterogeneity of technological
1339
knowledge among countries. When PATENT STOCK
substitutes for GDP/POP as knowledge stock, the coef-
ficient of log PATENT STOCK (1.144) in latecomer
countries is similar to that in the OECD countries. The
impact of FTE S&T (0.194) is smaller than in col-
umn 5.1, again consistent with the same finding for
the OECD countries.
In column 6.2, the coefficient of R&D EXPENDI-
TURE is reduced from 2.38 (in 5.2) to 0.85, which is a
64% reduction. This may be interpreted to mean that in
latecomer countries, R&D EXPENDITURE in the ear-
lier years is mostly aimed at industrial upgrading and
export production, rather than focused on innovation
activity, which becomes important only in the 1990s.
Notably, the variable IP turns positive (even if still sta-
tistically insignificant) in using PATENT STOCK as
knowledge stock, indicating a weak effect of the IPR
system on technology knowledge management.
More interestingly, our preferred model (column
6.3) in using PATENT STOCK as knowledge stock
greatly reduces the coefficient (and significance level)
of SPECIALIZATION (the coefficient is reduced from
3.070 to 1.553), the largest contributor to international
patenting in column 5.4. This may be interpreted as fur-
ther evidence of the importance of the (international)
stock of patents in latecomer countries, in having the
power to moderate the impact of specialization. This
also indicates that innovation activity in latecomer
countries is concentrated on certain high-tech indus-
tries (e.g. electronics, IT and communications), which
lead national industrial development as a whole.11 We
also find that ANTITRUST becomes a negative coef-
ficient when other variables maintain a similar magni-
tude (except for SPECIALIZATION).
5.2.7. Public R&D expenditure and industrial
specialization
The role of PUBLIC R&D FUNDING is greatly
reinforced when we use PATENT STOCK as knowl-
edge stock, as reported in column 6.4. The impact of
SPECIALIZATION rises (with a coefficient of 3.272,
compared with a coefficient of 1.553 when public sec-
tor R&D was not included as a separate variable (in col-
11 This suggestion is further strengthened by the impact of PATENT
STOCK (1.278) on innovative activity, which is 1.67 times greater
than in the OECD countries (again because of the effect of special-
ization).
1340 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
umn 6.3)). Thus, the effect of specialization on patent-
ing rates is enhanced by 110% when the variable PUB-
LIC R&D FUNDING is added into the model. This
result indicates that the effect of SPECIALIZATION
in East Asian latecomer countries is highly depen-
dent on cumulative knowledge capacity (e.g. PATENT
STOCK) along with PUBLIC R&D FUNDING.
We suggest that this is perhaps the most signifi-
cant finding of our study. Note that PUBLIC R&D
FUNDING only shows its significant impact on SPE-
CIALIZATION, by taking PATENT STOCK (as in
column 6.4) rather than GDP per capita (in column 5.5)
as knowledge stock.12 This corresponds to the efforts
of external technology acquisition, where the goal of
PUBLIC R&D in these latecomer countries tends to
increase the level of innovation (particularly in the
high-tech industry) as measured by PATENT STOCK,
rather than to increase overall national welfare as mea-
sured by GDP per capita.
5.3. Comparison of NIC in latecomer countries
with the case of OECD countries
Our main results in Tables 5 and 6 demonstrate
the fact that the innovation activity in latecomer coun-
tries is concentrated on three measures, namely R&D
inputs (i.e. FTE S&E), cluster-specific innovation envi-
ronment (SPECIALIZATION and PRIVATE R&D $)
and accumulated knowledge capacity (i.e. PATENT
STOCK). The accumulated knowledge capacity refers
to accumulated knowledge worldwide: it is the pool of
knowledge from which all latecomer countries draw in
order to accelerate their catch-up. This finding, which
we elaborate in the case study of Taiwan below, is
markedly at odds with those for advanced countries
where national innovation capacity is built on more
diverse sources. National innovation capacity in late-
comer countries, by contrast, is built on more limited
and focused sources in order to accelerate the process
of catch-up. However, the framework as a whole has
remained significant, suggesting that there are char-
acteristic development patterns of national innovation
capacity in latecomer countries, and also responds to
the suggestions by FP&S, namely (1) the level of R&D
12 We acknowledge that the instability of coefficients might possibly
reflect multicollinearity, where follow-up work would be needed to
settle remaining uncertainties.
inputs is a critical factors in determining a nation’s level
of visible innovation and (2) more delicate measures
of the national innovation environment significantly
impact on R&D productivity.
In contrast to the finding of OECD countries, the
coefficients of the year dummies in Table 5 (GDP
per capita as knowledge stock) increase over time,
implying that average R&D productivity in latecomer
countries has been increasing since 1975. In other
words, resource inputs in the latecomer countries have
been raising the marginal productivity of innovation
(in terms of GDP per capita) over time. In order to
test whether our results are affected by any particular
country, we utilize a Taiwan dummy variable as well
as year dummy variables. The effects of the inclusion
of these dummy variables may be contrasted between
Tables 5 and 6, when we use two different variables
(GDP per capita and patent stock) to represent knowl-
edge stock in our preferred model. In Table 6, the
coefficient of the year dummies declines over time (as
in the OECD countries), whereas the Taiwan dummy
exerts a significant negative impact on PATENT inno-
vation, implying the important contribution of Taiwan’s
PATENT in R&D productivity of East Asian latecomer
countries.
Some studies have demonstrated declines in the
magnitude of year fixed effects in the OECD coun-
tries imply innovation in the advanced countries is
becoming a ‘fished out of the pond’ effect (Jones, 1995
and Furman et al., 2002). Our model demonstrates this
effect still holds tightly in the latecomer countries as the
innovation activity (in terms of PATENT) in latecomer
countries are derived from those advanced countries’
existing knowledge, in which also allows a huge vari-
ety of process innovations (or new-to-the-country) to
be generated (and so that increase the innovation level
in terms of GDP per capita).
We now summarize our findings on the NIC of
East Asian latecomers, emphasizing the differences we
found between the latecomers and the OECD coun-
tries. In general, the contribution of each determinant
of national innovation capacity in OECD countries is
greater than in latecomer countries, except for the case
of SPECIALIZATION. This is a plausible departure,
since the latecomer countries concentrate their inno-
vative efforts so closely on electronics, semiconduc-
tors, IT and communications. Note in particular the
point made above, that when the variable, PUBLIC
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
R&D FUNDING, is added into the model of late-
comer countries, the effect of SPECIALIZATION is
enhanced by 110% to reach the same level of con-
tribution as in OECD countries. In the case of the
OECD countries, their national innovative capacity
is found to depend broadly on the strength of each
nation’s common innovation infrastructure (e.g. R&D
manpower, R&D spending, IP protection and openness
to international trade), the environment for innova-
tion in a nation’s industrial clusters (e.g. PRIVATE
R&D FUNDING and SPECIALIZATION), and the
strength of linkages between these two (e.g. the share
of academic sector’s R&D performance). By contrast,
innovation activity in our latecomer sample is more
reliant on three measures, the accumulated knowl-
edge capacity (e.g. PATENT STOCK), the strength
of a nation’s common innovation infrastructure (e.g.
R&D manpower) and cluster-specific innovation (e.g.
SPECIALIZATION and PRIVATE R&D $) along with
PUBLIC R&D FUNDING.
In order to test the role of PUBLIC R&D and explic-
itly measure the differential impact of PUBLIC R&D
FUNDING in these latecomer countries, we high-
light the differences between the 1980s and the 1990s,
respectively, along with a dummy variable. It is found
that PUBLIC R&D FUNDING reaches a significant
level in the 1980s and loses its importance in the 1990s,
indicating that PUBLIC R&D plays an indispensable
role in the early stage of industrial development in
latecomer countries and changes its role from inno-
vation infrastructure to a function of linkages between
common innovation infrastructure and industrial clus-
ter when the development of industry has accumulated
a certain level of technology capability in the 1990s.
Despite the decreasing rate over the years, PUBLIC
R&D FUNDING is still playing an indispensable role
in facilitating a national cluster innovation environment
in latecomer countries.
We also performed the same robustness check as car-
ried out by FP&S and explored the robustness including
country-specific fixed effects.13 GDP PER CAPITA
becomes of statistical and quantitative significance,
suggesting that the level of innovative outputs is sen-
sitive to the level of GDP PER CAPITA within a
country (GDP PER CAPITA is insignificant in our pre-
ferred model as a whole is because the huge population
13 The table can be supplied on request.
1341
in China). SPECIALIZATION also has a significant
impact on national innovation capacity (its coefficient
increases by 98.8% compared with that in column 6.4).
Since the same variable exerts only a 29.4% increased
effect in OECD countries, our result indicates that the
impact of SPECIALIZATION on innovation outputs is
more sensitive in a given latecomer country than that
in an advanced country.
6. Case study: Taiwan
We now illustrate and elaborate these results in
the specific instance of Taiwan, which has arguably
been the East Asian country that has made most
progress in shifting from imitation to innovation (as
measured in terms of patenting). The case study for
Taiwan traces the process of building up the national
innovative capacity, exploring the role of IP and the
impact of PUBLIC R&D in achieving its leverage
effect.
As the US is the global critical and cutting-edge
market, the outstanding performance of Taiwan’s semi-
conductor and IT-related industries in the USPTO has
become an essential driver of Taiwan’s internal tech-
nology knowledge flow. The practice of Taiwan firms
is to patent first in the Taiwan Intellectual Property
Office (TIPO), and then to choose relevant patents that
call for the trouble and expense of patenting in the
USPTO. The patenting activity in the TIPO reveals the
extremely strong focus on electronics and IT as in the
USPTO, in which all the top eight private firms are in
this sector. The other two are public sector organiza-
tions, the Industrial Technology Research Institute and
the National Science Council (NSC) that patent across
a broader range of industrial sectors.
The striking feature of the patenting activities in the
TIPO is the high level of patenting by foreign firms,
as revealed in Fig. 4. Patenting by foreign inventors
highlights a nation’s attractiveness as a market for new
technologies, and patent activity by resident inventors
provides a measure of productivity for a nation’s
science and technology human resources (Rausch,
1995). Taiwan’s Intellectual Property Office has
classified patents into three categories: invention, new
utility and new design, where the criteria of Invention
in the TIPO are equivalent to those of utility in the
USPTO. As invention patent is defined as the highest
1342 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349

Fig. 4. Domestic and foreign patent granted in the Taiwan’s IPO–Invention Type. Source: Taiwan Intellectual Property Office, www.tipo.gov.tw.

level of innovation, Taiwanese inventors took 27% of
total awarded patents in 2002, rising from just 5% in
the 1980s. The percentage is rising but still relatively
much lower than that of the foreign inventors which
took over 73% in 2002 and as much as 95% in the
1980s and the early-1990s; in terms of new utility and
new design patents, where there can be an emphasis
on process innovations, the reverse is the case.
When we look more closely at the level of the
firms involved, further striking features are revealed,
that shed light on the macro-trends revealed in our
analysis above. We conducted interviews in Septem-
ber 2003 with several of Taiwan’s leading firms, in
the semiconductor sector, as well as with public sec-
tor organizations including TIPO, III and ITRI. The
case of Taiwan’s leading semiconductor firm, the pur
foundry Taiwan Semiconductor Manufacturing Corpo-
ration (TSMC), is striking, as shown in Table 7 and
Fig. 5.
TSMC was founded in 1986 and has become Tai-
wan’s largest IC Company and the world’s largest ded-
icated integrated circuit foundry. Table 7 shows that
TSMC’s dramatic increase in patenting rate is corre-
lated with the company’s increase in R&D expendi-
ture and its employment of professional manpower.
This is an important finding that reinforces the overall
results in Section 4, namely that the essential drivers of
national innovative capacity in latecomer countries are
derived from specialization in the high-tech industry,
R&D expenditure and manpower. Note too the finding
that TSMC’s royalty income is relative small, whereas
royalty payments are still relatively high, indicating

Table 7
The operation facts in TSMC, 1995–2002
Year R&D expenditure Net Sales (NT$ Professional Patent Awarded Royalty Income Royalty Expense
(NT$ million) million) Manpowera in the USPTO (NT$ million) (NT$ million)
1995 748 28766 1834 25 – –
1996 1494 39400 2287 74 – –
1997 2505 43936 2881 127 – –
1998 3246 50233 3197 213 8 637
1999 2391 73131 3469 288 64 1032
2000 5131 166228 6988 383 24 2477
2001 10649 125888 6608 527 55 3715
2002 11725 160961 7456 444 204 6232
Source: TSMC Annual Report, various years.
a Professional manpower includes R&D engineers and managers.
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
Fig. 5. TSMC’s R&D expenditure and innovation performance, 1995 to 2002. Source: TSMC Annual Report, various years.
that Taiwan is still a learning economy, and still in a
process of catch-up.14
Table 7 and Fig. 5 also indicate that while
R&D expenditure gradually increased, the number of
TSMC’s US patents awarded declined in 2002 for the
first time, since the company was established. We inter-
pret this to mean that TSMC has been concentrating on
improving the quality and effectiveness of its patents,
rather than simply the quantity. This is consistent with
our finding that TSMC is aggressively upgrading the
effectiveness of its in-house IP management as a result
of a series of patent infringement disputes, and putting
effort into encouraging R&D engineers to engage in
patenting activity (for example, through the Employee
Stock Option Program, ESOP).15
Note how TSMC, even as a foundry (and thus hav-
ing no proprietary products) has still been burdened
with considerable royalty payments (of the order of
NT$ 6232 million in 2002, approximately US$ 186 mil-
lion, see Table 7) which has sharpened its propensity to
build its own patent portfolio, in line with many other
semiconductor firms, as revealed in the study by Hall
and Ziedonis (2001). But whereas Hall and Ziedonis
14 There was a big jump in all categories in 2000, when TSMC
acquired the semiconductor operations of the TSMC-Acer Manu-
facturing Corp joint venture.
15 ESOP is a flexible system and ties employees’ performance
to rewards. The remuneration package allows the firm to reward
employees when they are doing well and enhances the employees’
sense of belonging by giving them a stake.
1343
(2001) found no evidence amongst US firms of a link
between enhanced patenting rates (what they called
“patent portfolio races”) and R&D expenditure, the link
is clearly established for a latecomer firm like TSMC,
which may correspond to the suggestion by Lanjouw
and Schankerman (1999): the quality of patenting by
firms exhibits a more stable relationship to firm’s R&D
expenditure.
Quantity of patents is one index of innovative capac-
ity, but the quality of the patents filed is another, and
potentially of greater long-term benefit to a country.
We found evidence in our interviews in Taiwan that
firms like TSMC have been reviewing their patent-
ing processes in the past year, and have been pay-
ing more attention to the quality of the patents filed.
This is corroborated by striking evidence from the
patents database firm, CHI Inc. (the firm that supplied
the data on which the FP&S analysis is conducted).
CHI Research define patent quality in terms of a Cur-
rent Impact Index (CII) which measures the impact of
patents taken out over the previous five years in terms
of their current rate of citation, which therefore avoids
the truncation problem in using citation rate. The CII
is calculated as the number of citations in a given years
of all patents filed in the previous five years, compared
with the average across all patents in the USPTO.16
16 To take an example, a Current Citation Index (CII) value of 1.0
represents the average. A value of 2.0 would indicate twice the fre-
quency of citation (and hence twice the “quality” of the patents over
1344 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
As shown in Table 8, the leading countries in terms
of the quality of their patents within the USPTO in
1995 were the U.S. (1.12), Japan (1.02) and Taiwan
(1.01). But by the year 2000, Taiwan had emerged as
the world’s leader in terms of patent quality, with a CII
of 1.25, followed by the U.S. (1.15) and Israel (1.01).
This striking result reflects the quality of the patents
taken out by Taiwan firms in the years 1995–1999. The
table reveals that in the field of semiconductors and
electronics, Taiwan firms and organizations account
for no less than 11.3% of the world patent stock in
those sectors. Thus, the latecomer status of Taiwan is
reflected in both the frenzied pace of its patenting, in
the quality of the patenting, and in the almost complete
focus on certain critical sectors such as semiconduc-
tors where the country has sought to establish global
production and trade leadership. These are patterns to
be expected of the innovative capacity of a latecomer
country like Taiwan, but not of a developed country
within the OECD, thus further emphasizing the differ-
ences between our study and that of FP&S.
However, two caveats are in order. First, although
the Taiwan patenting rates look high, they are concen-
trated in a specific sector, namely semiconductors. In
world terms, this sector has also demonstrated high
rates of patenting (Hall and Ziedonis, 2001). Taiwan
would thus lose its distinctiveness if one normalised its
patenting rate against the semiconductor trend world-
wide. But this point echoes the key finding in the
empirical results: the national innovative capacity relies
heavily on the strategic SPECIALIZATION industry
(which is the most significant driver of NIC for late-
comers). Second, the Taiwan citation rate may include
high levels of self-citation, i.e. one patent citing earlier
patents by the same company. In this context it would be
worthwhile to explore the possible differences in cita-
tion rates between Taiwan’s public and private sectors,
when the patent citation associated with knowledge dif-
fusion could be geographically localized. It is known
that corporate patents are more often self-cited and self-
citations are more often localized (Jaffe et al., 1993).
To summarize our findings on Taiwan, we wish
to highlight the features that emerged in our analy-
sis of the five countries’ innovative capacity. We noted
the previous 5-year period, whereas a value of 0.25 would indicate
a citation frequency of only 25% of the average across all patent
classes. The number of classes considered is 30.
above that, in contrast with the experience of the OECD
countries, the latecomers from East Asia focused their
innovative activities on three key factors, namely on
building cumulatively their R&D manpower; in tar-
geting certain industrial sectors and specializing their
innovative activities in these sectors; and in promoting
public R&D as a means of enhancing national innova-
tive capacity.
In the case of Taiwan these features are captured by
examining the role of the public sector R&D agency,
the Industrial Technology Research Institute. ITRI’s
patenting activity has been significant, in both the
USPTO and the TIPO, as described above. A summary
of its R&D expenditures, and patenting rates over the
years 1995–2002, is given in Fig. 6.
While the public sector plays the role of leading
and guiding Taiwan’s industry, ITRI’s patenting activ-
ity has given a significant impetus to IP development
in the private sector. Not only has ITRI been an impor-
tant foundation for the innovative capacity of Taiwan,
in terms of its building of what must be termed techno-
logical capabilities in strategically chosen sectors such
as semiconductors, electronics and IT, but also in terms
of its efforts to diffuse such capabilities to the private
sector, through such institutions as targeted R&D con-
sortia (Mathews, 2002). There is a high turnover of
ITRI technical staff, with much of the staff transferring
to Taiwan’s private sector, thus again revealing how the
cumulative build-up in full-time equivalent R&D staff
translates across to innovative capacity in the private
sector.
Since the 1990s, IP protection is the worldwide trend
and highly related to the sustainability of a company or
an industry. Patent portfolio and analysis play a critical
role in exploring patent mapping and IP management.
Quality patents, therefore, have become the goal of
patenting strategy for ITRI to utilize and leverage IP
value, and in order to acquire multiple effects of IP
utilization. This trend is reflected in the sharp rise in
the quality of Taiwan’s patents, as reported by the CHI
database.
Recent developments in the ITRI (and III) spon-
sored R&D consortia are of relevance to a discussion
of strategic management of IP, in that consortia have
been formed as “patent pools” in order to provide Tai-
wan firms with collective defense against infringement
suits of the kind described for TSMC above. To the
year 2002, ITRI has formed six new companies by
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349 1345

Table 8
Taiwan’s US patents performance in CHI’s 30 technology areasa
S. no. Technology areas 1991–1995 1996–2000 Growth rate 1995 Global 2000 Global 1995 CII 2000 CII
patent patent between (1) share of share of (cited from (cited from
numbers (1) numbers (2) and (2) patents patents 1990 to 1994) 1995 to 1999)
1 Agriculture 92 152 66.01 1.05 1.28 1.19 1.56
2 Oil and gas, mining 7 18 176.92 0.08 0.00 0.00 1.22
3 Power generation and 57 141 145.72 1.39 2.77 1.11 1.01
distribution
4 Food and tobacco 51 116 127.95 1.17 2.11 1.12 1.12
5 Textiles and apparel 225 660 193.51 3.46 4.82 1.46 1.57
6 Wood and paper 191 616 222.69 3.77 6.07 0.92 1.18
7 Chemicals 68 218 220.32 0.28 0.55 0.72 0.69
8 Pharmaceuticals 12 52 317.74 0.08 0.20 0.00 0.42
9 Biotechnology 7 47 554.17 0.19 0.32 0.53 0.39
10 Medical equipment 102 239 135.17 1.11 1.23 0.71 0.77
11 Medical electronics 5 27 446.00 0.22 0.40 0.44 0.36
12 Plastics, polymers and 91 215 136.56 0.65 0.88 0.66 0.83
rubber
13 Glass, clay and cement 19 35 83.16 1.34 1.30 1.01 1.28
14 Primary metals 18 20 12.72 0.64 0.31 1.61 1.48
15 Fabricated metals 45 160 252.98 1.29 2.87 1.11 0.97
16 Industrial machinery 406 1138 180.55 2.46 4.08 0.95 1.32
and tools
17 Industrial process 149 420 181.07 1.40 2.33 1.16 1.07
equipment
18 Office equipment and 165 507 207.09 1.14 1.83 0.69 0.78
cameras
19 Heating, ventilation, 62 91 45.97 1.93 1.55 0.78 0.73
refrigeration
20 Misc. machinery 288 739 156.56 2.06 3.25 1.06 1.13
21 Computers and 138 876 537.09 0.71 1.45 0.60 0.83
peripherals
22 Telecommunications 109 682 523.60 0.58 1.43 0.90 0.70
23 Semiconductors and 237 3375 1,325.73 3.87 11.35 1.86 1.61
electronics
24 Measurement and con- 127 400 214.80 0.75 2.15 0.63 0.80
trol equipment
25 Electrical appliances 485 1772 265.26 3.19 7.33 1.01 1.23
and components
26 Motor vehicles and 235 380 61.49 1.67 1.82 1.08 0.76
parts
27 Aerospace and parts 7 17 137.14 0.46 0.54 0.85 0.46
28 Other transport 182 386 112.02 4.73 4.70 2.50 1.51
29 Miscellaneous manu- 480 1081 125.30 2.24 2.47 0.98 1.06
facturing
30 Other 475 926 94.78 4.09 5.18 1.12 0.98
All Patents 4534 15502 241.94 1.60 2.98 1.01 1.25
Source: CHI Research Inc., Taiwan Economic Research Yuan (2002 Economic Report) and calculated by the author.
a Utility patents only.
1346 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
Fig. 6. ITRI’s R&D expenditure and innovation performance, 1995 to 2002. Source: ITRI Annual Report, various years.
means of utilizing patent portfolio. Two developments
demonstrate ITRI’s strategic utilization of its patent
portfolio. The first development of note is the Taiwan
TFT-LCD Association, representing all the important
firms in Taiwan’s recently emerged flat panel display
industry based on TFT-LCD technologies. In the 1990s,
Taiwan’s fledgling TFT-LCD companies acquired tech-
nologies needed in panel production directly from
Japanese companies so as to become capable of mass
production as soon as possible. The capability of mass
production makes Taiwan a significant player in the
TFT-LCD industry following a series of aggressive
investment in 1999, and this has led to numerous patent
infringement claims from Japanese and Korean leading
companies, such as Sharp and Samsung, and resulting
higher royalty payments to be met by Taiwan firms.
Now ITRI had accumulated several hundred patents
relating to TFT-LCD technologies, and so in 2002 it
selected a portfolio of 232 patents and assigned them to
seven TFT-LCD companies for the purpose of defense
and negotiation. This is seen as a way to develop a
stronger position in patent negotiations, and take the
lead in developing new technologies and setting stan-
dards.
A second case is the spin-off biotech firm Pha-
lanx Biotech Chips Company, which was formed with
technology transferred from ITRI, along with a set of
patents that might stand it in good stead in any future
patent infringement suit launched by foreign competi-
tors in the field of DNA chips. The technology charac-
teristics of biotech chips rely on the complementarity
of inter-industry technology (ITRI, 2002). In order to
form a strong competitive patent portfolio, Phalanx was
established in 2002, under the combination of biotech,
electronics, optoelectronics and information technol-
ogy areas, and collected 41 domestic and international
patents. The patent portfolio provides an incentive for
the Biotech Chips R&D Alliance, which unifies Tai-
wan’s biotech companies in technology, manpower,
finance and intellectual property. This too provides
an example of the strategic management of IP in Tai-
wan, which is now seen to be a key contributor to the
enhancement of the country’s innovative capacity (Liu,
2001).
Taiwan’s successful diffusion of technology from
public institutions (mainly ITRI) has been achieved
whilst maintaining a high level of R&D in the pri-
vate sector, and a rather high degree of support from
national technology policy and trade and research asso-
ciations. Now, apart from the cutting-edge technology,
Taiwan’s IPR organizations and public institutions are
also committed to training programs in intellectual
property management, including aspects, such as law,
patent engineering, licensing and negotiation. These
efforts demonstrate the strategic role that IP man-
agement comes to play in the building of national
innovative capacity in latecomer countries, such as
Taiwan.
7. Discussion and concluding remarks
Both our quantitative empirical results and our qual-
itative case studies in Taiwan produce the finding that
while the process of building national innovative capac-
ity in latecomer countries is comparable to that fol-
 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
lowed in more advanced countries, yet it is distinctive
in ways that illustrate the strategies that need to be
pursued by latecomers in order to catch-up with the
technological leaders.
There is a core finding common between the OECD
and latecomer countries, namely that variations in the
rate of patenting across countries is accounted for by
four variables: patent stocks, levels of R&D man-
power, R&D expenditure by the private sector, and
industrial specialization in electrical, mechanical and
chemical engineering fields. The distinctive process
of building national innovation capacity in latecomer
countries, and its divergence from the patterns found
for the OECD countries, is also demonstrated. In the
OECD countries studied by FP&S and others, more
broadly based variables are closely associated with
variations in the rate of patenting, namely GDP per
capita, total R&D expenditure, intellectual property
protection, public expenditure on higher education and
funding on academic R&D. We found these variables
to have less of an impact in the case of latecomer coun-
tries. The most important point of variance is the impact
of public R&D expenditure, guiding and utilizing the
limited resources in latecomer countries, reinforcing
incentives of national innovative capacity (e.g. SPE-
CIALIZATION) and still playing an indispensable role
in facilitating a national cluster innovation environment
in latecomer countries.
Our results raise two interesting issues. In the first
place, IP, in practice, is found to have a negative impact
on latecomers’ national innovation capacity, as con-
trasted with the case for more advanced countries where
IP institutions are highly correlated with international
patenting activity. The effect of IP thus appears to vary
according to a country’s level of industrial, technolog-
ical and economic development (Lall, 2003). Not until
the second half of the 1990s, does the importance of
IP emerge in latecomer East Asian countries. In the
early stage of specializing on OEM business, latecom-
ers simply ignore the costly R&D and IP issues. When
these latecomer countries catch-up and keep pace with
advanced countries, IP starts to attract attention. How-
ever, the evidence that a strong IP policy will stimulate
greater technology transfer and suggest a positive cor-
relation with economic development over the long term
has been put forward by some cross-country econo-
metrics (Maskus, 2000). When technology purchasing
becomes one of the primary ways to acquire the “key”
1347
technology within R&D outsourcing and involves a
fee or a royalty as a proportion of sales, its usage is
connected closely with the range of intellectual prop-
erty. Another important contribution of this study is that
while public sector R&D has exerted a significant effect
on patenting rates, which reinforces its claim to be con-
sidered as part of the innovative capacity of a latecomer
country, the case of Taiwan provides evidence that the
effect continues: the efforts of the public R&D sector in
utilizing and leveraging diverse IP resources with the
aim of facilitating the knowledge flow and overcoming
the disadvantages of second movers, as exemplified in
the transfer of IP to spin-off enterprises such as Pha-
lanx and to consortia such as the Taiwan TFT-LCD
Association.
Secondly, the variable PUBLIC R&D FUNDING
greatly strengthens the contribution of the most impor-
tant determinant (i.e. SPECIALIZATION) in our pre-
ferred model. Note that this effect will only be regis-
tered where a latecomer country is pursuing a targeted
strategy of catch-up, as in East Asia. If no targeting
is taking place (i.e. the government is not playing a
leadership role) then PUBLIC R&D FUNDING will
have less of an impact. While the decline of govern-
ment spending in R&D relative to private spending is
an unavoidable trend, what is of over-riding importance
is not the amount of public R&D funding per se, but
the allocation and emphasis of innovative activities,
which provides incentives in fostering national inno-
vative clusters, such as private R&D and the pattern
of specialization (as found by our empirical results).
While the evidence shows that involvement in global
production networks is an important source of knowl-
edge for successful late industrializing countries, this
is critical especially for a knowledge-intensive and
highly globalized high-tech industry. In such industries
clusters of local capabilities have to be closely con-
nected with international production networks in order
to remain abreast of knowledge currents through a vari-
ety of multinational linkages. Regardless of whether
one agrees with the interpretations in this study, these
empirical regularities exist and must be accounted for.
The detailed case study of Taiwan provides some
support for our empirical results, where the distinc-
tive process of building national innovative capacity in
latecomer countries, as divergent from the patterns for
the OECD countries, is also demonstrated. Latecomers
from East Asia have focused their innovative activities
1348 M.-C. Hu, J.A. Mathews / Research Policy 34 (2005) 1322–1349
on three key factors, namely on cumulative building
of their R&D manpower; in targeting certain indus-
trial sectors and specializing their innovative activities
in these sectors; and in promoting and effecting pub-
lic R&D as a means of enhancing national innovative
capacity. These features are revealed in the case study
of Taiwan, by examining the role of the public sec-
tor R&D agency, the Industrial Technology Research
Institute, and the private sector. While ITRI’s patenting
activity has been significant, Taiwan’s knowledge dif-
fusion pivot, semiconductor and electronics industries,
are essentially built on the leverage effect from ITRI,
including diffusion of R&D manpower and technology.
Another aspect of the Taiwan case is that the increase
in patenting rates reflects a genuine increase in innova-
tive capacity, a point that cannot be sustained in the case
of the advanced countries, where much of the recent
increase in patenting rates is tactical (or strategic) in
nature, and does not necessarily reflect enhancements
in innovative capacity (Hall and Ziedonis, 2001). Thus,
the reliance on patenting rates as a proxy for innovative
activity works well for the latecomer country Taiwan,
whereas it is less well-defined in some of the advanced
countries.
A final contribution of this study is that it raises
new questions. Why are some latecomer countries more
innovative than others? How does the involvement of
the public sector relate to the performance of national
innovative capacity? When will IP turn to a significant
and positive effect on innovation activity of latecomer
countries, and to what extent will that affect national
innovative capacity? While the reliance on patenting
rates as a proxy for innovative activity works well
for the latecomer country, such as Taiwan, one should
consider whether the high level of patent self-citation
biases the assessment of national innovative perfor-
mance. Future research on these questions and others
will lead to a better understanding of how national inno-
vative capacity is established in latecomer countries.
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