85 MARTINDALE CENTER FOR THE STUDY OF PRIVATE ENTERPRISE Rethinking the start-up and venture capital industry of Taiwan Mansoor Mughal Taiwan’s dependence on semiconductors to power its economy and its intensifying geopolitical tensions have mounted pressure on its start-up and venture capital ecosystem. Although government programs have aimed at supporting in-house innovation, fragmented bureaucracy, a conservative investor culture, and limited global integration have stifled Taiwan’s true start-up potential. This article analyzes the historical roots of venture capital development in the small island, its current structural weak points, and proposals for reform. Introduction Taiwan has a storied history, highlighted by unique geopolitical tensions and its recent transformation into a technological powerhouse. Over the past several decades, the Taiwanese GDP increased from US$42B in 1980 to US$775B in 2024 (International Monetary Fund [IMF], 2024d), a compound annual growth rate of 6.8%, driven specifically by Taiwan’s advanced semiconductor industry. For comparison, this growth rate significantly outpaces those of the US, at 5.4% (IMF, 2024e), and one of the Asian Tigers, Hong Kong, at 5.2% (IMF, 2024a), underscoring Taiwan as one of the world’s most promising economies. However, despite its strong performance, Taiwan has lagged significantly behind the two other Asian Tigers, Singapore at 9.0% (IMF, 2024c) and South Korea at 7.8% (IMF, 2024b). Beyond semiconductors, an overlooked catalyst for Taiwan’s economic evolution has been venture capital (VC). While rarely emphasized in analyses, VC has fostered unprecedented innovation across this small island. In the mid-1980s, US and European firms turned to the Asia–Pacific region for growth opportunities (Kenney et al., 2004). The Taiwanese government viewed VC as critical for fueling technological investment to enhance global competitiveness. After extensively analyzing various VC models, Taiwan helped Stan Shih launch Acer in 1984, the first venture-backed firm in Taiwan (KlinglerVidra, 2018). Unfortunately, after the dotcom recession of 2001, the Taiwanese VC industry saw both existing capital and new fund establishments fall precipitously (Yeh, 2006). This trend persisted after the 2008 financial crisis, with Taiwan’s total VC capital pool falling from ~US$8B in 2000 to ~US$5B in 2014 (Jennings, 2014). Even so, venture firm numbers grew from approximately 150 in 1999 (Sun, 2000) to 312 firms by 2011 (Tseng & Yeh, 2016). Shrinking capital for start-ups notwithstanding, Taiwan’s economy succeeded thanks to Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest semiconductor foundry, whose revenue grew from US$5B in 2000 to US$88B in 2024 (TSMC, 2024). Taiwan effectively deprioritized VC and innovation in favor of hardware manufacturing. Despite economic growth, geopolitical tensions between the US and China threaten Taiwan’s semiconductor dominance. Taiwan is in an especially precarious situation, with TSMC producing ~90% of the world’s most advanced chips and Taiwanese corporations controlling ~65% of global chip production as of 2023 (Wu, 2024a). Both superpowers seek influence over Taiwan without provoking each other. With semiconductors representing 15% of the island’s GDP (Wu, 2024a), Taiwan is exposed to China’s increasingly aggressive military and political pressure (Blachard et al., 2024) and TSMC’s expansion to the US (Sacks, 2023). China–US relations complicate matters; for instance, former US President Joe Biden imposed sweeping technology restrictions limiting Taiwan’s sales to China for semiconductors made using US manufacturing tools (Nellis et al., 2022)—a challenge for Taiwan, as China represented 46% of Taiwan’s integrated circuit exports (Chang, 2023). However, the most critical economic threat to Taiwan is the risk that China may develop its own chipmaking facilities, which could devastate Taiwan’s economy (Chiang, 2024). Taiwan faces an uncertain future as GDP growth benefits from the AI boom, but China’s diplomatdoi:10.18275/pbe-v043-012
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