Taiwan's Semiconductor Industry: A Comprehensive Analysis of Political History, Economic Dominance, and Geopolitical Risk

Taiwan stands at the intersection of global technology and great power politics, embodying one of the most complex and consequential situations in contemporary international relations. The island democracy of twenty-three million people produces over ninety percent of the world's most advanced semiconductor chips, making it indispensable to the global economy while simultaneously serving as a potential flashpoint for conflict between the United States and China[1][18]. Taiwan's journey from an impoverished refuge for Chinese Nationalist forces in 1949 to the world's premier semiconductor manufacturing hub represents a remarkable story of strategic planning, technological innovation, and geopolitical maneuvering[7][12]. Today, as tensions across the Taiwan Strait intensify and China conducts increasingly aggressive military exercises around the island, the world watches anxiously, recognizing that any disruption to Taiwan's semiconductor production would cascade through virtually every technology-dependent industry globally[3][15]. Understanding Taiwan's political evolution, its relationship with both China and the West, the deliberate policy choices that created its semiconductor dominance, and the current geopolitical risks to this critical supply chain requires examining seven decades of history, economics, and strategic calculation.

Historical and Political Context

The Origins of Modern Taiwan and the Great Retreat

The modern political entity known as the Republic of China on Taiwan emerged from one of the twentieth century's most consequential civil conflicts. Following their defeat in the Chinese Civil War, the remnants of the Nationalist government under Generalissimo Chiang Kai-shek, alongside approximately two million refugees and soldiers, retreated to the island of Taiwan beginning on December 7, 1949[7][10]. This exodus, sometimes called the Great Retreat, occurred over four months after Mao Zedong had proclaimed the founding of the People's Republic of China in Beijing on October 1, 1949[7][10]. The Nationalist Kuomintang party, its officers, and ROC troops took part in this retreat, fleeing the advance of the People's Liberation Army as Communist forces secured control over mainland China[7][10]. The ROC troops mostly fled from provinces in southern China, particularly Sichuan Province, where the last stand of the ROC's main army took place[7]. By the time the dust settled on December 10, 1949, Communist victory had resulted in their total control over mainland China, while the Nationalist government clung to Taiwan and several offshore islands[10].

The leadership of the ROC, particularly Chiang Kai-shek, initially planned to make the retreat only temporary, hoping to regroup, fortify, and reconquer the mainland[7]. This plan, which never came to fruition, was known as "Project National Glory" and constituted the national priority of the ROC on Taiwan for decades[7]. The conflicts between the KMT and CCP had resumed in 1946 after the Second World War, and as the tide of war turned with the Communist victory in Manchuria, Chiang concluded in late 1948 that he needed to move assets to Taiwan[7]. By the end of 1948, he had started shipments of China's important cultural artifacts and financial reserves to Taiwan[7]. The three decisive campaigns of Liaoshen, Pingjin, and Huaihai between 1948 and 1949 saw most of the northern mainland fall to the communists[7]. When Nationalist hardliners rejected Mao's demands during peace negotiations, the People's Liberation Army crossed the Yangtze River and captured key cities including Nanjing, Shanghai, Guangzhou, Chongqing, and finally Chengdu[7][10].

The retreat involved massive logistical efforts as the ROC leadership relocated critical assets to the island. Throughout four months beginning in August 1948, the ROC leaders relocated the Republic of China Air Force to Taiwan, taking over eighty flights and three ships[7]. Future Chinese Cultural University founder Chang Chi-yun was the first to propose moving to Taiwan in 1948[7]. Between August 1949 and December 1949, an average of fifty or sixty planes flew daily between Taiwan and China transporting fuel and ammunition[7]. Chiang also sent the twenty-six naval vessels of the Nationalist army to Taiwan[7]. The final Communist assault against Nationalist forces continued until the end of summer 1949, and by August, the People's Liberation Army dominated almost all of mainland China, with the Nationalists holding only Taiwan and the Pescadores Islands, some parts of Guangdong, Fukien, Zhejiang, and a few regions in China's far west[7].

Beyond military assets, the intellectual and cultural preservation efforts proved crucial for Taiwan's future development. Institute of History and Philology director Fu Ssu-nien spearheaded a rush to persuade scholars to flee to Taiwan, as well as bringing books and documents[7]. Institutions and colleges like Academia Sinica, National Palace Museum, National Tsing Hua University, National Chiao Tung University, Soochow University, Fu Jen Catholic University, and St. Ignatius High School were re-established in Taiwan[7]. This transfer of human and intellectual capital would later prove instrumental in Taiwan's technological development, creating a foundation of educated professionals and research institutions that would support the island's transformation into a high-tech manufacturing powerhouse. The establishment of these academic institutions in Taiwan created an ecosystem of research and education that would eventually feed into the semiconductor industry decades later.

The Cross-Strait Divide and Competing Claims

From the moment of separation, the relationship between the People's Republic of China and the Republic of China on Taiwan has been defined by mutual non-recognition and competing claims to legitimacy. The People's Republic of China, established in 1949, has never governed Taiwan but nonetheless views the island as a breakaway territory that must be "unified" with the mainland, by force if necessary[1]. The PRC views the island as a renegade province and vows to eventually unify Taiwan with the mainland, preferably by peaceful means but using force if necessary[1]. In Taiwan, which has its own democratically elected government and is home to twenty-three million people, political leaders have differing views on the island's status and relations with the mainland[1]. This fundamental disagreement over sovereignty and legitimacy has shaped seven decades of cross-strait relations and continues to define the political landscape today.

Beijing argues that productive cross-strait relations can only occur under a "One China" framework, which has taken form under the 1992 Consensus, an understanding reached by the two sides of the Taiwan Strait[1]. However, the two sides fundamentally disagree on the content of this so-called consensus, and it was never intended to address the question of Taiwan's legal status[1]. For the PRC, as Chinese President Xi Jinping has stated, the 1992 Consensus reflects an agreement that "the two sides of the strait belong to one China and would work together to seek national reunification"[1]. For the Kuomintang, it means "one China, different interpretations" with the ROC standing as the "one China"[1]. The KMT opposes Taiwan's independence and has consistently called for closer ties with Beijing, though in the face of recent election losses and public polling showing the unpopularity of the 1992 Consensus, KMT leaders have discussed whether to adopt a new platform on cross-strait relations[1].

The platform of the Democratic Progressive Party, the KMT's chief rival, has long claimed Taiwan as a sovereign, independent country under the name of the ROC, and therefore does not need to declare independence[1][26]. The DPP rejected the 1992 Consensus, but former President Tsai Ing-wen attempted to find another formulation acceptable to Beijing[1]. In her 2016 inaugural address, Tsai pledged to "conduct cross-strait affairs in accordance with the Republic of China Constitution, the Act Governing Relations Between the People of Taiwan Area and the Mainland Area, and other relevant legislation," which contain a One China framework[1]. Beijing, however, rejected this formulation and cut off official contacts with Taiwan[1]. This rejection marked a significant deterioration in cross-strait relations, as Beijing has ramped up political and military pressure on Taipei since 2016, when the Democratic Progressive Party returned to power and did not endorse an explicit "One China" framework[1].

The current president, Lai Ching-te, has maintained a careful position on Taiwan's sovereignty while managing relations with both Beijing and Washington. Previously viewed as a "deep green" member of the DPP advocating for Taiwanese independence, Lai has moderated his position, saying that there was no need to declare independence as "Taiwan is already a sovereign, independent country called the Republic of China"[59]. Under Lai, who took office on May 20, 2024, Taiwan has continued to assert its sovereignty while expressing hopes for dialogue with Beijing, despite ongoing military pressure and tensions[59]. Lai stated that the ROC and the PRC are not subordinate to each other and reaffirmed the island's commitment to resisting Chinese annexation, emphasizing its sovereignty during National Day celebrations[59]. This position reflects the complex balancing act that Taiwan's leaders must perform, asserting the island's de facto independence while avoiding provocative declarations that might trigger a military response from Beijing.

Taiwan's Democratic Transformation and Authoritarian Legacy

Taiwan's current status as a vibrant democracy represents a dramatic transformation from its authoritarian past under Kuomintang rule. In December 1949, the Kuomintang-led government of the Republic of China retreated to Taiwan and immediately implemented martial law that would last for thirty-eight years[25][28]. Under the martial law, the formation of new political parties was prohibited except the Kuomintang, the Chinese Youth Party, and the China Democratic Socialist Party[25]. The government was authorized by the martial law to deny the right of assembly, free speech, and publication in Taiwanese Hokkien[25]. Newspapers were asked to run propaganda articles or make last-minute editorial changes to suit the government's needs, and at the beginning of the martial law era, newspapers could not exceed six pages, a number that was gradually increased over the decades[25].

The Taiwan Garrison Command had sweeping powers, including the right to arrest anyone voicing criticism of government policy and to screen publications prior to distribution[25]. According to a report by the Executive Yuan of Taiwan, around 140,000 Taiwanese were arrested, tortured, imprisoned, or executed for their real or perceived opposition to the KMT, and 3,000 to 4,000 people were executed during the martial law period[25]. Since these people were mainly from the intellectual and social elite, an entire generation of political and social leaders was decimated[25]. This period of authoritarian rule, often referred to as the "White Terror," left deep scars on Taiwanese society and created a collective memory that has shaped the island's commitment to democratic values.

Enforcement of martial law was slowly relaxed after Chiang Kai-shek's death in 1975, but continued until the exposure of the Donggang Incident by international media reportage and follow-up Parliament questioning by newly elected Democratic Progressive Party members in June 1987[25]. The lifting of martial law was proclaimed by President Chiang Ching-kuo on July 14, 1987, followed by the liberalization and democratization of Taiwan[25][28]. Before that momentous decision, the Democratic Progressive Party was illegally established in September 1986 and won 22.2 percent of the vote in the Legislative Yuan election and 18.9 percent of the vote in the National Assembly that year[25]. The lifting of martial law permitted opposition political parties to be formed legally for the first time, giving Taiwan's fragmented but increasingly vocal opposition a new chance to organize[25].

In the case of Taiwan, Chiang Kai-shek's son Chiang Ching-kuo authorized full democracy on the island, which went into place in the early 1990s[4]. All declarations of martial law based on the Temporary Provisions against the Communist Rebellion were lifted when the Temporary Provisions were repealed on May 1, 1991[25]. This temporary martial law was formally lifted on November 7, 1992, marking a turn to constitutional democracy for the entire Free area of the Republic of China[25]. Taiwan's transformation into a liberal democracy has been remarkably successful, with regular competitive elections, a free press, and robust civil society organizations. This democratic evolution stands in stark contrast to the authoritarian system maintained by the People's Republic of China on the mainland, creating a fundamental political gulf between the two sides of the Taiwan Strait that complicates any discussion of unification.

The success of Taiwan's democratization has profound implications for cross-strait relations and the island's international standing. Taiwan's democratic system has become a core element of its identity and a source of international support, particularly from the United States and other liberal democracies. The contrast between Taiwan's vibrant democracy and China's authoritarian system has made the question of Taiwan's future increasingly a matter of global concern about democratic values and self-determination. Public opinion polls in Taiwan consistently show strong support for maintaining the status quo and preserving Taiwan's democratic way of life, with overwhelming majorities rejecting unification under the current political system of the PRC. This democratic consolidation has made Taiwan more resistant to Beijing's pressure and more valued by democratic nations that see Taiwan as a partner sharing similar values.

The Evolution of US-Taiwan-China Relations

The One China Policy Framework and Its Interpretations

The United States' approach to Taiwan is governed by its One China policy, which is distinct from China's One China principle and represents one of the most carefully calibrated diplomatic frameworks in international relations[1][26]. This policy is based on several documents, including three US-China communiqués reached in 1972, 1978, and 1982; the Taiwan Relations Act passed by the US Congress in 1979; and the recently declassified Six Assurances, which President Ronald Reagan conveyed to Taiwan in 1982[1][2]. These documents lay out that the United States "acknowledges the Chinese position that there is but one China and Taiwan is part of China" and that the PRC is the "sole legal government of China," though some US officials have emphasized that the use of the word "acknowledges" implies that the United States does not necessarily accept the Chinese position[1][2]. This careful linguistic formulation allows the United States to maintain diplomatic relations with Beijing while continuing substantial unofficial relations with Taiwan.

The simplest definition of the One China policy of the United States is that it recognized the government of the People's Republic of China as the sole legal government of China, while maintaining that the future of Taiwan must be determined peacefully[29]. The policy was intended to ensure that the United States could maintain productive relationships with both of the opposing actors in the area to secure American interests, a role that could only be played if the United States maintained the confidence of both actors by pursuing a balanced policy that stayed within the guidelines of the cross-Strait policy in relations with each side[29]. The United States rejects any use of force to settle the dispute, maintains cultural, commercial, and other ties with Taiwan carried out through the American Institute in Taiwan, commits to selling arms to Taiwan for self-defense, and will maintain the ability to come to Taiwan's defense while not actually committing to doing so, a policy known as strategic ambiguity[1][2].

The United States' chief goal is to maintain peace and stability in the Taiwan Strait, and Washington has encouraged both Beijing and Taipei to maintain the status quo[1]. Washington says it does not support Taiwanese independence, nor does it support unilateral changes to the status quo by either side[1]. The best example of this balanced approach was US policy during the tenure of Taiwanese President Chen Shui-bian, when concern that Chen's policies were endangering the peaceful status quo prompted a public statement by President George W. Bush in 2003 in the presence of the Chinese premier rejecting any unilateral changes to the status quo[29]. Bush's statement was a clear expression of the balanced nature of the One China policy, and its essence has been repeated by the Biden administration and subsequent US administrations[29].

The United States' approach has remained consistent across decades and administrations, guided by the Taiwan Relations Act, the three Joint Communiqués, and the Six Assurances[2]. The United States continues to have an abiding interest in peace and stability across the Taiwan Strait and opposes any unilateral changes to the status quo from either side[2]. The United States expects cross-Strait differences to be resolved by peaceful means, free from coercion, in a manner acceptable to the people on both sides of the Strait[2]. Consistent with the Taiwan Relations Act, the United States makes available defense articles and services as necessary to enable Taiwan to maintain a sufficient self-defense capability and maintains the capacity to resist any resort to force or other forms of coercion that would jeopardize the security or the social or economic system of the people on Taiwan[2][61]. This framework has allowed the United States to navigate the complex cross-strait relationship for over four decades, though it faces increasing challenges as tensions between the United States and China intensify.

The Taiwan Relations Act and US Commitments

The Taiwan Relations Act, passed by Congress in 1979 and signed by President Carter, represents the legal foundation of US-Taiwan relations in the absence of formal diplomatic ties[58][61]. The Act was passed after the breaking of relations between the US and the ROC, when Congress rejected the US State Department's proposed draft and replaced it with language that has remained in effect since 1979[58]. The TRA is intended to maintain commercial, cultural, and other relations through unofficial relations in the form of a nonprofit corporation incorporated under the laws of the District of Columbia, the American Institute in Taiwan, without official government representation or formal diplomatic relations[58]. The Act entered retroactively into force, effective January 1, 1979[58].

The Taiwan Relations Act declares it to be the policy of the United States "to provide Taiwan with arms of a defensive character" and "to maintain the capacity of the United States to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people on Taiwan"[1][61]. The Act states that "the United States will make available to Taiwan such defense articles and defense services in such quantity as may be necessary to enable Taiwan to maintain a sufficient self-defense capability" and "shall maintain the capacity of the United States to resist any resort to force or other forms of coercion that would jeopardize the security, or social or economic system, of the people on Taiwan"[58][61]. However, the decision about the nature and quantity of defense services that America will provide to Taiwan is to be determined by the President and Congress[58].

The TRA further stipulates that the United States will "consider any effort to determine the future of Taiwan by other than peaceful means, including by boycotts or embargoes, a threat to the peace and security of the Western Pacific area and of grave concern to the United States"[58][61]. The TRA does not guarantee the US intervening militarily if the PRC attacks or invades Taiwan, as its primary purpose is to ensure that the Taiwan policy will not be changed unilaterally by the US president and ensure any decision to defend Taiwan will be made with the consent of Congress[58]. America's policy has been called "strategic ambiguity," and it is designed to dissuade Taiwan from a unilateral declaration of independence and to dissuade the PRC from unilaterally unifying Taiwan with the PRC[58].

Successive US administrations have sold arms to Taiwan despite demands from the PRC that the US follow the Three Joint Communiqués and the US government's proclaimed One-China policy[58]. A July 2007 Congressional Research Service Report confirmed that US policy has not recognized the PRC's sovereignty over Taiwan[58]. The PRC continues to view the TRA as "an unwarranted intrusion by the United States into the internal affairs of China," while the United States has continued to supply Taiwan with armaments and China has continued to protest[58]. Both chambers of Congress have repeatedly reaffirmed the importance of the TRA, and in May 2016, Senators Marco Rubio and Bob Menendez introduced a concurrent resolution reaffirming the TRA and the Six Assurances as cornerstones of United States-Taiwan relations[58]. This bipartisan support for the Taiwan Relations Act demonstrates the enduring commitment of the United States to Taiwan's security and prosperity, even as the geopolitical landscape has evolved dramatically since 1979.

Recent Diplomatic Developments and Strategic Tensions

Recent years have witnessed increasingly complex diplomatic dynamics involving Taiwan, with high-level visits triggering significant responses from China. When then-Speaker of the House Nancy Pelosi visited Taiwan in August 2022, China responded with unprecedented military activities and strong punitive diplomatic measures[57][60]. China's military exercises in August 2022 were larger and closer to Taiwan than the exercises China carried out during the Third Taiwan Strait Crisis in 1995-1996[57]. The exercises also included unprecedented live-firing of ballistic missiles over Taiwan[57]. In a press release, Pelosi declared that the visit "in no way contradicts longstanding United States policy, guided by the Taiwan Relations Act of 1979, US-China Joint Communiques and the Six Assurances"[60]. NSC representative Kirby reiterated this perspective at a press conference held during the visit, saying "The Speaker's visit is totally consistent with our longstanding One China policy"[60].

President Joe Biden initially cautioned against the reported trip on July 20, 2022, saying the US military had assessed "it is not a good idea right now"[60]. However, on August 1, White House national security spokesman John Kirby said that Pelosi had the right to visit Taiwan, adding that the United States would not be intimidated by China's expected escalation in response to the potential trip[60]. US Secretary of State Antony Blinken issued a statement after China's military response, saying "The United States has conveyed to the PRC consistently and repeatedly that we do not seek and will not provoke a crisis. President Tsai has said the same thing. China has chosen to overreact and use Speaker Pelosi's visit as a pretext to increase provocative military activity in and around the Taiwan Strait"[60]. Blinken emphasized that "nothing has changed about our one China policy" and that "We don't want unilateral changes to the status quo from either side. We do not support Taiwan independence"[60].

In March and April 2023, Taiwan President Tsai Ing-wen transited through the United States and met with US Speaker of the House Kevin McCarthy in California[57]. By having Tsai and McCarthy meet during an unofficial Taiwan transit of the United States, there were hopes that Beijing's activities would be less escalatory than when Speaker Pelosi visited Taiwan in August 2022[57]. Despite these hopes, China again launched a series of large-scale military drills in the Taiwan Strait and around Taiwan, though analysis suggests Beijing carried out less heavy-handed, more calculated measures in April compared to August, indicating it learned from its experience[57]. On May 23, 2024, three days after Taiwan's new president William Lai delivered his inauguration speech, China commenced large-scale military exercises surrounding Taiwan called "Joint Sword-2024A"[57]. China also conducted "comprehensive law enforcement exercises" near Taiwan's outlying islands and east of Taiwan[57].

The election of Lai Ching-te as Taiwan's president in January 2024 with approximately 40 percent of the vote marked another important development in Taiwan's democratic evolution and cross-strait relations[56][59]. US Secretary of State Antony Blinken issued a statement congratulating Lai on his victory, as well as the people of Taiwan for showing once again the strength of their robust democratic system[56]. The Ministry of Foreign Affairs also issued statements thanking Taiwan's friends for their congratulatory messages, including allies and like-minded partners such as Japan, Singapore, and the European Union[56]. Under Lai, Taiwan has continued the previous administration's New Southbound Policy, signing an investment pact with Thailand in June 2024, making Thailand the fifth trading partner to sign an investment agreement with Taiwan since the announcement of the policy in 2016[59]. These diplomatic activities reflect Taiwan's efforts to expand its international engagement despite Beijing's opposition and its exclusion from most international organizations.

The Genesis of Taiwan's Semiconductor Industry

Strategic Government Planning and Economic Transformation

Taiwan's emergence as a semiconductor powerhouse did not happen by accident but resulted from deliberate government planning and strategic investment beginning in the 1970s. In the 1970s, policy decisions by technocrats like Li Kwoh-ting helped Taiwan pivot from low-tech manufacturing to high-tech industries[6][12]. Li Kwoh-ting, who would later be known as the "Father of Technology," served as economics minister from 1965 to 1969 and as finance minister from 1969 to 1976, playing a crucial role in transforming Taiwan's economic structure[43][46]. Serving as the Minister of the Ministry of Economic Affairs since 1965, Li began to promote the export processing industry of textiles, plastic, and consumer electronic products, and large industries such as the steel-making and petrochemical industries[46]. The export processing zone in Kaohsiung was completed for use in December following Li's initiatives, attracting the investment of foreigners or overseas Chinese, expanding export trade, and creating employment opportunities[46].

Taiwan's shift to an export-oriented trade strategy in the 1950s had laid the groundwork for later technological development. Taiwan was perhaps the first developing country to adopt an export-oriented trade strategy after World War II[45][48]. The factors usually associated with big shifts in policy, such as a macroeconomic crisis, a change in political power or institutions, lobbying by export interests, or pressure from international financial institutions, were not present; it was ideas that were key[45][48]. In 1954, economist S. C. Tsiang proposed that Taiwan boost export earnings rather than squeeze import spending to deal with its chronic shortage of foreign exchange[45][48]. He recommended a currency devaluation to establish a realistic exchange rate and a market-based system of foreign exchange allocation to end the inefficient rationing by the government[45][48]. Four years later, a leading policymaker, K. Y. Yin, fought for the adoption of Tsiang's proposal, helping clear the way for Taiwan's phenomenal growth in trade[45][48].

In 1958, Taiwan changed course by devaluing its currency to eliminate the overvalued exchange rate which suppressed exports[45]. The government freed up the market in foreign exchange, allowing exporters to keep or sell their earnings at a market-determined exchange rate, which meant that foreign exchange rationing could be terminated and the government could give up direct control over its allocation[45]. These reforms led to phenomenal growth in exports and, together with improvements in the investment climate, helped propel Taiwan's economic miracle[45]. Taiwan's rapid industrialization and maintained exceptionally high growth rates of more than 7 percent a year between the early 1950s and 1990s, earning it recognition as one of the Four Asian Tigers alongside Hong Kong, Singapore, and South Korea[27][30]. By the early 21st century, these economies had developed into high-income economies, specializing in areas of competitive advantage, with Taiwan becoming a leader in manufacturing electronic components and devices[27].

The creation of stable macroeconomic environments was the foundation upon which the Asian miracle was built[27]. Each of the Four Asian Tiger states managed, to various degrees of success, three variables: budget deficits, external debt, and exchange rates[27]. Taiwan's budget deficits were kept within financial limits so as not to destabilize the macro-economy, and external debt was non-existent as Taiwan did not borrow from abroad[27]. Export policies were the de facto reason for the rise of these Four Asian Tiger economies, and Taiwan adopted mixed regimes that accommodated its own export industries[27][30]. The government worked to promote specific exporting industries, which was termed as an export push strategy[27]. All these policies helped Taiwan to achieve growth averaging 7.5 percent each year for three decades and achieve developed country status[27][30].

The RCA Project and Technology Transfer

The "RCA Project" marked a significant starting point for Taiwan's semiconductor industries and represented a crucial moment in the island's technological development[9][12]. In the mid-1970s, Chiang Ching-Kuo, the de facto political leader at the time, sought a "technical breakthrough" to advance Taiwan's industrialization[9]. Fang Hsien-Chi, the Director General of Telecommunications, began discussions with Dr. Pan Wen-Yuan, a Chinese American engineer who had previously worked at RCA, to achieve this goal[9]. Following ongoing discussions and Dr. Pan's investigative trips across Taiwan's industries, they proposed to Sun Yun-Suan, the Minister of Economic Affairs, the idea of investing in the transfer of IC manufacturing technology to Taiwan[9]. After a pivotal breakfast meeting in a modest noodle restaurant in downtown Taipei hosted by Minister Sun, the government committed to investing in the project to transfer IC technology[9].

As the decision to invest in IC technology transfer was finalized, several critical questions arose about implementation[9]. To address these challenges, the Taiwanese government selected the newly established Industrial Technology Research Institute, a semi-state-owned research institute, to oversee the technology transfer[9]. This choice aimed to ensure that the newly acquired technology would benefit the private sector, even though the government was the sole sponsor of the substantial initiative[9]. Additionally, Dr. Pan established the Technology Advisory Council to assemble a group of Chinese and Taiwanese American scientists and engineers who would provide expertise and consultation on the technology transfer[9]. The founding of the Industrial Technology Research Institute in 1973 provided the institutional framework for coordinating technology development and transfer[6][12].

The Technology Advisory Council and Dr. Pan focused on utilizing the technology transfer to boost Taiwan's capability to produce specific IC products rather than merely advancing scientific research[9]. Identifying electronic watches as potential products to meet this goal, Dr. Pan and Fang Hsien-Chi noted that Taiwan already had an established IC packaging industry, heavily dependent on foreign investments and imported components[9]. Consequently, the Technology Advisory Council recommended the transfer of C-MOS technology, which is particularly suitable for consumer electronics like electronic watches due to its power efficiency[9]. They advocated for a comprehensive transfer of manufacturing capabilities to the Industrial Technology Research Institute, not just a turn-key solution[9]. The plan included building a demonstrative factory at ITRI that could produce market-ready IC products to be sold globally[9].

In 1976, the government convinced RCA to transfer semiconductor technology to Taiwan under the direction of Chiang Ching-Kuo[12]. The government appointed the Industrial Technology Research Institute to lead the development of the industry with an emphasis on developing commercial products rather than pure scientific advances[12]. ITRI sent four teams of engineers to train at RCA before building a demonstration factory in Taiwan[12]. The technology transferred to Taiwan through the RCA Project was not the newest or mainstream at the time, but the initiative was strategically focused on embedding comprehensive manufacturing capabilities within Taiwan[9]. This was designed to reduce local electronic industries' dependence on imported components[9]. Additionally, the project facilitated connections and collaborations between people and technologies across Taiwan and the US, reinforcing the technological capabilities of IC manufacturing in Taiwan[9]. The RCA Project transcended being merely a replication of American technology in Taiwan and instead was an endeavor that encouraged the transnational flow of knowledge, materials, and personnel[9].

The Founding of TSMC and the Foundry Model

The establishment of the Demonstrative Factory and United Microelectronics Corporation marked a foundational phase for Taiwan's burgeoning semiconductor industry, yet it also ushered in immediate challenges[9]. The demonstration factory was spun off by ITRI in 1980 as United Microelectronics Corporation, which received initial investment from both private and public sources[12]. The inauguration of the Hsinchu Science Park in 1979 attracted significant foreign investment and saw a wave of "returning" Chinese and Taiwanese Americans establishing enterprises, particularly IC design houses, in the early 1980s[9]. Despite this influx of talent and ideas, these new firms faced substantial financial hurdles, lacking the capital necessary to build their own fabrication plants[9]. Consequently, they had to rely on the spare production capacities of existing Integrated Device Manufacturers[9].

Morris Chang's founding of Taiwan Semiconductor Manufacturing Company in 1987 was a foundational moment for Taiwan's semiconductor industry[6][11][12]. Chang had worked at Texas Instruments for twenty-five years, rising to become group vice president responsible for TI's worldwide semiconductor business[11]. During his 25-year career at Texas Instruments, he rose up in the ranks and pioneered the then controversial idea of pricing semiconductors "ahead of the cost curve," which meant sacrificing early profits to gain market share and achieve manufacturing yields that would result in greater profits over an extended timeline[11]. In the early 1980s, while still at Texas Instruments, Chang witnessed TI's factory in Japan achieving twice the chip production yield as TI's factory in Texas[11]. Observing that the staff and technicians in Japan were better qualified and had lower turnover, and failing to recruit the same caliber of staff in the United States, he concluded that the future of advanced manufacturing appeared to be in Asia[11].

After he left General Instrument Corporation, Sun Yun-suan, Premier of the Republic of China, recruited him to become chairman and president of the Industrial Technology Research Institute in Taiwan, where the ROC government is now based[11]. This marked his return to the ROC, initially thought to last for a few years, three decades after he left during the chaotic Chinese Civil War[11]. As the head of a government-sponsored non-profit, he was in charge of promoting industrial and technological development in Taiwan[11]. Chang's plan was to establish a new venture to be called Taiwan Semiconductor Manufacturing Company, or TSMC, which would operate as a pure-play foundry serving fabless design companies[8][49]. Chang needed to find an existing semiconductor manufacturer to partner with who would contribute a significant portion of the funding to create confidence in the project[8].

Chang asked all the major semiconductor manufacturers, including Intel, Texas Instruments, Motorola, AMD, Panasonic, and Sony if they wanted to invest, but they all turned him down[8]. The only company that was interested was Philips, a second-rate semiconductor manufacturer from the Netherlands[8]. Philips agreed not because the idea of TSMC seemed especially compelling, but because they wanted to take advantage of Taiwan's low-cost labor and expand their factory operations there, and investing in TSMC seemed like a good way to win favor with Taiwan's government[8]. Ultimately Philips invested $40 million in the new venture, private investors contributed $35 million, and the government invested $70 million[8]. Chang founded TSMC in 1987 thanks to transfer of production technology and license of intellectual property from Philips in exchange for 27.6 percent equity and financing from the government's National Development Fund for 48.3 percent stake[11].

In 1987, TSMC pioneered the fabless foundry model, reshaping the global semiconductor industry[12][49]. To run the company, Chang hired Jim Dykes, the former director of GE's semiconductor business, which GE was closing down[8]. Dykes joined in early 1987, shortly after TSMC's first factory, a repurposed production line in an ITRI building, came online[8]. As expected, TSMC's first customers were Taiwanese semiconductor companies, but in late 1987 the company got an unexpected visit from Intel[8]. Intel wanted to use TSMC to produce some of Intel's older, less advanced products so it could free up capacity to produce more leading-edge chips[8]. Intel first gave TSMC a trial run to see if TSMC's yields would meet Intel's requirements; when they did, Intel became TSMC's first American customer, but not before requiring TSMC to establish a rigorous production control system, including quality control, preventive maintenance, and statistical process control[8].

Landing Intel as a customer sent a strong signal of TSMC's competence, and Intel was soon followed by many other major semiconductor manufacturers wanting to outsource portions of their production, including Motorola, Texas Instruments, and Philips[8]. In some cases, not only were TSMC's costs lower than the company doing the outsourcing, but its yields were higher[8]. By 1988, TSMC was cash-flow positive, and the company broke ground on its second factory[8]. This factory was what really began to drive TSMC's success as the first semiconductor factory in the world to adopt the SMIF wafer-carrying pod and the company's decision to use higher-performing but relatively untested machines from a new company called ASML[8]. TSMC's bets paid off, and the company grew rapidly, with revenues growing at an average rate of 49 percent annually over ten years, surpassing $1 billion in revenue by 1995[8]. By 2000, TSMC was operating five factories producing more than 3 million wafers a year, and sixty percent of TSMC's revenues were from fabless companies like Qualcomm, Broadcom, and Nvidia[8].

The Hsinchu Science Park and Innovation Ecosystem

The idea of establishing the Hsinchu Science Park was first proposed by Shu Shien-Siu, the former President of National Tsing Hua University and Minister of Science and Technology[44]. After Shu became the Minister of Science and Technology in 1973, he traveled to the United States, Europe, and Japan to learn and study their conditions of the development of science and technology[44]. In 1976, Shu came up with the idea of building a science and technology park like that of Silicon Valley[44]. President Chiang Ching-kuo proposed to build the park in Longtan District because of the potential future benefits that could be drawn from National Chung-Shan Institute of Science and Technology and the military[44]. However, Shu argued that the technology and science park should not be close to the military as the primary goal of the founding of the park was to expand the size of private economy and creative vitality of Taiwan[44].

Shu's idea was to build the park in Hsinchu next to the National Tsing Hua University and the National Chiao Tung University, like the Silicon Valley which is adjacent to Stanford University and University of California, Berkeley[44]. Shu's idea was ultimately approved by Chiang, and the park was built and opened in 1980 in Hsinchu[44]. After the original idea of the establishment of the science park and the location of the park were settled, Chiang Ching-kuo assigned the task of constructing the Hsinchu Science Park[44]. Irving Tze Ho was tasked to set up the park in 1979 and serve as its first director[44]. Li Kwoh-ting, former Finance Minister of the Republic of China, was among those who significantly contributed to the founding of the park, as ordered by Chiang[44].

Inspired by Silicon Valley, Li consulted Frederick Terman on how Taiwan could follow its example[44]. From there, Li convinced talents who had gone abroad to build companies in this new Silicon Valley in Taiwan[44]. Among those who returned was Morris Chang, who later led the Industrial Technology Research Institute and founded TSMC[44]. Li also introduced the concept of venture capital to the country to attract funds to finance high-tech startups in Taiwan[44]. The 1,400-hectare plot of land, an hour's drive south of Taipei, is home to chipmaking giants like TSMC, UMC, and MediaTek, which are just a handful of the approximately 500 tech companies that call the park home[47]. Back in the 1980s, Taiwan's government wanted to establish a zone that specialized in manufacturing and research and development for the tech industry, and the Hsinchu Science Park started off as a hub for PC production, with the government dangling carrots such as tax and land incentives to entice companies to set up shop there[47].

Training has been key to the park's success as it is close to industry-focused institutions like the Industrial Technology Research Institute and academic ones like National Tsing Hua University[47]. The Hsinchu Science Park now makes up a sizable part of Taiwan's economy, with integrated circuit companies reporting 11.3 trillion New Taiwan dollars ($363 billion) in revenue in 2022, over 75 percent of the total amount generated by the park's 500-plus companies[47]. Morris Chang, founder of TSMC, said at an event marking the 40th anniversary of the park in December 2020, "If not for the science parks that offer all the infrastructure and land, a lot of tech companies may not be possible today"[47]. This park has been at the center of Taiwan's efforts to first build the technological capacity to have a chief industry, to second train the workforce that the industry requires, and third incubate most of the key firms that have emerged in Taiwan, creating an interesting and successful mix of education and training programs where it is easy for firms to get established and find partners and skilled workers[47].

Close ties with Silicon Valley and the return of engineers trained in the United States fostered a startup ecosystem distinct from the conglomerate-driven models of Japan and South Korea[6][12]. The semiconductor industry is one facet of a wider geopolitical contention regarding Taiwan's independence from China, and Taiwan has responded to the crisis by growing closer to the United States via investments in US-based fabs, including a $65 billion project in Arizona supported in part by the CHIPS and Science Act[6][12]. The success of the Hsinchu Science Park model has been so pronounced that the Taiwan government approved the establishment of additional science parks including the Longtan Science and Industrial Park, Zhunan Science Park, Tongluo Science and Industrial Park, Biomedical Science Park, and Yilan Science and Industrial Park[44]. These expansions reflect the continuing commitment of Taiwan's government to supporting high-tech industries and maintaining the island's competitive edge in semiconductor manufacturing and related technologies.

Taiwan's Semiconductor Dominance

Current Market Position and Global Significance

Taiwan's semiconductor sector has achieved a position of global dominance that is difficult to overstate. Taiwan's semiconductor sector accounted for $115 billion, around 20 percent of the global semiconductor industry, and in sectors such as foundry operations, Taiwanese companies account for 50 percent of the world market, with Taiwan Semiconductor Manufacturing Company the biggest player in the foundry market[6][12]. Two years ago, Taiwan accounted for 20 percent of global semiconductor production, 37 percent of logic chip manufacturing, and a dominant 92 percent of the world's most advanced logic chip capacity[3]. TSMC alone was producing 70 percent of smartphone chipsets and 35 percent of automotive microcontrollers[3]. In 2024, that influence expanded further as TSMC's global market share in dedicated contract chipmaking rose to 64 percent, up from 60 percent the year prior, driven by surging demand for chips powering artificial intelligence, smartphones, and advanced computing systems[3].

Taiwan's total semiconductor output reached $165 billion in 2024, a 22 percent increase year-on-year[3]. TSMC now produces over half the world's advanced chips, supplying firms like Apple and Nvidia[6][12]. The second quarter of 2025 was a windfall for the world's chipmakers, with global foundry revenue climbing 14.6 percent to an unprecedented $41.7 billion, but the real story is Taiwan Semiconductor Manufacturing Company, which seized a staggering 70 percent market share on the back of soaring demand for AI accelerators, smartphones, and next-gen PCs[33]. TSMC pulled in just over $30 billion for the quarter, its strongest showing yet[33]. Nearly three-quarters of TSMC's sales now come from 7nm nodes and below, with 3nm alone accounting for roughly a quarter of wafer revenue[33]. These are the wafers underpinning Blackwell GPUs, AMD's Zen 5 CPUs, and Apple's M-series Macs[33].

The concentration of advanced semiconductor manufacturing in Taiwan represents both an economic triumph and a strategic vulnerability. In 2019, 100 percent of the world's most advanced logic semiconductors (less than 10 nm) were produced overseas, with the vast majority in Taiwan[35]. By 2020, Taiwan was the unmatched leader of the global semiconductor industry, with Taiwan Semiconductor Manufacturing Company alone accounting for more than 50 percent of the global market[6]. About 44.2 percent of US imports of logic chips were manufactured in Taiwan, compared to 24.4 percent of US imports of memory chips and 1.0 percent of US imports of analog chips from Taiwan[32]. In a hypothetical scenario of a major manufacturing disruption in Taiwan, the US logic chip segment would experience the largest negative impacts, which may lead to as high as a 59 percent increase in the price of logic chips that US downstream producers would have to pay[32].

Taiwan remains a global leader in semiconductor manufacturing, with TSMC at the forefront producing over 50 percent of the world's advanced semiconductors, supplying critical components to tech giants like Apple, Nvidia, and AMD[6]. Sub-5nm process technology, the cornerstone of next-generation computing, continues to be concentrated in Taiwan[3]. TSMC's unparalleled manufacturing efficiency, integrated supply chain, and deep engineering talent pool maintain a lead that rivals have yet to match[3]. Even with a projected 203 percent increase in US fab capacity by 2032, Taiwan remains the critical node for the most advanced chip production[3]. This structural dependence introduces profound strategic tension as Taiwan's semiconductor centrality acts as a stabilizer, making any military conflict an economic catastrophe for all sides, including China, which still receives over half of Taiwan's chip exports[3].

The Fabless-Foundry Model and Industry Structure

The fabless-foundry business model pioneered by TSMC has fundamentally transformed the global semiconductor industry and explains much of Taiwan's dominance. The term "fabless" in the semiconductor industry refers to companies that design and sell semiconductor chips but do not own the manufacturing facilities, known as fabs, where these chips are produced[49][52]. Instead, fabless companies partner with specialized foundries like Taiwan Semiconductor Manufacturing Company that handle the complex and capital-intensive process of chip fabrication[49][52]. This model allows fabless firms to concentrate their resources on innovation, design, and marketing while leveraging the advanced manufacturing capabilities of their foundry partners[49][52].

The fabless model has emerged as a dominant force in the semiconductor industry, offering several advantages over traditional integrated device manufacturers that handle both design and manufacturing in-house[49][52]. One of the key advantages is cost efficiency, as building and maintaining state-of-the-art fabs requires significant capital investment, often running into billions of dollars[49]. Fabless companies avoid these costs, allowing them to operate with a lighter capital structure and allocate more resources to research and development, driving innovation and staying ahead of technological trends[49]. Fabless firms spend less on manufacturing, driving higher free cash flow, and invest more in research and development relative to sales compared to integrated device manufacturers[49]. Additionally, the fabless model provides greater agility and scalability as fabless companies can quickly adapt to market changes by adjusting production levels through their foundry partners without the constraints of managing large manufacturing operations[49].

The shift towards the fabless model was greatly influenced by the founding of Taiwan Semiconductor Manufacturing Company in 1987 by Morris Chang[49]. TSMC pioneered the concept of a dedicated foundry, offering manufacturing services to companies that focused solely on chip design[49]. TSMC's success demonstrated that separating design from manufacturing could lead to more efficient, higher-quality production[49]. This model quickly became the preferred approach for many semiconductor companies, with TSMC emerging as the go-to partner for fabless firms worldwide[49]. In 2009, Advanced Micro Devices strategically decided to spin off its manufacturing operations, creating GlobalFoundries[49]. This move underscored the growing recognition that managing both design and manufacturing was no longer a sustainable or competitive business model, particularly as the complexity and cost of chip fabrication continued to rise[49].

A semiconductor foundry, also known as a fab, is a factory where silicon wafers are manufactured, and the main customers of a semiconductor foundry are chip makers such as Qualcomm, Intel, and AMD[52]. Foundries emerged in response to the growing need for semiconductor devices, driving the electronics industry towards larger and more efficient fabrication plants[52]. The foundry market is highly competitive, with several major players vying for business, though TSMC has established a commanding lead[52]. By comparison, Samsung managed a respectable 9 percent growth in its foundry business but remains a distant second with 7.2 percent of the market[33]. China's SMIC dipped 1.7 percent in revenue from the previous quarter, thanks to advanced-node production issues and resulting shipment delays, putting it in third place with 5.1 percent market share[33].

For PC enthusiasts and gamers, the implications of Taiwan's dominance are significant as more advanced chips are flowing than ever, easing the kind of shortages that left GPU shelves empty in 2021, but they are not cheaper[33]. TSMC's upcoming 2nm node is expected to carry a price premium over 3nm, and Nvidia has already nudged GPU pricing upward to compensate for rising wafer costs[33]. That tension between more supply and higher cost defines the silicon industry in 2025[33]. With TSMC now controlling seven out of every ten dollars spent in the foundry market, it is clear that the company is doing more than just riding the AI wave but has established a structural