As the popular mantra goes, manufacturing shifts to mainland China, Taiwan moves up the technology ladder and everybody lives happily ever after. Well, China is also migrating toward the high-end, which leaves us with the fundamental question: What makes Taiwan Inc. so unique?

The island transformed itself from an assembler of cheap toys into an electronics powerhouse, and now it's in the midst of another historic transition in which a market driven by manufacturing is striving to become an economy driven by a combination of design know-how and manufacturing. It is also transitioning out of the PC box to an era driven by system-level chip design and applications.

Low-profile in its very essence, Taipei is hardly seen among Silicon Valley wannabes by business media, which periodically trots the world—from India to Israel and England to Sweden—in search of emerging technology hotspots. But a closer look at the present-day Taiwan shows an analogy of sorts.

Starting from downtown Taipei and going all the way to the outskirts of Hsinchu, you will see different bits and pieces of the electronics supply chain located in this periphery.

Big-name personal computer maker Acer Inc., ODM specialists like Quanta Computer Inc. and HTC Corp., and contract manufacturing giants like Hon Hai Precision Industry Co. Ltd are in close proximity with each other, while super fabs Taiwan Semiconductor Mfg Co. Ltd and United Microelectronics Corp. sit next to the world's second largest fabless semiconductor industry that includes design houses like MediaTek Inc. and Sunplus Technology Co. Ltd.

Then, there is a vast pool of returnees who have years of work experience in the semiconductor industry and bring valuable contacts from Silicon Valley. Taipei port is just nearby, which minimizes any transport overhead.

Researchers at Taipei's National Taiwan University, one of the island's top schools, work on strategically important technologies such as MPEG-4, and when these technologies near commercial realization, they hand them over to companies that are mostly founded by the school alumni.

Likewise, National Tsing Hua University and National Chiao Tung University are adjacent to Hsinchu Science Park, and a lot of alumni from these two schools are executives of companies located in the park.

So at a time when India and mainland China are emerging as bright stars of a new world economy, Taiwan still matters with its diverse and sophisticated electronics supply chain.

However, Taiwan's ascendancy to a high-tech heaven is not without challenges. The island, for instance, faces an uphill battle in the software arena, where it's confronting issues such as dearth of good software engineers and lack of methodology for software development.

The PC hardware icon is finally coming to terms with this imperative by seeking a future in software in its quest to move beyond commodity items. For that matter, the island has set aside more than $500 million for investment and training.

Taiwan would also fare better if it can lure a bigger pool of software engineering talent. The software frontier, it seems, would be critical in assuring its standing as Asia's high-tech dynamo.

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