The relevance of clustering for upgrading continues to be a controversial topic in the industrial development debate. This paper investigates this question for the case of the Taiwanese computer cluster. It is a particularly challenging case because of two features: first, it probably presents the most significant case of industrial upgrading outside the OECD countries; second, a significant and rapidly increasing share of its output is made offshore. What then is left of the much discussed cluster theory and the alleged benefits of clustering for local development and upgrading?
This paper argues that, in order to examine such issues, it is important to take two analytical steps: first, distinguish between the production and knowledge systems, and second, complement the local cluster approach with the global value chain approach. On the first, the paper shows that the importance of clustering has diminished in the production system but remained high in the knowledge system. As regards the second analytical step, the paper shows that linkages of the local producers with their global customers have been critical to their upgrading and analyses how local and global linkages have reinforced each other. Particular attention is paid to the qualitative transformation of linkages over time.