7.1. Taiwan’s Economic Basis
According to the study of Taiwan’s Competitive advantages done by Wong Maher, Wang and Long (2001), Taiwan has relied on the fields of Original Equipment Manufacturing (OEM) and Original Design Manufacturing (ODM) in the production and export of products in the high tech area for the past two decades. The result has made is the world’s third largest supplier of information products. Taiwan accounts for production of a third of the world laptop computers.
The computer industry in Taiwan is surpassed only by brand name giants such as Dell, HP and IBM. A number of variables have been suggested to explain Taiwan’s success; however we will elucidate them using the components of Porter’s Diamond model of National Competitive Advantage. (35)
With regard to the Factor Conditions Element, Wong, they argue that Confucianism has given Taiwan a culture that epitomizes diligence, thrift, harmony, loyalty, education and respect for authority. Investing heavily in education, as an integral component of its economic plan, Taiwan is also one of the most cash-rich countries in the world. Although it was the recipient of foreign aid in the 1960’s, It recognized the important of self-help and quickly embarked upon a course of economic independence. Its personal saving rate of 30% to 40% of the income became one of the highest in the world. With dynamic and fluid capital markets, Taiwan has been able to make funds available to small and medium sized firms, and its export-led national policy has made it one of the largest holders of foreign exchange reserves. As for its soft infrastructure, it has transformed itself from an agricultural economy to an industrial economy. It provides a stable and democratic political environment that people and businesses can pursue their economic objectives.
This environment also attracts foreign investors.
The Demand Conditions of Taiwan is characterized by a domestic market that accounts for only a very small portion of its total production. Foreign demand for Low- Cost Manufacturing objectives accounts for most its production, its rapid economic growth, and its rising per capita income with its high level of consumer sophistication.
The intertwining of Taiwan’s industries has contributed greatly to its success. Intertwining has resulted in a system of production, transportation and distribution processes that has given
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Taiwan a competitive advantage that other countries cannot easily duplicate. For example, its production of personal computers now includes a full line of computer hardware products, such as mice, scanners and cables. Furthermore, Taiwan’s success in chemical manufacturing has made it a world leader in certain plastic products, such as plastic pipes (PVC), (35).
Firm strategy, structure and rivalry component are symbolized by the small and medium-size enterprises (SMEs) that are the backbone of Taiwan’s economic success.
They account for ninety-five percent of all companies registered in Taiwan and employ eighty percent of its workforce (36). Their total production accounts for half of Taiwan’s exports.
Because of their size, Taiwan’s SMEs have the advantages of flexibility and quick response.
They also have the ability to accommodate change in specifications without serious production line consequences. Because of their size and the competition they face, they regard every order as important to their survival. This promotes manufacturing processes that are streamlined for both complex and simple orders. In the area of financial management, Taiwan’s companies follow a traditional, conservative Chinese approach and are financed mostly by equity rather than debt (37).
7.2. Taiwanese Overseas Foreign Investment
Investment overseas and Foreign Nationals Total amount
199019911992199319941995199619971998199920002001200220032004 20052006 STATISTICS ON APPROVED OVERSEAS CHINESE AND FOREIGN INVESTMENT (
2006 STATISTICS ON APPROVED OVERSEAS CHINESE INVESTMENT BY YEAR
Source: Arranged by author from arranged by from Investment Commission, MOEA(2006), “Statistics on Overseas Chinese & Foreign Years
Investment, Outward Investment and Mainland Investor＂, MOEA, Taiwan
Figure 45 Arranged by author from investment Commission, MOEA (2006).
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Source:“Statistics on Overseas Chinese & Foreign Investment, Outward Investment and Mainland Investment”, MOEA
Taking the last ten years as a reference, one can readily see a clear trend in Taiwanese FDI, namely, the domination of Mainland China as the main recipient of Taiwanese FDI. After Asia, North America stands as the second most important recipient of FDI followed by the Middle-South Americas. Figure 44 provides us with the total investment amount divided into 6 geographic regions. As seen in the figure, in the last five years up until the end of 2006 there has been an upward trend in the North and South Americas. The bulk of Taiwanese FDI is concentrated around manufacturing activities. For example, during 2006, the increasing amount of FDI and the electronics and electrical appliance manufacturing accounted for 48.8 % of the total commission (Figure 44). Moreover, the FDI in trade, service(professional and scientific), financial activity, transportation-communications, insurance, electronic parts-components manufacturing and chemical production have also been strong worldwide in recent years in alignment with a strong trend, which shows a shift in the world FDI mix with an increasing share of FDI in the service sector. (38)
0
STATISTIC S ON APPR OVED OVER SEAS C HINESE INVESTMENT
B Y YEAR & AR EA (1 9 8 5 ~2 0 0 6 ) STATISTICS ON APPROVED OVERSEAS CHINESE
Source: Arranged by author from arranged by from Investment Commission, MOEA(2006), “Statistics on Overseas Chinese & Foreign Investment, Outward Investment and Mainland Investor＂, MOEA, Taiwan
Figure 46: Arranged by author from investment Commission, MOEA (1985~2006).
Source: “Statistics on Overseas Chinese & Foreign Investment, Outward Investment and Mainland Investment-2006-”, MOEA
Looking more closely at the distribution of Taiwanese FDI in the Americas, it can be seen that in the last twenty years the United States has been the major recipient of Taiwanese FDI, followed by Canada, the Caribbean and British Territories, Panama and Brazil. Looking at the amount in the Figure 45 it can be seen that the amount of Taiwanese FDI in countries of Central and South
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America is negligible in comparison to the amount invested in North America mentioned above.
Hence, it can be seen that there is still a large potential to engage these countries.
Taking the years 2000-2006 pie-chart as a reference, the cases of North and Mid-South Americas account for the major portion of Taiwanese FDI. In this sector, the United States is the major recipient of Taiwanese FDI across nearly all the industries. While Canada attracts investments in textile product manufacturing and precision, optical, medical equipment, watches and clocks manufacturing. Similar to the US, the Caribbean and British Territories are involved in almost all the industries. Finally, in Panama it is rubber product manufacturing, leather, fur and allied product manufacturing and transportation, storage and communications which are the main investment sector ( See appendix) (38)
7.3. Panama –Taiwan Commercial Relations 7.3.1 Direct Investment from Taiwan
In 1953, the first Taiwanese company was registered in Panama; however, it was not until 1993 onwards when the amount of FDI became a sizable amount. Indeed, the first instance of Taiwanese FDI in Panama took place in 1953; however before 1993 there were only eight cases of approved FDI to Panama. From 1952 to the end of 2006 there were fifty-four approved cases of FDI (Figure 46). The major investment activities have been in transportation, accounting for more than half of the approved FDI to the isthmus. Since then there has been a breakdown in industry, cases and amount of initial investments.
The following is also the figure of Taiwanese-approved outward investments by industries in Panama to the end of 2006:
STATISTICS OF APPROVED FOREIGN INVESTMENT BY AREA & INDUSTRY (MOEA) Panama Unit：US$1,000 1952~2006
================
Case Amount Industries
25 295,111 Manufacturing
2 8,587 Food, Beverage and Tobacco Manufacturing
2 1,496 Textile Product Manufacturing
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Taiw an FDI Amount in Panama (1985-2006)
0
0 96,220 Leather, Fur and Allied Product Manufacturing
8 66,427 Chemicals
5 50,750 Rubber Products Manufacturing
1 827 Non-metallic Mineral Products Manufacturing
3 50,848 Basic Metal Industries and Fabricated Metal Products Manufacturing 1 3,538 Machinery and Equipment Manufacturing and Repairing 1 206 Electronic Parts and Components Manufacturing
2 16,212 Electrical Machinery, Supplies and Equipment Manufacturing and Repairing 1 45 Electricity, Gas, Water and Construction
9 66,424 Trade
2 15,552 Accommodation and Eating-Drinking places 8 329,551 Transportation, Storage and Communications 5 35,113 Financing and Auxiliary Financing
1 179 Financing Investment
4 25,496 Professional, Scientific and Technical Services
54 767,470 Total
Figure 47: Approved Taiwanese FDI to Panama 2006 by Industry sector total
Source: Arranged by author from investment Commission, MOEA (1952~2006), “Statistics on Overseas Chinese & Foreign Investment, Outward Investment and Mainland Investment”, MOEA
Figure 48 : Taiwan’s Approved FDI to Panama 2006 by Industry sector total
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Figure 49: Taiwan’s Approved FDI to Panama from 1985~2006by years
Source: Arranged by author from arranged by from Investment Commission, MOEA (2006),
“Statistics on Overseas Chinese & Foreign Investment, Outward Investment and Mainland Investor”, MOEA, Taiwan
The predominance of transport sector investments is due the predominate role of the Evergreen Corporation, which has seen an increase in its transport and logistics operations following the privatization of Panama’s container ports. From the appendix provided, it can be seen that the most important main cases are Evergreen Marine Corp (Taiwan), Taiwanese Financial Institutions, Taiwanese Companies in the Colon Free Zone and Davies EPZ.
7.4 Current Situation of Taiwan-Panama FTA
The FTA between Taiwan and Panama was signed on August of 2003 and entered into effect on December 4, 2003. In the first eleven months of its implementation, the total trade between Panama and Taiwan doubled each year from 2003 to 2006 (Table 7), with the bilateral trade balance tilting strongly in favor of Taiwan. (40)
The FTS is a comprehensive agreement, which includes provision not only for trade in goods but also for the investment and services. In total the text of the agreement comprises seven parts:
Part I: General Aspect, Part II: Trade in Goods, Part III: Technical Barriers to Trade, Part IV:
Investment Services and Related Matters, Part V: Competition Policy, Part VI: Intellectual Property Right, and Part VII: Administrative and Institutional Provisions.
With regards to investment provisions, Panama may not impose any performance requirements on Taiwanese companies such as percentage quotas for export or to achieve any percentage on domestic content, or to relate in any way to the amount of investment based on imports and exports. Also, no conditions on the part of Panama exist on the nationality of senior management or the board of directors. The agreement also stipulates that each country shall permit all transfers relating to an investment of an investor of the other party in the territory of the party to be made freely and without delay. Such transfers include: (a). profits, dividends, interest, capital, gains, royalty, payments, management fees, technical assistance and others, returns in kind and
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other amounts derived from the investment; (b). proceeds from the sale of all or any part the investment or from the partial or complete liquidation of the investment; (c). payments made under a contract entered into by the investor, or its investment, including payments made following a loan agreement.
With respect to the risk of nationalization and/or expropriation, no party (Panama or Taiwan) may directly or indirectly nationalize or expropriate an investment of an investor of the other party in its territory, or taking a measure tantamount to nationalization or exportation of such an investment, except for a public purpose, or public order and social interest, on a non-discriminatory investment in accordance with the agreement. Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the exportation took place (“date of expropriation”), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include the going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine the fair market value.
Years Total Bilateral
Total 2,862.19 573.99 2,288.20
Table 10 The trade in goods, from January 2001 to 2006, the trade in goods, from January 2001 to 2006 reflect in the table the export-import the amount for the bilateral agreement between Taiwan and Panama.
Source: Data of the directorate of Census and Statistics, National Controllers Office (NCO), Panama
7.5. Motivations of Taiwanese companies already invested in the Americas
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In order to have an idea of the motivations of Taiwanese companies investing in Panama, it is useful to take a closer look at the aggregate data for the whole American continent. According to a survey carried out by the Investment Commission of MOEA in 2003, of those Taiwanese companies already investing in the U. S. a large percentage of them cite the wish to increase sales competitiveness as their main motivation for investing. In contrast, Companies in Central and South America are eager to take advantage of the low labor and land cost, and to increase their overseas sales competitiveness, not to mention the advantages offered by tax and other incentives.
Kou and Li (2003) found that the motivation of utilizing local labor, expanding markets, and following major clients are important factors influencing the FDI decisions of Taiwanese small and medium sized enterprises. Then at least as far as SMEs are concerned, the motivation of strategic considerations is not critical in influencing their behavior when investing abroad. The motivations of expanding markets is a major factor driving FDI, this may be due to the fact that Taiwan is a small country with market of modest size. Because companies have little room for expanding in Taiwan, they may employ FDI as means of expanding theoretical markets.
Internationalization theory had already suggested such a trend, the work of Buckley and Casson (1976), Dunning (1997) and others points out that market imperfections make it less costly for firms to undertake imperfections that result in internationalization are generally related to cost or benefits associated with uncertainties in external market and costs, imperfections in markets for knowledge and information, the size firm and government policies. (41,42, 43)
In short, investment in the U.S. by Taiwanese firms is mostly driven by internal factors such as R&D intensities, firm size, export ratio and capital intensities. Large companies with high export ratios are more likely to invest abroad, but the higher the capital intensity the less the likelihood they will invest abroad. According to the factor endowment theory, the lower the degree of capital intensity, the more harm a firm will suffer when wages rise, the more a firm suffers when wages rise, the greater its likelihood to undergo FDI.
7.5.1 Table for Motivations for Taiwanese Companies Investing in American Countries
U.S.A. Middle -South
Mexico Canada
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America
Number of the cases 68 cases 12 cases 1 cases 1 cases
Low cost labor 2.94% 50%
Low land cost 1.47% 16.67%
Use of local natural resource 1.47% 8.33%
Increases sales in local market 42.65% 100.00% 100%
Access new technologies 32.35%
International Cooperation 30.88%
Increase overseas Sales Competitiveness
39.71% 41.67%
Tax advantages and other incentives
4.41% 41.67%
Better support for local customers
2.94% 16.67%
Others 10.29% 33.33%
Table 11 Motivations for Taiwanese Companies investing in America Countries.
Source: Data from Investment Commission, MOEA (2003), “Survey of Situation of Overseas Enterprises” Investment commission, MOEA, Taiwan.
In conclusion, external factors seem to drive Taiwanese firms investment in Central and South America such as low cost labor, tax advantages, increase overseas sales competitiveness and others.
7.6. Problems encountered by Taiwanese Companies in Panama
Liu Ban-Tian (1997) outlined the basic advantages faced by Taiwanese companies in Panama.
Indeed some of these problems and advantages have remained the same, however, it should be pointed out that at present the advantages related to Panama can be summarized as follows:
reasonable wages and operational costs, a modern worldwide telecommunication system, a bilingual labor pool, and finally a good living environment and geographic location (46).
Although labor unions are considered influential they are mostly strong in the construction sector.
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Advantages Problems
Good geographic location Labor unions
Good transportation infrastructure Language barrier Closeness to North and South American Markets High wages
Abundant labor Political and legal instability
The establishment of EPZ (Davies) Problems with supply of electricity
Table 12 Advantages and Problems of Companies already investing in Panama (1997)
Source: Lieu, P.T, (1997), “Analysis of trade and investment between Taiwan and Central America”. Taipei Bank Monthly Journal, 27, No. 10, 29-52.
Website:http://www.moea.gov.tw/~ecobook/season/saa26.htm
With respect to work wages, it can derived that they are not very high as seen on the previous chart, however, they are relatively high compared to those of nearby Central American and South American neighbors. As for the legal environment, since the accession of Panama to the WTO and recent overhaul of regulatory laws, a more fluid regulatory climate has been in place. The more serious disadvantages have to do with the fact that there is a lack of manufacturing base, with no “down-stream” industries, therefore manufacturing operation have to take care of the whole production process”.
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