Chapter III Findings: Taiwan
III.1. Economic strategies of Taiwan
Taiwan is a middle power economy in the global market, and it seeks to use this position to its advantage for its economic growth and status. Taiwan’s political economy is marked by significantly high market and trade liberalization, advanced trade facilitation networks, service sector industry, and high-sophistication manufacturing. Taiwan is unique among its neighbors, particularly the other three Asian Tigers (South Korea, Hong Kong, and Singapore) in several ways. First, its economy is primarily based on the collective innovation of SMEs that operate together as a surrogate to large corporations, and that as an independent economy it has tied much of its fortunes recently to the development of the mainland’s economy. SMEs have been traditionally the area of native-born Taiwanese families whereas the elites, mostly KMT-mainlanders, occupied the large state and corporate areas. Taiwan is unique in that the non-elites are its major innovators. Taiwanese entrepreneurs have been comfortable investing in China because there are little to no cultural barriers such as language or social norms. The proximity of China to Taiwan makes it the primary investment target. It is simply easier to invest in China than elsewhere.79 Today, due to the rising cost of low-sophistication and labor-intensive manufacturing on the mainland, particularly in the coastal provinces, Taiwanese investment in china is moving up the sophistication ladder and emptying out Taiwan’s native industry to take advantage of China’s price margins. Low-pay labor intensive investments from Taiwan are very rarely taking the bait offered by Chinese incentives to move further inland, and are largely beginning to turn south to the easily accessible production markets of southeast Asian states (ASEAN). Complexities in the region’s trade networks are contributing to the shifts. Not all Taiwanese manufacturers that are taking advantage of ASEAN are moving their facilities to southeast Asia. Some taishang are setting up manufactories in China to take advantage of
79 Huang, 2010, p. 80.
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China’s tariff-free trade agreement with ASEAN. Regardless, much of Taiwan’s overseas SMEs are still reinforcing the “central” role of China’s economy to Taiwan.80
Due to being locked out of FTA networks, Taiwan is forced to become economically dependent upon China. In some cases, even outward-bound FDI has been forced to go through the PRC, highlighting the “deterioration of Taiwan’s economic fundamentals.” The economic dependency that Taiwan has found itself in is not sustainable for the island’s economy, but it can be changed.81
Taiwanese capital has shown, as one of the winners of globalization, particularly through its incredible mobility and flexibility, that it can avoid political restrictions and completely move to China if favorable conditions exist. Capital’s mobile factors make greater profits due to their ability to exploit profit margins, yet Taiwan faces a problem where its own capital has become completely disinterested in its own economy. Such free movement of capital is a threat to Taiwan’s economic wellbeing.82 When President Chen Shui-bian (DPP, 2000-2008) initiated the 2006 “Active Management, Effective Opening” policy he announced that Taiwan must be mindful of reducing cross-strait trade risks when opening up. Three concerns of his regarding deepening ties were: the hostage effect, hollowing out, and the taishang fifth column. Missing from the debate, according to Chen Ching-chang, is that China may not just exploit its gains over Taiwan, but over who the actual threat to Taiwan’s economy is: China or overseas businesspeople.83
SME-Driven Market Economy
Taiwan features a heavily liberalized market economy with high integration with in the global market and supply chains. State economic policy is largely reactive to existing trends and developments. Government policy toward the economy is mainly reactive, with intervention largely to help create brand firms.84 Business networks in Taiwan are based on guanxi and often the state will identify and cultivate existing patterns of industrial development rather than creating the industry trends itself thus guanxi capitalism and networks are allowed to drive development patterns in Taiwanese business and economic growth. Many of Taiwan’s largest business groups and SMEs found their start-up and investment capital from the curb market,
80 Huang, 2010, p. 87.
81 Wilson, p. 1.
82 Kenneth S. Lin, “Cross-Strait Economic Integration and Its Impacts on Taiwan’s Society,” 2007, pp. 291-292.
83 Ching-Chang Chen, “Useful adversaries: How to understand the political economy of cross-Strait security,” 2012, p. 56.
84 Gary G. Hamilton, “Culture and Organization in Taiwan’s Market Economy,” 1998, p. 70.
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family and friends, or other “informal money markets.” Taiwanese business startup capital often comes from reinvestments of profits or informal connections. Larger businesses use loans for raising capital but keep their guanxi networks as backups.85 Often the guanxi capitalism leads to high assessments of cronyism within the economic system. According to a Corruptions Perception Index poll conducted in 2015, the perception of nepotism and personal connections in business has become better over the years, with Taiwan improving its ranking to be the 30th cleanest country for business out of a total 168 surveyed. In the past three years Taiwan has slowly moved up the list.86
SMEs do not have large profit margins. Innovations are drivers of competition within the SME system. SMEs seeking the largest profit margins drives innovation. As a result, Taiwan’s business and manufacturing industry does not typically generate large revenue despite huge production output.
By the late 1990s most of Taiwan’s business competition occurred among SME networks oriented toward export markets. Unlike Japanese or Korean style corporatism, where large corporations drove growth, Taiwan’s SME entrepreneurship behaved like a “swarm of bees” to create growth. “Swarm of bees” growth stemmed from a bandwagoning effect of pre-1990s SMEs fostering a gold rush mentality toward exporting to the global market. The first group of
“swarm of bees” SMEs initially found low profits and few benefits, but as more joined the cutthroat industry the industrial structure transformed as the swarm shifted and changed with the product demands.87
Today Taiwan is moving away from its supply-driven manufacturing economy toward one based on demand-driven manufacturing. Rather than manufacturing products at large scale, producers take small special orders for specialization manufacture. This is a result of much of Taiwan’s former manufacturing roles are moving offshore. Taiwan’s IT industry, however, is growing. Tan identifies a spillover effect of the growing IT industry from Hsinchu, where Taiwan had established a technology park in the 1970s, to surrounding cities.88
85 Hamilton, pp. 60-61, 68, 70-71.
86 See Taiwan Today, “ROC improves in Corruption Perceptions Index ranking,” 28 Jan. 2016.
87 Gary G. Hamilton, pp. 45, 48.
88 PhD research conducted on Taiwanese industrial cluster growth at National Chengchi University, Taipei, 2016.
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Development initiatives
From a national perspective the government of Taiwan has sought to take advantage of Taiwan’s relatively early industrialization and transform the island into a regional hub for investments, production, and trade. National economic policy has been one of increasingly fewer restrictions on greater amounts of investments with China in order to facilitate economic growth and take advantage of China’s market. Taiwan would prefer to diversify to other avenues of investment and has actively sought improved trade relations with Southeast Asia to counter its dependence upon China. Taiwan incentivizes domestic investment and attempts to establish trade agreements with other countries to promote growth with limited success. This is due in part to Taiwan’s higher costs of production when compared with the opportunities and advantages available for manufacturers in China. Restrictions impeding cross-strait trade have been reduced dramatically in recent years. Chinese investment is severely restricted in Taiwan largely due to fears of inundation. Restrictions on investing in China are often circumvented by taishang establishing manufacturing ventures directly in China. Taiwan has a relatively small and uncompetitive domestic-oriented service sector, a surprising contrast to its counterparts Hong Kong and Singapore, which have robust, competitive international service sectors.89