Measurement of Indicator

The rate of value-added transshipment can be computed from equation (2) based on Taiwan domestic re-export industries categorized in 2005 (DGBAS, 2005)¹. To determine the core industries, a sharp change of value-added rate among those industries, that is the cutting point and the threshold of 15%. And the threshold of the rate of value-added transshipment is set at 15% following the study of Liou (2007). It is found in Table 4-1 that the industries exceeding the threshold value, including ′chemical products and industries related thereof′, ′leather and products thereof′, ′base metals and articles of base metal′, ′footwear, headgear; umbrellas; feathers and their products′, ′precision instruments and equipments′, ′machinery and electronic component equipments′ and ′miscellaneous products′ , which are identified as candidates of core industries into FTZs. This empirical finding of core industries in this paper is similar to the high value-added industries in the Pearl River Delta (Gui et al., 2006).

The value-added rate of machinery and electronic component equipments is slightly below that predicted (only 15%), which signifies that this industry in Taiwan is also a labor-intensive one needing an industrial upgrading, and has limited added value.

Nevertheless, Liou (2007) found that re-export schemes offered in Hong Kong provide some peripheral services and raise the transportation trade prices (i.e. price markup), therefore, even the re-export price markups of Hong Kong are lower than 35% (not high enough to alter the rules of origin for merchandise, and their mean value is around 22%, still, the price markup is higher than that for the added value of Taiwan. Thus, transshipment

1

value-added operations in Taiwan still have room for growth.

Table 4-1 Industries with High Rate of Value-added Transshipment

Industry Value-added indicator

Products of the chemical or allied industries 16%

Leather and products thereof 17%

Footwear; headgear; umbrellas; feathers and their products 16%

Base metals and articles of base metal 16%

Machinery and electronic components 15%

Precision instruments and equipments 20%

Miscellaneous (toys, games and sports requisites) 16%

Note: These industries categories are classified into 21 industries by Harmonized System (HS) Source: Compiled from the website of Directorate General of Customs, ROC.

2. Market Share Indicator

The industries in Taiwan having a market share exceeding 50% include ′mineral products′, ′plastics and products thereof′ and ′precision instruments and equipment′. Since most market shares of industries are below 30%, market share at 40% are thus utilized in this study as the threshold value. Based on equation (3) and the defined threshold value, it is found in Table 4-2 that ′mineral products′, ′plastics and articles thereof′, ′precision instruments and equipment′, ′chemical products or industries related thereof′, ′base metals and articles of base metal′, ′machinery and electronic components′, and ′transportation equipment′ are candidates of core industries for FTZs in Taiwan. These potential core industries are consistent with the categories recognized as primary exports industries in Taiwan

Taiwan is competitive in above industry categories, and our findings regarding market share are consistent with what is generally recognized as the industry categories of primary exports in Taiwan.

Table 4-2 Industries with High Market Share among Competing Ports

Industry Market share indicator

Mineral products 53.3%

Products of the chemical or allied industries 45.2%

Plastics and articles thereof 60.0%

Base metals and articles of base metal 49.3%

Machinery and electronic component 48.5%

Transportation equipments 40.1%

Precision instruments and equipments 60.4%

Note: These industries categories are classified into 21 industries by Harmonized System (HS) Source: Compiled from the China Commerce Yearbook 2005, Yearbook of Shanghai Foreign

Economic Relations and Trade Statistics, Yearbook of Xiamen Special Area Statistics, Yearbook of China Economy and Trade Statistics, website for Directorate General of Customs, ROC.

3. Forward and Backward Linkage Indicator

The forward and backward linkage indicator of Input/Output analysis is computed from equation (7), (8), (9) and government data in Taiwan in which 49 categories are included. These industries categories are classified by Department of Budget, Accounting and Statistics of the Executive Yuan (DBGAS), and the 49 categories data is standardized.

Due to the data limitation, this study is assumed that regional I/O ratio of FTZ is same as national I/O ratio. The industries with both the forward and backward linkage performance value higher than the average value of all industries belong to Category I in Table 3-2 and are selected as the core industries.

Based on the total linkages of forward and backward linkage indicator from 49 industries are shown in Table 4-3, 'industrial chemicals', 'Iron and steel products', 'electronic components and parts', 'miscellaneous metals', 'plastic', 'process foods', 'plastic and rubber products' and 'miscellaneous chemical manufactures' are selected as candidate of core industries in FTZ.

Table 4-3 Industry with High Forward and Backward Linkages

Industry Total linkages

Industrial Chemicals 4.28

Iron and Steel Products 3.31

Electronic Components & Parts 2.92

Miscellaneous Metals 2.73

Plastic 2.51

Process Foods 2.37

Plastic & Rubber Products 2.31 Misc. Chemical Manufactures 2.26

Note: These industries categories are classified into 49 industries by Department of Budget, Accounting and Statistics of the Executive Yuan (DBGAS)

4. Intersection Set of Core Industries Using Three Indicators

The potential candidates of core industries selected from three indicators have been discussed above. To obtain the final list of core industries, this study uses the simple scoring approach. If an industry classified as a core industry for an indicator, we give one point for that industry. The maximum point for an industry will be 3 points due to three indicators. An industry with 3 points implies that it is simultaneously with high potential for promoting domestic industries, high market share and high value-added transshipment in the international trading of Taiwan. Three industries with 3 points, including ′base metals and articles of base metal′, ′products of the chemical or allied industries′ and ′machinery and electronic components′ in table 4-4, are finally determined as the core industries for FTZs in Taiwan.

Table 4-4 Score of Each Industry Industries\ indicators Value-added Market

share

Forward and backward

linkage scores Base metals and articles of base

metal 1 1 1 3

Machinery and electronic

components 1 1 1 3

Products of the chemical or

allied industries 1 1 1 3

Precision instruments and

equipments 1 1 2

Plastic and products thereof 1 1 2

Leather and products thereof 1 1

Footwear; headgear; umbrellas;

feathers and their products 1 1

Miscellaneous 1 1

Transportation equipment 1 1

Mineral products 1 1

Process Foods 1 1

There are two industries with 2 points, including ′precision instruments and equipments′

and ′plastic and products thereof′. If we recalculated the rate of value-added transshipment of all trading data of FTZ in 2007, the result showed that the rate of value-added of ′precision instruments and equipments′ still kept in high value-added in 19%. The percent of re-export value of ′precision instruments and equipments′ is lower than 1% (only 0.99%), however, its export value lists on the third of Taiwan major export industries. If we could re-create the opportunity of industry ′precision instruments and equipments′ in re-export in the long term, it seems that the industry of ′precision instruments and equipments′ may be the potential industry to be the core industry. As for the industry ′plastic and products thereof′, its market share is the highest industry (60%), but its re-export value is tiny (under 1%).

After all, the industries of ′base metals and articles of base metal′, ′products of the chemical or allied industries′ and ′machinery and electronic components′ are finally determined as the core industries for FTZs in Taiwan. Due to the limited data, this result was obtained assuming all FTZs under same operational situation (for example, same working condition, offered same infrastructure, same operational cost) and same industrial trend. In fact, each FTZ are located on different area and with different function. If there are more detail regional data, we may distinguish detail categories of industries in different FTZ.

Once the core industries are identified, the most important thing is to attract these core industries to move into the FTZs. The related industries, such as buyer-supplier relationships, shared-resource relationships and competitor/collaborator relationships of core industries may also move around the core industries and form industry clusters. Since just-in-time inventory management and time-to-market responsiveness are elements of competitiveness and productivity, the shorter of distance from loading dock to loading dock or from desk to desk is better. Similarly, the flow of information that directs the flow of goods and services improve as distance decreases (Anderson, 1994). All these relationships benefit from geographic proximity. If close physical relationships are important in the effective operation of a cluster, then it follows that industry clusters are important in regional development.

Figure 4-1 Different Related Industries Enjoy the Benefit of Cluster

For example, the machinery and electronic components industry is one of the core industries. However, this industry is a large category, and includes machinery and mechanical appliances, electrical machinery and equipment, sound recorders and reproducers, television, etc. However, actual firms in the Taiwan FTZs include many flash memory firms, LCD firms, and computer peripheral firms. Hence, analysis of their related industries should be performed before clustering the industries, and their related industries are shown as follows:

1. Computer peripheral industries: there are many logistic companies in seaport FTZs and airport FTZs.

Figure 4-2 Relationship Graph of Upstream and Downstream Industries of the Computer Peripherals Industry

Semiconductor

Source: Gfnet corp., 2005, Industrial relationship.

Core industries Core industries

2. Flash memory industries: there are many such companies in the airport FTZs because of the necessity of fast delivery.

Figure 4-3 Applications of Flash Memory Products

Figure 4-4 Upper and Lower Relationship of Memory Module and Memory Card

3. LCD industries:

There are some such companies in the airport FTZs. A report provided by the most

NOR/OR

Upstream Midstream Downstream

DRAM

Upstream Midstream Downstream

prominent investing company, DisplaySearch Corp., announced that the top 4 TFT-LCD companies are AUO Optionics Corporation, LGDisplay, Samsung, and Chi Mei Optoelectronics (now renamed Chimei Innolux Corporation). And many interviews with experts showed that there may be more LCD related companies as potential FTZ industries.

Figure 4-5 Upstream and Downstream of LCD Industry Relationship Graph

Figure 4-6 Value Chain of LCD TV

Source: Wealth Magazine, 2006; Gfnet corp., 2005.

Class

Downstream Applications IndustryMidstream pannel ModualUpstream Materials

Class

Downstream Applications IndustryMidstream pannel ModualUpstream Materials

Mask Glass Master

•Optial thin films. OTF (Prism Sheet, Diffusion film, Reflector

•Optial thin films. OTF (Prism Sheet, Diffusion film, Reflector