Chapter III The Cross-Strait Economic Exchange
3.3 Status of the Taiwan Enterprises that have been Investing in Countries
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own right bringing large consumption demand and market opportunities that include fulfilling aggregate consumer demand and aggregate service industry demand. To global enterprises from around the world, China represents great potential and seemingly infinite opportunities for investment and development.16
Influenced heavily by domestic and foreign politics, local economic conditions and driven by the marketing economy, cross-strait relations have developed and continue to develop quickly. Cross-strait industrial integration and specialization transformations and changes are obvious reflections of the changes in Taiwanese investment patterns in China.17
3.3 Status of the Taiwan Enterprises that have been Investing in Countries
The data (Table 3.1) compiled by the Mainland Affairs Council (MAC) shows Taiwan's cumulative total investment of US dollars 202.45 billion from 1991 to the end of 2013 worldwide and US dollars 126.885 billion into China during the same timeframe, which accounts for 62.7% of Taiwan’s total worldwide investment amount. From this data, it is clear that China has become the target for Taiwan’s biggest investments in the world.18
Table 3.2 shows the distribution of Taiwan’s investment by industry in China,19 from 1991 through March 2013, the manufacturing industry accounts for 73.8% of the investments
16 Asia Industrial and Economic Roundtable, China Times, Version A4, Dec. 9, 2002; Feng-Shou Liu, op. cit.,
“Cross-Strait Economy and Trade Policy and Kaohsiung Development,” p. 66, http://nccur.lib.nccu.edu.tw/bitstream/140.119/33850/9/102509.pdf
17 Ai Wei, op. cit., “The Strategic Choice of Cross-Strait Economic and Trade Relations under the Economic Globalization,” http://www.haixiainfo.com.tw/217-7409.html
18 Investment Commission, MOEA, ROC., “Taiwan Approved Outward Investment by Country (Area),”
Cross-Strait Economic Statistics Monthly, No. 241, 2013.
http://www.mac.gov.tw/public/Attachment/352817281137.pdf
19 Investment Commission, MOEA, ROC., op.cit., “ Taiwan Approved in Mainland China by Industry.”
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and the rest of 26.2% is into non-manufacturing industries.20
Table 3.2 Taiwan’s Foreign Investment by Country
Unit: US$ million),%
Period
Area
Feb. 2013 Mar. 2013 Jan.-Mar. 2013 Accumulation
(1991-Mar. 2013) Cases Amount Percent Cases Amount Percent Cases Amount Percent Cases Amount Percent China
Note: 1. The figures do not add up to the total because of rounding errors.
2. Up-to-date investment amounts are in order of cumulative amount.
Source: Investment Commission, MOEA, ROC., “Taiwan Approved Outward Investment by Country (Area),”
Cross-Strait Economic Statistics Monthly, No. 241, 2013, http://www.mac.gov.tw/public/Attachment/352817281137.pdf
20 Ibid.
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Table 3.3 Taiwanese Investment in China by Industry
Unit: US$ million), (%; case)
Total 5615.21 5880.43 4923.0 6008.60 7798.93 7707.68 5439.26 10491.07 11695.12 7841.91 7330.28 2596.50 128021.5
Note: 1. Figures include lagged reports and approvals.
2. An approved case number of 0 indicates the capital-raising of a past case, therefore only indicates the amount.
3. Financial Holding Companies is calculated as part of Financial and Insurance sector from 2003.
4. Up-to-date investment amounts are in order of cumulative amount.
Source: Investment Commission, MOEA, ROC. “Taiwan Approved in Mainland China by Industry,”
Cross-Strait Economic Statistics Monthly,
http://www.mac.gov.tw/lp.asp?CtNode=5720&CtUnit=3996&BaseDSD=7&mp=1&xq_xCat=2012
3.4 Conclusion
Taiwan has had different economic policies towards China during different periods of presidential administration. China and Taiwan each have their own comparative advantages for their respective division and integration roles in new cooperative business ventures.
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China has low-cost raw materials, labors and land. Taiwan has technical, management, operations and professional skills and trains China to play a role in manufacturing and processing. Taiwan often provides equipment, especially that of advanced technological nature .
Taiwanese enterprises apply the methods of “global logistic arrangement” to use their knowledge of Chinese markets and have sufficient local technological manpower to expand the supply of integrated production capacity to the global market. It’s logistic capacity is used to promote and expand Taiwanese power on the economy and relationship.21 Through the division and integration of roles between Taiwan and China, China has become the top foreign investment and development target of Taiwan. From the finding of this research, the author has concluded that government’s policy is very important in its effects on Taiwanese enterprise’s outward investment and industrial development. Government policy also affects worker’s on employment opportunities and choices.
21 Ibid.
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Chapter IV
Status of Taiwanese Enterprise in China
From the perspective of trade, the first reason that the Taiwanese economy leans towards China is the geographical proximity. According to the gravity model of trading theory,22 all other variables being equal, the frequency of any two countries’ trade event will be inversely proportional to their respective distances. A close geographical distance between two countries’ shipping hubs reduce transportation costs, creates for opportunity for interaction between the people and finding appropriate business pattern is done more easily.
Although China has been opening its markets, there have still been some limitations which include their import quotas, visa restrictions, and other administration interventions that make it difficult to engage in commerce with China by foreign countries. The second reason that Taiwan has an advantage in trading with China is its history, language and cultural alignment and heritage shared with China.
The third reason is that Taiwan’s massive investments drives the finance capabilities and supplies components to export to China. After the finished products are manufactured in China for export to Europe, America, Japan and other markets, this forms a “triangle”, a three-way relationship between Taiwan, China and the Western Hemisphere. Further, literature claims that similar language, culture and psychological outlook are important factors in rapid decisions about where to invest.23 Still, it should be noted that Taiwanese
22 N. D. Aitken, “The Effect of the EEC and EFTA on European Trade: A Temporal Cross-Section Analysis,”
American Economic Review, Vol. 63, No. 5, 1973, pp. 881- 892; J. Anderson, “The Theoretical Foundation for the Gravity Equation,” The American Economic Review, Vol. 69, pp. 106-116; Tain-Jy Chen,
“Globalization and Cross-Strait Economic Relations,” Taiwan Economic review, Vol. 31, No. 3, 2003, p. 331.
23 Tain-Jy Chen, op. cit., p. 331.
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trade (over) dependency on China may cause some issues to Taiwan; the first issue would be the risk to Taiwan and Taiwan’s enterprises of “hollowing-out.”24
In addition to consideration of the variables that go into an investment decision, the sense of affinity between potential partners influences these investment decisions.25 China has devoting considerable energy on economic development and has, as a result, become the largest current potential future market for Taiwan. In the future, China has the possibility to lead massive economic integration in East-Asia and like the European Union model; it has the strength to become the core of an economic system to compete with North America.
Enterprises from the around world have been entering China’s market to obtain more opportunities - Shanghai has become the most important location in the world for high-tech enterprises to set up their branches or factories. The changes of Chin’s role in the international order have caused the world’s international structure to be re-aligned and Taiwan’s key advantages are thus affected and its enterprises now face ever stronger international competition.26
4.1 Reasons for Taiwanese Enterprises to Invest in China
The reasons that Taiwanese enterprises are driven to invest in China include:
1) Taiwan’s regional investment circumstances have changed:
The lack of labor supply
Increasing employee salaries
Environmental protection requirements
24 Ibid.
25 Ibid.; J. H. Dunning, S. Bansal, “The Cultural Sensitivity of the Eclectic Paradigm,” Multinational Business Review, Vol. 5, No. 1, 1997, pp. 1-16.
26 Cheng-Tai Huang, op. cit., “Under the Globalization, Cross-Strait Economic and Trade Policy and Taiwan’s Competitiveness,” http://old.npf.org.tw/PUBLICATION/TE/090/TE-R-090-015.htm
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Increased cost of real estate
Deteriorating economic conditions and faltering social security program funding
Insufficient public infrastructure
Unstable political environment and
Various social reasons
2) Competitive stress of international market:
Coupled with the NT dollar’s appreciation, tariff and non-tariff international trade barriers, especially in Korea, Hong Kong and other developed countries, stress Taiwan’s ability to export large volumes at a profit.
3) The attraction of China’s reformed new openness
After 1978, China changed to the new economic policy of “domestic economic reform and open the door to foreign trade,” its economy is gradually moving towards market development and has become more attractive to foreigner investors in China. Both soft and hard infrastructure is improving leading to greater efficiency, which leads to more national income and more FDI. This in turn has attracted the notice of Taiwanese enterprises.
4) China’s preferential policies to attract Taiwan
In addition to reforms opening China to foreign trade, China has implemented policies to encourage the Taiwanese people, government and enterprises to invest in China and it provides flexible strategies and options to attract that Taiwanese investment.27
4.2 The Motivating Drivers for Taiwanese Enterprises to Invest in China
The interaction between and the effect of these preceding four conditions (see 4.1)
27 Charng Kao, “Management Localization Influences of Taiwanese Manufacturing Industry Invests to China,”
Economic Situation and Common, Vol. 7, No. 1, 2001, p. 142; Chin-Ching Lin, The Effect of FDI in Domestic Employment-Research of Taiwanese Inventors in Mainland China (MA Thesis for Institute of Economics, Kaohsiung: National Sun Yat-sen University, 2004), p. 36.
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create the background for Taiwanese enterprise investments in China.28 According to MOEA’s data for Taiwanese enterprises who have invested overseas in 2000, 47.98% of those enterprises were motivated by the opportunity to expand into the local Chinese market, 18.35% considered local Chinese manufacturing because of low relative cost and the other 17.53% set up their branches or factories in China to coordinate with international brand companies’ requirements. Further, up to 96.7% of Taiwanese enterprises investing in China, were not able to export raw materials, semi-manufacturing goods and end products back to Taiwan. Those enterprises aggregate exports from China to Taiwan that didn’t even reach 20% of Taiwanese imports.
This indicates Taiwanese enterprises’ motivations overseas were primary driven by the desire to expand local markets (in the target country; in this case, China) and that this expansion was coordinated with international brand companies. This shows that Taiwan’s own domestic manufacturing and production environment couldn’t satisfy the volume and cost demands of international brand companies.29
According to the data of “Manufacturing Industry Foreign Investment Status Investigation” in 2002 by MOEA as shown in Table 4.1, the primary motivation for Taiwanese enterprises to invest in China included: cheap and sufficient man-power resources, the fact that China has potentials markets to develop business into and that Taiwan’s domestic market for its own products is deteriorating together with its labor market for its own citizens. Further, the fact that Taiwan and China share the same language helps with bi-lateral communicates with each other, which is also a very important consideration.30
28 Charng Kao, op. cit., p. 142; Chin-Ching Lin, op. cit., p. 36.
29 Jui-Chen Chang, A Study of Foreign Direction Investment Motivation and International Strategy (MA Thesis for Department of MBA, Yunlin: National Yunlin Univeristy of Science and Technology, 2003), pp. 1-2.
30 Charng Kao, op. cit., p. 142; Chin-Ching Lin, op. cit., p. 36.
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Over time, these motivational drivers have changed, Let us compare that data of 2002 with the data from 2006. Ministry of Economic Affair (MOEA) shows that at this time, the primary motivation of Taiwanese enterprises’ investment in China was that the enterprises saw that “Local Market Has Potential Development Power (61.25%),” that they saw that
“Applying Local Low Cost of Manpower, Land and Sufficient Manpower (53.75%)”, and that they saw that “Following to Taiwanese’ firms requirement to invest to China” accounted for 29.09% which was the highest percentage score from 2004 to 2006.31
Table 4.1 The Motivations for Taiwanese Enterprise Investments Overseas- in Left-to-Right Order of the Top 10 Main Investment Area
Unit: % China U.S.A. Hong
Kong Malaysia Vietnam Thailand Indonesia Philippine Japan Singapore Local market Application of Analytic Hierarchy Process (MA Thesis for International Affairs, Taipei: National ChengChi University, 2006), p. 183; MOEA, “2007 Small and Medium Enterprises Document: Small and Medium’s Enterprise Motivation of Investing Overseas,” 2007, p. 110,
http://www.moeasmea.gov.tw/public/Attachment/791213314771.pdf
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Source: Department of Statistics, MOEA, ROC., “Report on Foreign Investment Strategies of theManufacturing Industry in Taiwan Areas,” 2002.32
Table 4.2 shows how Taiwanese enterprises’ motivations have changed on investing in China. Comparing this investigative report and some other previous related reports, we find that the Taiwanese enterprises’ motivations for investing in China are similar to those of the earlier period. Some of their considerations are very similar. But vendors focus more and care more about the consideration “Local Market Has Larger Development Potential” than previously. In the earlier period, the vendors investing in China mostly belonged to labor-intensive manufacturing industries and used to the low cost of foreign labor to sustain Taiwanese export competitiveness. However, in the latest period, the Taiwanese enterprises focused more on opening the Chinese market, which is clearly related to the Chinese
34 Feng-Shou Liu, op. cit., p. 183; MOEA, op. cit., “2007 Small and Medium Enterprises Document: Small and Medium’s Enterprise Motivation of Investing Overseas,” p. 110,
http://www.moeasmea.gov.tw/public/Attachment/791213314771.pdf
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and maintain a good domestic business environment. Both are very important to promoting the domestic economy.
Because the Taiwanese domestic manufacturing environment has changed, global competition has changed, and customer requirements have changed, Taiwanese vendors have not been able to meet international brand companies’ product’s requirements, demand or cost-targets. Further, Taiwanese enterprises need to move closer to their international clients and invest overseas. Other reasons for Taiwanese enterprises to aggressively pursue internationalization are: to be closer to their international clients, acquisition of technological
“know how,” taking advantage of the low costs of local manufacturing labor, land and resources and to acquire new and expanded local leadership. From the facts and trends given above, we can conclude that Taiwanese enterprises are losing their strategic autonomy – developing potentially dangerous dependency on China that limits its flexibility and options in the future.35
Table 4.2 The Transform of Taiwanese Enterprise’s Motivation of Investing to China
Unit: %
Source: Manufacturing Industry Foreign Investment Status Investigation36
35 Jui-Chen Chang, op. cit., pp. 1-2.
36 MOEA, “The Transform of Taiwanese Enterprise’s Motivation of Investing to China,”
http://www.moeasmea.gov.tw/
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4.3 The Challenges of Taiwanese Enterprises that Invest Overseas
Market competition is the most difficult for Taiwanese enterprises that invest overseas and it accounts for difficulties for 58.91% of Taiwanese enterprises that invest overseas.37 Secondly, the cost of local labor is decreased which accounts for difficulties for 30.65% of the Taiwanese enterprises investing overseas.38 The third primary difficulties is rapid response to sudden funding requirements – cash flow - which accounts for difficulties in 28.25% of the Taiwanese enterprises investing in expansion overseas.39 The primary investment areas are, in large part, areas that have the difficulty of “Intense Market Competition” with countries such as those in Western Europe, Hong Kong and Malaysia. The percentage of Taiwanese companies investing and expanding abroad are as much as 70.7%.40
The challenge represented by “Decreased Cost of Local Labor” is the most intense in Malaysia and China and accounts for 30.3% of the enterprises involved. Over 80.5% of enterprise investors think that “The Unstable Local Economy and Political Situation” is the most challenging difficulty when investing in Indonesia. When investing in Vietnam, a common challenge for 30.8% of Taiwanese enterprise investors is “Intense (Local) Market Competition” and, of course, the “Difficulty of Communication and Language.”41
According to Ministry of Economic Affair’s (MOEA’s) research report, Taiwanese enterprises have been facing various issues when investing overseas as following six items.
1) With respect to manufacturing: the stocking cost of raw material (inventory) is too high and production efficiency must be improved.
2) With marketing: there are competitors in the same business locally and it is difficult to
37 Feng-Shou Liu, op. cit., p. 183.
38 Ibid.
39 Ibid.
40 Ibid.
41 Ibid.
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open the domestic market. There is a general lack of global or local marketing skills on the part of Taiwanese enterprises.
3) Human resources: it is not easy to train workers. There may be high turnover rates and labor costs keep rising.
4) Research and development R&D: product development and worker and organizational skill development are not simple or easy, and cost a lot of money and time. This leads to an environment where there may be a lot of fake products that take advantage of the enterprises’ research and development (R&D) efforts.
5) Financing: obtaining financing is not easy. Products exported from expanded production in China may not be easy to export profitably, making it difficult to repay loans.
6) The local investment environment: the local government does not have good governance efficiency, import/export customs processing is complicated, there is insufficient soft and hard infrastructure and the related investment rules are not transparent.42
4.4 Taiwan’s Opportunities and Challenges Arising from China’s Rapid Growth
The World Bank has pointed out that the Chinese economy’s growth has triggered many opportunities for the global development. China’s rapid growth has driven world economic and trade growth.43 From the New York Times: China’s vigorous development has led to large amounts of FDI, export and import demands are such that it has become Asia’s engines of economic growth.44 “For China, swift growth and structural change, while resolving many
42 MOEA, “The United Service Center of Taiwanese Investment Enterprise,” 2011, p. 8, http://twbusiness.nat.gov.tw/files/201110/1013/1013-1thppt1-1.pdf
43 Feng-Shou Liu, op. cit., p. 56; The World Bank, “China 2020: Development Challenges in the New Century (English),” 1997,
http://documents.worldbank.org/curated/en/1997/09/694610/china-2020-development-challenges-new-centu ry
44 Charng Kao, “Changes in China’s Economy and Global Trends on Trade and Economic Growth and Decline
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problems, have created new challenges: employment insecurity, growing inequality, stubborn poverty, mounting environmental pressures, and periods of macroeconomic instability stemming from incomplete reforms.”45
China’s rapid growth, has affected Taiwan in different ways. In politics, because Taiwan is located near to China, China has changed its policy towards Taiwan as one part of its changing geo-political strategy. China’s stance towards Taiwan has shifted from the threat of using military force to creating a situation of Taiwanese economic dependence on China.
Some say that China’s purpose is to slowly capture Taiwan in a peaceful, slow and quiet unification by absorption. Opening direct flights and charter flight, and the “four related projects, for instance, 1992 Consensus that is to implement the cross-strait peaceful development relations” boosts the cross-strait exchange and cooperation on politics and economic issues.46
On the economic side, the cross-strait mutual dependency has been expanding and both sides’ capabilities are complementary; mutual benefit and economic integration proceed apace. There are two different points-of-view by Taiwanese domestic scholars. One group of scholars advocates tighter regulation of the cross-strait economic relations. They think that the Chinese economic system is vastly larger than Taiwan’s, and that if the cross-strait economy and trade relations are too close, that would cause a “Magnet Effect” on Taiwan.
Taiwanese government should regulate Taiwanese investments in China to avoid Taiwanese economic dependency which would increasingly harm Taiwanese economic autonomy and further affect national security and overall domestic interests. They also consider it possible
Territory,” 2004, http://www.ndc.gov.tw/
45 The World Bank, “China 2020: Development Challenges in the New Century (English),” op. cit.,
http://documents.worldbank.org/curated/en/1997/09/694610/china-2020-development-challenges-new-centur
http://documents.worldbank.org/curated/en/1997/09/694610/china-2020-development-challenges-new-centur