Strait Dealing

Mr. Lo owns a shoemaking company. After the government began allowing citizens on Taiwan to visit their relatives on the mainland, he took the opportunity of a visit there to size up the investment climate and decided to set up a factory in the Shenchun economic zone.

Mr. Lo was in Taipei when he heard about the Tienanmen massacre. Heedless of his personal safety, he at once caught a plane to Shenchun to see how his factory was doing. The factory, he found, was operating as usual, and the people there didn't even know anything had happened. None of the Taiwan-run firms in the area was planning to pull out.

At the same time, multinational corporations like Coca Cola, Kentucky Fried Chicken, and IBM were fleeing Peking in droves. The Bank of Japan decided to freeze two loans to the mainland totalling US$145 million, and the World Bank was considering postponing a loan program of US$340 million.

With foreign firms recoiling in shock from the brutality they had witnessed, why were businesses from Taiwan taking things so in stride?

"The moves by foreign firms to withdraw investment and personnel from the mainland is just a pose," believes Y. Y. Chang, a special correspondent in Hong Kong for Taiwan's Business Weekly magazine. Business comes first and foremost. After the political situation on the mainland has settled down, those firms will naturally return to the fold, he thinks.

Andrew Tsuei, consultant to the Chinese National Federation of Industries, feels that the firms from Taiwan that have invested on the mainland differ by nature from their Japanese and American counterparts. Most belong to labor-intensive, tertiary industries such as footwear, leather goods, and textiles. Their capital investment is largely in equipment that is no longer efficient on Taiwan, so they run less risk than the Japanese and Americans, who have poured in huge sums of money in the hopes of developing the local market.

Mr. Lo says he would never have invested on the mainland if it weren't so hard making footwear on Taiwan now and the language barrier weren't such a problem in Southeast Asia. But he admits there are other advantages too.

The mainland has offered several kinds of incentives to foreign businesses in recent years to attract investment, the most enticing of which is low taxes. Foreign firms on the mainland generally pay a corporate tax of just 15 percent. And to encourage investment from Hong Kong, Macao, and Taiwan, authorities last July 6 decided that firms from those areas with more than ten years of experience can enjoy a 100 percent tax deduction during their first two years of operation on the mainland and a 50 percent deduction during years three to five.

In addition, owing to decentralization of power in recent years, various regions have been competing with each other in offering favorable terms to Taiwan investors to attract capital and develop their local economies. Favorable treatment includes priority distribution of water and power, help with recruiting, expediting paperwork, and the like.

Also, Andrew Tsuei points out, the mainland is much more adept at handling foreign exchange than it was in the past. "Changes in the investment environment, adjustments in trade policy, and break-throughs in ways of thinking are the most important reasons more and more firms from Taiwan have invested on the mainland in recent years," he concludes.

But following the Tienanmen massacre, many people now feel that political risks must be factored in as much as business risks by firms intending to invest on the mainland.

"You'd better peel your eyes first and stop, look, and listen," cautions Wu Tsai-i of the Taiwan Economic Research Institute. "How can you expect the economy to run right when people with guns are in charge?"

Casper Shih of the China Productivity Center predicts that mainland authorities will offer even more favorable incentives in the future to restore the confidence of investors, but he recommends that firms planning to do business there make sure they possess the necessary strength to adapt to contingencies first.

Since mainland China has no intention of shutting off external trade and the Mainland Affairs Council of the Executive Yuan has agreed in principle to allow indirect trade with it, business and trade relations between the two sides of the Taiwan Strait are bound to grow closer in the future. Setting up "rules of the game" for both sides to observe is indeed the task of the moment.

The National Federation of Industries is planning to set up a private organization called the Association for Economic and Trade Relations Between Both Sides of the Taiwan Strait. "And we hope to find an equivalent private organization on the mainland to serve as a communication channel for business and trade activities," Tsuei says.

The complex feelings of Taiwan businessmen thinking about investing on the mainland, with its ever-volatile political situation, are not hard to imagine. Not without practical norms and restrictions can stable growth in bilateral trade relations be maintained and ROC firms obtain clearer guarantees.

[Picture Caption]

(Right) Sufficient and cheap labor is one of the attractions the mainlan d holds for foreign investors. (photo by Hsiao Yao-hwa)

(Left) In small and medium-sized towns in the mainland, the illegal hiri ng of child labor is not uncommon. (photo by Ko Hsiao-tung of Commonwealth Magazine)

The appearance and prosperity of individual enterprise has certainly had its effect in bringing along free market exchange. (photo by Chou Kuo-wei)

In the mainland, many people complain that the rate at which incomes ris e cannot keep up with the rate of inflation. (photo by Hsiao Yao-hwa)

Imported products are now the synonym of fashion in the hearts of mainland Chinese. (photo by Chen Ping-hsun, Commonwealth magazine)

Tight supplies of goods is something you can see in the mainland anytime, anywhere. (photo by Chou Kuo-wei)

In recent years, because of a devolution of power from the center, local governments have contended with each other to offer the best conditions for investment. (photo by Chou Kuo-wei)

Left） In small and medium-sized towns in the mainland, the illegal hiri ng of child labor is not uncommon. （photo by Ko Hsiao-tung of Commonwealth Magazine）

The appearance and prosperity of individual enterprise has certainly had its effect in bringing along free market exchange. （photo by Chou Kuo-wei）

In the mainland, many people complain that the rate at which incomes ris e cannot keep up with the rate of inflation. （photo by Hsiao Yao-hwa）

Imported products are now the synonym of fashion in the hearts of mainland Chinese. （photo by Chen Ping-hsun, Commonwealth magazine）

Tight supplies of goods is something you can see in the mainland anytime, anywhere. （photo by Chou Kuo-wei）

In recent years, because of a devolution of power from the center, local governments have contended with each other to offer the best conditions for investment. （photo by Chou Kuo-wei）