"Foreign investment willingness has been continually declining."
"Factories are getting out, and there is a deindustrialization crisis!"
In the past two years, headlines such as these have been continuously appearing in local newspapers and magazines. Not only have the "weak and brittle" small and medium enterprises been moving in droves to mainland China and Southeast Asia, even the rock-solid transnational corporations are letting out the word that their capital will go elsewhere because of environmental disputes, or the rising costs of land and labor.
Take for example the Japanese Matsushita Electronics, which has quite a bit of influence in the Taiwan electronics industry. "Thirty years ago, when Matsushita first came to Taiwan to set up a factory, Taiwan was its number one overseas base of production," says Shinozuka Akio from the Matsushita building in Osaka. "But now Malaysia and Singapore have already caught up, and Taiwan has fallen to number three."
Matsushita is no exception, as a succession of statistics reveals.
Red light for investment? In 1989, a record breaking amount of Overseas Chinese and foreign investment flooded into Taiwan--US$2.418 billion. But since then the graph line has gone straight down. Totalling up the first quarter of this year there was only US$214 million, a drop of 64% from the same period last year!
Of course, Taiwan is awash in cash, and doesn't really need the embellishment of foreign capital, but with foreign investors all wanting to shift to other fronts, is it possible that Taiwan's investment climate is going to the dogs?
In this atmosphere of wariness, there are some hopeful signs. According to the well-known US risk assessment corporation BERI in a report issued at the end of last year, among the 50 major countries in the world Taiwan's investment climate is the fourth best, behind only Switzerland, Japan and Singapore. Moreover, this superiority can be maintained at least until 1997.
Other upbeat news which corroborates this report is also frequent. For example, last June Philips of Holland, besides placing the technology center for its four main products--lighting, semiconductors, electronics and electronic parts, and video communications--in Taiwan, also announced that it would set up its "Asia Pacific Lighting Technology Support and Production Center" in Taiwan. Not only will this center produce the same level of equipment as the European center, it also has the tasks of research and development and of assisting other countries in the Asia Pacific region.
Further, the well-known British corporation ICI is investing US$300 million in the construction of a 350,000 ton capacity PTA (a type of fiber) factory in the Kuanyin Industrial Park. Work will be completed this June. "This is one of the finest PTA factories in the world," says John Chandler, managing director of ICI Taiwan Limited, proudly, in perfect Mandarin. And last year, the US firm Hughes invested US$150 million to set up a branch in Taiwan....
Searching for a new place for Taiwan: Such seemingly contradictory numbers can't help but make one confused. Is our importance in the eyes of foreign businesses on the rise or falling? Where will Taiwan's place be in the Asia-Pacific region, where new economic forces are continually arising?
Chen Ming-bang, executive secretary of the Investment Commission of the Ministry of Economic Affairs, which is responsible for vetting foreign investment, first explains the dramatic drop in foreign investment over the past three years. First, from a global perspective, in the last three years the world economy has been in bad shape. Taking the three wealthiest countries--Japan, the US and Germany-- since Japan and the US are facing economic problems, and Germany is saddled with the new burden of paying for the former East Germany, it's not strange that the large corporations in these countries would be pulling capital back from overseas. The R.O.C. on Taiwan is not the only country to have suffered a sharp decline.
Kuo Wen-jeng, a research fellow in the International Division of the Chunghwa Institute for Economic Research, also notes that because of the integration of the two great regional economies--the North American Free Trade Area (Canada, the US and Mexico) and the European Unified Market--there is definitely some "distorting effect" on international capital flows. For example, many corporations are rushing to invest in Mexico or Spain to get in before the erection of trade barriers.
Further, in contrast to the intense effort to attract foreign investment among the Southeast Asian nations at present, Taiwan's "Investment Incentive Provisions"--which were of great benefit in attracting foreign and overseas Chinese investment through tax breaks in their 30 years of implementation--fulfilled their mission and retired gracefully in 1990. "Many foreign businesses wanted to catch 'the last train' and all its incentives, so they rushed to get their investment applications in by 1989 and 1990. Naturally this indirectly created a sharp fall last year and this year," concludes Chen Ming-bang.
These factors can perhaps partially explain the dramatic fall in foreign investment, "but it's undeniable that the cheap labor and land and the export processing zone type investment environment that we offered in the past have gone, never to return," states Wen C. Ko, formerly of Hewlett Packard Taiwan and now chairman of the WK Technology Fund. "It's already time for us to reassess our strategy for attracting foreign investment."
An "ROC" foreign businesses will never forget! In May and June of this year, Minister of Economic Affairs Vincent Siew first put forth the "Regional Operation Center" plan, which looks to make Taiwan into the center of operations for major international corporations, and which also makes Taiwan into a "diversified profits center" for international corporations. The contents of the plan are very broad, including making Taiwan an Asia-Pacific R&D center; a high technology products manufacturing center; a development, testing and maintenance center for new products; a personnel training center; a strategic alliance center; a materials purchasing center; and even a financial center, a transportation and distribution center, and so on.... (please see the attached table).
"Don't just look at all those different names. That makes it too complicated. In fact, they are mutually interrelated," points out S.J. Lee, administrative vice minister of Economic Affairs, who has just come back from leading personnel from the Industrial Technology Research Institute, the Information Industry Promotion Commission, the Environmental Protection Administration and the Ministry of Communications to the United States to promote "Plan ROC."
Of course, if you want to become the "regional center" for the Asia Pacific region--which will be the area of the fastest economic growth in the world over the next ten years-- it's not something that can just be wished into existence. The main thing is to see where foreign corporations "place" Taiwan in their global development strategies. In fact, after the dramatic changes of the last three years, not only Taiwan, but everyone in the world is feverishly searching to find their niche. In this game of musical chairs, what advantageous conditions do we have, and how good is the place we can achieve?
Production, talent and capital: "Taiwan has more than a few good points, which rely on the foundations built up over the past thirty years," notes Wen C. Ko.
In terms of production, there is every type from heavy industry to light consumer industries. Among 20 million people and 4 million households, there are 400,000 registered companies, and more than 60O,000 businesses. "Taiwan's high level of industrialization and entrepreneurial atmosphere are proof of the continued vitality of the manufacturing environment," states Chen Ming-bang.
In terms of people, Taiwan is rich in middle-level technicians and specialized management and operations talent. You could say that superior human resources, plus the experience accumulated over a long period of export led growth, make up the greatest asset for Taiwan. On another front, "In the past few years, you have had more than 10% of the population go abroad to travel or to study, much higher even than Japan's 8%," says Matsushita's Shinozuka Akio. "Thus the degree of understanding Taiwan people have of foreign information and the degree of sensitivity to foreign fads and new products are extremely high."
Besides a manufacturing base and talented people, one of our advantages is "lots and lots of money." "Taiwan is capital-deep, and for many strategic high-tech industries, it's a great incentive for foreign corporations if the government provides some development funding," notes Kuo Wen-jeng. Examples are the connection between the establishment of Philips Taiwan integrated circuit company and the Executive Yuan Development Fund, and the variety of investment and financial cases currently being sponsored by the Bank of Communications.
"Lots and lots of money" is also reflected in market potential. In fact, not only has the consumption potential of the average citizen gone up greatly, Taiwan is one of the major buyers of some industrial raw materials. "In terms of PTA, one of the major reasons why ICI chose to build their factory in Taiwan is that Taiwan is the world's second largest market, behind only the US, and market demand was our first consideration," says John Chandler.
As the above advantages all draw on the economic foundation built up over the past thirty years, where will future opportunities be?
Taiwan can become a "hub": "After the entry of mainland China into the world economy, Taiwan's geographic location will be its greatest advantage in future regional competition," says Huang Ho-ming, president of Hewlett Packard Taiwan.
Huang explains using the "hub effect." In its relatively early period of economic development, Taiwan was a base for Japanese expansion into Southeast Asia, and this historical role can be traced back to World War Ⅱ. Of course, Japan occupied Taiwan for 50 years, and left behind a great deal of productive and interpersonal ties; also the complex ties between Taiwan and overseas Chinese in Southeast Asia were something that Japan needed in going to invest in Southeast Asia at that time. "With Taiwan businesses participating and serving as guides, on the one hand they could take some of the risk off Japanese companies, and on the other, with the Japanese in the background, reduce anti-Japanese sentiments among the local people," points out Huang.
This longitudinal "Japan--Taiwan-- Southeast Asia" axis has helped many Japanese companies to get a foothold in Southeast Asia. However, at present, because Taiwan investment in Southeast Asia is booming and has become a competitor to the Japanese, and the fact that Japan now has set down roots in Southeast Asia, the spokes in this "hub" are already obscured.
What is taken away by the right hand is returned by the left. The timely opening of mainland China brought Taiwan into another, latitudinal axis: US/Europe--Taiwan--Southeast China."American companies have been our closest partners over the past 40 years. Taiwan companies have a great deal of cooperative experience doing business with American firms, the business ideals of the two are compatible, and there are so many people in Taiwan who have studied in the States and are fluent in English that US companies can employ," notes Huang Ho-ming. The general manager and vice general manager of Hewlett Packard's mainland China branch are both Taiwanese, with a mutually accessible language and culture. They are the best choice of all the people HP has tried, including Americans and overseas Chinese from Hongkong or Singapore.
Also a technology transfer station: "Naturally, many European and American companies who have been in the Asia-Pacific region for thirty or forty years, like HP, won't use this path, because they long found a niche much nearer to mainland China, in Hongkong," says Huang. But for those European, American and even Japanese companies just arriving, who hope to get a sip of the cup from this rapidly growing region, their reliance on this axis will be somewhat deeper. For example, three years ago the US company Microsoft set up a subsidiary in Taiwan, and the US company Hughes also set up a subsidiary last year, and they have both gone from Taiwan to advance into the mainland market.
It's worth noting, moreover, that this "US/Europe--Taiwan--mainland China" path is not a one-way street. Besides serving as an ordinary trade and investment "transshipment station," "we can also play the role of 'technology transfer station,'" notes Huang. For example, the mainland has many technological achievements, but mainland enterprises generally lack concepts of commercialization and marketing. We can take mainland Chinese technology, and after commercializing it sell it to the US and Europe. This is a path that is definitely worth trying.
"Whether talking about the early period in Southeast Asia or the new era in the mainland," points out S.J. Lee, "our pivotal position in the 'rice-eating cultures,' that is to say the Asia Pacific region, is one of the main things to which the Ministry of Economic Affairs' Plan ROC appeals."
Taking new functions slowly: In fact, using Taiwan's pivotal position among 'rice-eating cultures' is not an idea that originates with the MOEA. "Many foreign companies have been quietly evaluating and even moving forward on this idea," says Wen C. Ko, who after hearing of Plan ROC stepped forward voluntarily to help the MOEA explore the reactions of foreign businesses. This is especially true if you reduce the scope to the dynamic interrelationship among just the "two sides and three places" (mainland China, Hongkong and Taiwan, on the two sides of the Taiwan Strait), which early on entered the strategic considerations of foreign firms.
Taking Hewlett Packard, which has long had its Asia-Pacific headquarters in Hongkong, for instance, it has already done preliminary mapping of its strategy for a division of labor among the "two sides and three places": to use Hongkong's free trade environment and world-class financial services to do sales and financial work; to use Taiwan's superior technical and management personnel to develop computers and all types of technological software, and moreover to enter into various cooperative relationships with Taiwan's own manufacturers, on the one hand to exchange technology and on the other to go through them to get into the Taiwan market; and to use the cheap land and labor in mainland China as the main location for manufacturing hardware.
John Chandler points out that for ICI, which has its headquarters for the Asia-Pacific region in Singapore, Taiwan's position will be "increasingly important. This is because we feel that in the future Taiwan will make major contributions to the mainland and will have a great impact. If we don't get on board now, how will we get into the mainland in the future?" he adds.
Of course, notes Wen C. Ko, our conditions are not quite ripe, and one can't expect foreign corporations to move their headquarters here in one fell swoop. But "it's possible that they can move in one function at a time, gradually increasing Taiwan's importance." For example, Philips is establishing a technology support center in Taiwan, and the US company Digital is setting up its UNIX system support center. Although at present these are but scattered examples, it's a good start.
The time is right, but are preparations inadequate? With this new opportunity available, is Taiwan ready to grab it and go all out to accommodate it? This is a separate question.
"It is generally said that Taiwan's investment climate is deteriorating.For example, there is a labor shortage, rising environmental consciousness, increasing land prices, the appreciation of the NT dollar, and so forth. In fact, these are all natural signposts of economic development, and one needn't be overly worried," says Kuo Wen-jeng. Foreign corporations adapt to their environments, and naturally their investment items here will be upgraded to more capital intensive, technology intensive and even brainpower intensive higher value-added types. Taiwan can in this way place itself on a different level from Southeast Asia or mainland China. Looking at foreign investment items over the last three years, chemical industries-- which easily give rise to environmental disputes --fell from number one to number three, while investment in trade and electronics increased, reflecting the choices of foreign businesses.
But aside from productive technology, in order to bring together the service-oriented functions needed for a regional center, there are many places Taiwan needs to improve.
In order to be the regional operations center for transnational businesses, "at the minimum you have to be able to move four things quickly and conveniently--people, money, goods and information," says Y.C. Lo, president and CEO of Philips Taiwan succinctly. In all four of these areas, we are hardpressed to compete with Hongkong and Singapore.
Service at the top, speed and convenience above all: "Taiwan is one of the most strict places for visas and has one of the most complex entry and exit procedures in the world!" says John Chandler, who has been in Taiwan for five years, complaining that "every three months you have to reapply, every six months you have to apply for an exit permit, and if you forget anything then it's a big hassle ...."
Wen C. Ko points out that if you want to become a regional operations center, then inevitably that means holding regional and international conferences. But don't even mention the fact that people from mainland China can't come, there are even a lot of limits on people coming from Hongkong. "The business community of course understands the political considerations, but economic competition is very hardheaded--the more open you are, the more people will come; the more limits you set up, maybe other people won't be able to get in but you're the one who'll end up losing," adds Huang Ho-ming.
As for money and goods, local banking services are conservative and there are many limits in the local capital market. Add to this that customs reporting and port clearance are not fast enough, and this greatly reduces the possibility that Taiwan could become either a "financial center" or a "storage, transport and distribution center." "This is really a shame. Taking Singapore, for example, many companies first take the things they manufacture and purchase in Southeast Asia to there, get everything organized and separated out, and then transship them on to their destinations," says Kuo Wen-jeng. Given Taiwan's even better geographic location, in fact Taiwan could get a piece of the action in this service.
Information flow runs up against the problem of crowding on Taiwan's communications network. Y.C. Lo notes that every day by 3:00 or 4:00 in the afternoon during the "rush period," international long distance telephone and fax lines are often "occupied," and it is necessary to wait to connect a call, which can often be done only after two or three hours. "In this age of fighting over minutes, to only be able to get your information out of the country after two or three hours means that it might already be old news, and even affect decisionmaking efficiency," he suggests.
Faster, faster: Putting all these things together, is becoming a regional operations center just a distant dream? Not necessarily. "A lot of knots can be undone with just one word," says Wen C. Ko. For example, as of July 1, participants in certain scholarly conferences can get visas after arriving in Taiwan, and regulations governing visits to Taiwan by mainland Chinese are also being liberalized. Giving up conservative mindsets and simplifying various regulations is an urgent and practicable task. Increased urgency in all types of infrastructure planning and construction is also essential.
Most importantly, people who have been in touch with the idea of the "regional center" all believe that this is a correct, and indeed unavoidable direction for Taiwan's future. "Faster, faster!" is their common refrain. Sensing this, at the end of May Vice Minister of Economic Affairs S.J. Lee went to the States to meet with 19 major corporations, and, together with the Industrial Technology Research Institute and the Information Industry Promotion Commission, signed memorandums for future cooperation with the four major companies of Hewlett Packard, IBM, AT&T and Digital. In the middle of June, twelve seminars on the investment climate, chaired by Minister of Economic Affairs Vincent Siew, began, with local and foreign firms raising suggestions about how to remove various obstacles to the investment climate.
In this age of regional economies, when everyone is trying to find their niche in their region and seize opportunities, if you wait two or three years and let the tide of events place you last and then expect to be able to get the best seat in the house, unfortunately you will be too late. Taiwan has a clear goal, so now is the time to act.
[Picture Caption]
With the help of foreign corporations, the R.O.C. hopes to make Taiwan a corporate "ROC"--regional operations center. This dream is already being realized. (photo by Cheng Yuan-ching)
With labor intensive industries moving offshore, Taiwan's economy faces a turning point. The photo is of a Taiwan factory in Indonesia (photo by Huang Li-li)
Speedy movement of goods is one of the keys to being a "regional operations center." Taiwan still needs to improve in this area. The photo shows the container pier at Keelung Harbor. (photo by Cheng Yuan-ching)
The success of Plan ROC also depends on the efficiency of financial services. Will new banks bring a new energy? (photo by Diago Chiu)
Exchanges between the two sides of the Taiwan Strait are increasingly open, a humanitarian development also looked at favorably by business. The photo shows leading scientists from mainland China visiting Taiwan. (photo by Yang Hui-wen)
Speeding completion of infrastructure is the only way to ensure the success of ambitious development plans. (photo by Yu Pi-juo)
With the help of foreign corporations, the R.O.C. hopes to make Taiwan a corporate "ROC"--regional operations center. This dream is already being realized. （photo by Cheng Yuan-ching）
With labor intensive industries moving offshore, Taiwan's economy faces a turning point. The photo is of a Taiwan factory in Indonesia （photo by Huang Li-li）
Speedy movement of goods is one of the keys to being a "regional operations center." Taiwan still needs to improve in this area. The photo shows the container pier at Keelung Harbor. （photo by Cheng Yuan-ching）
