Written by Jan Knoerich.
When looking at overseas investment in Taiwan, one might expect direct investments from mainland China to play an important role. Not only is Mainland China located very close to Taiwan, the cultural, institutional and linguistic similarities between the two should easily facilitate mutual business exchanges.
Just as Taiwanese firms have, since the 1980s, successfully taken advantage of this geographic, cultural and ethnic proximity by investing intensively in mainland China, why shouldn’t similar advantages play out in the other direction? Mainland Chinese multinationals have, after all, rapidly expanded their global investments, elevating mainland China to the second largest source of foreign direct investment (FDI) flows in the world in 2016. Chinese outward FDI has even surpassed the inward FDI into Mainland China. Given its proximity to mainland China, its leading high-tech industries, its high GDP per capita of almost US$ 50,000 and a market of 23 million consumers, we would expect Taiwan to receive an impressive share of mainland Chinese direct investment.
The reality, however, is rather different. Although Taiwan had received some investment from mainland China even before the thawing of Cross-Strait relations under Ma Ying-Jeau in 2009, and direct investments from the mainland were officially welcomed with the conclusion of the Economic Cooperation Framework Agreement (ECFA) in 2010 and a Cross-Strait Bilateral Investment Agreement in 2012, investment from mainland Chinese companies into Taiwan has remained modest.
Over the period of 8 years (July 2009 to August 2017), the Taiwanese authorities approved just 1041 mainland Chinese investments, amounting to an overall capital investment of US$ 1.86 billion. This is a strikingly low figure. For comparison, mainland Chinese firms undertook 6,236 investments worth US$S 120 billion globally in 2017 alone, and in the short 8-month period from January to August 2017, Taiwan approved US$ 4.87 billion worth of FDI projects.
One might be inclined to blame this low recorded mainland investment into Taiwan on anomalies in available public records. Mainland Chinese money has often passed through Hong Kong or tax havens before it reaches Taiwan – a detour that was necessary prior to the thawing of Cross-Strait relations under the Ma administration. But since the legalisation of direct investment links between mainland China and Taiwan after 2009, this need to trans-ship investments via offshore financial centres has been dramatically reduced. Inaccurate record-keeping and statistical anomalies can therefore not be the only explanation for the modest levels of mainland investments in Taiwan. Instead, various business and political economy considerations offer more viable explanations why Taiwan is not a particularly attractive investment location for companies from the mainland.
Some mainland Chinese firms have shunned investments in Taiwan because of a lack of a business case. Despite its estimated GDP of more than US$ 570 billion in 2017, Taiwan is a smaller and more isolated market compared to regions like North America or the European Union.
Taiwan’s proximity to mainland China means its market can be quite feasibly served from the mainland, reducing the need for a local presence. Labour costs in Taiwan are higher than on the mainland, elevating the costs of a local presence or production on the island. Taiwan does not offer the geography for large-scale exploitation of natural resources or the construction of infrastructure, which have been dominating the global activities of mainland Chinese multinationals. And while Taiwan has a wide range of high technologies that mainland Chinese firms could tap into through their investments on the island, world leading technology centres are located elsewhere in places like the United States, the European Union or Japan. High-quality Taiwanese human capital is itself moving increasingly to mainland China.
Beyond the potential lack of a solid business case, the politically loaded context of Cross-Strait relations is complicating the entry of mainland Chinese firms into Taiwan.
Although the Taiwanese government opened almost all manufacturing sectors and more than 50% percent of services and public construction sectors to mainland investors not long after the conclusion of the ECFA, it kept stringent regulations on operational issues, such as the degree of ownership and managerial control over subsidiaries in Taiwan. Investment-related migration from the mainland to Taiwan has also remained highly restricted. Such restrictions have particularly affected high-technology, sensitive sectors, and acquisitions. Investment screening and approval procedures were put in place, enabling the Taiwanese government to prevent undesired investments. For example, three planned investments by Tsinghua Unigroup have fallen through in recent years.
Many of these restrictions do not apply to FDI entering Taiwan from other parts of the world and are thus discriminatory in nature. They are nevertheless in conformity with the clauses of the Cross-Strait bilateral investment agreement, which were deliberately formulated to allow flexibility and accommodate exceptions. The regulatory restrictions reflect uncertainties in Taiwan about whether mainland investments are primarily an opportunity or might constitute a danger to the island. Mainland Chinese companies are often state-owned with close links to government, and tend to fall in line with mainland China’s overall industrial policy and development priorities.
There are concerns that mainland direct investments could constitute a security threat to Taiwan, that technology-seeking investments from mainland China could erode Taiwan’s technological lead in semiconductors and other strategic sectors and that large-scale investment might make Taiwan more dependent on the mainland. Similar concerns about Chinese investments exist elsewhere, but they are particularly acute in Taiwan, due to the unique political sensitivities in its relationship with the mainland. The resulting policy uncertainties, risks and outright rejections have prevented mainland firms from investing more decisively in Taiwan.
Although the business case for mainland companies to invest in Taiwan may not be particularly strong, there would likely be more investment activity from mainland Chinese firms if the political realities of the Cross-Strait relationship and the resulting regulatory restrictions were less problematic. Judging from recent political trends, the difficult situation facing mainland Chinese firms seeking to invest in Taiwan is unlikely to change soon.
In 2014, the Sunflower Movement and occupation of the Legislative Yuan prevented further liberalisation with China in services sectors, and in 2016, the election of Tsai Ing-wen from the Democratic Progressive Party to the Presidency brought someone to office who takes a reserved stance on Cross-Strait rapprochement. Taiwan will therefore continue to be left out as an investment location for mainland Chinese companies.
Jan Knoerich (@janknoerich) is Lecturer in the Economy of China at the Lau China Institute and Department of International Development, School of Global Affairs, King’s College London. Image credit: CC by Sese_87/Flickr.
Would Taiwan gain if Chinese entities (companies, investment trusts, private investors) placed more investments there? Let’s look at different aspects of this question.
What would Taiwan gain if Chinese entities gobbled up existing assets in Taiwan, not interested in developing them, just for speculative profit making or parking capital in a save haven? Just look at the consequences such a development has had in Hong Kong. Obviously, there is nothing to be gained for Taiwan. Taiwan has plenty of available capital and reserves itself. It does not need capital inflow.
Are there promising investment opportunities in Taiwan that Taiwanese deem too risky to invest in but Chinese, being less risk averse and more entrepreneurial, would like to exploit? I doubt that any of this is true considering the proven economic agility of the Taiwanese.
Would valuable and new know-how accompany Chinese investment, such resulting in a know-how transfer from China to Taiwan? I doubt that much of such know-how exists yet, but it is likely that it will some time in the future.
So, without even considering that China poses a self-proclaimed threat to Taiwanese independence and to Taiwanese liberties, currently I cannot see any advantage to Taiwan seeking investment originating in China. There is nothing to indicate that Taiwan would have to worry about being “left out as an investment location for mainland Chinese companies”. There simply is next to nothing to be gained from more Chinese investment in Taiwan.