The Repositioning of Taiwan in the Global Supply Chain Network

Written by Min-Hua Chiang.

Image credit: Taipei by Steffen Flor/Flickr, license CC BY-SA 2.0

Several events across the world recently have raised concerns for global business leaders. China’s economic slowing down as a result of the wage hike and economic restructuring, have shelved the global economic growth prospect. Its role as the world factory is further challenged by the US trade retaliation against Chinese exports. Hong Kong’s unique position as the regional financial centre is under threat in view of the ongoing protests against the Hong Kong government. Misfortunes never come alone. The global economy is overshadowed, furthermore, after the outbreak and quick spread of Coronavirus from China to several other countries. Being one of the key players in the global supply chain network, Taiwan is a focal point in the global business reshuffle. Will Taiwan be able to turn the new global challenges into opportunities? Will it be able to maintain its relevance in the global supply chain network?

The Sharp Decline of Taiwan’s Investment in China

The relocation of Taiwanese outward direct investment (ODI) away from China is a clear sign of the shifting global business landscape. The cross-strait division of labour in manufacturing production has started to fade after China’s wage hike, industrial upgrading as well as stricter rules on the environment and labour protection. Taiwan’s ODI in China has declined visibly after 2012 (Figure 1). The US-China trade war since 2018 has accelerated this investment shift away from China. Total investment in China was US$4.2 billion in 2019, the lowest since 2002. China’s importance in Taiwan’s total ODI also shrank to 37% in 2019, from a peak of 84% in 2010, though the country still remained Taiwan’s main ODI destination.

Figure 1 Taiwan’s Investment in China 1999-2019

pic 1
Source: Investment Commission, Ministry of Economic Affairs (Taiwan)

Taiwan and Vietnam as Alternative Investment Destinations

There are two alternative investment channels after Taiwanese firms withdrew their capital from China. The first is developing countries in Southeast Asia, in particular, Vietnam. According to the statistics from Taiwan’s Investment Commission, Taiwan’s accumulated investment in Vietnam during the 2014-2019 period amounted to US$4.8 billion. In comparison, the figures from Vietnam’s side is ten times larger (US$47.3 billion). This gap could be attributed to a large portion of Taiwan’s investment in Vietnam being made through Taiwanese firms’ holding companies in a third country that was not in Taiwan’s official records.

The second is the investment repatriation to Taiwan. In 2019, the total recorded investment inflow made by Taiwanese firms amounted to NT$840 billion (nearly US$28 billion), with the majority coming from China-based Taiwanese firms. The growing US-China rivalry made China no longer an ideal export platform for Taiwanese firms. Taiwan government’s policy to encourage overseas Taiwanese firms to invest at home succeeds as it fits with the current US policy against China-made products. The investment repatriation also helped to rejuvenate local manufacturing industries and to offset the negative impact of declining exports to China.

Developing Inward Foreign Direct Investment to Taiwan

When Taiwanese firms were actively investing in China in the 1990s and 2000s, the inward foreign direct investment (FDI) became trivial. In recent years, however, the inward FDI has increased more than double, compared to a decade ago (Figure 2). A large portion of FDI came from the British Overseas Territories in the Caribbean. Domestic Taiwanese companies could be ‘round-tripping’ through subsidiaries in these territories to take advantage of incentives aimed at attracting foreign investors. The Netherlands is another important source of inward FDI. Dutch companies mainly target semiconductor and chemical industries as sources for producing semiconductors. Apart from Dutch firms, some investments are made by foreign firms registered in the Netherlands.

Figure 2 Taiwan’s Inward FDI by Main Sources 1999-2019

pic 2
Source: Investment Commission, Ministry of Economic Affairs (Taiwan)

Despite the growing inward FDI, Taiwan’s FDI amounts are still lagging behind most other economies in the region. According to the World Investment Report 2019, Taiwan’s FDI inflow during 2013-2018 period was US$ 28 billion, less than Singapore’s US$417 billion, South Korea’s US$70 billion, Malaysia’s US$61 billion and Thailand’s US$ 45 billion. The only East Asian countries with less FDI were Mongolia and North Korea, while of the Southeast Asian countries only Brunei, Cambodia, Laos and Myanmar failed to exceed Taiwan.

Future Prospects

The new development of global investment flow will be key to define Taiwan’s role in the global supply chain network. The strong industrial linkage across the strait may be waning due to the US concerns about leaking high technology information to China. The quick spread of coronavirus in China is likely to drive more FDI, including Taiwanese investment, away from the country. Unlike China, Taiwan could become an important investment destination for high-end manufacturing production and R&D in software technology. Here are the reasons.

First, Taiwan’s manufacturing strength in the semiconductor industry is attractive for global investors. Taiwan Semiconductor Manufacturing Corporation (TSMC) is the world’s largest contract chipmaker and owns more than 50% of the world’s pure wafer foundry business. In addition, both US’ and China’s high-tech firms (e.g. Apple and Huawei) rely on chips made by TSMC.

Second, Taiwan’s relatively less expensive engineers and better protection for Intellectual Property Right (IPR) are attractive factors for foreign investments. Several US high-tech companies such as Google, Microsoft, Facebook, Microsoft, Intel, Micro Technology and so on have announced plans to boost investment in Taiwan.

Third, amid the growing US-China rivalry, the US government has been actively supportive of American firms’ investment in Taiwan. In October 2019, three US ministries sent a joint letter to urge the top 500 American firms to boost their investment in Taiwan. The election of Democratic Progressive Party (DPP) in January 2020 is likely to allow Taiwan to have continuous support from the US for investment.

However, Taiwan’s limited involvement in various Free trade agreements (FTAs) makes itself less attractive than its regional peers in attracting FDI. Without having extensive free trade and investment facilitation measures with many countries, corporate leaders may find it disadvantageous doing business in Taiwan.

In addition, Taiwan will have to continue to improve its regulatory business environment. According to the World Bank, “getting credit” in Taiwan was ranked the lowest (104) among the 190 countries surveyed in 2020. The low ranking in “getting credit” indicates Taiwan’s weaker credit reporting systems and the ineffectiveness of its collateral and bankruptcy laws in facilitating lending.

Taiwan’s limited land and human resources will restrain its capacity to accommodate substantial inward investments. The government estimated a shortage of skilled-labour of 83,000 workers in 2030 following the development of artificial intelligence (AI). The greater facilitation of foreign workers’ mobility will help Taiwan to attract foreign firms to set up business operation on the island.

Finally, despite Taiwan’s declining investment in China, the breakaway of cross-strait production relations will be very costly. Almost 90% of Taiwan’s Information and communication technology (ICT) products, purchased by overseas clients, were made in China in 2017. 40% of Taiwan’s exports still went to China in 2019. Although the growing inward investment is expected to offer Taiwan a new opportunity to upgrade its economy, restructuring the external investment and trade relations, which Taiwan’s economy has relied on for nearly three decades, could have negative repercussion in the near term.

Min-Hua Chiang is research fellow at the East Asian Institute, National University of Singapore.

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