Written by Lotta Danielsson.
Image credit: Taipei by othree/Flickr, license CC BY 2.0
The Taiwan economy fared well in 2020 and continues to do so into early 2021. This is primarily due to strong domestic demand, robust technology exports driven by the global shift to remote work, and a rebound in export orders for industrial goods. According to recent figures released by its national statistics bureau, Taiwan’s economic growth in 2020 was 2.98%, outperforming China’s same-year growth of 2.3% for the first time in 30 years. Taiwan’s exemplary handling of the coronavirus pandemic — leading the Lowy Institute to rank the island third in its recent global COVID Performance Index — has kept schools and offices open and factories up and running. With some exceptions, like in the hard-hit tourism sector, Taiwan has managed to resist the global economic malaise and to remain open for business.
The coronavirus pandemic has, of course, had significant effects on the global economy. However, it also appears to have hastened the pre-existing trend of companies re-evaluating their China investments and their reliance on China-based supply chains. This trend has been driven largely by the fact that the cost advantages of production in China have steadily eroded over the last decade, along with diminishing incentives offered to foreign firms. In addition, Chinese firms have become more competitive. China’s political and human rights environments have become constricting, and global customers’ concerns over insufficient intellectual property rights and trade secrets protections have deepened. The pressure to exit China has further increased since 2018 due to the intensified U.S.-China trade tensions, and more recently due to growing government constraints that limit partnering with some Chinese firms.
Along with Bangladesh, India, Indonesia, South Korea, Vietnam, and others, Taiwan has been a substantial beneficiary of this trend to diversify away from China. Taiwan government-backed investment incentives, introduced in 2019 and especially focused on bringing Taiwan companies back home, have also helped attract new investments. InvesTaiwan, which coordinates Taiwan government investment efforts, estimates that through early February 2021 those incentives have drawn NT$1.1922 trillion (US$42.5 billion) in committed investment projects, supporting almost 100,000 jobs on the island. Around 66% of that total is attributed to domestic businesses re-shoring back to Taiwan.
Taiwan continues to play an increasingly important role in the global technology supply chain. That is true not only in the flagship semiconductor sector — as showcased by the call for Taiwan companies to help alleviate recent supply constraints surrounding automotive chips — but also in industries such as flat panels, printed circuit boards, network communication equipment, servers, and other electronics and parts. It is not surprising then that most investment projects under the government incentive programs have come from the electronics and information technology sectors. Leading Taiwan tech companies like Acer, Asustek, Compal, Innolux, and Quanta have announced that they are shifting some investments away from China. Instead, they bring funding back home to build new factories and expand existing operations, thereby helping to drive overall positive capital spending trends in Taiwan.
U.S. technology firms have long had a presence on the island, and the U.S. is a large source of foreign direct investments into Taiwan. U.S. companies also increasingly see Taiwan as a strategic alternative to China – not only for potentially relocating their China operations but also in general as a favoured investment destination in the Indo-Pacific. Taiwan has positioned itself as an attractive target due to its stable political climate and supportive government, well-educated talent pool, sound legal environment, and strategically advantageous location. Its robust existing infrastructure and well-developed technology ecosystem add additional rationales for selecting Taiwan as an investment partner for technology firms.
Over the last several years, Taiwan has benefited greatly from these advantages. There has been an influx of leading U.S. tech companies announcing investments on the island — not just for hardware manufacturing but also for research and development, software development, and telecommunications. Announced investments read like a who’s who list of U.S. technology titans. Amazon Web Services established a Taiwan innovation centre, and IBM has announced substantial investments in a Taiwan R&D centre to explore developing cloud computing, artificial intelligence, and blockchain technologies. Microsoft is establishing a new Azure data centre in Taiwan, and an R&D centre focused on developing new technologies. Cisco Systems has also announced opening a software development centre in Taiwan, which will be first created in the region. Meanwhile, Google has stated its plans to build a third data centre in Taiwan to serve as an Asian data-transfer hub, and the company says that it will make Taiwan its primary hardware R&D hub outside the United States.
For Taiwan to continue attracting new investments like these, it should take further advantage of the unique opportunities that the escalating diversification trend away from China offers. Foreign firms trying to restructure their supply chains or make sound investments in the region are looking for assurance that investments in Taiwan will thrive. For Taiwan, that means making sure that potential investors’ concerns are addressed. Such concerns include questions regarding stable access to power and water, excessive or inconsistent regulations, a hard-to-navigate bureaucracy, and a lack of transparency and predictability in portions of the investment process. Taiwan will also want to address the underlying reasons behind its apparent reluctance to support new business models, such as for some platforms within the sharing economy.
According to the 2021 Business Climate Survey published by the American Chamber of Commerce in Taiwan, an unprecedented 86% of U.S. companies on the island have confidence in Taiwan’s continued economic growth over the next 12 months. The AmCham Taiwan survey also showed that most surveyed executives say that signing a Bilateral Trade Agreement (BTA) between the U.S. and Taiwan would be important for their businesses. Preparing for a potential high-standards trade agreement with the U.S. could offer Taiwan an avenue towards making additional regulatory reforms – both on trade and on investment issues. Continuing to loosen regulations while streamlining the government bureaucracy could attract additional investments to Taiwan – not only in technology but also in financial services, healthcare and biotech, and renewable energy.
Taiwan has given itself a head start due to its hard work containing the pandemic. It is now up to the Taiwan government to keep the momentum going and capitalise on that advantage to build the island into an even more attractive investment destination.
Lotta Danielsson is the Vice President of the US-Taiwan Business Council.
This article was published as part of a special issue on Post-Covid Economy.