Written by Lin, Thung-Hong.
Image credit: Supply Chain by Matthias Weinberger/ Flickr, license: CC BY-NC-ND 2.0.
The Changing Role of Taiwanese Firms in the Global Economy
Over the past three decades, the role of Taiwanese firms in the global supply chain has undergone a profound transformation. Once known for their flexible production models as small and medium-sized enterprises (SMEs), many of these firms have recently grown into global technology giants, such as Foxconn and TSMC. This shift challenges traditional academic perspectives on Taiwan’s economic model, particularly the explanatory power of the flexible production theory. While this production expansion has led to unprecedented revenue growth, it has simultaneously exposed new dilemmas. In an era of intensifying global competition and geopolitical tensions, Taiwanese firms face an inescapable triple-balancing challenge: they must simultaneously scale their operations, upgrade their technological capabilities, and secure their long-term survival in an increasingly volatile global landscape.
My research with Bowei Hu, “Subcontractors’ Dilemma: the Expansion of Taiwanese Firms 2002–2015,” recognised by the 2023 IJTS Open Access Award, examined how Taiwanese firms expanded in response to global supply chain competition between 2002 and 2015. A forthcoming study, co-authored with Chun-Yin Lee, further explores how China’s autocratisation under Xi Jinping has affected the performance of Taiwanese firms in China until 2022. Taken together, these two studies provide a comprehensive perspective on the challenges Taiwanese businesses face at the intersection of globalisation and shifting geopolitics, offering crucial insights into corporate strategy and government policy.
The Growth Drivers and Dilemmas of Taiwanese Firms
Over the past two decades, Taiwanese businesses have grown significantly in both scale and influence, with some becoming key suppliers in the global electronics industry. However, this expansion has not primarily resulted from technological advancement or market leadership but rather from the relentless pressures of global supply chain competition. International brand-name firms, such as Apple, have continually pushed Taiwanese manufacturers to reduce costs and increase production capacity.
In response to the external pressure, Taiwanese firms have primarily pursued three strategies: horizontal integration, vertical integration, and technological specialisation. The first approach has been horizontal integration, in which firms expand production capacity to reduce unit costs and suppress potential competitors. Foxconn’s large-scale employment of millions of workers in China, making it the world’s largest electronics contract manufacturer, exemplifies this model. Nonetheless, this strategy has led to extremely low profit margins, effectively trapping these firms at the lower end of the global value chain. The second approach has been vertical integration, where firms attempt to gain greater control over their supply chains to improve profitability. The Korean competitor Samsung, in contrast to Taiwanese firms, has successfully adopted this strategy by manufacturing key components in-house, thus securing a stronger market position. Nevertheless, due to limited government support, most Taiwanese firms have struggled to implement similar strategies, with only a few exceptions, such as TSMC, which benefited from state-backed investment and technological development. The third strategy has been technological specialisation, in which firms invest heavily in research and development to gain a competitive edge in critical technologies. TSMC’s leadership in semiconductor manufacturing demonstrates the success of this approach, but the substantial capital investment and long-term commitment required to make it viable only for a select few firms.
Using financial data from Taiwan’s top 5,000 manufacturing firms (2002–2015), our study found that the majority of firms opted for the first strategy—expanding production in China to maintain competitiveness. However, this short-term survival strategy resulted in declining profitability, creating what we term the “subcontractors’ dilemma.” Firms were forced to choose between short-term survival and long-term upgrading, and most ultimately favoured large-scale expansion at the expense of technological investment.
The Impact of China’s Autocratisation on Taiwanese Firms
If Taiwanese firms were already facing immense challenges due to global supply chain competition, China’s autocratisation under Xi Jinping further exacerbated their difficulties. Since the 1990s, China has successfully attracted large amounts of Taiwanese investment by offering low labour costs and favourable policies, making it Taiwan’s largest overseas investment destination. However, after Xi Jinping came to power in 2012, China’s economic policies shifted from market openness to economic nationalism, fundamentally altering the business environment for foreign firms. The first major shift was China’s transition from an open-market model to an industrial policy focused on domestic firms. Under Xi’s leadership, the “Made in China 2025” initiative sought to enhance local technological capabilities while reducing reliance on foreign companies. As a result, many Taiwanese firms, particularly those in low-end manufacturing, faced an increasing risk of being displaced by Chinese competitors, namely the “red supply chain.”
At the same time, China’s political climate worsened as the Xi administration intensified its control over businesses. Restrictions on capital flow, increased scrutiny of foreign enterprises, and direct political pressure—such as demands for Taiwanese firms to endorse the “1992 Consensus”, which affirms Beijing’s One-China principle—made operating in both Taiwan and China riskier. The situation deteriorated further when the US-China trade war erupted first in 2018, reducing China’s export dependence on the United States and further disrupting the operations of Taiwanese firms that relied on Chinese production bases. Many began exploring alternative production sites in Southeast Asia or repatriating operations back to Taiwan. Meanwhile, China’s increasing military assertiveness, including rising defence spending and aggressive manoeuvres in the Taiwan Strait and South China Sea, heightened uncertainty, prompting more Taiwanese businesses to reconsider their reliance on the Chinese market.
Building on my earlier research with Bowei Hu, my co-authored study with Chun-Yin Lee analysed financial data from Taiwan’s top 500 business groups and 5,000 firms (1995–2022). The results reveal a clear decline in Taiwanese firms’ revenue and profitability in China after 2012, demonstrating the negative impact of Xi’s economic and political policies. Companies that had invested heavily in China performed worse under Xi’s leadership, reflecting a “sunk investment cost” problem, where firms struggled to exit the Chinese manufacturing and market despite declining returns. Additionally, China’s decreasing trade dependence on the United States weakened the positive effects of US-China economic relations on Taiwanese businesses. With China’s growing autocratisation, Taiwanese firms faced mounting uncertainty, accelerating their capital flight from China.
The Future of Taiwanese Firms and Global Supply Chain Realignment
The combined findings of these two studies reveal that Taiwanese firms’ globalisation strategy is facing unprecedented challenges. Over the past two decades, Taiwanese businesses expanded production at the expense of profitability to remain competitive within the global supply chain. This approach, however, led to a structural vulnerability—the subcontractors’ dilemma. Under Xi Jinping’s leadership, China’s autocratisation and economic policy shift have further deteriorated the operating environment for Taiwanese firms and catalysed their exodus from China.
Looking ahead, Taiwanese firms must transition toward industrial upgrading and technological specialisation to secure their future. The success of TSMC demonstrates the need for greater investment in research and development and strategic market positioning to break away from low-margin subcontract manufacturing. Given China’s increasing risks, Taiwanese firms must also diversify their supply chains, accelerating shifts toward Southeast Asia, the United States, and domestic reinvestment to mitigate reliance on any single market. At the same time, the Taiwanese government should strengthen its role in supporting businesses’ repatriation, developing a more attractive investment environment to facilitate industrial transformation.
Taiwanese firms are at a pivotal juncture in their global strategy. Their future success will depend on their ability to navigate geopolitical risks and reposition themselves within the evolving global supply chains. The era of easy expansion into China has ended, and the next phase will require strategic adaptation, innovation, and a recalibration of Taiwan’s place in the new global order.
Thung-Hong Lin is a Research Fellow at the Institute of Sociology, Academia Sinica (Taiwan). His scholarly achievements have earned him prestigious recognitions, including the Golden Tripod Award (2012), the Wu Ta-You Memorial Award (2015), and the Fulbright Scholarship (2023-2024). Lin’s research spans social stratification, political sociology, information technology sociology, and risk sociology, and his work has been published in leading international and Taiwanese academic journals across diverse disciplines. Email: zoo42@gate.sinica.edu.tw
This article was published as part of a special issue on ‘IJTS Open Access Awards‘.
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