Sunday, April 23, 2006

More Problems with Taiwanese Investment in China

The last installment of this was the one from Lee Teng-hui discussing the problems of investment in China and how it has slowed Taiwan's economic growth and worsened its income equality. This week's talks about other issues...

In 1990, the differentiation of products exported to the U.S. by South Korea and of products exported to the U.S. by China stood at 75.2. At the same time, the differentiation between Taiwanese and Chinese products stood at 72.5 (a differentiation of 100 means that two products are completely different), which shows that back then there was not much of a difference between Taiwan and South Korea in terms of product differentiation. However 13 years later in 2003 the degree of product differentiation between South Korean and Chinese exports to the U.S. still stood at 59.1, while Taiwan’s had narrowed to just 31.2, because our companies due to their cost-reduction strategy and over-investment in China were unable to transform and upgrade, only producing goods at low costs. If products do not differ and also cannot compete on price, then they will be easily substituted.

Essentially Taiwan is not becoming less like China as it offshores low-value added projection, leaving the brainy stuff to be done at home. Rather, it is becoming more like China, product-wise. Scary, because there's more China, and it can do anything we can do here. It also discusses the investment issue:

From 2001 to 2004 Taiwan’s domestic investment accounted for less than 20 percent of GDP. Many people think that investment activity was not really thriving because of the international recession. I will especially take the situation of other countries for comparison to see how differently the international slump affected the individual countries. We will then take a look to see how much the international economic situation affects Taiwan. The three other small Asian dragons South Korea, Hong Kong, and Singapore were affected by the international slump during the same time as Taiwan, but their domestic investment rate was higher than Taiwan’s. Even in the U.S., Japan and Italy the domestic investment rate was higher than in Taiwan during the same period. This shows that the international slump is definitely not the only reason why Taiwan’s domestic investment rate is low.

Where does the problem lie? After the year 2000 the Economic Development Advisory Conference reached consensus to implement an “active opening, effective management” policy toward investment in China, but it failed to come up with concrete methods of adequate management. From 1993 to 1999 when President Lee Teng-hui was in power appropriate controls and norms were in place regarding commercial and trade contracts between Taiwan and China. As a result Taiwanese investment in China remained always at around 0.5 percent of GDP. But after 2000 this figure kept rising so that by 2004 it had already soared to 2.4 percent. These Mainland Affairs Council figures are still rather conservative, because they only include investments that went through the legal application and approval process, while investments that were made clandestinely are not factored in. Therefore the 2.4 percent figure is still underrated.

The direction of investments is wrongheaded, according to this crowd:

First I would like to define “excessive investment in China.” There are two indicators, one of which is the amount that Taiwanese entrepreneurs have invested in China, which accounts for too high a proportion of our Gross Domestic Product (GDP). Taiwan usually ranks among the first three top investors in China worldwide. The second indicator is the share of Taiwanese investment going to China, which accounts for too high a proportion of our overseas investment. In the course of globalization Europe, the United States, Japan and South Korea usually invest 60-70 percent of their total overseas investment in countries that are at an equal level of development such as Europe, the U.S., and Japan. They use such investments as an opportunity to obtain certain technologies or for acquisitions. But Taiwan does exactly the opposite by investing 70 percent of its overseas investment in China. Why do we invest in China? This is probably related to the size of our companies, our past successful experiences and our business philosophy. What our companies have adopted is a cost-reducing strategy. If everyone adopts a strategy of reducing costs, Taiwan’s economy will be severely affected.

At the moment I see no easy solution to the problem of the need to diversify the nation's investments.......


Anonymous said...

Michael, if you know anyone who is interested in a junior high or senior high job in Taichung, please give them the following address to send a resume and cover letter: recruitment[AT] Need a minimum of 2 years experience preferably in Taiwan, preferably in senior or junior high.
Excellent package, including PAID vacations (3 months a year).
We are looking for people who will stay for more than a year, and take their job seriously. Seriously.
One postion to start immediately, a couple in September. I know this is not the right place to do this...please forgive me!

Anonymous said...

This is the problem. Everyone thinks Three Links is the problem with Taiwan's economy. Actually that's not it at all. Taiwan's problem is that no matter what, it's competing with China and all the other low-cost producers, and in this environment, if it wants to maintain its standard of living and continue to grow, it has to differentiate or move up the chain. As soon as the Three Links are implemented, a lot of Taiwanese are going to be baffled at why all the things that were happening before are still happening but even faster! Those with capital can more easily make more money. Those without will face even rougher times. That's the key, and I hope these talks get the notice they deserve.

Michael Turton said...

I'll blog on it and put a link on my sidebar tonight.


Anonymous said...

"At the moment I see no easy solution to the problem of the need to diversify the nation's investments."

Let me clarify between the problem Michael brings up that has been a known problem since the days of Lee Teng-hui and the Go South policy and the problem of Taiwan's growth even not accounting for the threat from Taiwan.

The problem of national defense is that since China is so big and Taiwan is so small, the normal, free trade makes everyone better off argument (and contrapostively, trade sanctions harm yourself as well as your trade partner) doesn't work. The more that the economies intertwine, the more Taiwan needs China, but it's not true the China needs Taiwan. It'll hurt China a hell of a lot if they cut off investment from Taiwan, but it'll devestate Taiwan. For a surrender of Taiwan, I think China would be willing to take the hit of a few years of economic development. This is why Taiwan needs to consider places like Vietnam, India, Thailand, Malaysia, Southeast Asia, Central and South America, etc.

"As soon as the Three Links are implemented, a lot of Taiwanese are going to be baffled at why all the things that were happening before are still happening but even faster!"

On the other hand, there is a question of a maturing economy that is faced with competition from low-cost labor from all over the world, a surprising large portion of which is sophisticated and "middle" tech. The signs of an economy with limited room for growth have been around for a long-time, and you can tell by looking at where the capital is running. Where are people investing? Where are Taiwanese people investing?

Even in the 90's, people were beginning to wonder what was with the East Asian Dragons and China. Why is it that the economies grew so fast, but then all they do is accumulate huge foreign reserves which they then turn around and invest in the US or some other foreign country, even throwing large chunks at low-growth US Treasury bonds? The choice is telling--this means that Treasury bonds, even at their low growth, are better investment choices than parking the money in Taiwan or Korea or Japan or Hong Kong.

So Taiwan's problem isn't just diversification, but why isn't domestic investment worthwhile? Why isn't developing higher tech, more efficient businesses, or special technology/arts in Taiwan worthwhile?

I don't know what the problem is, only that there is a very big one. There are some very capital intensive industries in Taiwan now, LCD manufacturing being one, and perhaps if they get their nascent biotechnology industry off the ground, medicine could be another. The return on capital has to be raised--otherwise it's just going to flow not just to China, but generally out of Taiwan.

Mark said...

1) What is this with "east Asian dragons". Aren't Taiwan, Korea, Singapore and Hong King the four tigers, while it's China that's the sleeping dragon?

2) It definitely is a problem for Taiwan to try to compete with mainland China on price. However, I'm not sure how climbing up the value chain will help much, either. China's basic research output has already surpassed that of Taiwan. China has proven that it is also very capable of moving up the value chain.

Maybe a longer-term approach would be the consolidation of stronger brands, and more Japan-style cultural exports?

Anonymous said...


Basic research output doesn't say much about the actual state of industry though it can be something of an indicator. You're confusing breadth with depth. You're right, Taiwan couldn't possibly be ahead of China in every single field, but they can certainly dominate the field in select industries, and in certain computer industries, Taiwan is still the best place in the world to open factories and do R&D, just because that's where everyone else is and where all the knowledge is.

It is common in Chinese to call them the 4 little dragons; it's an interesting phenomenon that in English, people can never tell the difference between Chinese dragons and Chinese tigers. The dragons the long one, the tiger is the two person one.

Anonymous said...

Your point that China can do anything that can be done here hit a nerve with me.
China is quite a large market for the New Zealand dairy industry. However back in NZ, I did work for a company that was exporting diary cows and dairy technology to China.How long before that comes back to bite us on the arse?
It seems to me that Taiwan has the same problem, only in spades.

Michael Fahey said...

Michael--would you mind pointing me to some sources that could help me clear of the misinformation in this thread?

Michael Turton said...

I'm not sure what "misinformation" you mean. The post about AID contains several errors. Neil Jacoby's US Aid to Taiwan is the best book on that. For econ
growth in general, you want Ho's Economic Development of Taiwan 1860-1970.

I'd have gone with (3) in the poll, I think. It's closest to what I see as the correct answer.

Anonymous said...

James, Hua Ren control Taiwan at the moment because Taiwan Ren aren't smart enough to see Hua Ren for what they really are.

Everything Hua Ren said to Taiwan Ren is bullshit. They don't care about Taiwanese or our future. They just want to get off Taiwan with our wealth and go back to their China.

If Taiwan Ren are smart, we'll be walking the same path as that of Japan right this moment. This is something that South Korea is doing right now, and they are good... very good (learn what matter from Japan)!!

Anyhow, Taiwan Ren should be thinking with of how to get rid off cancer cells in Taiwan. In US medicine, they bombard cancer cells with radiation. I do exactly the same.


Gerry said...

I heard from a Taiwanese businessman that half of China's production is due to investment from Taiwan. Would it really be as high as this?