Taiwan: Business Environment and Investment Opportunities

AN ANALYSIS OF THE BUSINESS ENVIRONMENT AND INVESTMENT OPPORTUNITIES IN TAIWAN

HISTORY

Pre 20th Century History

Little archaeological evidence remains from Taiwan’s early history. People – probably from Austronesia – are though to have inhabited the island since 10,000 BC with migration from China in the 15th century. In 1517 Portuguese sailors reached Taiwan and named it Ilha Formosa (Beautiful Island). The Dutch invaded in 1624 and built a capital at Tainan – two years later they lost the island to a Spanish invasion but returned the favour by booting the Spanish out in 1641. During the 1660s the Ming and Manchu (Qing) dynasties arrived on the scene, kicking out the Dutch and wrestling one another for control of the island. The Manchus eventually won, making Taiwan a county of Fujian province and triggering a flood of Chinese immigration.

At the end of the 19th century, the Japanese decided to weigh in as well: Taiwan was ceded to them in 1895 following China’s defeat in the Sino-Japanese War. The Japanese quashed a republican rebellion organised by the local Chinese population and went on to establish a military base on the island and to promote education and economic development. After Japan’s defeat in at the end of WWII, Taiwan was handed back to China.

Modern History

When Communist forces took control of China in 1949, the president, General Chiang Kai-shek and his Nationalist Party, the Kuomintang (KMT), fled to Taiwan to plan their reconquest of the mainland. They’re still planning. One and a half million Chinese also left the mainland for Taiwan when Mao took control. The leaders of both Communist mainland China and the Republic of China (Taiwan) claim to be the voice of all China, but the international community has, almost without exception, chosen the mainland. In 1971 the KMT lost the Chinese United Nations seat, and in 1979 the USA withdrew its recognition of the Republic.

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When Chiang Kai-shek died in 1975 and was replaced by his son Ching-kuo, Taiwanese started muttering the word ‘dynasty’, and criticism of the one-party system rose. In 1986, those opposed to Chiang formed the Democratic Progressive Party and were granted seats in the legislature. Two years later Chiang died and was replaced by the first native-born president, Lee Teng-hui.

Taiwanese politics is divided among those who want reunification with China (the KMT line), those who want Taiwanese independence, and those who want the status quo preserved. In 1995 relations between the two Chinas, always chilly, plummetted to a new low. Lee Teng-hui’s high-profile visit to the United States brought mainland China out in a rash of nervous jealousy. Determined to isolate Taiwan and sway the minds of its voters, China held intense military exercises near the Taiwanese coast. In response, the United States donned its global cop hat and sent a couple of warships to monitor the situation. Despite the region’s sudden high concentration of itchy trigger fingers, the first direct presidential election was held without incident, and Lee Teng-hui was returned to office.

Taiwan’s fortunes took a turn for the worse in September 1999 when a massive earthquake hit the island, the largest in its history, leaving over 2000 islanders dead and a rubble-strewn country. Even in this time of crisis, however, the snippy relationship between mainland China and the wannabe republic continued. A defiantly sulky China demanded that any country entering Taiwan to offer earthquake relief get permission from the Chinese government first: a demand that was met with less-than-hearty agreement from humanitarian organisations and other countries around the world.

Recent History

In March 2000, Taiwan elected its next president Chen Shui-bian, the candidate of Taiwan’s Democratic Progressive Party, who believe in a formal declaration of independence for the island. The upset ended 55 years of Nationalist rule and alarmed China, which regards Taiwan as a rebel province.

In 2004, Chen Shui-bian was re-elected by a narrow margin following a possibly-dubious assassination attempt on him only hours before the election. In a concession to political opponents and a country fearful over its constant Chinese threat, Chen Shui-bian vowed to forge closer relations with China and leave the volatile issue of Taiwan’s sovereignty off the political reform agenda.

BUSINESS ENVIRONMENT IN TAIWAN

To adjudge whether or not a country is suitable for investment opportunities we must use certain parameters these can range from descriptive tools like reports available from various established organizations like The World Bank or The IMF. Else we can make use of diagnostic tools like PEST analysis which we will employ to analyse the business environment of Taiwan and look at the possibility of investment opportunities.

PEST ANALYSIS

(P)OLITICAL SCENARIO

The political status of Taiwan is a controversy over whether Taiwan, including the Pescadores (Penghu), should remain the effective territory of the Republic of China (ROC), become unified with the territories now governed by the People’s Republic of China (PRC), or become the Republic of Taiwan. Taiwan’s political status is complicated by the controversy over the Republic of China’s existence as a state.

Currently, Taiwan, Kinmen (Quemoy), Wuchiu (Wuciou) and Matsu off the coast of mainland Fukien, and Taiping (Itu Aba) and Pratas in the South China Sea effectively make up the entire state known as the Republic of China. The ROC government has in the past considered itself to be the sole legitimate government over Taiwan, as well as its former territories on the continent that include mainland China, Outer Mongolia and Tannu Uriankhai (part of which is present day Tuva). This position started to be largely ignored in the early 1990s, changing to one that does not challenge the legitimacy of PRC rule over mainland China, although the ROC’s claims have never been renounced through a constitutional amendment. Different groups have different concepts of what the current formal political situation of Taiwan is.

In addition, the situation can be confusing because of the different parties and the effort by many groups to deal with the controversy through a policy of deliberate ambiguity. The political solution that is accepted by many of the current groups is the following perspective of the status quo: that is, to unofficially treat Taiwan as a state and at a minimum, to officially declare no support for the government of this state making a formal declaration of independence. What a formal declaration of independence would consist of is not clear and can be confusing given the fact that the People’s Republic of China has never controlled Taiwan since its founding and the fact that the Republic of China, whose government controls Taiwan, considers itself a de jure sovereign state. The status quo is accepted in large part because it does not define the legal status or future status of Taiwan, leaving each group to interpret the situation in a way that is politically acceptable to its members. At the same time, a policy of status quo has been criticized as being dangerous precisely because different sides have different interpretations of what the status quo is, leading to the possibility of war through brinkmanship or miscalculation.

Hence we can say that Taiwan has a volatile political situation but is stable currently.

(E)CONOMIC SCENARIO

Taiwan has a dynamic capitalist economy with gradually decreasing guidance of investment and foreign trade by government authorities. In keeping with this trend, some large government-owned banks and industrial firms are being privatized. Exports have provided the primary impetus for industrialization. The trade surplus is substantial, and foreign reserves are the world’s third largest. Agriculture contributes less than 2% to GDP, down from 32% in 1952. Taiwan is a major investor throughout Southeast Asia. China has overtaken the US to become Taiwan’s largest export market. Because of its conservative financial approach and its entrepreneurial strengths, Taiwan suffered little compared with many of its neighbors from the Asian financial crisis in 1998. The global economic downturn, combined with problems in policy coordination by the administration and bad debts in the banking system, pushed Taiwan into recession in 2001, the first year of negative growth ever recorded. Unemployment also reached record levels. Output recovered moderately in 2002 in the face of continued global slowdown, fragile consumer confidence, and bad bank loans; and the essentially vibrant economy pushed ahead in 2003-04. Growing economic ties with China are a dominant long-term factor, e.g., exports to China of parts and equipment for the assembly of goods for export to developed countries.

A FEW RELEVANT STATISTICS
GDP

purchasing power parity – $576.2 billion (2004 est.)
GDP – real growth rate

6% (2004 est.)
GDP – per capita

purchasing power parity – $25,300 (2004 est.)
GDP – composition by sector

agriculture: 1.7%
industry: 30.9%
services: 67.4% (2004 est.)
Inflation rate (consumer prices)

1.7% (2004 est.)
Labor force – by occupation

agriculture 8%, industry 35%, services 57% (2001 est.)
Unemployment rate

4.5% (2004 est.)
Budget

revenues: $67.41 billion
expenditures: $76.7 billion, including capital expenditures of $14.4 billion (2004 est.)
Industries

electronics, petroleum refining, armaments, chemicals, textiles, iron and steel, machinery, cement, food processing, vehicles, consumer products, pharmaceuticals
Industrial production growth rate

12.2% (2004 est.)
Oil – consumption

988,000 bbl/day (2001 est.)
Agriculture – products

rice, corn, vegetables, fruit, tea; pigs, poultry, beef, milk; fish
Exports

$170.5 billion f.o.b. (2004 est.)
Exports – commodities

computer products and electrical equipment, metals, textiles, plastics and rubber products, chemicals (2002)
Exports – partners

China, including Hong Kong 37%, US 16%, Japan 7.7% (2003)
Imports

$165.4 billion f.o.b. (2004 est.)
Imports – commodities

machinery and electrical equipment 44.5%, minerals, precision instruments (2002)
Imports – partners

Japan 26%, US 13%, China, including Hong Kong 11%, South Korea 6.9% (2003)
Debt – external

$55.5 billion (2004 est.)
Investment (gross fixed)

18% of GDP (2004 est.)
Public debt

32.4% of GDP (2004 est.)
Current account balance

$21.16 billion (2004 est.)
Reserves of foreign exchange & gold

$246.5 billion (2004 est.)

Hence after having a look at the economic structure we can say that a few indicators like the availability of labour forces, growth rates, inflation rates point to the fact that Taiwan is a stable economy and hence suitable for investment opportunities.

(S)OCIAL SCENARIO

Although the majority of the people residing in Taiwan (84%) are descended from 17th century migrants from China, the political power (and a substantial part of the economic power) of the island has been, until recently, almost exclusively held by less than one-fifth of the population. A population who fled to Taiwan in 1949 after the communist takeover of the mainland. Almost a half-century of co-residence has seen an integration of these two populations to some degree, with both pride in Chinese heritage and culture and national pride in being a resident of Taiwan, combining successfully to date.

Taiwan is a society that supports strong Confucian values, reflecting the island’s predominantly Chinese heritage (the native aborigines of Taiwan make up only 2% of the population). European influences have also made their mark, in the form of trading links (and some colonial aspirations) from the Spanish and Dutch in the 17th and 18th centuries. Japan has also had a more recent influence over the character of Taiwan: the island was occupied by Japan from 1895 to 1946, but this occupation – although repressive at times – was also a period of prosperity for Taiwan.

Taiwan today is a vibrant and prosperous patriarchal society, which maintains the family as its basic foundation. Multi-generational households are the norm, with age being respected and children prized. The people are reserved, respectful and humble, although individual achievement and a hearty entrepreneurial attitude is found throughout the Taiwanese society. The practice of religious tenets, more so than pure belief alone, influences the Taiwanese character. Approximately 24% of the population is Buddhist, 16% is Taoist (Confucian) and 3% Christian.

Much like other Chinese societies, respect and formality mark social relationships, and guanxi (guanji) is quite strong in Taiwan. Open conflict or direct criticism is avoided, as is any other action which could create embarrassment. Boasting or loud behaviour is to be avoided, although compliments are appreciated but usually denied.

While many educated Taiwanese speak English, the national (and commercial) language is Mandarin Chinese, with many also speaking the local Taiwanese (Chinese) language. Varying degrees of English is spoken by many of the younger generation and the internationally educated.

Taiwan is one of the most urbanised nations in Asia with over 60% of the population living in cities. Taipei, the capital, houses nearly 13% of the population, or approximately 2.75 million. Other major cities include Kaohsiung and Keelung.

The people of Taiwan are well educated and have relevant knowledge of subjects like English and science. The society is a peaceful one and not very different from other South East Asian countries. The cities are well developed and the working conditions are conducive to conducting business. Hence investments with respect to the social structure will be a safe bet.

(T)ECHNOLOGICAL SCENARIO

Measures accompanying Science & Technology (S&T) development include the four main aspects of educating, training, recruiting, and rewarding S&T manpower; the S&T research environment; technology diffusion, intellectual property rights, and standards; and international S&T cooperation. The goal of manpower training is to establish superior S&T research and development manpower, which may be considered a R&D software input. The goal of common research facilities is to provide the infrastructure needed for research, and this infrastructure may be considered a R&D hardware input. Superior R&D outputs can be obtained only after these two inputs are appropriately matched with funding.

1. Manpower education and training

The education and training of S&T development manpower includes the three aspects: (1) education in colleges and universities, (2) advanced studies in Taiwanese institutions and overseas for personnel selected by government agencies, and (3) training by vocational and professional training institutions. In addition, the Executive Yuan’s “Implementation Regulations for Commendation of Outstanding Scientific and Technological Personnel, Executive Yuan” and the Academia Sinica’s “Topical Research and High-level Manpower Training Program” both serve to actively promote key S&T research and train S&T manpower. Apart from education in universities and colleges, the government also promotes the training of S&T manpower via advanced studies or research in Taiwan and overseas for personnel selected by government agencies, and training by vocational and professional training institutions.

A total of 37,945 students received Ph.D. or master’s degrees in the natural sciences, engineering, medicine, agriculture, or the humanities and social sciences from domestic universities during the 2003 academic year. This number represented an increase of 16.3% over the 2002 academic year from this total 35,981 persons, or 94.8%, received master’s degrees. See Table VI-1 for an overview of the various advanced S&T manpower training and technical skills education training systems and their results in 2004.

2. Manpower recruiting

In order to meet shortages of S&T manpower, the government has implemented a number of policies and programs to train domestic high-tech manpower and recruit outstanding overseas manpower to work in Taiwan. It has established long-term targets for S&T manpower recruiting, training, and utilization. The government has adopted simultaneous long- and short-term approaches to the recruiting of S&T manpower. The Academia Sinica recruits overseas post-doctoral research personnel, foreign consultants, specialists, and scholars, and the NSC funds the recruiting of S&T manpower, the hiring of post-doctoral researchers, the recruiting of research scholars, and the invitation of scientific and technological figures from China to participate in research in Taiwan

3. Rewarding Personnel

The government offers a variety of grants and awards aimed at encouraging S&T personnel to engage in academic research, technology development, and invention. Relevant honors include the Outstanding Achievement in Science and Technology Award, Academic Award, National Lectureship, Outstanding Research Award, and the Ta – You Wu Memorial Award.

Hence we can say that technologically also Taiwan is very superior and backed by Government. Technologically there should be no problems with investments in Taiwan.

Therefore after doing a PEST analysis we can conclude that weighing all options Taiwan is a relatively safe place to invest resources. Now let us have a look at the various industries in Taiwan and try to zero in on an industry or a sector where a investments are a possibility.