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Foreign Investment
Foreign investment in Taiwan first played an important role in
the development of its export industries during the 1950s and 1960s.
Later on during the 1980s, foreign investment in Taiwan helped develop
its technology-related and service industries. By far, the largest
investment has been in Taiwan's manufacturing industries - especially
electrical machinery and apparatus, chemicals, machinery, equipment
and instruments and basic metals.
During the 1960s and 1970s, Taiwan was an attractive destination
for foreign investors because of its cheap labour, stable government,
and very loose environmental controls. Foreign investors, therefore,
flocked to Taiwan to establish low-cost, labour intensive, export-oriented
industries. In contrast, the high price of labour in Taiwan today
has induced foreign investors to turn their attention to high-tech,
capital intensive industries such as electronics, computers, banking
and finance. Moreover, rather than being purely export oriented
as in the 1960s, many foreign enterprises in Taiwan are now locally
established to produce for the burgeoning domestic market.
Approximately 75% of Taiwan's industries are open to private foreign
investors, except for agriculture, military equipment, power supply,
transport, real estate, mining, communications and finance - which
are restricted or prohibited to foreign investment. The government
encouraged foreign investment to Taiwan under the Statute for Encouragement
of Investment (SEI), originally promulgated in 1960. The SEI offered
a broad range of incentives including:
- 100% ownership;
- Appointment of foreign directors;
- Permission to remit funds in and out;
- Corporate tax of 25% (reducible to 20%);
- Five-year tax holidays in encouraged industries;
- Other tax breaks in R&D, customs duties and other areas;
and
- Reduced withholding tax from 35% to 20%.
On January 1 1991, the Statute for Upgrading Industries (SUI) replaced
the SEI. The SUI has changed both the range of incentives offered
- such as no longer offering tax holidays - and the range of industries
to which the incentives apply.
Rather than concentrating on those industries that will lead to
economic growth, the SUI concentrates instead on the restructuring
and improvement of existing industries. It encourages mostly research
into sunrise industries, energy conservation, and pollution control
and production efficiency. The SUI also goes hand in hand with Taiwan's
current Six Year Plan.
Taiwan's current six-year plan is the KMT's most ambitious yet.
In an effort to restore past levels of economic growth, its aims
are to combat shortages in skilled labour, transport gridlocks and
environmental degradation. The CEPD has earmarked approximately
US$ 315 billion for its successful completion, and its priorities
reflect the combination of Taiwan's expertise in high technology
and the traditional concentration on labour intensive small industry.
By focussing upon further research and development into high-tech
industries while upgrading existing industrial plant, the Plan calls
for an increase in the total output of ten key industries. It is
envisaged that total output will increase by 141.1%, or 13.6% per
year by the end of 1996. The KMT government, while hoping that private
enterprise will fund the rest aided by unsecured interest free loans,
will contribute half the investment.
Large-scale construction projects include renovations at Chiang
Kai-shek International Airport - including a second terminal - a
monorail and a transport network linking the airport to major tourist
destinations around the island. Underground mass transit services
for Taipei - already construction - and Kaohsiung, as well as plans
for a high speed train running down the West coast of the island
linking Taipei and Kaohsiung are also on the drawing board. Such
large-scale investment comes as good news for foreign exporters
and investors, as all projects require massive inflows of technology
and equipment. Subsequently, private investment will increase, adding
further to the inflow of producer goods and services.
Also attracting foreign interests in Taiwan will be the planned
liberalisation of its financial system that will aid in adjusting
its trade imbalance. Measures include; the elimination or reduction
of export subsidies; the encouragement of import liberalisation
through lifting import restrictions and lowering tariff rates; and
the gradual reduction of tax rebates for exports.
In an effort to tie itself in with the international financial
system - thereby opening up a new front in increasing its international
contacts - the KMT government is planning to make Taiwan a 'regional
financial centre' by the year 2000. Inspired by the void Hong Kong
might leave after 1997, the KMT government has already laid plans
for the establishment of an international currency exchange and
gold market; improving the currency and capital markets; and erecting
an international finance building in Taipei. The KMT believes that
this goal can be achieved due to several factors in its favour,
mainly "the ROC's great accumulation of foreign reserves, availability
of a highly-educated workforce and the rapidly growing financial
industry in the Asian-Pacific region."
The KMT has already prescribed a timetable to meet these goals,
and divides into short-term, mid-term and long-term goals. These
goals are as follows:
Short-Term : Within three months, a panel to promote Taipei as
the regional financial centre will be set up, the revision for the
statute of forex administration will be completed, regulations on
gold imports and the export of gold will be liberalised, and the
public land on which private investors will build the international
finance building will be selected. Within six months, the following
will take place: initiating new monetary instruments and re-opening
the forward forex market; allowing international monetary dealers
to come to Taiwan; relaxing the regulations concerning the establishment
of foreign bank branches, especially those that will engage in offshore
operations; and the issuance of gold deposit certificates by banks
and other approved institutions.
Mid-term : Within one year, the restrictions on the setting up
of operations by foreign financial institutions will ease. Telecommunications
will be improved and user rates lowered. And within two years, the
design for the international finance building and its telecommunications
network will be completed. Also, the gold market will be established.
Long-term : The goals include internationalising the NT$, allowing
non-residents to open NT$ accounts and relaxing regulations on their
holding and use of the currency, constructing the international
financial building, and improving telecommunication facilities.'
(FCR, September 1991, p. 36.)
Implicit in these plans are the need for major structural changes
within Taiwan's financial system. In the first step towards the
realisation of these goals, the KMT government has allowed the establishment
of fifteen new private banks. Until recently, twenty-four mostly
government-owned banks have been the major participants in Taiwan's
financial markets. The introduction of fifteen new banks therefore
envisages increased competition, leading to a narrowed margin between
interests on deposits and interest on loans. Apart from the establishment
of new banks, the MOF will also allow the establishment of more
foreign banks in Taiwan, and more branches for those banks already
operating.
Foreign participation in Taiwan's financial system is also likely
to increase due to the creation of a securities and futures market,
only now beginning to become more accessible to foreigners. Permitted
only to buy and sell on behalf of local investors prescribed securities
listed on the New York, Tokyo and London stock exchanges, foreign
securities firms in Taiwan are not permitted to finance the trade
in the foreign securities themselves. The scope of investment is
also limited to trade in stocks, government or corporate bonds and
beneficiary certificates, and trading in futures, options or deposit
certificates is not permitted.
While Taiwan's plans to become a financial centre may seem perfectly
reasonable, many problems still lay in the pipeline, the greatest
obstacle being that well established centres of international finance
already exist in Asia. Taiwan could never compare itself with the
financial might of Tokyo, and even though the future of Hong Kong
is unsure, Singapore still remains a magnet for finance in Southeast
Asia. Caught geographically in the middle of Tokyo and Singapore,
Taiwan will find it very hard to compete with these already well-established
markets.
Geographical problems aside, the logistics of changing virtually
overnight moribund financial structures are also very daunting.
For 'strategic reasons', Taiwan's whole financial structure has
been heavily protected from foreign intervention during the last
four decades. Always aware of the potential for the PRC to misuse
internationally accepted norms and conventions in international
finance - such as foreign currency transactions or real estate purchases
- as a method to gain influence in Taiwan's economy, the KMT passed
strict laws regarding the flow of foreign capital in and out of
Taiwan, particularly gold. Changing these outdated laws, therefore,
will be particularly difficult, as the KMT has to balance the economic
need for liberalisation together with the strategic need for protecting
its financial system. To exemplify this point further, in order
to open Taiwan's telecommunication lines to Reuter's International
Dealing System (IDS), the Central Bank in Taiwan had to seek permission
first from the Taiwan Garrison Command. For 'strategic reasons',
the Garrison Command had displayed extreme caution for fear that
Taiwan brokers might conduct direct transactions with the PRC.
Despite Taiwan having the funds to embark on such a venture, the
prospect of laying wide open its financial system to outside influence
may result in the KMT adopting less liberal laws than are required.
This in turn may lead to foreign brokers ignoring Taiwan for the
more laissez-faire systems of its major rivals - Hong Kong and Singapore.
In Hong Kong's case, however, its future would have to be more certain
than it is at present for brokers to continue investing there.
Yet another hurdle in the KMT's plan is indigenous corruption.
Already rocked by massive scandals in the past, more scandals in
the future are predicted in Taiwan, especially after liberalisation
of its financial system.
Regardless of the many problems facing the KMT in its dream to
convert Taiwan into a regional centre by the year 2000, it is still
likely that the restructuring of Taiwan's financial system will
attract much foreign interest at first. The major hurdle for the
KMT will be to maintain this foreign interest. This will depend
largely on the degree to which they are willing to open up Taiwan's
financial system, and the degree to which they will enforce the
laws. Foreign interests as evidenced by past performances will not
tolerate constant scandals, with millions of dollars perhaps at
stake.
Also, while Taiwan's standard of living rises and trade liberalisation
continues, imports for consumer goods will increase. The KMT government
envisages that during 1991-1996, imports will rise at an annual
rate of 10%, well above the 6.9% increases expected for exports.
This in turn will result in Taiwan's current account surplus declining
to US$ 5 billion. An examination of their effects on Taiwanese society
as a whole will follow.
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