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Taiwan Investment in ChinaTaiwan Investment in China Facts, Issues, and ProspectsFacts, Issues, and Prospects

Presented at Presented at

USC Asia ConferenceUSC Asia ConferenceSeoul, KoreaSeoul, Korea

October 28-30, 2004October 28-30, 2004

Dr. C. Y. LinDr. C. Y. LinUSC Professor Emeritus

Chairman

A Fubon Financial Company

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Straight line is the shortest distance between two points.

Is it correct?

Correct mathematically.But, it does not apply to Taiwan/China situation

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I.I. Taiwan v.s. ChinaTaiwan v.s. China

China Taiwan

Name P.R.C. R.O.C.

Taiwan

Chinese Taipei

Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei)

Population 1,298 million 22.7 million

Area 9,573,952KM 36,181 KM22

Table 1. Basic facts about China and Taiwan

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Shanghai

Hong Kong

Figure 1. Maps of China and Taiwan

台北 Taipei

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II.II. Cross-Strait TradeCross-Strait Trade

1.1. The trade amount has increased rapidly from The trade amount has increased rapidly from US$15.1 billion in 1993 to US$46.3 billion in US$15.1 billion in 1993 to US$46.3 billion in 2003.2003.

2.2. The cross-strait trade as a percentage of Taiwan The cross-strait trade as a percentage of Taiwan total trade has increased from 9.3 in 1993 to ﹪total trade has increased from 9.3 in 1993 to ﹪17.1 in 2003, nearly doubled.﹪17.1 in 2003, nearly doubled.﹪

3.3. During this period, China’s trade has increased During this period, China’s trade has increased from US$195.7 billion to US$851.5 billion. The from US$195.7 billion to US$851.5 billion. The cross-strait trade as a percentage of China’s trade cross-strait trade as a percentage of China’s trade remains stable, 6-8 . ﹪remains stable, 6-8 . ﹪

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Figure 2. Cross-Strait Trade

151 179 225 238 264 240 258 312 278 374 463

7.7 7.68.0 8.2 8.1

7.4 7.26.6

5.56.0

5.4

9.3

10.010.5

10.9 11.2 11.1 11.110.8

12.1

15.4

17.1

0

50

100

150

200

250

300

350

400

450

500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

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6

7

8

9

10

11

12

13

14

15

16

17

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兩岸貿易總額

兩岸貿易總額占中國貿易總額比重

兩岸貿易總額占我國貿易總額比重

億美元 比重

Source: Cross-Strait Economic Statistics Monthly

US$ Hundred Million Ratio

Total Cross-Straits Trade

Cross-Straits Trade as share of China Total Foreign Trade

Cross-Straits Trade as share of Taiwan Total Foreign Trade

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III.III. Taiwan Investment in ChinaTaiwan Investment in China 1.1. It is difficult to figure the actual amount of It is difficult to figure the actual amount of

Taiwan investment in China because many Taiwan investment in China because many investments go unreported to the government.investments go unreported to the government.

2.2. Official record shows a total investment of Official record shows a total investment of US$34.3 billion between 1991 and 2003, while US$34.3 billion between 1991 and 2003, while unofficial estimates range from US$ 100 billion unofficial estimates range from US$ 100 billion to US$150 billion. to US$150 billion.

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IV.IV. Changes in Investment BehaviorChanges in Investment Behavior

1.1. Steady increase in number of investment Steady increase in number of investment and scale of investmentand scale of investment

Optimistic about investment in ChinaOptimistic about investment in China Medium and large scale companies have Medium and large scale companies have

invested in China invested in China

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Table 2. Taiwan Investment in China

Source: Cross-Strait Economic Statistics Monthly

Taiwan Direct Foreign Investment (FDI) (including China)

Taiwan Investment in China

Taiwan Investment in China as share of Total Taiwan FDI ﹪

Taiwan Investment in China as share of China Contracted FDI ﹪

1993 4.83 3.17 65.61 8.13

1994 2.58 0.96 37.31 2.23

1995 2.45 1.09 44.61 2.27

1996 3.39 1.23 36.21 2.24

1997 7.23 4.33 59.96 6.73

1998 5.33 2.03 38.17 3.47

1999 4.52 1.25 27.71 2.38

2000 7.68 2.61 33.93 4.39

2001 7.18 2.78 38.80 5.61

2002 10.09 6.72 66.61 12.22

2003 11.67 7.70 65.99 13.71

2004 4.81 3.39 70.42 -

Unit: US$ Billion

(1-6)

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Table 3. Average Scale of Taiwan Investment in China

# of Applications

Amount (US$ Billion)

(2)

Average investment Scale (US$ Thousand)

1991 237 0.174 734.8

1992 264 0.247 935.6

1993 (a) 1,262 1.14 903.3

(b) 8,067 2.028 --

1994 934 0.962 1,030.2

1995 490 1.093 2,230

1996 383 1.229 3,209.5

1997 (a) 728 1.615 2,217.8

(b) 7,997 2.72 --

1998 (a) 641 1.519 2,369.7

(b) 643 0.515 --

1999 488 12.53 2,567.2

2000 840 2.607 3,103.6

2001 1,186 2.784 2,347.4

2002 (a) 1,490 3.859 2,589.9

(b) 3,950 2.864 --

2003 (a) 1,837 4.595 2,500.8

(b) 8,268 3.104 -

2004 (1-6)

1,074 3.390 3,156

(a): New Application , (b): Retroactive Source: Ministry of Economic Affairs, R.O.C.

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2.2. Diversification of Industries InvestedDiversification of Industries Invested Expanding from traditional manufacturing to Expanding from traditional manufacturing to

service industries, including insurance, service industries, including insurance, tourism, and business servicetourism, and business service

Share of service industryShare of service industry• Prior to 1995 5.26﹪Prior to 1995 5.26﹪• 1995-1999 7.96﹪1995-1999 7.96﹪

• 2000-2003 8.23﹪2000-2003 8.23﹪

Shifting from labor intensive to capital and Shifting from labor intensive to capital and technology intensive industriestechnology intensive industries

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3.3. Extending from investment in coastal Extending from investment in coastal areas to interior, such as Beijing, Sichuan areas to interior, such as Beijing, Sichuan and Northeastern region and Northeastern region

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4.4. Changes in Business StrategiesChanges in Business Strategies

Adopting strategic alliance and joint venturesAdopting strategic alliance and joint ventures

Developing related industries into satellite Developing related industries into satellite systems or clustering in a regionsystems or clustering in a region

Creating own brands in addition to Creating own brands in addition to OEM/ODMOEM/ODM

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4.4. Changes in Business StrategiesChanges in Business Strategies Moving operation headquarters to China Moving operation headquarters to China

Developing chain-stores, particularly in Developing chain-stores, particularly in food, IT, and communication industriesfood, IT, and communication industries

Changing competitive advantage from cost Changing competitive advantage from cost reduction to human resource development, reduction to human resource development, e.g. recruiting graduatese.g. recruiting graduates from top-rank from top-rank universitiesuniversities

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5.5. Localization of Business OperationsLocalization of Business Operations Hiring local management staff Hiring local management staff

Extending business functions from Extending business functions from production to R&D and marketing production to R&D and marketing

Residing in China instead of commuting Residing in China instead of commuting cross-straitcross-strait

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V.V. Risks faced by Taiwan Risks faced by Taiwan Investors in ChinaInvestors in China

1.1. Market risksMarket risks Changes in governmental policies and economic Changes in governmental policies and economic

environment due to entering WTO. environment due to entering WTO. According to a survey, 65%of Taiwan investors According to a survey, 65%of Taiwan investors in China fear this kind of risk.in China fear this kind of risk.

Severe competition from local private business Severe competition from local private business companies that are improving, growing, and companies that are improving, growing, and expanding expanding

80% of Taiwan investors are concerned with this 80% of Taiwan investors are concerned with this competitioncompetition.

Piracy and lack of intellectual property protectionPiracy and lack of intellectual property protection

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2.2. Financial RisksFinancial Risks Banking systems not easy to fully accessBanking systems not easy to fully access

Lack of integrity, poor credit system, Lack of integrity, poor credit system, unreliable financial statementsunreliable financial statements

Foreign exchange controlForeign exchange control

Appreciation of RMBAppreciation of RMB

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3.3. Operational RisksOperational Risks Logistic problemsLogistic problems

Tax problemsTax problems

Legal problemsLegal problems

Shortage of electricity, waterShortage of electricity, water

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4.4. Physical RisksPhysical Risks

Increasing number of incidents occurred during Increasing number of incidents occurred during the last ten years. Incidents include physical the last ten years. Incidents include physical harm, missing persons, and deaths.harm, missing persons, and deaths.

• 1994 30 deaths1994 30 deaths

• 19981998 64 deaths 64 deaths

• 20022002 91 deaths 91 deaths

5.5. Political RisksPolitical Risks

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VI.VI. ConclusionConclusion

In short, Taiwan and China have a very strange In short, Taiwan and China have a very strange relationship. Politically, they are at odds. relationship. Politically, they are at odds. Economically, people in Taiwan and China work Economically, people in Taiwan and China work closely to trade and invest actively. closely to trade and invest actively.

Taiwan investors in China are facing various risks Taiwan investors in China are facing various risks and difficulties. Some of them are common to and difficulties. Some of them are common to investors from all countries, others are unique to investors from all countries, others are unique to Taiwan investors. Hopefully, the risks and Taiwan investors. Hopefully, the risks and difficulties will be lessened in the future as China difficulties will be lessened in the future as China amends its policies and improves its administration.amends its policies and improves its administration.

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VI.VI. ConclusionConclusion

Taiwan investment in China has been increasing Taiwan investment in China has been increasing steadily in the last decade. We believe this trend steadily in the last decade. We believe this trend will continue because more and more Taiwan will continue because more and more Taiwan investors see the comparative advantage and investors see the comparative advantage and market potential in China.market potential in China.

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Thank YouThank You