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UNCLAS SECTION 01 OF 04 TAIPEI 000109 
 
SIPDIS 
 
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GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN PINR OPIC KTDB USTR TW
SUBJECT: Overview of Taiwan's Investment Climate 
 
¶1.  Summary: Septel transmits AIT's mandated annual report 
with Taiwan's "Investment Climate Statement."  Here we 
attempt to answer a different question:  Are local and 
international investors, especially long-term investors, 
satisfied with Taiwan's investment climate, looking at both 
political and economic factors?  Are they expanding their 
presence or moving elsewhere?  What does Taiwan need to do, 
in the opinion of such investors to make itself more 
attractive?  End Summary. 
 
¶2.  The direct answer to these questions is that foreign and 
Taiwan multinational corporations are not fully satisfied 
with Taiwan's investment climate.  Taiwan's investment 
climate disadvantages are well-publicized by local media 
that thrive on gloom.  Corruption and incompetence of 
government officials, unemployment, rising personal debt, 
crime, decline in traditional virtues, and exodus of 
manufacturing are standard fare in daily news reports. 
Bitter partisan politics and the shadow of China's military 
threat further lessen Taiwan's appeal to investors. 
Restrictions on trade, investment, personnel, and capital 
flows with China are a nuisance even though these 
restrictions directly affect only a small percentage share 
of products and industrial categories. 
 
¶3.  Many, if not most, of the complaints from the business 
sector stem from the tense relations between Taiwan and 
China.  The multinational corporations complain that cross- 
Strait shipping and air links must go through a third 
territory (i.e., a place other than Taiwan and China). 
Cross-Strait travel by air must stop in a third territory. 
Indirect navigation costs extra time and money.  Tedious 
application procedures are required for sending mainland 
Chinese-born employees (even those with non-PRC passports) 
to Taiwan for work or training in their affiliated offices 
on Taiwan. 
 
¶4.  The biggest formal hurdle is that Taiwan-registered 
companies' investment in China may not exceed 40% of the net 
worth.  This means a foreign firm registered in Taiwan must 
limit its activities in China to 40% of its Taiwan capital. 
The effect for local and foreign firms is to limit growth 
possibilities to the growth of the Taiwan market.  With 
China growing at close to double-digit rates and Taiwan 
growth at around 4%, few companies favor tying their growth 
strategies to the Taiwan market.  For American firms that 
seek to use Taiwan as a platform for the China market, the 
threshold is just too high. 
 
¶5.  Taiwan authorities also forbid foreign companies with 
mainland Chinese ownership from establishing offices in 
Taiwan.  Taiwan's resistance to absorption by China and its 
insistence on a cross-Strait financial regulatory agreement 
have prevented Taiwan banks from setting up branches and 
subsidiaries on the mainland.  Consequently, Taiwan firms in 
China complain of inconvenience in getting loans and raising 
capital, and have therefore turned to Chinese or third- 
country banks for banking services and have listed on Hong 
Kong and other stock exchanges rather than in Taiwan. 
 
Rambunctious Democracy Cuts Both Ways 
------------------------------------- 
 
¶6.  President Chen Shui-bian's 2006 New Year Message 
prompted further complaints that his replacing "active 
liberalization, with effective management" with "active 
management, with effective liberalization" may foreshadow an 
increase tensions across the Taiwan Strait, resulting in 
setbacks in cross-Strait economic relations.  The change 
reportedly was an attempt to mollify pro-independence groups 
in Taiwan.  However, many local observers believe that 
further restrictions on investment in China will lead to 
 
TAIPEI 00000109  002 OF 004 
 
 
more Taiwan companies listing on overseas stock markets, and 
diminishing ties to Taiwan.  The President's New Year speech 
re-enforced the widespread perception that the government is 
less interested in the health of Taiwan's economy than in 
partisan goals. 
 
¶5.  While divisive, overactive politics are sometimes cited 
as a factor discouraging investment in Taiwan, its 
successful transition to democracy is viewed as an advantage 
over regional competitors.  Taiwan's democratic society, 
free press, and vigorous debate of current issues make it an 
environment conducive to the sort of critical, creative 
thinking most valued in an information-based economy.  Local 
businesspeople have cited to AIT the liberal environment as 
a major quality-of-life advantage that Taipei has to offer 
over some other cities in the region. 
 
Good International Rankings 
--------------------------- 
 
¶6.  Well-known investment climate indexes continue to rate 
Taiwan highly as an investment destination.  The World 
Economic Forum in its Global Competitive Report for 2005- 
2006 ranked Taiwan the most competitive economy in Asia, and 
fifth highest in the world out of 117 economies in its 
growth competitiveness index.  South Korea, the regional 
economy most similar to Taiwan, ranked number 17 in 
competitiveness.  The Business Environment Risk Intelligence 
2005 report gave Taiwan it highest rating, reserved for low- 
risk economies worthy of investment.  The annual World 
Competitiveness Yearbook Competitiveness Scoreboard put 
Taiwan in 11th place out of 60 economies, with Hong Kong as 
number two and Singapore as number three.  These ratings 
tend to emphasize Taiwan's dynamic private sector 
businesses, well-developed infrastructure, detailed 
commercial laws, and relatively open markets. 
 
Open Markets May Slow Foreign Investment 
---------------------------------------- 
 
¶7.  Taiwan's relatively open markets allow foreign companies 
to export their products to Taiwan without the need to 
establish a physical presence, in contrast to some economies 
where local manufacturing is necessary to bypass market 
barriers.  The relative infrequency of merger and 
acquisition cases in Taiwan limits what in other economies 
is an effective means of attracting foreign direct 
investment. 
 
¶8.  Another factor behind the slowing growth of foreign 
direct investment in Taiwan is the prevalence of indirect 
investment through foreign shareholding in major Taiwan 
companies.  According to market participants, expectations 
of a weaker U.S. currency in 2006 have prompted portfolio 
investors to move huge amounts of capital from the United 
States to East Asia recently.  AIT believes that higher 
stock prices and a stronger NTD (against the USD) will 
prevail throughout the first half of 2006, buoyed 
additionally by the strong attraction of investing in 
Taiwan's LCD/TFT (flat panel display) industries, which 
anticipate a very good year. 
 
¶9.  Taiwan has largely dropped barriers to most types of 
imports from China and most types of investment in China. 
About 83% of all trade categories are open to imports from 
China, basically only agriculture goods are restricted. 
About 93% of all industrial categories are open for Taiwan 
investment in China, basically only some high-tech and 
infrastructure items are restricted.  However, as noted in 
para 4 above, there are stringent limits on the value of 
investment in China. 
 
 
TAIPEI 00000109  003 OF 004 
 
 
Investment in Taiwan Continues to Expand (Slowly) 
--------------------------------------------- --- 
 
¶10.  Industrial relocation to China has not prevented 
continued, albeit slow, expansion of Taiwan's domestic 
investment.  Real growth in private investment slowed from 
31% in 2004 to as low as 3% in 2005 due to excess inventory 
stock, and is to reach only 3.6% growth in 2006.  The stock 
of foreign investment has continued to grow every year, up 
7% to US$60.5 billion in 2004 and up another 5.2% to US$63.9 
billion in the first 11 months of 2005. 
 
Trade with China Huge and Growing Rapidly 
----------------------------------------- 
 
¶11.  Liberalization of cross-Strait restrictions has 
contributed to a steady increase in Taiwan's trade with 
China.  In September 2005, Taiwan's imports from China for 
the first time exceeded imports from the United States, 
making China Taiwan's second largest source of imports. 
Taiwan's imports have grown at a double-digit rate over the 
past four years.  In contrast, the island's imports from the 
United States have shrunk on a y-o-y basis over the past six 
months, and the rate of decline has accelerated.  China for 
the first time replaced the United States as Taiwan's major 
export destination in 2002 when the island's exports to 
China totaled US$29,465 million, more than US$26,764 million 
from the United States.  The percentage share of exports to 
China steadily increased from 19.6% in 2001 to 28% in 
September 2005.  Meanwhile, the share of shipments to the 
United States steadily fell from 22.5% to 14%. 
 
Investment in Taiwan as a China Play 
------------------------------------ 
 
¶12.  A growing number of companies, both local and foreign, 
are taking advantage of Taiwan's high-quality human 
resources to staff projects in China.  They invest in Taiwan 
or partner with Taiwan companies in order to gain technical 
and management know-how, and language and culture advantages 
that make investment projects in China much easier.  The 
extensive involvement of Taiwan companies in China attracts 
foreign investors to Taiwan who want to share in the 
benefits of China's rapid growth without the high risk 
associated with direct investment there. 
 
New Factor Discouraging Investment 
---------------------------------- 
 
¶13.  Taiwan's new labor pension system and higher taxes that 
will both take effect in 2006 greatly concern investors 
because of the impact on operating costs here.  Inbound 
foreign direct investment approved in October and November 
2005 reversed from a y-o-y growth of 53% in Q3 to fall 17%. 
Meanwhile, outbound direct investment approved in October 
and November 2005 grew 16.4% from a year ago. 
 
Globalization Contributes to Huge Outbound DI 
--------------------------------------------- 
 
¶14.  Like other developed economies, Taiwan has begun to see 
outbound direct investment exceeding inbound direct 
investment as manufacturing has moved offshore.  Taiwan 
business firms started to relocate their production bases to 
Southeast Asia in the mid-1980s and subsequently mainly to 
China.  Meanwhile, foreign investors continue to flow into 
the island to take advantage of Taiwan's high technologies, 
relatively liberalized service sector, and as a China play. 
An additional factor unique to Taiwan is that in spite of 
its continuing competitiveness on paper (as measured by the 
investment rating organizations) its appeal to investors has 
been declining in direct proportion to China's growing 
 
TAIPEI 00000109  004 OF 004 
 
 
economic importance and the falling barriers to trade and 
investment there.  The tension between Taiwan and China 
forces investors to choose between the two to some extent, 
and the growing favorite is China.  While cross-Strait 
tensions and trade and investment barriers will not 
disappear overnight, presumably they will eventually.  When 
progress on this front is good, Taiwan looks like a good 
place to invest.  But when progress toward lowering cross- 
Strait tensions does not keep pace with expectations, Taiwan 
looks like a lousy place to invest. 
 
PAAL