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### Viewing cable 06TAIPEI109, Overview of Taiwan's Investment Climate

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06TAIPEI109 | 2006-01-12 06:55 | 2011-08-23 00:00 | UNCLASSIFIED | American Institute Taiwan, Taipei

`

    VZCZCXRO9366
    RR RUEHCN
    DE RUEHIN #0109/01 0120655
    ZNR UUUUU ZZH
    R 120655Z JAN 06
    FM AIT TAIPEI
    TO RUEHC/SECSTATE WASHDC 7961
    INFO RUCPDOC/USDOC WASHDC
    RUEATRS/DEPT OF TREASURY WASHDC
    RUCPCIM/CIMS NTDB WASHDC
    RUEHBJ/AMEMBASSY BEIJING 4497
    RUEHHK/AMCONSUL HONG KONG 5694
    RUESLE/AMCONSUL SHANGHAI 8250
    RUEHGZ/AMCONSUL GUANGZHOU 8849
    RUEHSH/AMCONSUL SHENYANG 4869
    RUEHCN/AMCONSUL CHENGDU 0954

` `

    UNCLAS SECTION 01 OF 04 TAIPEI 000109

    SIPDIS

    STATE PLEASE PASS AIT/W, USTR AND OPIC

    STATE FOR EAP/RSP/TC AND EB/IFD/OIA
    USTR FOR WINTER AND WINELAND
    USDOC FOR 4430/ITA/MAC/AP/OPB/JKELLY/MBMORGAN
    USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
    USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
    TREASURY FOR OASIA/LMOGHTADER
    TREASURY PLEASE PASS TO OCC/AMCMAHON
    TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
    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

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