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Government should not regulate capital flow

According to local newspa-pers, Taiwan plans to ease restrictions on capital remittance to China by adopting a "net turn-over" system (淨額制). Under the system, businesses with investments in China are allowed to remit as much money to China as they have previously sent back to Taiwan for the purpose of cyclical capital utilization.

The decision was one of the 36 resolutions reached by the cross-strait panel of the Economic Development Advisory Conference in August. After more than two months of waiting, I am pleased to see that the government has finally put the measure into effect.

If we think deeper about the issue, there are two matters that are worth discussing: the government's restrictions on overseas investments and its encouragement of the remittance of capital back to Taiwan.

First, in the handling of overseas investments, the authorities need to adjust their attitudes. The globalization of business operations is an unstoppable trend, as businesses always go after their own best interests. Taiwan's manufacturing industry has gradually lost the advantage it previously enjoyed. As a result, the bans on business relocation are in fact traps for local industries. There are only two things that should be regulated by the government in overseas investments: the sources of the capital and whether leading technologies are involved in the investment.

As far as the sources of the capital are concerned, what should be restricted is Taiwan's "net capital outflow" -- especially from the sources of public funds, such as the banking industry and capital markets. If the capital is private or comes from overseas funds, it should not be subject to heavy regulation.

Overseas investments that do not involve crucial leading technologies and do not create competitors should not be regulated either. As for general technolo-gies, even if Taiwanese businesses do not go to China, other foreign companies will naturally step into the Chinese market. The government's restrictions, therefore, will only limit the opportunities for Taiwanese businesses in China.

Second, consider the remittance of capital back to Taiwan. The authorities were only concerned about the repatriation of profits. But it was unrealistic to demand Taiwanese businesses remit their profits. Generally speaking, a new business does not make profits immediately. It is able to turn a profit only after a breakeven point is reached -- which may take several years.

After a company starts to earn a profit it has to consider the necessity of increasing its capital in order to expand. As for the final surplus of capital, it inevitably goes to where capital is able to freely circulate or where investment profits are expected. Unfortunately, Taiwan meets neither of these two conditions. No wonder local businesses' capital usually stays overseas.

Besides, capital backflow is not just limited to the form of profit remittance. We may, for example, enjoy export revenues when local companies investing in China purchase equipment and materials from Taiwan. Also, we may receive foreign exchange when Taiwanese companies export goods from China but receive payment in Taiwan. The above are all examples of remittance of capital.

To sum up, capital flow should follow market mechanisms. If Taiwan wants a return on its overseas investments, it has to improve its investment environment and provide more opportunities for investors. It must provide appropriate incentives in order to encourage capital repatriation. Not only have the government's restrictions failed to attract business, they will limit opportunities for "global business arrangements."

Kao Koong-lian is a professor at Chung-yuan Christian University.

Translated by Eddy Chang
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