The Ministry of Finance recently announced that Taiwan's balance of trade amounted to US$751 million in the first seven months of this year. This was about US$4 million less than in the same period last year. Meanwhile, the Directorate General of Budget, Accounting and Statistics (DGBAS) adjusted its expected annual balance of trade to US$2.2 billion from US$3.5 billion, the lowest since 1981.
Government officials all argue that this is a result of the business mode of "accepting orders in Taiwan while manufacturing goods overseas." Whether this is the case or not, if an effective solution cannot be found to reverse this trend, how are we to face the future challenge from the other side of the Taiwan Strait?
Look at the 24 categories in the manufacturing industry, Taiwan's leading export sector. Fifteen of these suffered negative growth in the first quarter of the year compared to the same period last year. Their overall productivity dropped 2.4 percent in the first quarter.
Moreover, the industrial production growth rate of all our major competitors in the first half of the year was better than ours. Thailand's growth rate was 5.7 percent, Singapore's was 4.7 percent, Malaysia and South Korea both had 3.9 percent, while Taiwan recorded zero growth.
All four the Asian Tigers have invested overseas. South Korea's investment in China has even surpassed that of Taiwan. So the government's attempts to place the blame for Taiwan's economic performance on this model is merely lazy thinking.
I am inclined to believe that Taiwan is simply less competitive than before. South Korea has become increasingly competitive, as we can see from its balance of trade with Taiwan. At the beginning of the 1990s, the two nations' trade was almost balanced, but by last year, Taiwan had a trade deficit of US$6.3 billion.
Taiwan had long maintained a slight lead on South Korea in manufacturing technology but this situation has changed, and IT companies such as Samsung and LG now pose an enormous threat. This is probably because of their higher investment in research and development (R&D). Looking at all industrial sectors, South Korea gained 2.8 percent in added value through investing in R&D, a similar percentage to that enjoyed by the US. This compares with only 1.9 percent for Taiwan.
Over the last 10 years, R&D investment in Taiwan's science-based industrial parks has stood at around 5.5 percent of business revenue. It pales in comparison with Samsung's 8 percent. Samsung also has revenues of US$100 billion a year and a staff of 27,000 involved in R&D. Taiwan's two main science parks combined only have a third of that revenue, and although they have 15,000 people in R&D, their access to funding is limited.
R&D is the soul of industrial growth. Between 1994 and 1998, Taiwan's R&D spending rose three-fold and revenue grew 1.6-fold. Between 1999 and 2003, R&D revenue grew 0.4-fold and revenue grew only 0.6-fold. Taiwanese manufacturers habitually use investment in China to counter competition and have not maintained R&D at a sufficiently high level. And when they do make money, they give out massive bonuses. How can Taiwan remain competitive if these trends continue?
Expanding the number of graduate schools is one option, but this could lead to a drop in quality, even as numbers increase. Taiwan needs to look overseas, importing R&D talent with generous employment packages. This is what the US is already doing. Taiwan has already been marginalized in the process of regional integration and if the government and private sector do not begin to take R&D seriously, Taiwan's economy will be left out in the cold.
Tu Jenn-hwa is an associate professor at the Graduate Institute of National Development, National Taiwan University
Translated by Eddy Chang and Ian Bartholomew
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