Globalization and regional economic integration are two major factors that have affected the world economy. Globalization speeds up capital flow, promotes cross-border activities and invites business competition.
The process of globalization has reshaped the global economic and trade structures and encouraged foreign direct investment (FDI). In response to new competition, FDI has been used by the business sectors of most economies as a strategy for development and expansion. To retain its economic competitiveness, Taiwan should embrace such a strategy.
Regarding the other factor, regional economic integration, it has been presented with two different dimensions, market-driven and institutional-driven. The market-driven dimension is about comparative advantages in the global arena.
The institutional-driven dimension comprises regional trade agreements, preferential arrangements, free-trade agreements (FTAs) and customs unions to strengthen various advantages. Among them, the free-trade agreement is the main form dominating all regional integration processes, and the FTA and FDI are actually closely related.
Taiwan has done some FDI and has been seeking to sign FTAs with its major trading partners. Taiwan began investing overseas in the 1980s.
Taiwanese companies decided to invest overseas include dealing with increasing domestic labor costs and facing with competition from foreign economies.
In the 1990s, many Taiwanese companies selected Southeast Asia as the target of investment; however, the East Asian financial crisis and the effect of a rising China led to a shift in Taiwan's investment from this area to China. It would be economically beneficial for Taiwan to diversify its FDIs and push for FTAs through FDIs.
A full analysis of Taiwan's FDI strategies, as well as the economic and trade relations between Taiwan and its FDI targets, is needed in order to negotiate better deals for Taiwan when signing bilateral economic treaties. It is also necessary to identify feasible ways to manage the potential impacts of globalization as well as regional integration.
The purpose can be extended to avoid risks, protect Taiwanese investors and explore business opportunities.
Several recent studies by the Taiwan Institute of Economic Research delved into the feasibility of Taiwan signing an FTA or bilateral investment treaty with other economies, analyzed the impacts on relevant sectors of Taiwan's investment in target areas, promoted trade and economic relations with other countries, emphasized the need to protect the rights and benefits of Taiwanese investors, and provided practical policy suggestions for the government.
Some study results showed that globalization and regional integration have brought Taiwanese businesspeople not only challenges but also opportunities. These two factors have jointly helped shape the nation's economic structure.
China has attracted many Taiwanese investments, but the Chinese government also has been pressuring Taiwan internationally. Therefore, Taiwan needs to sign FTAs with its trading partners to expand its international opportunities.
Moreover, efficiency-oriented vertical FDIs have gradually replaced market-seeking horizontal FDIs.
At the same time, economic and trade relations are presented in the form of division of international production.
These forms complicate bilateral trade relations that involve more imports and exports of intermediate goods and raw materials.
Taiwan might be able to use its FDIs as a means to push for signing an FTA with certain targets, but there are pros and cons.
Using FDIs to enhance the flexibility of investment strategies would help promote trade relations.
The cons are: a) it is not easy to convince investors unless the government's selected targets can provide value-added incentives; b) FDIs might not always be in alignment with government trade policies; c) a cluster effect caused by FDIs could dilute the expected effect of government FTA policies; d) FDIs might not be able to balance local stakeholders' interests; and e) Taiwan is not able to play the role of a leader in the global supply chain just yet, so using FDIs as a means may not be as effective.
As a general rule, investments invite two outcomes -- direct and indirect ones. Direct outcome includes encouraging capital flow, increasing returns and creating job opportunities.
Indirect outcome comprises technology and knowledge transfer and exports enhancement. It is suggested that Taiwan should seek to expand its investment and economic influences in countries other than China.
For example, India is interested in overseas financial services, so Taiwan could consider deregulating its financial markets and inviting India's investment in this area. The objective is to form a bilateral relationship. After all, strengthening economic relations with trading partners requires a sound scheme, and that scheme shall place FDIs as a good way to form potential FTAs.
Darson Chiu is an associate research fellow at the Taiwan Institute of Economic Research.
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