The latest debate over whether the government should allow Chinese investment in Taiwan’s semiconductor industry has drawn widespread attention. Some claim that it is important to accelerate the integration of Taiwanese industries into the Chinese market by allowing Chinese capital to be invested in Taiwanese firms.
Opponents argue that it would put national security at risk if the ban on Chinese investment in Taiwanese firms is lifted without sufficient oversight measures in place. In other words, the core of the debate actually lies in striking a balance between freedom of investment and concerns over national security.
In an era of economic interdependence, the rapid growth of foreign direct investment (FDI) around the world is one of the major driving forces in the global economy. Only a few hermit states, such as North Korea, are able to resist the lure of FDI or take an abruptly hostile attitude against it. On the contrary, most nations have been competing with one another to remove red tape and provide favorable regulations and incentives to entice FDI.
Amid the global race for FDI, many nations are relentless in their efforts to facilitate freedom of investment. If measures restricting foreign investment are imposed on a project, it is generally because it has evoked national security concerns or sparked political sensitivities. To avoid the negative impacts of FDI on national security, as well as to promote an investor-friendly environment, it is essential for policymakers to cautiously calibrate a prudent and transparent mechanism to oversee and scrutinize FDI inflows.
A recent case serves as an example. Last month, a US semiconductor company, Fairchild Semiconductor International, declined a US$2.6 billion acquisition bid by China Resources Microelectronic Ltd and Hua Capital Management Co, to prevent the risk of it being rejected by the Committee on Foreign Investment in the United States, which screens foreign investment for national security concerns.
The case indicates that a sound official supervision organization can effectively persuade private firms to take national security considerations into account when making business decisions.
Some might question how foreign investment, a seemingly harmless business activity, could trigger national security concerns. The links between FDI and national security are evident in two aspects. The first centers on where foreign investment comes from and the second points to the activities of foreign investment itself. For instance, it is likely to trigger an alarm if a significant amount of FDI originates from a rival state, due to uncertainty over its motivations. Likewise, it might raise eyebrows if a foreign firm attempts to take over a domestic firm which possesses critical technologies or plays a vital role in a state’s economy.
National security concerns are primarily sparked by FDI that comes from a state that is considered a potential enemy. Most nations have already established meticulous regulations to preclude unwanted foreign influences on critical industries.
A host nation might encounter the following risks from FDI originating from rival states.
The first risk is the potential of a fifth column effect. Foreign firms from hostile states might undertake espionage, infiltration and subversion activities in host countries, so as to undermine and disrupt political stability. In addition, foreign firms might deliberately attempt to persuade certain political figures in host countries to act on their behalf, shaping policy directions in accordance with their political agendas, thus impairing the independence of elected officials.
The second risk lies in the potential for strategically important technology to be leaked. Foreign firms from potential adversaries might attempt to merge or acquire a nation’s high-tech firms so that cutting-edge technologies might be acquired. It is of particular concern if such technologies are related to national defense or are vital to a nation’s economy. Given that the transfer of such technologies could pose a substantial threat to national security, most countries tend to adopt rigorous procedures scrutinizing any foreign investment in high-tech firms.
The third risk is the potential for dependence on foreign nations in terms of sensitive and key technologies. It certainly causes anxieties if a nation’s sensitive technologies are controlled by foreign firms from potentially rival states. If a foreign entity has a monopoly on sensitive technologies — that are critical to the host nation’s strategic defense industries — is almost equivalent to saying that the rival state enjoys the asymmetrical power to dictate political decisions in a host nation, because they can deny or manipulate access to those technologies to achieve their political aims.
The final risk is the potential for essential strategic goods and national assets to become controlled by foreign firms. As some strategic goods, such as natural resources, and national assets, such as harbors, railways and other infrastructure, are monopolies or oligopolies, most nations are vigilant against any foreign takeover bids in these fields. Since foreign control of strategic goods and national assets could undermine a state’s ability to prepare for war, most nations either impose strict limitations on, or cautiously screen out, foreign investment in these areas in order to safeguard national security.
These risks shed light on how foreign investment can pose challenges to national security and are critical for Taiwan. Due to Taiwan’s sluggish exports, gloomy economic prospects, and the emerging storm of the so-called “red supply chain,” the nation’s industries are increasingly calling for the government to lift bans on foreign investment, especially Chinese investment, in the hopes of attracting more capital and revitalizing the economy.
As the government’s disappointing record in drawing FDI has made Taiwan one of the least attractive destinations for foreign investors in Asia, it is certainly essential that Taiwan devotes more effort in this area to strengthen its global competitiveness.
However, while Taiwan needs to actively cultivate a business-friendly environment, it does not mean that the drive toward freedom of investment should outweigh concerns over national security. It definitely does not mean that the government should relax all regulations and accommodate the demands of foreign firms. Most importantly, freedom of investment should not take place at the expense of national security, as the latter is a vital cornerstone in a sustainable environment for the freedom of investment.
In addition, it should be fully understood that these four risks of FDI are severe challenges for Taiwan. It is an open secret that Beijing has manipulated Taiwanese businesspeople in a bid to influence the nation’s elections. Not only have Chinese firms recently shown great interest in buying Taiwanese high-tech firms, but some of them have already circumvented restrictions and penetrated the nation’s industries. Given the extremely imbalanced military capabilities of Taiwan and China, and Beijing’s unwavering political ambition toward Taiwan, there is no room for Taiwan to let its guard down to allow for freedom of investment.
The goal of national security is not to erect barriers to freedom of investment. On the contrary, a government’s oversight of foreign investment serves as a safety valve to protect the interests of all its citizens. Since it is unrealistic to expect private firms seeking to maximize profits not to act based on self-interest, it is the duty of the government to set limits and prevent firms from crossing boundaries and putting national security in jeopardy.
Even a strong advocate of investment freedom, such as the US, has maintained a rigorous and transparent mechanism to monitor foreign investment. The implementation of the monitoring system has not deterred FDI, but has actually educated foreign firms how to abide by the US rules, while effectively addressing the needs of national security. Therefore, investment freedom and national security should not be regarded as two incompatible concepts, but two mutually supportive tools serving the best interests of a nation.
It is time for Taiwan to revamp its dated FDI monitoring system and related regulations, not only to address the growing impact of Chinese investment, but also to respond to the latest requirements of regional trade blocs, such as the Trans-Pacific Partnership — in which Taiwan is eager to participate. Upholding the principle of transparency in the government’s FDI monitoring system is crucial. FDI originating from any nation, including China, must be rigorously scrutinized for national security concerns
A few years ago, the Organisation for Economic Co-operation and Development produced a series of reports on existing practices aimed at ensuring freedom of investment, while protecting national security. As the nation’s political leaders are facing mounting pressure from industries to “green-light” Chinese investments, what might be more critical is the role of foreign investment in Taiwan’s economy from a long-term strategic perspective.
The experiences of other nations might provide valuable reference points for Taiwan on how to harness the benefits of foreign investment, while keeping national security intact.
Eric Chiou is an assistant professor at National Chiao Tung University.
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