No progress in economic thinking

By Bert Lim 林建山  / 

Sun, Apr 28, 2013 - Page 8

Two recent cases have shown the huge gap between the nation’s government and public on the one hand, and the global economic community on the other, in terms of how they perceive the capability and value of free-market enterprises.

One example is how, in the face of a global trend for mergers and acquisitions in recent years, the nation’s tax authorities place no value at all in goodwill, such as a company’s business reputation and other symbols of economic value.

To the authorities, only physical assets have value that can be entered into the accounts and be tax deductible.

Another example is the Taipei Twin Towers development project.

With registered capital of NT$77 million (US$2.6 million), Taipei Gateway International Development Co successfully bid for a project worth more than NT$70 billion.

The project’s third-priority bidder had registered capital of just NT$5 million. This led to doubts as to how a company whose capital is just 0.1 percent of the project cost could take on such a project.

These two issues highlight that Taiwanese society retains the intellectual framework of agricultural societies, believing that the capability and value of a company is reflected in the value of assets that can be seen and counted, such as its number of staff and the value of its assets.

When looking at a company’s past performance, the only thing apart from physical indicators that has economic value are production capacity and revenue. Current performance and futurities — possible future performance — are not taken into account.

With the beginning of globalization in the 1980s, and the post-knowledge economy era in 2000, assessment of the capability and value of companies has shifted from traditional supply-side thinking to more forward-looking, market-focused demand-side thinking.

Thus, assessments no longer consider past physical capital, number of employees or physical assets as key indices of value. Rather, market penetration, market share, market persuasion, market trust and market confidence are considered key rating criteria.

Business rights, trading name and trademark rights, intellectual property rights, patents, network topology rights, network access rights, time and space usage rights and management model rights have market value in the new global economy.

Hence, many advanced economic societies’ criteria for assessing a company’s capability and value have turned from physical to virtual criteria, and from looking to the past to looking to the future.

This is also why in the international investment market, more investors are using “dream benchmarks” and even the “price-to-dream ratio” — instead of “price-to-earnings ratio” — as assessment criteria for policies, decisions and other matters.

Among the world’s 500 most reliable businesses, the mining and manufacturing industries had taken the lead before globalization began in the mid-1980s.

However, over the past 30 years, the network sector has risen and surpassed many traditional enterprises in terms of performance ranking. Moreover, a new trend has appeared as the virtual network sector surpasses the fixed network sector.

For such new economic paradigms, using physical assets to increase profit by 1,000 or 10,000 times is recognized and expected.

The two Taiwanese examples mentioned earlier reflect outdated and flawed thinking made in the absence of regulations or precedents.

Meanwhile, elected institutions and social populism reject new economic models based on thinking rooted in a traditional agricultural society.

As a result, it is becoming increasingly difficult to upgrade the Taiwanese economy and get it on track with the rest of the world.

If the nation remains stuck in the physical economy, and fails to see the future, importance and dominance of the symbolic economy, how will it ever be able to create enterprises such as Google or Facebook?

A major problem is that accounting principles, based on the mindset of agricultural societies, and regulations based on the physical economy, are not ready to tolerate or recognize the market value of a new knowledge-based society. This denies the feasibility and suitability of using real assets to operate a business that may increase profit by 1,000 or 10,000 times.

This kind of institutional obstacle is the worst hindrance to economic innovation, industrial upgrade and a breakthrough in businesses operations.

Such an approach would seriously damage the attractiveness and competitiveness of Taiwan’s investment environment.

This is a serious problem that those in positions of power and the public must tackle head-on.

Bert Lim is president of the World Economics Society.

Translated By Eddy Chang