In July, the UN Conference on Trade and Development (UNCTAD) issued the 2012 World Investment Report (WIR), which revealed that foreign direct investment (FDI) inflows into Taiwan amounted to US$1.96 billion last year. This figure was the worst among East and Southeast Asian countries, and put Taiwan in the second-lowest place worldwide, only ranking above Angola.
The news has triggered criticism of the government’s efforts to boost the economy and has also spurred some immediate responses from the government in considering new initiatives for promoting foreign investment.
However, a quick fix can hardly cure a chronic illness, nor can it be expected to bring any substantial results. Without a thorough understanding of why Taiwan is no longer attractive for FDI and a prudent blueprint for the future role of FDI in Taiwan’s economy, any reckless pro-FDI policy will not address the root cause of the problems.
UNCTAD’s report highlighted more issues than just the FDI deficit. For example, the report’s FDI Attraction Index, which evaluates countries’ success in attracting FDI over the past three years, indicated that the economies of Taiwan’s neighbors Hong Kong and Singapore had made remarkable achievements in drawing FDI, and were respectively ranked No. 1 and No. 3 in the world.
By contrast, Taiwan’s ranking had declined for the fourth consecutive year, dropping to 151st place last year. The report also pointed out that China and Indonesia are ranked No. 1 and No. 4 as the most likely destinations for FDI worldwide in the period 2012-2014.
Similarly, other Asian countries, such as Thailand, Vietnam, Japan, South Korea and Malaysia, are also in the top 20. Taiwan remains anonymous and unattractive in the eyes of global multinational executives.
This disheartening reality is actually a wake-up call. If policy-makers have listened carefully, perhaps, they might be able to find the correct prescriptions to cure the anemia of Taiwan’s foreign investment.
Before pondering how to formulate feasible measures to attract FDI, policymakers should ask themselves a few key questions: Why does Taiwan need FDI? What kind of FDI should it look for? And what would be the expected contribution of FDI to Taiwan’s economy? The more unequivocal answers policymakers have, the better chance the government has of forming precise and effective policies to entice FDI.
FDI has been a major factor behind economic globalization. For a host country, FDI inflows bring numerous benefits, including the spread of technologies, dissemination of know-how and managerial skills, enhanced employment opportunities, facilitation of capital flows, and so on.
However, FDI can also induce adverse effects and unpleasant controversies, like the exploitation of labor and environmental destruction. Considering the various costs and benefits of FDI, the question of why Taiwan needs to devote effort to encouraging FDI becomes the foremost issue to be considered.
Does Taiwan lack the required FDI for capital formation to propel the economy? The answer is negative. Although official statistics show that Taiwan’s private investment rate has been declining for years, Taiwan’s FDI outflows have been on the rise, particularly the FDI outflows to China.
Moreover, despite the shrinking average wage, speculative ventures in Taiwan’s stock and real-estate markets have barely been restrained, while skyrocketing housing prices also show no sign of weakening. In other words, as a result of the government’s loose monetary policy, private capital is quite abundant.
Nevertheless, much of this capital has not been adequately transformed into more productive, long-term investments. The situation reveals that Taiwan’s lack of promising investment opportunities may be the fundamental reason for the lack of investor confidence and domestic investment in recent years.
The government’s inability to provide an appealing economic vision and a favorable business-friendly environment has been widely recognized. If the existing problems, such as excessive red tape and unnecessary regulatory constraints, remain unchanged, it may be difficult to expect that any short-term measure could revive Taiwan as a desired destination for FDI.
Another critical question that policymakers should ask themselves is: If Taiwanese companies and people maintain a negative outlook on Taiwan’s economic future and are reluctant to invest, why should multinationals be different? In the end, the key to attracting FDI lies in an improved business climate and the soundness of economic fundamentals.
What kind of FDI does Taiwan need? Taiwan needs foreign investments with long-term commitments that can make solid contributions to enhancing local employment, productivity and technologies.
More importantly, the successful utilization of FDI can play a leading role in revamping existing business practices, fostering export expansion, facilitating market competition, stimulating more cutting-edge innovation, and ultimately strengthening our competitiveness as a host country.
Taiwan should target FDI that satisfies our long-term economic objectives and generates positive “spillover” effects which benefit local companies and people. FDI should be expected to provide Taiwan with the latest technologies and marketing know-how in order to accelerate the nation’s industrial upgrading and transformation.
Additionally, the targeted FDI should be expected to create more cooperative opportunities with local firms, which will help Taiwanese small and medium enterprises (SMEs) to connect with global markets and gradually climb up the value chain.
Since FDI is essentially a profit-seeking activity, what is Taiwan’s appeal to multinationals? FDI is driven by four types of motives: natural resources seeking, market-seeking, efficiency-seeking and strategic asset-seeking. As Taiwan lacks natural resources, markets and strategic assets, it should focus on efficiency. High-quality human capital combined with dynamic SMEs have been the two important assets in Taiwan’s economic achievement. How to further highlight these advantages to multinationals is a crucial issue that policymakers should contemplate.
Furthermore, Taiwan’s rule-based, free and vigorous economic environment and stable, democratic political system definitely plays to our advantage. Actively engaging in free-trade agreement (FTA) negotiations and displaying the government’s determination for trade liberalization will build a positive image for multinationals. Nevertheless, whether it is necessary to oversell the special advantages of Taiwan’s economic links with China for attracting FDI may deserve further consideration.
Although Taiwan’s recent economic agreement with China helps its trading position and somewhat alleviates its marginalization from regional FTA competition, the record suggests that few multinationals investing in China had taken a detour by investing in Taiwan first. The economic and legal environments are too dissimilar.
Prior business experience in Taiwan is not a necessary prerequisite for multinationals to succeed in China. In other words, the advantage of engaging the Chinese market should be regarded as part of Taiwan’s FDI appeal, but not the center of it.
Finally, as policymakers attempt to revitalize Taiwan’s FDI inflows by initiating pro-FDI policies, several caveats deserve attention.
Encouraging FDI inflows by deepening Taiwan’s investment liberalization does not mean putting the “green light” on every sector. Concerns over national security, environmental protection and the interests of vulnerable domestic industries should be taken into account.
Ultimately, as the WIR emphasizes, “attracting FDI requires a stable, predictable and enabling investment climate.” To meet this challenge, the government needs a forward-looking vision, sophisticated planning, and swift and firm action, rather than just eye-catching slogans.
Eric Chiou is an associate research fellow at the Taiwan Institute of Economic Research.
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