Taiwan has for many years worked toward the “industrial upgrading” of its economy, with the government encouraging local manufacturers to increase their value-added ratio, and boost real output and tax revenue, while improving people’s livelihoods. Coupled with US-China trade tensions and the COVID-19 pandemic, which have realigned global supply chains and prompted the return of high-margin industries from abroad, the value-added ratio of Taiwanese industries has risen over the past few years.
The value-added ratio is the ratio of added value to total production value, and it has great relevance to a nation’s industrial development. In the past, local industries were often criticized for not generating high added value as their fixed-asset investments tended to focus on construction, transportation and manufacturing equipment rather than intellectual property.
National Development Council data show that local industries had seen their ratio of intellectual property to fixed-asset investment increase significantly from 24.3 percent in 2011 to 29.6 percent in 2019. As for information and communications technology (ICT) suppliers, a major economic pillar, their ratio also grew from 29.6 percent to 35.6 percent over the period, indicating robust potential in industrial upgrading and product innovation.
Based on Directorate-General of Budget, Accounting and Statistics (DGBAS) data released on Nov. 26, the overall value-added ratio of Taiwanese industries, including manufacturing and service industries, climbed to 48.45 percent last year, a record high in the past 19 years, and the manufacturing industry — which includes many segments such as machine tools, textiles, petrochemicals and auto parts — also reported a record ratio of 32.28 percent. The ICT suppliers’ ratio was 42.97 percent, while the figure was 42.24 percent for power and gas companies and 31.19 percent for construction firms.
Even though manufacturers spend a lot on raw materials and other intermediate goods, which affects their value-added ratio, most have reported significant progress in creating added value in the past few years. DGBAS data show that the value-added ratio of the manufacturing industry increased by 12.4 percentage points from 2011 to last year, while that of the ICT segment expanded by 15.27 percentage points over the same period. This improvement followed a substantial enhancement in the gross margins of companies over the past decade as they geared up for research and development, to specialize their product offerings and deepen their niche areas of expertise.
Private investment is another key factor that drives production potential. It explains why the manufacturing industry has been able to continue raising the value-added ratio over the past few years, despite fierce international competition and fluctuations in raw material prices, as the government’s “Invest in Taiwan” initiative has convinced a growing number of companies to return home.
The three-year scheme provides incentives to companies seeking to move production to Taiwan from China or to expand their local facilities. Its goal is to accelerate the transition of value-added manufacturing, while rewarding projects that meet smart manufacturing and strict environmental requirements with favorable loan terms and help with finding land and skilled labor. As of Friday, 1,082 companies had invested more than NT$1.5 trillion (US$54.11 billion) in Taiwan through the initiative, the Ministry of Economic Affairs said.
Obviously, there is more to be done to upgrade the investment environment and convince more high value-added businesses to return home. The more profit businesses make, the more tax revenue the government can collect, and it would be easier to maintain a virtuous cycle between the nation’s economy and fiscal fronts. On the other hand, a higher ratio of industrial added value means a more stable and healthy economic structure.
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