Boosting the Economy through FDI

In an increasingly unfavorable overall environment of declining exports and anemic domestic consumption, Taiwan needs to be taking advantage of all possible ways to reinvigorate its economy.

One policy suggestion that appears on almost every list of potential solutions is to heighten Taiwan’s capability to attract foreign direct investment. Although FDI is often mainly thought of as a source of capital, even more significant for Taiwan is that it serves to create job opportunities, introduces innovative technologies and new business platforms, and ties Taiwan more closely to the regional and global economy.

Unfortunately, in recent years Taiwan been lagging far behind most other major economies in the region in its FDI totals. In fact, with US$5.8 billion in FDI in 2014, Taiwan came in dead last among 12 leading Asian locations, according to data compiled by the Hong Kong-based Political and Economic Risk Consultancy. Taiwan’s total was surpassed not only by China, Hong Kong, Singapore, India, Indonesia, and Korea, but also by Thailand, Malaysia, Japan, Vietnam, and the Philippines.

Numerous factors may account for the relative lack of investment interest. Among them may well be the difficulty Taiwan has faced in entering into bilateral and multilateral free trade agreements to help it retain competitiveness against trade rivals. For that reason, it is crucial for Taiwan to gain accession to the emerging Trans-Pacific Partnership trade grouping when it expands beyond the current 12 negotiating parties.

Improving regulatory coherence, for example by tackling many of the problems raised in AmCham Taipei’s annual Taiwan White Paper, would also create a more welcoming investment environment. Last year the government conducted an internal survey of areas in which Taiwan’s regulatory practices and standards are out of step with international norms. Speedier action in rectifying those discrepancies would certainly cause the multinational business community to take notice.

It is also highly relevant that for the past six years, Taiwan has attracted hardly any projects promoted by major international Private Equity (PE) firms. Elsewhere around the region, PE transactions have been responsible for massive amounts of investment. What has deterred PE deals in this market, in the opinion of AmCham Taipei’s Private Equity Committee, has been the sense that the investment approval process is opaque, leaving potential investors uncertain as to whether a given project will be deemed acceptable by the authorities. Without at least near-certainty, rather than spend large sums up front on due diligence and professional fees, the PE companies have largely stayed away.

Thankfully, however, a series of productive meetings has taken place over the past few years between representatives of the AmCham committee and government officials from the Investment Commission and the Financial Supervisory Commission. The results were encouraging. The committee members were assured that a number of rather vague criteria previously used in evaluating investment cases – such as the possible impact of the deal on supply chains or capital markets – would be either clarified or dropped. Since then, however, there has not yet been a clear statement in writing setting out the specific objective criteria on which investment applications will be judged.

Once investors are confident that they know what the rules are, they can shape a project to fit those parameters. But in the absence of transparency, Taiwan will be hard put to attract the FDI levels it needs to boost the economy.