Opinion is divided as to whether the designation is positive or detrimental for companies operating in the Taiwan market.

For many multinational corporations and other organizations, the treatment of Taiwan together with China and Hong Kong as the combined sub-region of “Greater China” has become common practice as a way of managing their activities within the Asia Pacific. Rather than being a political statement, in most cases this arrangement is merely a response to regional development trends over recent decades, as well as an acknowledgment that linguistically and culturally the three areas have much in common.

But what is the impact on the Taiwan entities of being treated under the umbrella of a “Greater China” division? Does it bring them more attention within their parent organizations by being associated with the fast-growing Chinese market, which is almost universally considered crucial for corporate profitability, if not today then in the future? Or does overshadowing by China distract from Taiwan’s claim on corporate attention and resources? Would it make more sense to place Taiwan in the same division as South Korea, an economy with which it has many more similarities?

Sound arguments can be made on both sides of the question, and the answer may well vary from institution or institution.

As background, “in terms of the notion of Greater China as a region, it has been the supply chain that has been the driver of this integration,” says a consultant involved in Taiwan’s economy for more than two decades. “Taiwan drove its supply chain across the Strait in the late 80s and 90s. In many ways, multinationals from the U.S. and other countries have simply been going along for the ride.”

Its Asian Tiger heyday behind it, Taiwan has been relegated within many corporate organizations to something akin to a Chinese province. With regional headquarters increasingly shifting from Hong Kong to China itself, multinational executives in Taiwan now frequently find themselves reporting to superiors in Shanghai or Beijing.

“Some people might feel disappointed about the trend of Taiwan being part of Greater China operations, seeing it as a downgrading of Taiwan’s importance in terms of global strategy,” says Lin Chun-pu, assistant research fellow at the Regional Development Study Center of the Chung-Hua Institution for Economic Research (CIER). “But I think it is common for multinationals to adjust their administrative structure according to market dynamics, especially considering the market size of China and other factors, such as reducing management cost.”

One American executive based in Taiwan says he is not a fan of combining the ROC and PRC markets into one area for management purposes. “The addition of Taiwan makes China greater, but it’s unclear what it does for Taiwan,” he says. “There’s an element of laziness to it – it’s just easier for managers to lump Taiwan and Hong Kong under a Greater China umbrella, despite their significant differences from the Chinese market.”

That said, the executive also noted several potential upsides to subsuming Taiwan commercially into Greater China – with the caveat that similar positive outcomes could be achieved in other ways. With corporate resources doled out according to market size and growth potential, for example, China is often allocated a large share of resources, while Taiwan is allotted much less.

“It’s probably easier for a Taiwan general manager to make a case for greater resources if it’s part of a Greater China structure because Greater China will be relatively flush with resources,” he observes.

Additionally, he notes, an increasing number of stakeholders in Taiwan, including both individuals and businesses, may see their futures tied to China – economically if not also politically. “From this perspective, being grouped under a Greater China approach may be viewed by some Taiwanese as a useful bridge,” he says.

Going back to the 1980s, Taiwanese businesspeople were among the earliest foreign investors in China. This long-term exposure to Chinese business and cultural norms, plus of course linguistic considerations, makes it relatively easy for Taiwanese to deal with a China-based regional headquarters. But cultural understanding isn’t necessarily a two-way street, says Michael Fahey, an associate at the Taipei-based law firm Winkler Partners.

“In my experience, it seems fairly easy for Taiwanese staff to deal with their Chinese peers or management, but the lack of Taiwan expertise in China often makes managing the Taiwan operations a bit difficult for either expat or Chinese management in Shanghai,” Fahey says. “In the end, they often end up having to hire outside advisors in Taiwan to help them.”

Two countries, two systems

The differences between Taiwan and China – which are much bigger than many China-based managers may realize – can be viewed either as a challenge to doing business or as an asset.

“There are so many areas in which Taiwan is years if not decades ahead of China,” said the American executive in Taipei. “Taiwanese can share best practices within their business or industry, as well as regulatory and management expertise. Within a Greater China framework, this could potentially be done more effectively.”

It is Taiwan’s distinctness and the different path it has taken to development that offers value to multinationals with operations on both sides of the Strait, he said. Companies who do operate under the Greater China model would be well advised to maintain the differences that give Taiwan its value within such a context.

“The ability for Taiwan to do so much in every sphere for China is dependent upon Taiwan doing things its own way,” he said. “By erasing distinctions, corporations will reduce diversity, with potential downsides for China operations. You may lose unique contributions from Taiwan.”

“The greatest problem is that Taiwan is in every way vastly different from China, running on its own operating system,” he added. “The synergies from a shared language are more likely than not going to be outweighed by a different market and regulatory environment, with a higher risk of conflict or misunderstanding than when dealing with places where the differences are known from the start.”

Such a dynamic creates the possibility of potential legal and reputational risks for companies, he said. Routine practices in China could violate laws or regulations in Taiwan, possibly leading to a high-profile event requiring PR damage control. When people come to Taiwan from China with a politically charged approach, that risk increases.

IP risk is also an issue. When merging entities or IT systems of operations on both sides of the Strait, multinationals will need to be careful that their Taiwan-based intellectual property does not become as vulnerable as their China-based IP.

For those multinationals that choose to use a Greater China framework, there are ways of mitigating risks, says Lin of CIER. “One example is found within some multinationals whose Taiwan subsidiaries maintain autonomy in certain specific functions, such as research and development,” he notes. “Additionally, some companies appoint the former Taiwan country head to lead the Greater China or Asia Pacific regional market, which demonstrates Taiwan’s strategic importance.”

That strategic value is not guaranteed going forward over the long term, however. Taiwan is encountering mounting challenges in the face of competition from China and other growing Asian economies, says Lin. “Taiwan needs to strengthen its competitiveness through industrial transformation, regulatory reforms, and recruiting and retaining talent in order to ensure its strategic value for multinationals.”

While it can’t compete with China in size, Taiwan does have certain unique strengths that some corporations are using to their advantage. “What we do see more of since about 2010, especially with European companies, is running pan-Asian sales and support services from Taiwan,” says Fahey of Winkler Partners. “The main reasons are the quality of life in Taiwan and the convenience of travel” from Taiwan to other parts of the region.

Politics, politics, politics

In the era of Xi Jinping, China has become more politicized than it was under his predecessors, and Beijing has shown greater willingness to mobilize public opinion to pressure multinationals to toe its political line regarding Taiwan, as evidenced by recent incidents over how such companies as Delta and Marriott referred to Taiwan on their websites.

With Xi declaring that China has entered a “new era,” it is difficult to know what additional pressures might be in store, and how they may affect companies with operations that straddle the Taiwan Strait. This issue is not only one for Taiwanese employees, but for Chinese as well, who may make decisions based more on political considerations than on the best interests of the company.

“One issue that can arise when Chinese are in charge of a multinational’s Greater China operations is that due to the heavily politicization of Taiwan on the mainland, they will be less willing to press his or her case regarding Taiwan,” said the Taiwan-focused consultant. “Chinese managers are very risk averse.”

From a Taiwan perspective, the stakes are likely much higher. Given Beijing’s political ambitions regarding Taiwan, greater cross-Strait business integration will provide China with greater opportunity to leverage economic considerations for political ends.

“Mixing business and politics is risky,” the Taipei-based American executive said. “I have a sense, and may be wrong, that the Chinese government is likely quite happy to see Taiwan merged into Greater China operations within multinationals. I think it’s a dangerous precedent and could cause other unforeseen problems down the road.”