Taiwan as Regional Hub: What are the Chances?

As a center of operations for local and foreign businesses across numerous industries, Taiwan has a lot to offer. However, some lingering issues require creative solutions if it is to compete on the same level as some of its neighbors.

Back in the 1990s, the idea of Taiwan becoming a regional operations hub for a variety of industries was a popular topic of discussion. The plan never made much headway, however, in part because of the lack of direct flights connecting Taiwan with mainland Chinese cities.

Now that the U.S.-China trade war and unrest in Hong Kong are causing many multinational businesses to rethink their operational strategies in the Asia Pacific, the notion of Taiwan serving as a hub is again receiving some attention.

Even before the recent turn of events, some major individual companies had decided to locate their regional headquarters in Taiwan. But largely due to political factors, the chance that Taiwan could realize its former dream of becoming a full-fledged “Asia-Pacific Regional Operations Center” – or a general regional hub – still seems as remote as ever.

Twenty-some years ago, the Taiwan economy was riding high as one of the four “Asian Tigers,” recording growth rates that were among the world’s highest. Since then, Taiwan’s comparative advantage for the role of regional hub – in the sense of a leading center of commercial activity – has receded in many respects as other locations such as Shanghai have risen to prominence.

Still, Taiwan can offer some key benefits for businesses that set up a base here, including relatively low personnel costs and operating expenses – without a compromise on quality – as well as comfortable living conditions.

Because of Taiwan’s positive attributes, it is now poised to become – if it is not already – a regional hub for two industries in particular: namely, wind power and high-end technology research and development. These are discussed in more detail in the accompanying story in this section.

In vying to be a regional hub, Taiwan has a number of advantages, but also some notable shortcomings. Although it has greatly improved its standing in recent years in international competitiveness surveys, it has still been unable to break into the top tier alongside Singapore and Hong Kong. 

In the World Economic Forum’s Global Competitiveness Report 2019, for example, Singapore took first place, with the U.S. second, and Hong Kong third. Taiwan came in at a respectable – but second tier – No. 12, ahead of South Korea at No. 13 and Australia at No. 16.

Altogether 141 economies were assessed in 12 categories that included infrastructure, macroeconomic stability, and health. Taiwan’s best score – ranking No. 4 in the world – was in the category of “innovation.” The only countries rated higher for innovation were the U.S., Germany, and Switzerland.

Meanwhile, on the World Bank’s Doing Business 2020 survey, which evaluates the ease of doing business in 190 economies, Taiwan ranked No. 15, compared to Singapore at No. 2, Hong Kong at No. 3 and Malaysia at No. 12, showing Taiwan could use a lighter regulatory touch if it wants to catch up to its neighbors.

Compared with regional rivals, Taiwan is a distinct bargain in terms of operating and living expenses. This year the annual Cost of Living Survey by Mercer, the U.S. human resources consulting firm, rated Hong Kong as the world’s costliest city, followed by Tokyo and Singapore. Shanghai came in 6th place and Beijing 8th. The survey considered the prices of items such as housing, food, and utilities for expatriates; it found that Taipei had dropped eight places to an inexpensive No. 35.

Tony Chao, Taiwan Country Head for real estate consultant Jones, Lang  La Salle, notes that office and residential rents in Taiwan are relatively cheap for the region. A recent report from the company found the average Grade A rent per square meter per annum in the upmarket Xinyi District to be US$545, compared to a whopping US$2,060 in Hong Kong, US$964 in Beijing, US$928 in Tokyo, and US$820 in Singapore. (Surprisingly, however, Seoul was cheaper at US$457.)

Chao also notes that while property prices in Taipei are comparable to those in Shanghai, the cost of renting a place to live is much lower than in Tokyo, Shanghai, and Singapore. Monthly rent for expatriate accommodations in Hong Kong would be about double the Taipei level, Chao estimates, while rents in Taipei are about a third that of Shanghai’s.

Electricity and water are also relatively inexpensive in Taiwan, as is the excellent medical care. Enrollment in the National Health Insurance system is compulsory for all residents and offers a comprehensive set of services, including Chinese medicine, dental care, and hospitalization. Co-payment for dental care can be as low as NT$50 (US$1.64).

A key advantage for Taiwan is its geographic position in the center of Asia, with most of the key business cities in the region about a two- to three-hour flight away.

Expats often rave about the friendliness of the Taiwanese people. They also appreciate that Taipei and the other cities do not feel like a concrete jungle, since both mountain getaways and seashore beaches are conveniently close. Transport links, including Taipei’s network of Mass Rapid Transit lines and the High Speed Rail running the length of the island, are well-maintained and easy to use.

Not all is well with the infrastructure, though. After the recent collapse of a bridge in the northeastern county of Yilan, killing several migrant workers, it was reported that nearly a quarter of the island’s 4,025 bridges had not been properly maintained. Air quality is also a continuing problem, due mainly to the large number of coal-fired power plants, although it is still significantly better than many other locations in the region.

Mercer’s 2019 Quality of Living Ranking ranked Taipei as the 9th most livable city in Asia and 84th most livable in the world. It assessed such factors as the availability of housing, recreational facilities, consumer goods, and public services, as well as the political and natural environment, all with expatriates in mind. Vienna topped the list, with Singapore at No. 25 in the lead among Asian cities, closely followed by Tokyo and Kobe. Among mainland Chinese cities, Shanghai was deemed most livable with a ranking of 103. 

Some downsides remain

Among the negatives impeding Taiwan’s ability to act as a hub include salary levels that have stayed roughly flat for around two decades, while they have grown in nearly every other part of Asia, particularly in Hong Kong and Singapore. According to the Directorate General of Budget, Accounting and Statistics, the average monthly income in September was NT$51,657 (US$1,692) for full-time workers once bonuses and other irregular payments were accounted for. In contrast, the gross average monthly income in Singapore is the equivalent of US$3,247, according to the Singaporean government.

Economist Yeh Chi-jen of the Taiwan Institute of Economic Research notes that a Taiwanese associate professor makes about NT$80,000 a month. He estimates that a Singaporean university would offer around three times more.

For foreign businesses hoping to set up shop in Taiwan, a lower payroll can be a plus. But it is a minus if Taiwan wants to attract the best and brightest from around the world to contribute their talent to the economy.

Stagnating salaries have led to a brain drain, with about 736,000 people – often high earners – working overseas in 2017, according to the Mainland Affairs Council.

Wang Jiann-chyuan, vice president of the Chung-Hua Institution for Economic Research, says that it could even be hard for Taiwan to attract blue-collar labor from ASEAN nations in the future, as “the wage differential between ASEAN and Taiwan is probably very close.” Consequently, Wang suggests that Taiwan will probably need to follow Japan’s example and utilize more automation in its factories.

The National Development Council stresses the government’s efforts to ease regulations regarding the hiring of foreign workers. For example, it early last year launched an Employment Gold Card aimed at attracting skilled foreign specialists. Recognizing that such specialists are often self-employed, the program does not tie residence rights to work for a specified employer. But any such measures cannot be fully effective if salaries are not regionally competitive.

One of the prime characteristics companies are certain to seek in a regional hub is the availability of sufficient personnel fluent in English, the international language of commerce.

In an indication that Taiwan is lagging in this respect but is determined to improve, the government late last year announced the “2030 Bilingual Nation Development Blueprint” with a goal of creating an English-friendly environment within a decade. The program will make English learning more immersive by incorporating the language into instruction in the schools in a broad range of subjects, even physical education. So far 67 elementary and high schools in around 20 cities have taken part in these programs, while teaching in English is also being encouraged at the university level.

The Taipei City government’s kickoff for a program to incorporate more English into the curriculum in the city’s schools. Photo: Taipei City Government

Starting next year, several local banks will launch pilot bilingual branches, and the Ministry of Justice has begun providing the main points of indictments in English when foreigners or foreign companies are charged with legal infractions in major cases. 

Many observers find the government’s plan to be admirable but perhaps unrealistically ambitious. Nicholas Chen, managing partner of the Pamir Law Group, notes that Singapore, even with its British colonial influence, took 20 years to establish an English bilingual policy. When Taiwanese government agencies provide an English-language website, he observes, it is usually outdated and not user friendly.

“English is the lingua franca, and if it isn’t adopted at the front end – the government – foreigners are unable to access critical information to determine if Taiwan is a potential place to relocate to,” says Nicholas Chen. In comparison, he adds, the website of China’s Ministry of Commerce is internationally focused, with multilingual support not only in English, but also in French, Russian, Spanish, and German.

Another consideration for multinational companies is the availability of schooling for the children in expat families. Local schools are usually out of the question because so much of the curriculum is taught in Mandarin. “The international schools have Western, English-taught curriculums, but the criteria to get in is tough, plus they can be expensive,” Nicholas Chen notes.

For instance, grades 9-12 at the Taipei American School cost an annual US$27,007, according to data on the school’s website, just slightly lower than the tuition and faculty fees for the Singapore American School of US$32,322.

Taiwan’s stagnant salaries also place a big question mark over whether Taiwan can hire the best professionally trained foreign English teachers at its public schools, given that other countries in the region are also hiring.

In addition, Taiwan’s tax regime is not as attractive as those of Hong Kong and Singapore. The maximum personal income tax rate in Taiwan is 40%, compared to Singapore’s 22% and Hong Kong’s 17%. Taiwan, which needs to administer a much larger and more diverse area than Hong Kong or Singapore, faces steeper government expenses than these megacities. It is unlikely that Taiwan could meet its budgetary needs with an income tax rate similar to that of its two rivals.

Arthur Chen, a tax partner with Deloitte Taiwan, also notes that Singapore and Hong Kong only tax income earned in their own territory, both for individual and corporate tax. In contrast, Taiwan has a global taxation regime. In principle, if expats receive dividends from shares purchased and distributed in their home country, they still need to pay tax to the Taiwanese authorities.  “I don’t know how we can make it competitive unless we change from global taxation to residential basis taxation,” Arthur Chen says.

He also points to quirky tax regulations that are inconsistent with international tax principles. For example, foreign companies without a branch in Taiwan and whose executives have never visited the island can still find themselves with a Taiwan tax obligation in the form of a 20% withholding tax on what is deemed to be “Taiwan-sourced income” – for example, on the sale of R&D services to a Taiwanese company, even if the services were not performed in Taiwan.

“Taxation in Taiwan is not necessarily aligned with international practices,” Arthur Chen says, and as a result “multinationals hesitate when considering Taiwan as a multinational jurisdiction.”

In a similar vein, foreign companies have complained about instances in which Taiwan’s regulatory practices deviate from accepted international ones. Problems can also arise due to bureaucratic vagueness or inconsistent interpretations of rules from different government agencies.

Another question hanging over Taiwan’s suitability as a hub is the always sensitive, increasingly challenging cross-Strait relationship. Beijing cut off official communications with the Tsai Ing-wen administration when President Tsai declined to accept any version of a “One China” policy after taking office in 2016. Recently Beijing has stepped up pressure on multinational companies operating in Taiwan to refer to the island as a part of China.

Chinese influence has also excluded Taiwan from nearly all of the world’s network of free trade agreements. It will undoubtedly also keep Taiwan out of what could become the world’s biggest trade agreement – the China-backed, 15-member Regional Comprehensive Economic Partnership, which is slated to be signed next year.

Still, Taiwan is a party to the World Trade Organization’s Information Technology Agreement (ITA), which eliminates tariffs on a wide range of the technology products that are a major pillar of the Taiwanese economy. CIER’s Wang considers the ITA provision to be one of the reasons why Taiwan could be successful as a technology R&D hub. A bilateral trade agreement with the U.S. could help Taiwan further capitalize on its strengths and mitigate against economic isolation, economists say.

Yet another of Taiwan’s assets is its free and democratic political system. “The key advantage Taiwan has is that it is one of the only completely free societies in Asia in a region that is going backwards,” says Hsieh Chang-tai, an economics professor at the University of Chicago. “That is a huge plus for Taiwan. The question is how to build on that in terms of making a living.”