Business environment in Taiwan

Business Environment in Taiwan

Taiwan is an island situated approximately 180 kilometers (Eastern Asia) away from southeastern coast of mainland China. Having a geographical area of 35,883 Km2, Taiwan is officially part of the Peoples Republic of China (PRC) although there is much tension between Taiwan and China regarding statehood of Taiwan. The U.S. however does not acknowledge Taiwan as a separate state. Taiwan has a population of 23 million (consisting three main ethnic groups i.e. Taiwanese, Mainland Chinese, and indigenous people) and Taipei is the capital city of Taiwan. Of late, relations between Taipei and Beijing have been cordial. Taiwan follows a civil law system and has a multiparty democracy as governance system (Department of Investment Services, 2013). Being a thriving economy based on hi-tech industrial base and trade relations with most of the developed world, the country is deemed an important destination by multinational corporations (MNCs) for the purpose of their company's internationalization strategies. This paper aims to present an informed analysis regarding political, economic, social, and technological (PEST) conditions prevalent in Taiwan. Business climate in Taiwan will be analyzed and evidence regarding prevalent conditions will also be presented. The paper will conclude by restating the main findings and recommending the appropriate course of action for foreign investors in the Taiwan business markets.

Political

Top-down analysis of a country helps in presenting a comprehensive picture regarding investment friendliness of any country. PEST is used as a macro environmental analysis tool. It help managers and business leaders make critical decisions before committing their investments in specific geographic locations of the world as part of internalization strategy. Political environment includes government stability in a country, governance efficiency and corruption level of state administration, along with governmental regulations regarding taxation, competition, and market-based economic activity. As per 2011 statistics published by World Bank, Taiwan ranked nearly 80% for aggregate indicator called 'Political Stability and Absence of Violence' (World Bank, 2011). Taiwan's political culture is based on 'rule of law' as it was termed as thriving democracy and 'vibrant market' economy by the U.S. Department of State (U.S. Commercial Guide, 2013; p. 2). Although it seems that Taiwan might be facing political instability due to strained relationship with China over former's status regarding nationhood, practically the Taiwan political elite and administration has maintained promising relationship with China to further economic progress. Taiwan not only maintains friendly and cordial relations with Asian countries but also boasts having strong trade partnerships with most of the developed world including the U.S. And Australia. Taiwan was also ranked amongst top 20% of the 212 countries for indicators such as 'Government efficiency' and 'Quality of laws and regulations'. World Bank in its 2011 reported mentioned percentile rank of Taiwan for 'accountability' as being above 70. In 2011, government effectiveness in Taiwan was reported to be 85% (World Bank, 2011). The WB statistics indicate that since the mid 1990s, government effectiveness in Taiwan has remained above 80%. This validates the notion that Taiwan enjoys high political stability in the region. Aggregate indicators of 'regulatory quality' and 'rule of law' were also reported to be higher than 80%. Corruption control index ranked by World Bank (2011) was just below 80%. Corruption Perception Index (CPI) of Taiwan, as reported by Transparency International (TI) was 37 out of 176 countries. However, bribe payer's index was as high as 19 out of 28. Some lax regulations in customs and court proceedings held responsible for growing bribe culture in Taiwan. Nonetheless, Taiwan maintains high political stability despite her 'unclear' legal status. Political stability of Taiwan is evident from her trade relations with China (despite disputed nationhood status), the U.S., Australia, and other Asian countries. Researchers have cited political stability and favorable image of countries such as Hong Kong and Taiwan as an important factor for their economic progress taking place via foreign direct investment FDI (Quazi, 2007; Liu & Wang, 2003).

Economic

Economic environment of a country directly impacts existing and potential foreign investments. The environment includes economic growth rates, inflation rates, interest rates, monetary and trade policies of respective government, and labor market conditions. Being an 11th largest trade partner of the U.S. (U.S. Commercial Service, 2013), Taiwan has maintained high growth rate of her economy. In 2012, the GDP of Taiwan was reported to be $140.421 million, up by $3.678 million as compared to the GDP of previous year. The economy of Taiwan registered a growth of 1.3% in 2012 compared to 2011. Estimated GDP for FY 2013 is $143.849 million. Inflation and unemployment rates are also kept under tight control by the government in Taiwan as it reported having just below 4% of unemployment and an inflation rate of 3.8% in 2012. The country managed to accumulate foreign exchange reserves of $403 billion, seventh largest in the world. With strong economic indicators during last three to four years, Taiwan remains 16th largest export market of the U.S. products. Large scale bilateral trade agreements by Taiwan have given an impetus to its existing economic growth.

Taiwan's economy is intertwined with major markets of the developed world such as the U.S., Japan, China, Hong Kong, and advanced European countries. A downward trend in economic progress of European countries also impacted Taiwan whereby the economic growth slowed down to 4.03% in 2011 compared to 10.8% in 2010. Inflation was arrested by the government under 3% while in years 2002 and 2009, there were actually deflationary trend in the economy. Rising population coupled with economic growth has led to the origination of consumers that seek high products such as baby foods, machinery, health services, and new businesses. The government remained successful in curtailing the unemployment rate below 4.24% in 2012, compared to 4.39% in 2011, the FDI in Taiwan increased by 12.3% in 2012. FDI growth rate was 30% in 2010. This indicates that being an export oriented country; Taiwan's economy is barely able to sustain global financial shocks and recessions (Taiwan's FDI was approximately $4.9 billion in 2011 and $5.5 billion in 2012). Economic growth rates were -1.81% in 2009, 10.76% in 2010, 4.07% in 2011, 1.32% in 2012, and estimated to be 2.4% in 2013. There seems great deal of fluctuation in economic growth rates; this indicates that the economy is susceptible to international monetary and fiscal shocks. Taiwan also reported having above 14% in annual foreign trade during FYs 2011 and 2012. World Economic Outlook (2013) published by IMF indicated Taiwan's Real GDP growth at 1.3% in 2012, 3.0% in 2013, and 4.4% in 2014. Inflation rate was 1.9 in 2012, 2.0% in 2013 and 2014 (World Economic Forum, 2013). By becoming member of World Trade Organization (WTO) in 2002 and WTO Government Procurement Program in 2009, Taiwan has in effect reduced non-tariff barriers. Information and communication technology (ICT) products dominate exports by Taiwan, such as those including optical instruments, machinery, and electrical products (U.S. Commercial Services, 2013).

Social

Social environment of a country includes health indicators, education levels, use and attitude toward imported goods and services, lifestyles, demographics, and urbanization. The data indicates that life expectancy in Taiwan has increased from 76 years in 2001 to 78 years in 2012. Increased population growth and increment in disposable income has translated into manifold hike in demand for consumer goods such as imported luxury items, health products, travel, and leisure services. Birth rates have also decreased owning to increased economic growth in Taiwan. Being a 'typical' Eastern locality, Taiwan has a collectivist culture. Firms intending to expand into Taiwan must be responsive to cultural sensitivities of Taiwan.

Technological

Technological environment of Taiwan that includes basic technology infrastructure, R&D expense by local firms, technology incentives, communication infrastructure, and internet penetration are all reflective of 'an advanced' economy. In fact, Taiwan is a an exporter of ICT products that include Smart Phone, smart TVs, Notebook PCs, global positioning system (GPS) devices, video phones, touch screens and panels, random access memory (RAM) circuits, etc. Taiwan has more than 60% of her population using internet. Internet connections, PCs, TVs, broadband cables, and fiber optic cables form technology infrastructure in Taiwan, both at individual and state level. Fixed-phone line, 3G internet services, and all contemporary technology infrastructures are present in Taiwan (Internet World Stats, 2013). Taiwan, from her share in global electronics market, can be termed as an 'innovation-based economy' (Lalkaka, 2002). Favorability of Taiwan's technology infrastructure is evident from World Economic Forum's '2013 Global Information Technology Report' that ranked Taiwan 11th out of 142 countries for 'The Networked Readiness Index' (World Economic Forum, 2013). To sum it up, Taiwan is amongst the four 'Asian Tigers' i.e. Republic of Korea, Hong Kong, and Singapore, having outstanding innovation and business environments.

Evaluation of current events: Significance for investors

Several events in Taiwan have considerable significance for investors belonging from mainland China, Europe, and specifically the U.S. It is generally observed that visa procurement is the most cumbersome process that investors and business travelers have to undergo while travelling to foreign countries. In this regard, Taiwan entered the U.S. Visa Waiver Program (VWP) that will allow Taiwan ICT sector customers to obtain 90 days visa free entry into the U.S. territory. This will allow the U.S. raw material suppliers (for Taiwan's ICT sector) to freely interact with their existing and potential clients and follow-up through their own visits at a later stage to Taiwan. The Ministry of Economic Affairs Taiwan also reviewed a 'negative list' containing items legally allowed for foreign investment. Items in this list were reduced from 52 to 30. Except shareholding ratios and industries involving national security, Taiwan now allows all industry sectors open to FDI. Services sectors, specifically financial services are now accessible for foreign investors to invest money. MOEA also recommended waiving off the requirement of 'pre-investment' approval by foreign nationals (Council for Economic Planning and Development, 2013). This will significantly reduce the time required for making FDI in Taiwan along with simplification of investment process. As mentioned earlier, services sector has been specifically opened up by the government of Taiwan. Taiwan recently reduced minimum annual operating revenue (from NT$10 billion to NT$6 billion) for airline carriers that operate international passenger routes in Taiwan. Landing fees were also reduced as far as 50% at some of Taiwanese major airports such as those at Taitung, Kinmen, Tainan, etc. (Council for Economic Planning and Development & MOTC, 2013). Under the guidance of American Chamber of Commerce in Taipei (AmCham), MOEA also announced in June 2013 that Taiwan, as part of economic liberalization policy, would soon start operating Free Economic Pilot Zones (FEPZs). To improve inward investments in Taiwan, strengthening of intellectual property (IP) laws, and regulatory frameworks, Taiwan's government has assured AmCham at the highest possible level of Prime Minister of Taiwan. Another specific event that will help the U.S. suppliers and MNCs to leverage from Taiwan's market potential is the signing of WTO Government Procurement Agreement in 2009 by Taiwan government. This has effectively reduced non-tariff barriers along with gradual elimination of all trade related barriers over a period of next 5 years from 2009 (U.S. Commercial Service, 2013). This relaxation is aimed at increasing imports from the U.S. companies in sectors of petrochemicals, lifestyle products, high-value added electronic components, and luxury consumer goods. The recent opening up of Taiwan's market for the U.S. beef under the Trade and Investment Framework Agreement (TIFA) has also great potential of growth. Taiwan has also announced relaxing capital controls that will allow the U.S. And other international investors to commit more investments in Taiwan's stock markets (Poon, 2013).

Business climate in Taiwan

The evaluation of Taiwan's political, economic, social, and technological environment along with an assessment of current events that took place in economic arena of Taiwan indicates that the country possesses promising investment potential for foreign investors. However, we must delve deeper to ascertain whether or not Taiwan's market is business friendly. This is because despite immense growth potential (Chow & Lin, 2002; Kim, Chen & Jang, 2006) and appetite for technological orientation, Taiwan's economic structure is also marred by lack of adherence to IP rights, infringement of copyrighted materials, and inadequate legislation of guarding business secrets. The American Chamber of Commerce in Taipei (AmCham Taipei) is an appropriate platform to acquire business climate information of Taiwan as this private, non-profit, and corporate body has, through its representative firms, the most up-to date and relevant feedback regarding Taiwan's business climate. It seems that Taiwan is yet to fully leverage the 'Asia advantage' in attracting private equity investment. Although the government has started to relax capital flow regulations, there are still much restrictive policies in human capital transferring. Foreign nationals are required to have two years work experience before applying jobs in Taiwan. There is high rate of personal income tax for foreign nationals that de-incentivize foreign human capital to be imported to Taiwan. There remains large gap between governmental resolve of 'economic liberalization' at the top level and implementation at the departmental level. This is represented as Taiwan's Investment Commission only managed to approve $5.56 billion of FDI in 2012 compared to $4.96 billion in 2011 and $3.81 billion in 2010 (AmCham Taipei, 2013). South Korea on the other hand attracted $16.3 billion of FDI during FY 2012. Weak IP rights and patent infringement still deters leading international firms to start operating from Taiwan. The current business climate of Taiwan lacks rigorous implementation of regulatory standards by the government, such as there are weak product registration guidelines in agro-chemical sector.