1. 1 Greater China Development from the Perspective of Taiwan Chi Schive President Taiwan Academy of Banking and Finance Adjunct Professor National Taiwan University April 6, 2001

2. 2 I.Mega trends in the late 20th century and beyond II.Taiwan’s role in East Asian regional integration III. Taiwan’s investment in mainland China IV. Impacts of Taiwan’s investment in mainland China V.Implications of WTO entry VI. Concluding Remarks Outline

3. 3 World Output and Goods Trade World Output (Growth, %) Trade Growth/ Output Growth World Goods Trade Volume (Growth, %) 84-88 89-93 94-98 I. Mega trends

4. 4 Regional Integration % Intra-regional exports as a percent total exports I. Mega trends

5. 5 The Tonne Age Industrial revolution - 1950s Steel, ships, textile, construction The Kilo Age 1960s Cars, consumer electronics, appliances The Gram Age 1970s - 1980s Micro electronics, robotics The Vacuum Age 1990s Services, systems, media Production Technology in History Source: Slightly revised from Jean-Pierre Lehmann,“The Future of the Asia Pacific Economies: Dynamism of Trade and Investment” presented at APEC Economic Committee Symposium The Future of Asia Pacific Economies, December 6 1999, Tokyo. I. Mega trends

6. 6 Lowering Real Inventory-to-Sales Ratios Source: U.S. Department of Commerce (Bureau of Economic Analysis.) Lowering Inventory-Sales Ratio - the U.S. Case I. Mega trends

7. 7 Japan Taiwan U.S. I:Investment M:Materials/Intermediates Q:Finished product/commodity S:Strategic alliance Before the mid-1980s Late 1980s and early 1990s After the mid-1990s ASEAN I&M M Q Q S Q Q Taiwan’s International Division of Labor from Triangle to Diamond China I&M Q S II. Taiwan and regionalism

8. 8 Investment in Southeast Asia and China According to Host Country Statistics US$ million Sources: Board of Investment, Thailand; Malaysian Industrial Development Authority, Malaysia; Board of Investment, the Philippines; Investment Coordinating Board, Indonesia; State Commission for Cooperation and Investment, Vietnam; Ministry of Foreign Trade and Economic Cooperation, mainland China. II. Taiwan and regionalism

9. 9 Production Sharing of Taiwan’s IT Industry % * Estimates. Source: Market Intelligence Center, Institute for Information Industry. II. Taiwan and regionalism

10. 10 Increasing Oversea Production Share in Taiwan’s IT Industry Source: The ITIS （ Industrial Technology Information Service ） Plan, Institute for Information Industry, November 2000. II. Taiwan and regionalism

11. 11 Trends of Taiwan’s Investment in China Labor-intensive industries (food, beverage, rubbers, plastics) are losing importance to technology-intensive industries (electronics). Invested areas are extending from coastal provinces to inland. Size of investors are expanding from SMEs to large enterprises. About one-third of Taiwan’s publicly listed companies invest in China presently. III. Taiwan’s investment in China

12. 12 Taiwan’s Investment in China * Cumulative amount up to 1991. **Registered amount increased remarkably in 1993 and 1997 due to belated reports of investments made in previous years. Sources: Investment Commission, Ministry of Economic Affairs, ROC; Ministry of Foreign Trade and Economic Cooperation, PRC. III. Taiwan’s investment in China

13. 13 Industrial Composition of Taiwan’s Investment in China Source: Investment Commission, Ministry of Economic Affairs 0% 10% 20% 30% 40% 50% 60% 1991199219931994199519961997199819992000/ NOV Electronic & Electric Appliances Precision Instruments,Food & Beverage Processing,Plastic Products,Basic Metals Products Others III. Taiwan’s investment in China

14. 14 Scale of Taiwan’s Investment in China Note: The “no haste, be patient” policy argument was announced in September 1996. Source: Investment Commission, Ministry of Economic Affairs. US$million No. of cases Average Total III. Taiwan’s investment in China

15. 15 The Impacts of Taiwan’s Investment in China Trade Bilateral trade has been expanding at double-digit rate, except during the Asian financial crisis. China has become Taiwan’s very important export market only second to the U.S., and sixth largest import supplier. Investment in China has caused expansion of Taiwan’s exports of machinery, parts, and raw materials to China. Whether negative impact will be produced from China’s introduction of local content requirement in 1998 remains to be clarified. III. Impacts of Taiwan’s investment in China

16. 16 Exports to Mainland China % Source: Board of Foreign Trade, ROC. III. Impacts of Taiwan’s investment in China

17. 17 Imports from Mainland China % Source: Board of Foreign Trade. III. Impacts of Taiwan’s investment in China

18. 18 Competing for overseas markets? Yes, Taiwan’s export share growth in the U.S., Japan and EU slowed down between 1996 and 1999. China, on the contrary, has been on the rise. No, a non-negligible portion of China’s exports are due to Taiwan-based companies pursuing comparative advantage in China. The Impacts of Taiwan’s Investment in China III. Impacts of Taiwan’s investment in China

19. 19 Competing for domestic capital? Yes, 1. provided capital supply is fixed/limited. 2. arrived capital in China represents a net outflow of capital in BOPs. No, 1. domestic capital can be enlarged with capital inflows. 2. direct investment generates favorable BOPs through inducing exports. The Impacts of Taiwan’s Investment in China III. Impacts of Taiwan’s investment in China

20. 20 Hollowing-out effect? Yes, 1.outward investment substitutes domestic investment. 2. outward investment results in job loss. The Impacts of Taiwan’s Investment in China III. Impacts of Taiwan’s investment in China

21. 21 Hollowing-out effect? No, 1. the exodus of industries reflects changes in comparative advantage (pull effect) and changes in local investment environment (push effect). 2. it is labor market rigidity, instead of FDI, that causes the job market shrinking. 3. outward investment in the 1980s and 1990s. helped industrial restructuring in Taiwan. 4. investment in the high-tech industry has been flourishing. The Impacts of Taiwan’s Investment in China III. Impacts of Taiwan’s investment in China

22. 22 Growing economic dependence hampers national security? Yes, Taiwan’s economic stability will be affected by market fluctuations in China as well as by China’s policies. No, 1. Taiwan’s economic dependence on China is reciprocal. 2. economic interdependence may enhance regional stability, rather than hamper it. III. Impacts of Taiwan’s investment in China The Impacts of Taiwan’s Investment in China

23. 23 More business opportunities in China Taiwan’s business sector has shown growing interests in investing in China because of an anticipation of larger and more opened local market. Companies see better opportunities in local market in finance, telecom, insurance, internet, and logistics. Companies attempting to keep international competitiveness sees better opportunities in agriculture and labor-intensive industries. Implications of WTO Entry V. WTO entry

24. 24 Industry The opening to China’s industrial imports into Taiwan will cause some, but manageable, impact on Taiwan’s industries. Services Since the service sector in both economies are not internationally competitive, both will be severely affected, while much more so for China. However, foreign investors are likely to form strategic alliance with partners from Taiwan when penetrating the market in China. Implications of WTO Entry V. WTO entry

25. 25 For Government: More economics, less politics. More invisible hand, less visible hand. For Scholars: More solid analysis, less ideological conjecture. For Business Community: Think globally, practice locally. Concluding Remarks VI. Concluding Remarks