Security Studies Program Seminar

How Taiwan Makes Friends and Gains Influence on the Mainland:
Taiwanese Business in the PRC 

Shelly Rigger
Associate Professor, Davidson College

November 28, 2007

TWO RESEARCH QUESTIONS

• Estimating dependence of Chinese localities and industries on Taiwanese investors and investment
• Studying how Taiwanese who live in Mainland China are affected by their experience there

CHINA'S ECONOMIC DEPENDENCE ON TAIWAN

• What is the contribution that Taiwanese are making to China, at the level of cities and provinces? Aggregate data on Taiwanese investment in PRC looks significant, but not overwhelming. At level of cities, provinces, and localities, a different picture emerges: the Taiwanese investment community looms very large.
  • No numbers on how many Taiwanese live in Mainland China nor amount of money invested in PRC. Reports of such numbers should be treated with skepticism.
  • In 1980s, level of (licit) economic activity was virtually zero. Today, 20 years after opening of direct economic relations, good estimates of Taiwanese investments in PRC are US$200-250bn.
  • Early phase was transfer of sunset manufacturing industries (low tech) from Taiwan to China. Now Taiwan's leading technology companies are also moving or expanding their manufacturing to mainland; also a substantial presence of Taiwan's retail and service industries.
• Extremely rapid pace and high level of Taiwanese investment in mainland has created anxiety in Taiwan, that it could have two detrimental effects for Taiwan (and thus for international security).
  • Domestic economy may be hollowed out by loss to PRC
  • Taiwan may become politically vulnerable because so much of its national wealth is tied up in interactions with a state unfriendly to its political aspirations
• Logical theoretical approach to take to these issues is interdependence theory. Interdependence literature generally focuses on positive effects of economic integration (raises opportunity cost of conflict, improves signaling). But interdependence theory also looks at asymmetry: asymmetrical interdependence can be very dangerous and destabilizing.
• Issue for Taiwan research is thus how symmetrical the PRC-Taiwan relationship is.
  • First question: How to define Taiwanese investment? All official statistics are wrong.
    • Some evasive investing because of Taiwanese restrictions, so should add in four major tunnels (British Virgin Islands, Caymans, Panama, Hong Kong). For first three, 75% of the money coming from there to China is Taiwanese; for HK, 15%.
    • Ownership of many companies convoluted. Her research suggests Chinese officials care where bosses are from, not where money is from or who owns company. Taiwanese bosses are treated differently from other foreign investors—both legally, though that discrepancy is fading with WTO regulation, and in practice. Taiwanese are preferred investors in many parts of Chinese, for political reasons (Communist Party wants good relations with Taiwanese business because it will give leverage over Taiwanese government) and for practical reasons (eg., they speak Chinese).
  • Composition of Taiwanese investors: by geography and by economic sectors.
    • Looking at individual provincial governments to see total investment from Taiwanese sources. When reported by a subset of provinces, consistently higher than the national total.
    • Individual provinces reliance on Taiwanese FDI: At least six provinces get 1/5 to 1/4 of total FDI from Taiwan. Some inland provinces aggressively soliciting Taiwanese investment.
    • Sectoral composition: Most is export-oriented manufacturing, traditional and high-tech. An increasing number of Taiwanese firms also recognize potential of Chinese market (eg., food industry). Taiwanese manufacturing tends to be for higher-end brands than Chinese (and thus mainland sales can be counterfeit or lower-end versions).
    • Taiwanese inter-industry trade common: most input comes from other Taiwanese input (if opening a factory, they move the whole Taiwanese supply chain to mainland). At least 2/3 of Taiwanese sales on the mainland is actually to other Taiwanese firms on the mainland, not to Chinese consumers/companies.
    • Fear of hollowing out of Taiwanese economy overstated: High-tech sector is growing most in Taiwan.
  • Contributions made by Taiwan to China.
    • Employment: no good statistics. Ministry of Commerce estimated 12mil Chinese workers directly employed by Taiwanese firms, 40mil with jobs indirectly dependent. Taiwanese firms are labor intensive. Given Chinese need for new jobs, this is a significant contribution.
    • Tax revenue: Significant. Convoluted system; negotiated tax amounts. Chinese could get more tax revenues if it weren't for high incentives to attract Taiwanese investment (particularly in some areas, like semiconductors). Also may pay head taxes (25% of wages) hard to calculate because numbers of employees so opaque; VAT; etc.
    • Also provide welfare and philanthropy, particularly to educational charities.
    • Intangible benefits: Management expertise and business savvy; access to global opportunities, developing connections. Taiwanese moving in 1989 helped recover from setback of Tiananmen crisis and sanctions; Taiwanese helped guide China into global economy.
• Bottom line: Cross-straight economic ties are a complex bilateral relationship that cannot be reduced to the question 'who's winning'. Both sides are winning, but also making themselves reliant upon the other for a meaningful chunk of their economic prosperity.
  • Macro level: relationship is bilateral but embedded in the global economy and international supply networks. If it fell apart, both would experience a huge loss in access to global economy (and rest of us would experience a huge loss).
  • Micro level: Rooted in individual polities and areas; it's not something you can cut down easily.
  • Disrupting these relationships would be costly for everyone. And most influential players in China are those with the most to lose.
  • Economic context would seem conducive to peace. But economics don't determine everything; military leaders may determine that economic costs are bearable to preserve some other interests.

Q&A

• Raw materials? Use Chinese sources for big items (steel, cement, food), but it's surprising how much of what they need is still sourced from other Taiwanese companies (eg., plastics).
• Profits/growth? A lot of Taiwanese companies go to China and fail, often attributing it to mistreatment/corruption, but a lot of them don't have the right business model for China. Huge companies are mostly producing low-margin commodities, so they don't report a huge profit margin, though they're growing quickly.
• Why provincial yearbooks overstate compared to national? Is national government adjusting it downwards, or are provinces underreporting? Nobody knows. Some of the players who have risen because of these economic relationships will gain influence at the national level. Whether they'll continue to discount the importance of these economics as the current leadership does is uncertain. How China chooses to exclude this in policymaking/central strategic context is different.
• Symmetry? On political/international dimension, obviously asymmetric: China is a giant. On economic dimension, not completely symmetric. PRC investors are not in China, for instance, which works against what we normally expect. Could Taiwanese be replaced in mainland is a key question; probably, but it would be very hard to do and there's little incentive to do so. Could PRC be replaced for Taiwanese? (A lot of Taiwanese investors and policymakers are worrying about eggs in one basket phenomenon.) Manufacturing price points usually set elsewhere (Dell, HP, etc.), and those companies may also get nervous about eggs in one basket. Taiwanese companies are unlikely to leave mainland, but if they're expanding they may look at Vietnam, Madagascar, etc. where wages are even lower. So both sides have cause for anxiety on replaceability question.
• Any constraints on Taiwan being provocative? Chinese have always hoped Taiwanese businessmen would be a check on the ambitions of Taiwanese politicians. A RAND study found that it worked briefly but then Taiwanese investors realized that, and went underground/tried not to engage on political issues. Taiwanese businessmen are self-interested and rarely go into political realm, but do work hard to promote a more liberal investment and trade climate on both sides, which causes some people to accuse them of being agents of Chinese government.
• How thinking plays out in long-term Chinese elite thinking about strategy? China acting more expansionistically when it comes to natural resources (they want ownership or exclusive relationships). That doesn't work so well when it comes to knowledge of chip manufacturing. Current spasm of adventurousness by Taiwanese is a last ditch attempt to prevent inevitable (probably not reunification, but does mean accepting stable engagement that will not allow further strengthening of Taiwan's position). Only trend that's moved in last 8 years of frantic effort by Taiwanese regime is that Taiwanese increasingly self-identify as Taiwanese, not Chinese; but all other significant trends (support for independence, economic disengagement, restrictions on economic ties, etc.) have flatlined.
• Evidence that Taiwanese skillset is transferring to Chinese (eg., middle management)? Taiwanese owners want to transfer those skills to Chinese because they're cheaper to employ. Major concern among Taiwanese is that Chinese will steal the business ideas/proprietary information and become competitors, and that Chinese understanding of certain functions (finances, marketing, HR) are low so those mainly need to be Taiwanese. Also very rapid turnover among Chinese employees, which results in less substantial learning of necessary skills to start their own businesses.
• Preferential treatment of patents? No, and that's a major complaint of Taiwanese investors. That's the one saving grace from the Taiwanese government's point of view, since it means sensitive operations stay in Taiwan.

Rapporteur: Jacob Hale Russell

back to Wednesday Seminar Series, Fall 2007