After Foxconn, Taiwan seeks to lure firms in China

In speaking to Taiwan’s industry leaders on June 9, President Ma Ying-jeou spoke of his plan to create a special trade and economic zone on the island to attract Taiwan businesses operating in China to relocate to Taiwan. As wages in China continue to rise and its environmental controls tighten further, more business leaders are considering relocating to Taiwan as an alternative. This trend began in 2006 and has continued as businesses see a decline in their profit margins. And, by lowering business taxes, Taiwan government hopes to lure more business back to Taiwan.

In 2006, the first batch of Taiwanese businesses returned due to newly adopted industrial policies and environmental standards in China, leading the government to crack down on high-pollution, low-technology industries. This prompted a number of Taiwanese businesses to close their small-scale plants and return to Taiwan.

In 2008, the Ma administration eased trade and investment restrictions with China and promoted the first and the second listing of Taiwanese Depository Receipts (TDR), which attracted more Taiwanese businesses to return home, and boosted the local stock market. In this wave of returning businesses, some overseas Taiwanese firms have made direct investments and have taken control of failing companies in Taiwan.

Coping with the end of China’s cheap-labor era

This year, businesses have returned to Taiwan due to changes in the labor market in China and further wage rises in the country. Initially, factories experienced a shortage of labor in the coastal provinces, then, this problem spread inland. Taiwanese firms could not find sufficient manpower despite offering higher wages. Then a spate of suicides at the Taiwanese-owned I-Phone manufacturer Foxconn led the company to announce a 122 percent wage increase last month. These wage increases have heavily impacted Taiwanese firms and the Chinese labor market as a whole.

According to the Taipei-based China Times, the Beijing government has decided that its export-oriented economy shall give way to one of increasing domestic consumption following the global financial tsunami. Beijing wants Chinese citizens to be wealthy enough to generate a vibrant domestic market. Thus “wage increases” have become a key policy goal of the Chinese government. Since the beginning of 2010, all provincial and municipal governments in China have announced plans to raise the minimum wage, with increases ranging from ten percent to over 40 percent. And, this wage adjustment will continue every year from now on. It is increasingly evident that the era of China as the “world’s workshop” with an abundant supply of cheap labor is coming to an end.

Idea of “special economic zones” considered

The China Times, in an editorial, pointed out, that due to rising labor costs and labor market change in China, coupled with relaxed cross-strait relations and the opening up of direct air links, more overseas Taiwanese businesses are returning home to invest. Taiwan’s government has also prepared a plan that it hopes will attract NT$40 billion (US$1.25 billion) of returning Taiwanese investment a year. This returning overseas Taiwanese investment will no doubt enhance the island’s economic structure and hopefully create a higher value-added economy that will also promote the general well-being of Taiwanese citizens. What the government wants to avoid, is Taiwan becoming a processing zone for large-scale high-pollution, low-value exports. The paper said the government should encourage the creation of pollution-free tourism, cultural and creative businesses, and financial services, as well as high value-added R&D and marketing centers, and the emerging green technology energy industry.

The United Daily News also commented in an editorial, that Taiwan has been the main supplier to the “world’s workshop,” yet the island have been buried in an economic slump in recent years. Only Taiwan’s export processing businesses in China have helped maintain Taiwan’s domestic economic growth. The industrial environment in China has changed, affecting not only overseas Taiwanese businesses, but also the fundamentals of the whole Taiwanese economy, to which the government should not turn a blind eye, cautioned the paper.

Taiwan’s cabinet-level Council for Economic Planning and Development is reported to be assessing the risks and feasibility of implementing “special economic operations zones” in Taiwan. The purpose of setting up special zones is to duplicate the successful cases of export processing zones and science parks in the past, starting a third wave of economic transformation. This new generation of “economic operations zones” is intended to attract investment from returning overseas Taiwanese businesses and multinational corporations, and to reduce the high unemployment rate in Taiwan.

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