Since the Economic Cooperation Framework Agreement (ECFA) between Taiwan and mainland China was signed in late June 2010, foreign investors have seriously begun to re-evaluate Taiwan as an investment destination. Investors are not only attracted by ECFA’s lowered trade barriers and newly opened service sectors, but also by Taiwan’s increased allure as a gateway to the mainland Chinese market. Christina Liu (劉憶如), minister of the Cabinet-level Council for Economic Planning and Development (CEPD), is one of those paying careful attention to the trend. “Last year our foreign investment increased by 32.5 percent, which was by far the highest in Asia,” she says. “That means that many people are re-evaluating Taiwan.”

For decades, strained relations led Taiwan to impose restrictions on imports, investment, travel and visitors from mainland China. As a consequence, the island became increasingly isolated and overlooked by foreign investors, while thousands of Taiwanese businesses moved to mainland China. Since May 2008 and the inauguration of President Ma Ying-jeou (馬英九), however, the government has worked to reverse those trends by improving cross-strait relations, opening direct transportation links to and from mainland China and welcoming its tourists.

ECFA goes beyond those steps by providing a framework for ongoing negotiations aimed at reducing tariff and non-tariff barriers to trade in goods and services, increasing investment protection and enhancing dispute resolution. The trade pact took effect in September 2010, while the first round of the agreement’s tariff reductions came into force on January 1 this year, cutting duties on hundreds of Taiwanese and mainland Chinese petrochemical, agricultural, transportation, textile and machinery products, among other items.

Multinational corporations fall under ECFA’s purview if they incorporate a company in Taiwan or merge with a company based on the island. Lee Chung-teh (李宗德) is a founding partner of Lee, Tsai & Partners Attorneys-at-Law, which specializes in legal services for multinational corporations investing in the Greater China region. Lee points to the example of Siemens Ltd. Taiwan, the local unit of Siemens AG, a large Germany-based engineering conglomerate. “Siemens’ company in Taiwan will still be qualified as a Taiwanese company because it’s incorporated under Taiwan law,” he says. “And that means it’ll be able to enjoy the benefits provided by ECFA.”

Christina Liu, minister of the Council for Economic Planning and Development (Photo Courtesy of Council for Economic Planning and Development)

Government efforts to boost foreign investment began soon after ECFA was signed. The Ministry of Economic Affairs (MOEA) hosted investment forums in mainland China’s Beijing, Tianjin and Wuhan in August 2010, while 27 multinationals signed investment letters of intent at the ministry’s annual Taiwan Business Alliance Conference in Taipei in September that year. For its part, the CEPD held investment promotion forums in Europe, Hong Kong, Japan, Singapore and the United States during the last quarter of 2010.

The CEPD’s Liu says that Taiwan’s soft power is key to attracting investors interested in the cross-strait market. “In a sense, our soft power includes our accounting systems, our legal system and our corporate governance, which are at an international standard,” she says. “And there’s our friendliness and politeness, things like that. Foreign companies with a Taiwanese firm as a partner will feel more comfortable, confident, and there’s more reliability.”

Lee echoes Liu’s emphasis on Taiwan’s alignment with international norms. “Taiwan has a much more democratic political system, and much better legal environment in terms of transparency and completeness of laws and regulations, and also the integrity of the court system,” he says. “In terms of human resources Taiwanese people are more educated, more internationally experienced, and the technology level in Taiwan is higher than in China.”

Services are a huge portion of mainland China’s economy, but were long closed to investment from Taiwan-based companies. That changed with ECFA’s first round, which saw the opening of 11 service sectors—including financial, accounting, computer, research and development (R&D), design, medical, cultural and transport services—in mainland China to Taiwanese firms. Meanwhile, Taiwan opened nine service sectors to mainland Chinese businesses, clearing the way for greater mainland Chinese involvement in Taiwan’s economy.

In fact, ECFA gives international investors with Taiwanese partners unique access to mainland China’s service markets. Foreign movie makers, for example, are drawn by the size of mainland China’s large film market, which generated combined revenue of US$1.5 billion in 2010. They are frequently stymied, however, by the mainland’s yearly quota of 50 foreign films that can be shown in theaters there. Prior to ECFA, Taiwan competed against all other countries for those slots, with Hollywood movies claiming around 20 in most years. In October 2010, however, ECFA opened the mainland Chinese market to Taiwanese film companies. In July this year, the film Night Market Hero became the first Taiwanese movie to be distributed in mainland China since the market opening.

In July this year, Night Market Hero became the first film from Taiwan to be distributed in mainland China since film quotas were lifted under ECFA. (Photo Courtesy of Green Film Production)

Investment Road Show

Now, by partnering with Taiwanese firms, foreign movie companies will be able to enter into joint projects that are not subject to mainland China’s quota for foreign films, a fact that is attracting the attention of potential movie investors. “In the past year, we have gone to countries such as India and the US and movie producers would come or send somebody to our road show and express their interest,” the CEPD’s Liu says.

Manufacturers from around the world also have reason to pay attention to developments across the strait. To take advantage of lower labor costs, Taiwanese companies have set up manufacturing bases in mainland China over the past several decades, which has given them extensive experience with markets there. Liu says mainland China is not a homogeneous country and that each province has a different appetite for different things, which poses a steep challenge for multinationals that wish to target the mainland market but are largely unfamiliar with regional preferences. “And who possesses that information?” Liu asks. “Again that is Taiwanese firms.”

“Consider that Taiwan is geographically close to China and the people speak the same language,” Lee says. “It’s easy for Taiwanese companies to get around in China. As long as trade barriers are reduced or eliminated, I think Taiwanese firms will have a better position in accessing the Chinese market.”

Foreign investors are also drawn by the quality of Taiwan’s human resources. The level of education is higher in Taiwan than in mainland China, which is attractive to multinationals that require personnel to assist in designing and manufacturing high-end products. After decades of making everything from integrated circuit (IC) chips to finished personal computers and smartphones, Taiwan also offers a deep pool of experienced technicians and engineers.

Taiwan’s educated, experienced workforce is especially attractive to multinationals seeking to establish research centers in Asia. In August this year, officials at the MOEA estimated that total foreign investment in R&D centers in Taiwan would reach more than US$200 million for the year. Foreign firms establishing such centers locally this year include Japanese e-learning company Shogakukan, Inc., ASML Holdings of the Netherlands, a manufacturer of machines used to produce IC chips, Hewlett-Packard Co. and IBM Corp.

IBM’s center, for example, will be the company’s first located outside the United States and will focus on developing high-end servers designed to handle large volumes of data for supercomputers. The center’s 100 local researchers will also collect market information, work out technical specifications and conduct strategic planning and product testing.

Siemens Ltd. Taiwan CEO Peter Weiss, right, presents the Asian Green City Index to Taipei Mayor Hau Lung-bin in February this year. Siemens’ local branch comes under ECFA’s purview because it is incorporated under Taiwan law. (Photo by Central News Agency)

Targeting the Region

With ECFA opening up the mainland Chinese market, Taiwan’s location is also proving attractive for multinationals seeking to establish operations centers targeting Southeast Asia. On August 31 this year, for example, Japan-based Hokuto Corp. agreed to invest NT$1.25 billion (US$43.1 million) to set up its second mushroom farm in Taiwan. While Hokuto’s mushroom sales in Taiwan have exceeded expectations, president Masayoshi Mizuno says, one of the company’s reasons for setting up the new facility is to serve a larger market. “We plan to build Taiwan into a regional operations base for sales in China and Southeast Asia,” he says.

Direct cross-strait transportation links are also helping Taiwan compete with Hong Kong and Singapore in the effort to attract multinationals’ headquarters units. Since the inauguration of those flights in 2009, traveling from Taipei to Shanghai takes only 80 minutes—slightly faster than it takes for flights from Hong Kong to Shanghai and much faster than those from Singapore.

While government officials are bullish about Taiwan’s success in luring multinational investment following ECFA’s implementation, not everyone in the private sector is so enthusiastic. “We don’t see a significant change at the moment and that’s because it’s quite early days for ECFA, but most importantly because European companies will be expecting significantly more progress before they’d contemplate Taiwan as a regional hub,” says Chris James, chairman of the European Chamber of Commerce Taipei and president & CEO of Allianz Taiwan Life Insurance Co. Ltd.

“Taiwan is an attractive place to invest—its geographical location is attractive, it has a productive, skilled, hardworking labor force, the climate and the people are lovely. So it’s a good place to be,” James says. “But I think for Taiwan to be a serious gateway to China, there are still issues which need to be corrected. Many of our members, who are maybe manufacturing cars, medical equipment, power plants, or building infrastructure—these companies have global supply chains. These are the companies that will benefit potentially from ECFA, and would benefit a lot more and would be willing to make much larger investments if we can make progress on other issues. The potential is really there, it’s just not realized yet.”

According to James, Taiwan’s continuing import bans on 2,700 products from mainland China are a pressing issue. “It’s very important to be able to access components from wherever the quality and the price are right, and of course mainland China is an important source for those components,” he says. “Lifting the bans and other restrictions would clearly make Taiwan a more attractive place for investors.”

James believes that another problem is the slow pace of normalizing business relations between Taiwan and mainland China. “We have seen considerable progress in recent years, especially establishing direct links and relaxing the cross-strait restrictions on investors, investments and visitors,” he says. “I think to achieve the goals that [ECFA] sets out to achieve there is still a lot to be done. I believe some urgency is warranted.”

Government efforts to boost foreign investment since ECFA’s signing include holding investment promotion conferences such as this one in Singapore in November 2010. (Photo Courtesy of Ministry of Foreign Affairs)

Taiwan’s relations with mainland China have continued to improve significantly since President Ma’s inauguration. Still, a presidential election will be held in January 2012 and there is always the chance that the opposition Democratic Progressive Party (DPP) could return to power. If that were to occur it would give investors, both local and foreign, something to worry about since the DPP has often been critical of ECFA.

Liu discounts such fears, however, saying that while ECFA would likely slow down under a DPP government, the agreement would be difficult to halt. “Taiwan is a country with credit, so whatever we have signed with China, I don’t think that a change in [the governing] party can really reverse that,” she says.

Another lingering issue that continues to dampen the interest of multinationals is the lack of an investment protection mechanism. Taiwan and mainland China have discussed establishing an official structure that protects the interests of investors on both sides of the strait and provides for dispute resolution, but little concrete progress has been made. A system to settle disputes through a disinterested third party is needed since many investors are still leery of the legal system in mainland China. “Investment protection I think is extremely important for many Western companies because they haven’t negotiated a FTA [free trade agreement] with mainland China,” Liu says. Most FTAs have established a binding and transparent arbitration mechanism to protect investors in participating countries. With a cross-strait investment protection agreement, foreign investors in Taiwan would have access to third party arbitration for disputes.

For now, some foreign investors appear to be waiting for continued reductions of tariff and non-tariff barriers with mainland China, as well as mechanisms to protect investments and intellectual property rights. Corporate lawyer Lee Chung-teh, however, is confident such hurdles will be overcome. “All these things are eventually going to help Taiwan be a better choice in terms of investment by multinational companies for their operations in Asia or the Greater China region,” he says.

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Butler Waugh is the director of Asia IQ Consulting in Taipei.

Copyright © 2011 by Butler Waugh