AmCham arrow Publications arrow Topics Archive arrow Topics Archive 2005 arrow Vol.35- No.7 arrow Commentary: Two Cures for "China Fever"
Commentary: Two Cures for "China Fever" PDF Print E-mail

BY RICHARD R. VUYLSTEKE

One of the hottest topics these days in Taiwan is "China fever." The rise of China as the "workshop" for the world and the shift of Taiwan manufacturing operations across the Strait - by both local companies and multinationals (MNCs) - have intensified fears of Taiwan's economic marginalization.

Are there cures for this fever? Two come to mind. The first requires clear thinking about "integration" and "differentiation." Taiwan needs to come to terms with the reality that its economic integration with China is here to stay. The two economies are already integrated across a broad range of business sectors, and that trend will continue, no matter what government policies are put in place. Businesses are driven by the bottom line and stockholder expectations. Either they find ways to circumvent unreasonable government restrictions (note the Taiwanese business model of registering operations in offshore locations) or they will vote with their feet by moving to more welcoming environments. That means goodbye to tax revenues, jobs, and technology transfer opportunities.

 

The answer is not to fight the loss of manufacturing, but to embrace the economic transformation constructively. The World Economic Forum and other organizations frequently laud the island's competitive advantages, but the challenge has been how to implement those advantages effectively. One cure for China fever is for Taiwan to differentiate itself from China, and to market its competitive advantages more effectively to domestic and international investors.

Consider, for example, the government's plan to attract R&D centers to Taiwan. According to recent reports, major U.S. companies have already set up more than 120 R&D centers in China, employing thousands of researchers and creating jobs for hosts of nearby service providers. Can Taiwan truly expect to compete with China in this sector?

Yes. Just as MNCs refrain from putting all their business units into one regional operations center, they are certainly disinclined to put all their R&D eggs into one basket - especially in China, where IPR protection remains a serious problem. Taiwan already offers significant competitive advantages. It has stronger rule of law in a democratic society. The laws and court system are more developed and more transparent. Enforcement agencies are not encumbered by one-party political constraints. And enough local companies have intellectual property and brands to protect to encourage stronger public support for IPR protection.

In fact, if Taiwan courts start handing down more appropriate civil and criminal penalties to IPR violators, and if enforcement agencies gain increased funding and training, Taiwan could create one of the best IPR environments in Asia. That would certainly catch the attention of prospective investors in R&D centers. It would give companies the option to "differentiate" their operations in Asia, putting the high-end work in Taiwan where it is safer and yet still close to the manufacturing action. (This assumes, of course, that Taiwan also revises its work-permit regulations, making it easier for companies to bring in the "best and the brightest" from around the world to work with their Taiwanese colleagues.)

Besides the R&D example, there are other sorts of potential differentiation from China. Taiwan is a maturing economy, with close to 70% of its GDP now coming from service industries. But few existing services are world class, and many other services common in developed societies are either rare or missing altogether. Here lies the second "cure" for China fever: expand links with longstanding trade partners, and shift the focus to service industries.

Although the United States and Taiwan have had a strong trade relationship for decades, it's time to rethink the substance of that trade. As a well-developed service-based economy, the United States has highly successful business models and best practices, world-class standards and technical know-how, and employee skill sets and training processes that could be transferred to Taiwan through investments and strategic alliances. (Private healthcare services, for example, have tremendous potential in an aging society such as Taiwan's.)

This provides another way for Taiwan to differentiate itself from China. Copyright, trademark, and other forms of IPR protection are extremely important for service industry investment, and so is a competitively welcoming environment for foreigners with service-sector business experience. Taiwan has long experience with conducting OEM manufacturing (involving decades of constructive business interaction with foreigners) and with attracting IT investment. If this experience were adapted to service-industry development, it could boost Taiwan's competitiveness by facilitating human-resource flows, improving investment incentives, and streamlining government procedures.

So, want to cure China fever?

First, find ways to be the safest environment in Asia for the world's best high-end manufacturing and services. Then aggressively reengineer regulations and incentives in order to attract investment in cutting-edge services. Widen the focus from attracting big-ticket manufacturing investments to also targeting "human capital investment" from trade partners known for their strong service industries. In this way, China fever can be replaced with a feverish dedication to transforming Taiwan into a world-class international economy.
 
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