Learning From Taiwan How to Invest in China: Taiwan's Current Investments into China and the Factors for their Success

No.155
February 2003
Senior Research Fellow Yan Zhu

1. As a result of the rapid increase of Taiwanese investment into China from the 90's onward, Taiwanese companies now have a large presence in the Chinese economy. China is currently Taiwan's largest investment destination. Not only are small-medium companies buying in but major listed companies are also developing large-scale investments.
2. The manufacturing industry is by far the dominant industry for Taiwanese investment and most of the capital is focused in the Southern and Eastern regions. Within manufacturing, investments have shifted from labor-intensive industries to technology- and capital-intensive industries. The IT industry currently takes up the largest share. But Taiwanese investment into China has also branched out to some extent into all the industries.
3. The main purpose of Taiwanese investment into China is to reduce costs, acquire market share, and follow the investment activities of domestic and foreign client companies. Characteristic of the management of Taiwanese companies located in China are the utilization of labor power, export mindedness, an advantageous management configuration, provision of parts between kindred Taiwanese companies, and a division of labor with the head office in Taiwan. Recently, many Taiwanese companies, aiming to further develop their business in China, are making localization efforts on all fronts including personnel, sale and supply, capital, and technology. The trend toward internalization (complete localization) has become apparent. Under such management efforts, many of the Taiwanese companies that have penetrated into China are taking in large revenues and enjoying great success.
4. Over the years, the political relations between Taiwan and China and the economic policies of each have had strong influences on both the investments of the Taiwanese and the corporate management of their companies in China. Though China has fundamentally encouraged Taiwanese investment and has even implemented policies to improve the management environment, Taiwan has taken a policy of restraining its investments toward China for both political reasons and for fear of hollowing out their own industry. The large-scale relaxation of these regulations, beginning in 2001, gave a strong boost to the China directed investments of Taiwanese. But the rapid movement of Taiwanese companies into China also accelerated the hollowing out of the Taiwanese industry. In response, the Taiwanese government aims to strengthen the competitiveness of its industry by reforming corporate operation and the investment environment.
5. The penetration of Taiwanese companies into China has also marked a new phase for China oriented Japanese-Taiwanese business alliances. Many Taiwanese companies who are seeking technology and capital have formed cooperative ties with Japanese companies in their Chinese business. Japanese companies, for their part, utilize the management know-how and the industrial clusters of China based Taiwanese companies, and have thus adopted a strategy of advancing into China jointly with Taiwanese companies. This Japan-Taiwan-China relationship has, in effect, become a new business model.
6. Going forward, China's high economic growth, the reforms of the Taiwanese economy, and the changes in the mutual policies of China and Taiwan indicate that Taiwanese investment into China will continue to develop and reach new heights.

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