The Cross-Strait Economic Relationship's Impact on Development in Taiwan and China:
Adversaries and Partners
Author(s): Douglas B. Fuller
Source: Asian Survey, Vol. 48, No. 2 (March/April 2008), pp. 239-264
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Asian Survey, Vol. 48, Issue 2, pp. 239–264, ISSN 0004-4687, electronic ISSN 1533-838X. © 2008
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239
THE CROSS-STRAIT ECONOMIC
RELATIONSHIP’S IMPACT ON
DEVELOPMENT IN TAIWAN AND CHINA
Adversaries and Partners
Douglas B. Fuller
Abstract
This paper evaluates the impact of ongoing cross-strait economic integration
on the development of China and Taiwan. The overall impact has been positive
for both economies. Taiwan’s industrial employment remains robust even
as it transforms into a knowledge-based economy. Taiwanese investment has
spurred China’s technological development.
Keywords: Taiwan, China, economic development, economic integration, crossstrait
relationship
Introduction
This article assesses the impact of trade and investment across the Taiwan
Strait on the economic development of Taiwan and China,1
and finds that
the benefits for each side have outweighed the costs thus far. While there
have been fears of hollowing out of manufacturing in Taiwan2
with the
Douglas B. Fuller is Lecturer in the Department of Management,
King’s College, University of London. He would like to thank Larry Diamond, Henry Rowen,
Michelle Hsieh, Xiaohong Quan, Murray Rubinstein, Joe Wong, Shelley Rigger, Tom Gold,
Dafydd Fell, and an anonymous reviewer for their comments on various drafts and presentations
of this article. Email: <Douglas.fuller@kcl.ac.uk>.
1. In this article, the Republic of China (ROC) will be referred to as Taiwan and the People’s
Republic of China (PRC) will be referred to as China for no other reason than that these
terms are a convenient shorthand for these two economies.
2. In the Taiwanese context, hollowing out has been seen as the loss of manufacturing
production and jobs. Many Taiwanese, including prominent officials and economists, such as
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240 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
opening of trade with China following the latter’s accession to the World
Trade Organization (WTO), this article argues that Taiwan has adjusted
remarkably well to increasing trade with and investment in China. For the
Taiwanese, even in some sectors, such as manufacturing employment, where
one might expect to see severe economic dislocation and adjustment, the
effects have been relatively minor. From China’s vantage point, there have
been charges that foreign investors, including Taiwanese,3
have come to
dominate China’s economy, particularly its export sector, even as these
foreign investors have brought little actual technology and knowledge to
China.4
This article will provide evidence that Taiwan has in fact played a
critical role in boosting China’s technological development, despite charges
to the contrary. Nonetheless, the gains from integration are not the only
story in the cross-strait economic relationship. There were also costs to
this increasing integration and disappointments in areas where benefits
had been expected. First, this article will present the historical development
and general statistics of the cross-strait economic relationship. Then
it will examine the economic impacts of integration on Taiwan and China.
Finally, the conclusion will consider the sustainability of current trends.
1. The Historical Development and
Current Magnitude of Cross-Strait
Economic Ties
The initial reaction of Taiwan’s government to the beginning of reforms in
China was to completely ban imports from and exports (even indirect ones)
to the PRC. Over the course of the 1980s, the Taiwanese government gradually
loosened restrictions on investment and trade, even as China continued
to open up its economy to both. In 1985, indirect exports channeled through
Hong Kong were legalized, and unofficial Taiwanese tolerance of small-scale
investments in mature industries emerged. With the lifting of martial law
in 1987, Taiwanese were permitted to visit China for the first time since the
end of the civil war in 1949. This new regulation, combined with capital
the former head of the Council on Economic Planning and Development (CEPD) Chen Bozhi,
have raised the specter of Taiwan’s hollowing out as resources flow from Taiwan to China.
See “Xuezhe Guandian: Fangxiang Zhengque, Qidai Dianfan” [Scholar’s viewpoint: Direction
is correct, expecting a (new) model], at CEPD’s website, <http://www.cedi.cepd.gov.tw/
document_info.php?fPath=13_386&documents_id=925&CediID=399a00bd0eaea7709e96d
8f6ca01a40d>, accessed February 26, 2008.
3 . The investors from Taiwan, Hong Kong, and Macao are treated as their own category
of investors separate from both domestic and foreign investors in the Chinese government’s
statistical data. But for most important purposes, such as tax breaks and sectoral restrictions
on investment, they are given treatment equivalent with foreign rather than domestic firms.
4. Yasheng Huang, Selling China (New York: Cambridge University Press, 2003).
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DOUGLAS B. FULLER 241
outflows in the context of the appreciation of the New Taiwan Dollar following
the 1985 Plaza Accords, opened up significant investment and trade
opportunities with China. As always, legalization trailed actual trade and
investment flows—Taiwan only issued regulations permitting indirect trade,
investment, and technical cooperation with Mainland China in 1989.
With growing investment in China, the Taiwanese government in 1990
decided to increase its supervision of flows of technology and capital to
China by requiring that all investments over US$1 million be registered
with the Ministry of Economic Affairs’ (MoEA) Investment Commission
(see Figure 1). Investors were prohibited from investing in certain “valued”
industries and a list of prohibited investments was created. In 1996, in the
face of continuing investment in China including from Taiwan’s prized
electronics sector, Taiwan President Li Denghui announced his Jieji Yongren
(No Haste, Be Patient) policy that introduced new regulatory hurdles
for investment in the mainland. Investment was capped at US$50 million
for each investment, and technology-sector investment had to be approved
on a case-by-case basis. This was simultaneously a liberalizing move (items
were moved off the prohibited investment list) and a constraining one, in
SOURCE: Mainland Affairs Council, ROC, based on statistical data from the PRC and Taiwan,
available at <http://www.mac.gov.tw/big5/statistics/em/>, accessed February 27, 2006.
FIGURE 1 China-Taiwan Bilateral Trade
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242 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
that investments still had to be vetted by the commission. These regulations
established a pattern that would be repeated time and again. Each round
of expanding China investment alarmed the Taiwanese government, which
would try to regain some control over the flow. But demands for a freer
hand from the Taiwan business community meant that regulations were
never strict enough to truly impede the cross-strait economic relationship.
This cycle repeated itself once again when Chen Shuibian came to power
in 2000, because the sectoral shift of investment (see Figure 2) worried the
Taipei government. Whereas in the early years of legal investment a mix
of sectors invested in China, in more recent times the electronics industry
came to dominate the effort. More worrisome for Taiwanese officials was
the increasing investment in higher value-added parts of the electronics industry
from the late 1990s onward.5
Even the notebook computer segment
began to move production to China, despite specific Investment Commission
prohibitions against this. While these prohibitions were still officially
in force, this author visited a number of major Taiwanese manufacturers’
plants in China where notebooks were being produced.6
The Taiwanese government was alarmed by these business trends, yet
the business community demanded greater access to investment in China
because of competitive pressures pushing Taiwanese manufacturers to
make use of China’s relatively cheap labor.7
Chen Shui-bian, after convening
a conference with business leaders, in August 2001 announced his Jiji
Kaifang, Youxiao Guanli (Active Opening, Effective Management) policy
toward economic integration with China. The liberalization measures announced
were substantial: the US$50 million investment cap was scrapped,
the investment cap was lifted to equal 40% of a firm’s total worth, direct
investment was permitted, the bar requiring investment approval was
raised to US$20 million, and the prohibited investments list was reduced.
However, some of the measures took a year to implement, and it was not
5. Douglas B. Fuller, “The Changing Limits and the Limits of Change: The State, Private
Firms, International Industry, and China in the Evolution of Taiwan’s Electronics Industry,”
Journal of Contemporary China 14:44 (2005), pp. 483–506.
6. Some firms tried to justify their production of notebooks through a loophole in Taiwanese
law. The law defined Taiwanese notebook computer generations by the central processing
unit (CPU) used, e.g., Intel Pentium 2. Some firms claimed to manufacture notebooks
without placing the CPUs in them in China. However, this author’s observations in plants in
China indicate that these CPU-less notebooks were not the only Taiwanese notebooks produced
in China.
7. Michael Chase, Kevin Pollpeter, and James Mulvenon, “Shanghaied? The Economic
and Political Implication of the Flow of Information Technology and Investment across the
Taiwan Strait,” RAND, Technical Report 133 (July 2004). This report covers the wage pressures
to move production to China historically (pp. 3–9) and in recent years (pp. 13–14 and
71–72).
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FIGURE 2 Investment by Sector
SOURCE: Investment Commission, MoEA, ROC, at <http://www.moeaic.gov.tw/>, accessed
February 27, 2006.
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244 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
clear which prohibited items would be legalized. Conflicts between government
and business over the details played out across several sub-sectors
of electronics.8
The end result was the same: partial liberalization with continued
restrictions or clarifications of restrictions. This compromise gave
the business community some of what it wanted while partially assuaging
the government’s concerns about hollowing out.
The cycle of increased integration followed by generally ineffective state
attempts to manage the cross-strait economic relationship continued in
President Chen’s second term. At the beginning of 2006, Chen announced
a change in economic policy by shifting the focus and scrambling the
words of his previous policy. The new policy was Youxiao Kaifang, Jiji
Guanli (Effective Opening, Active Management) and promised a tightening
up of actual supervision of Taiwanese investment in China. And yet,
when Chen convened an economic summit between his administration and
business leaders in Taiwan, no breakthroughs were made either in terms
of further regulation, as hoped for by Taiwanese independence supporters,
or further liberalization, as pushed for by Taiwanese business people. In
short, the cross-strait economic policy debate had reached a stalemate.9
While the sheer volume of investment and trade demonstrates the increasing
importance of China to Taiwan’s economy, investments from Taiwan
also have become a large proportion of China’s growing foreign direct investment
(FDI) inflows. In nominal terms reported by China’s government,
Taiwan’s is the fifth largest source of FDI in China. However, the data seriously
underestimate Taiwan’s role, for two reasons. First, much of Taiwan’s
investment has flowed through Hong Kong, which helps to explain why
the former colony’s quite small economy has contributed by far the largest
amount of FDI. Second, as Taiwanese investors, especially those investing
in items on the prohibited list, came under increasing scrutiny from the Taiwanese
government, they began to move their indirect investments through
discreet offshore banking locations in the Caribbean.10
This movement of
Taiwanese funds also explains why minor economies such as the Cayman
8. For the semiconductor case, see Chyan Yang and Shiu-wan Hung, “Taiwan’s Dilemma
across the Strait: Lifting the Bar on Semiconductor Investment in China,” Asian Survey 43:4
(July/August 2003), pp. 681–96.
9. Hwee Hwee Ong, “Taipei Economic Forum Fails to Reach Consensus,” Straits Times,
July 29, 2006.
10. Witness, for example, the case of the Semiconductor Manufacturing International
Corporation (SMIC). This Taiwanese-invested firm built a 200mm wafer fabrication facility
(a plant for manufacturing semiconductor chips) in China when it was still illegal to do so under
Taiwanese law. The firm registered in the Caribbean to place itself beyond the reach of
Taiwanese authorities. The Taiwanese government has since threatened the founder, Richard
Chang, with arrest if he enters Taiwan.
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DOUGLAS B. FULLER 245
Islands and the British Virgin Islands (BVI) have been among the top 10
largest investors in China over the reform period (see Figure 3). When one
includes the Taiwanese FDI to China coming through these regions, it is
likely that Taiwan is actually the second largest source of China’s FDI after
Hong Kong. Taiwan probably accounts for over 10% of China’s cumulative
US$610 billion in FDI; some estimates place Taiwan’s contribution as
high as US$150 billion.11
Even with such large flows of trade and capital,
the question remains what impact these flows have on each economy. The
next two sections address that question for Taiwan and China, respectively.
2. The Impact of Economic Integration
on Taiwan: Triumphs of Adjustment
In evaluating Taiwan’s economic integration with China, three issues are
paramount: the extent of hollowing out of its industrial base and employment,
Taiwan’s successful industrial adjustment, and the disappointment
FIGURE 3 China’s Cumulative Realized FDI, 1979-October 2005
SOURCE: Mainland Affairs Council, ROC, based on PRC data, at <www.mac.gov.tw/big5/
statistics/em/156/29.pdf>, accessed February 27, 2006.
11. Ong, “Taipei Economic.”
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246 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
of Taiwanese business in pursuing the “China Dream”12
of conquering that
potentially huge market.
2.1 The Absence of Hollowing out in Taiwan
Fears of the hollowing out of domestic industry are precisely fears of the
loss of manufacturing jobs. Thus, one needs to examine industrial employment
to look for evidence of hollowing out. What is most striking about
the Taiwanese case is how minimally integration with China has harmed
industrial employment (defined in Taiwanese statistics as manufacturing,
mining, utilities, and construction employment). It is in the area of industrial
employment where one would expect cheap low-skilled Chinese labor
to displace less-educated Taiwanese workers as Taiwan and China furthered
their economic integration through increasing trade and investment
flows. In fact, comparing 1991 to 2005, Taiwanese industrial employment
has actually risen slightly in absolute numbers, and industry has only experienced
a slight decline in its overall share of employment (see Table 1).
Even with the increasing employment of guest workers in the industrial
sector from 1992 onward, there was less than a 1% decline in the number
of locals employed in industry between 1992 and 2005. Indeed, the only
year where more locals were employed in industry than 2005 was 1992.13
All of this evidence suggests that fears of the hollowing out of Taiwan’s
industry and employment have been highly exaggerated.
Distinguishing manufacturing employment from the broader category
of industrial jobs, the same pattern of robust employment holds. Manufacturing
employment in Taiwan peaked at 2.8 million workers in 1987,
well ahead of the shift of manufacturing plants to China.14
The gentle de-
12. The phrase “China Dream” denotes the dream of selling billions of products to China’s
large population and has been used by a number of commentators on China’s economy and
business environment. For example, see Joe Studwell, The China Dream: The Quest for the Last
Great Untapped Market on Earth (Boston: Atlantic Monthly Press, 2002); and James McGregor,
One Billion Customers: Lessons from the Front Lines of Doing Business in China (New York: Free
Press, 2005), p. 2. The Taiwanese have also used similar phrases to denote the same “China
Dream.” See, for example, “Xijin Taojinmeng Sui, Taishan Xian Huiliu Qushi” [Go west gold
rush dream broken, now a trend of Taiwanese businessmen returning home], DaJiYuan
[Epoch Times], October 6, 2005, <www.epochtimes.com/gb/5/10/6/n1076694.htm>, accessed
May 22, 2007.
13. See Council of Labor Affairs, ROC, at <http://www.cla.gov.tw>, for the foreign labor
employment by sector; and Directorate-General of Budget, Accounting, and Statistics, ROC,
at <http://www.dgbas.gov.tw>, for the overall employment by sector. Both websites were accessed
on February 27, 2006.
14. Manufacturing employment data in this paragraph are from the Statistical Yearbook
of the Republic of China, available online at <http://eng.state.gov.tw/public/data/dgbas032/
bs2/yearbook-eng/y0251.pdf>, accessed July 9, 2007.
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TABLE1EmploymentinTaiwan,1991–2005(inthousandsofworkers,unlessotherwisenoted)
Year
Total
Employment
Foreign
Total
Local
TotalIndustry
Industry
%
Foreign
Industry
Local
Industry
Service
Total
Service
%
19918,439NANA3,37039.93NANA3,97747.13
19928,632168,6163,41939.6115.273,403.734,14848.05
19938,745988,6473,41839.0890.073,327.934,32349.43
19948,9391528,7873,50639.22137.543,368.464,45649.86
19959,0451898,8563,50438.74170.153,333.854,58750.71
19969,0682378,8313,39937.49205.373,193.634,75152.39
19979,1762488,9283,50238.17207.753,294.254,79552.26
19989,2892719,0183,52337.92216.533,306.474,94453.23
19999,3852959,0903,49237.21219.223,272.785,11854.54
20009,4913279,1643,53437.23219.483,314.525,22054.99
20019,3833059,0783,37736190.823,186.185,29956.48
20029,4543049,1503,33235.24180.343,151.665,41357.25
20039,5733009,2733,33434.83176.013,157.995,54357.9
20049,7863149,4723,44635.21179.853,266.155,69858.23
20059,9423279,6153,55835.79179.843,378.165,79358.27
SOURCE:CouncilofLaborAffairs,ROC,at<http://www.cla.gov.tw>fortheforeignlaboremploymentbysector;andDirectorate-Generalof
Budget,Accounting,andStatistics,ROC,at<http://www.dgbas.gov.tw>fortheoverallemploymentbysector.BothwebsiteswereaccessedonFeb-
ruary27,2006.
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248 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
cline in manufacturing jobs did, however, coincide with the revaluation of
the New Taiwan Dollar, which took place from 1985 to 1987 in the wake
of the Plaza Accords. In 2005, Taiwan still had 2.7 million manufacturing
jobs, higher than any year after 1989. Even taking into account foreign la-
borers,15
2.55 million domestic workers were employed in manufacturing
in 2005, higher than any year since 1992. Contrast this with Hong Kong’s
experience, where manufacturing employment collapsed as factories moved
to China.16
As for overall employment, despite the twenty-fold increase in foreign
guest workers between 1992 and 2005, the ability of Taiwan to employ almost
one million more local workers in 2005 than in 1992 (an almost 12%
increase in numbers of Taiwanese employed) is impressive. Most of the
employment increase was in the service sector, but that is to be expected in
a maturing economy.
Employment is only part of the story. One also needs to examine trends
in income distribution across the population to see if economic integration
has led to declining wages for industrial workers despite overall robust
levels of employment. Integration has not been entirely painless for Taiwanese
workers despite Taiwan’s excellent employment performance. As
should be expected when an economy with higher wages integrates with
another with generally lower wages, Taiwan has experienced increasing
wage inequality in recent years. As measured by the Gini index, a widely
accepted measure of income inequality in which a lower number signifies
more equality in income distribution,17
Taiwan’s inequality has increased
15. Data on foreign laborers in manufacturing are taken from the Council of Labor Affairs,
ROC, available at <http//:statdb.cla.gov.tw/html/year/d11030.pdf>, accessed July 9, 2007.
Given that the data prior to 2001 on foreign workers cited in this article do not separate out
manufacturing employment from other types of industrial employment, the assumption used
here is that the pattern of over half the foreign industrial workers working in manufacturing
during 2001 to 2005 also holds true for the earlier years.
16. Stephen W. K. Chiu and Ching Kwan Lee, “After the Hong Kong Miracle: Women
Workers under Industrial Restructuring,” Asian Survey 37:8 (August 1997), p. 56, shows that
Hong Kong’s manufacturing employment fell by more than half between 1987–95. According
to Hong Kong’s government, it more than halved again between 1995 and 2005 and was just
5.3% of total employment in 2005. Government data are available at <http://www.censtatd.
gov.hk>, accessed May 22, 2007.
17. To obtain the Gini index, the Gini coefficient is multiplied by 100. Using the Gini index
is superior to looking at average wage levels when examining the problem of hollowing out for
two reasons. First, the Gini index captures the distribution of income across the population
rather than simply the average of all wage earners. Second, hollowing out would predict increased
inequality (precisely what the Gini index measures) as lower educated manufacturing
workers become disproportionately unemployed, but because average wage rates do not necessarily
provide data on such inequality, wage data cannot capture hollowing out-driven
inequality.
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DOUGLAS B. FULLER 249
from a low of 27.7 in 1980 to approximately 34 in recent years.18
However,
it must be noted that Taiwan’s high point of inequality in recent years was
in 2001, during the bursting of the Internet bubble, when Taiwan’s Gini
index was 35.0. Thus, increasing trade with China cannot be the only culprit
in terms of Taiwan’s increasing inequality of income distribution. Indeed,
more than half of the increase in inequality as measured by the Gini
index had occurred by 1990 when the Gini index reached 31.2, even though
economic integration with China was still in its infancy at the time. Furthermore,
the recent years of heightened integration have witnessed relatively
stable income distribution with a trend of slightly declining income
inequality since 2001. Moreover, Taiwan’s Gini index places its level of
income inequality roughly in the middle of the advanced economies, in
recent years. Indeed, despite an incomplete welfare state, Taiwan’s inequality
is still lower than that of the major neoliberal Anglo-American economies,
if higher than that of the social democratic welfare states of Northern
Europe.19
Overall, Taiwan’s purported hollowing out seems more myth than reality.
Industrial employment remains high. Income inequality has been relatively
stable and moderate, compared to the rest of the advanced industrial
economies, during a period when more Taiwanese manufacturing has moved
to China and Taiwan has opened up its economy, as mandated under the
agreement for its 2002 entry into the WTO. This trend of stable income
distribution sustained over time, combined with continued high levels of
industrial employment, suggests that Taiwan is neither hollowing out nor
simply preserving industrial employment by lowering the wages of industrial
workers.
2.2 Public and Private Initiative in Taiwan’s
Industrial Adjustment
The fact that Taiwan has run a large and generally growing trade surplus
with China (see Figure 1) helps explain why Taiwan’s industrial employment
18. The Gini index was 33.85 in 2004 and 34.0 in 2005. More recent years are not yet
available. The Gini data for Taiwan are from the Council of Economic Planning and Development,
Taiwan Statistical Data Book, 2007 (Taipei: Council of Economic Planning and Development,
2007), p. 20. As this source rounds up to the nearest tenth for the Gini index, the
more precise figure of 33.85 for 2004 was from the Asian Development Bank, Key Indicators,
2007, vol. 38 (Manila: Asian Development Bank, 2007), p. 32, although the year was incorrectly
listed as 2003 in this source.
19. The comparison of Taiwan and other advanced countries is based on data from John
Weeks, “Inequality Trends in Some Developed OECD Countries,” Organization for Economic
Cooperation and Development, Department of Economics and Social Affairs (DESA),
Working Paper, no. 6, October 2005.
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250 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
has not declined in the face of increasing economic integration. But this
still begs the question of how Taiwan accomplished this feat of exporting
manufactured goods to China, the “workshop to the world.” This feat is
all the more impressive when one considers that the core of Taiwan’s industry,
electronics, has seen its manufacturing move to China.20
For example,
manufacturing of personal computers (PCs), the heart of Taiwan’s
electronic end-products sector, has moved completely out of Taiwan except
for pilot production (author interviews).21
Taiwan has avoided many adverse consequences of manufacturing’s move
offshore because it has been able to create new competitive advantages
in certain segments of electronics and maintain existing competitiveness in
one key component, semiconductors. Even in less technology-intensive and
more labor-intensive industries, such as auto parts and bicycles, Taiwan has
maintained its competitive edge. In technology-intensive sectors, Taiwan’s
government has played a crucial role in industrial adjustment; the following
section will examine both private and public initiatives in this process.
To understand how Taiwan adjusted in the key electronics sector, this
section examines three industry segments (semiconductors; flat-panel displays,
known as active matrix liquid crystal displays [AMLCDs];22
and
mobile devices) and the new policy to attract multinationals’ (MNCs) research
activities to Taiwan. These cases demonstrate that through a mix of
private and public initiatives, Taiwan’s electronics sector has been able to
shift to new competencies and maintain existing strengths despite the
move of computer manufacturing offshore, principally to China.
In 2000, two groups of Taiwanese semiconductor engineers announced
plans to create foundries, firms that fabricate but do not design their own
semiconductor chips, in China. From that time on, the Taipei government
has been alarmed by the prospect of China threatening one of the most
technology-intensive areas where Taiwan is competitive. Indeed, Taiwan
for years has dominated the international foundry industry, routinely representing
over 70% of the global foundry market.23
One of the two new foundry start-ups in China, Semiconductor Manufacturing
International Corporation (SMIC), has been quite successful in
20. Douglas B. Fuller, Akintunde I. Akinwande, and Charles G. Sodini, “Leading, Following,
or Cooked Goose: Explaining Innovation Successes and Failures in Taiwan’s Electronics
Industry,” Industry and Innovation 10:2 (2003), pp. 179–96.
21. Interviews with electronics companies in Taipei, Taoyuan, Hsinchu, and Tainan, in
1999, 2000, 2002, and 2003.
22. Technically, AMLCDs are only one type of flat panel displays, but the media often use
flat panel displays to refer specifically to AMLCDs.
23. Fuller, “The Changing Limits.”
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DOUGLAS B. FULLER 251
ramping up production, increasing sales revenue, and boosting its market
share since production started in 2002.24
However, SMIC has not threatened
the commanding position of Taiwan’s foundry giants, Taiwan Semiconductor
(TSMC) and United Microelectronics (UMC). These firms continue to
increase their revenues and command imposingly large shares of the global
foundry market (see Figure 4). That market continues to grow as more and
more semiconductor firms outsource their production to foundries. Thus,
SMIC’s gain has not been TSMC’s and UMC’s loss. Instead, SMIC has
displaced the leaders’ perpetual and distant follower, Singapore’s Chartered,
as the third largest foundry. Grace, the other Taiwanese-run, China-based
FIGURE 4 Foundry Revenue, 2002–2005
SOURCE: IC Insights data provided by an interview subject.
24. For a case study of SMIC, see Douglas B. Fuller, Creating Ladders out of Chains:
China’s Technological Upgrading in a World of Global Production, Ph.D. diss. (Massachusetts
Institute of Technology, 2005).
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252 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
foundry, and China’s domestic champion, Huahong NEC (HHNEC), are
still very small players in the global foundry market.
Given the skill-intensive demands of semiconductor fabrication and the
developed competencies in Taiwan’s large engineering community, there has
been little incentive for the Taiwanese semiconductor industry to mimic the
rapid shift overseas of Taiwan’s computer manufacturing. SMIC appears to
have developed a successful model of bringing skilled Taiwanese engineers
to China to train local persons, but the fact remains that TSMC and UMC
each have only one fabrication facility in China. Indeed, when TSMC and
UMC have set up fabrication plants overseas, they generally have gone to
advanced industrial countries where skilled engineers are located. TSMC
has its own plants or joint ventures in Singapore and the U.S. UMC has its
own plants or joint ventures in Japan and Singapore. These facilities have
more total capacity than these firms have in China. Furthermore, most of
their production capacity remains in Taiwan.
Although the Taiwanese state originally created both TSMC and UMC,
the continued competitiveness of its semiconductor fabrication has had
little to do with government policy beyond preferential tax treatment. On
the contrary, the one recent government initiative in semiconductor fabrication
technology was undermined and ultimately abandoned because of
the refusal of TSMC and UMC to take part.25
Nevertheless, in moving into
new segments of the electronics industry, Taiwan’s government has continued
to play a critical role. In particular, the quasi-governmental Industrial
Technology Research Institute (ITRI) has continued to diffuse new technologies
to industry, which then blossom commercially. ITRI’s approach
to technological diffusion and upgrading has been to master advanced foreign
technologies in its own labs and then diffuse them. This diffusion typically
takes one of two paths. ITRI either spins off researchers from these
labs into new commercial ventures or it transfers the technologies (often
along with staff) to existing firms that supported or collaborated on the research.
This so-called ITRI model of technological upgrading has been
well documented,26
but its continued effectiveness has been questioned.
Fortunately for Taiwan, the cases of AMLCDs and mobile technologies
indicate that the ITRI model still works.
For AMLCDs, ITRI was less of a major force than has been typical in
the past. Most of the Taiwanese AMLCD firms received their technology
directly from Japan rather than from ITRI. However, the research institute
25. See Fuller, “The Changing Limits”; and Fuller et al. “Leading.”
26. Dan Breznitz, Innovation and the State (New Haven, Conn.: Yale University Press,
2007); John A. Mathews, “Origins and Dynamics of Taiwan’s R&D Consortia,” Research
Policy 31(2002), pp. 633–51; Fuller et al., “Leading”; and Fuller, “The Changing Limits.”
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DOUGLAS B. FULLER 253
did play an active role in training engineers in AMLCD manufacturing tech-
niques.27
Consequently, Taiwan grew from being a nonentity in the global
display industry in 2000 to the largest producer of AMLCDs in the world
today.28
What is interesting about the distribution of this relatively new Taiwanese
industry is how quickly production has moved to China. As early as
2001, Taiwanese producers were building back-end LCD module plants in
China. However, this distribution of the industry has been to Taiwan’s
advantage. The back-end module assembly is the labor-intensive part of
the process. The actual making of the liquid crystal display is capital- and
skill-intensive and remains in Taiwan. From the perspective of creating
high-wage employment with the potential of creating technological spillovers,
this type of cross-strait distribution of production is just what Taiwan
should want.
ITRI has led the way in acquiring and transferring mobile technologies,
such as cellular phone technology, to local firms by training local engineers
through its Computer and Communication Research Laboratories (CCL).
In fact, many of the computer firms, such as Quanta, Acer, and Compal,
were able to benefit from ITRI’s technology transfer to become major producers
of mobile phones.
In contrast to ITRI’s success in diffusing information technology (IT)
knowledge to Taiwanese firms, the ITRI research units that are not connected
to IT have been less successful in spurring local innovation. Instead,
those mature manufacturing industries that have managed to stay competitive
in the face of cross-strait integration, such as bicycle and auto parts
manufacturing, have done so with little effective state support.
Although the bicycle industry has moved some production of massproduced
bicycles to China, it has kept the manufacture of higher valueadded,
custom bikes in Taiwan. Production of these bicycles relies on a
dense network of specialized suppliers co-located in central Taiwan. In essence,
for the custom bicycles the industry follows the Italian industry district
model based on a network of small and medium enterprises (SMEs)
with focused competencies; this is much harder to replicate in China. Thus,
it is not surprising that much of the industry remains in Taiwan.29
Other industries have taken a similar path. After-market auto parts (i.e.,
replacement parts) have been the driving force behind Taiwan’s auto parts
27. This brief synopsis of the development of Taiwan’s AMLCD industry relies heavily on
the account in Fuller et al., “Leading.”
28. “Taiwan Dogs Korea for LCD Share,” Business Week, June 14, 2006.
29. This section is based on Michelle Hsieh, The East Asian Miracle Revisited: The TaiwanSouth
Korea Comparison Based on a Case Study of the Bicycle Industry, Ph.D. diss. (Department
of Sociology, McGill University, 2005).
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254 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
success story and the industry has received virtually no government technological
help or guidance. In contrast to Taiwan’s heavily protected and
inefficient auto assembly industry, the after-market auto parts makers are
focused on overseas markets. This focus has forced them to be efficient.
Unlike in the case of auto assemblers, for auto parts the barriers to achieving
technological independence have been relatively low because these parts
are often readily reverse engineered. Yet, Taiwanese manufacturers have
still been able to distinguish themselves from Southeast Asian and Chinese
auto parts makers, which rely solely on cheap labor, because the Taiwanese
have developed skills in electronic data exchange with their key retailers,
primarily in the U.S., to receive, process, and track orders.30
Despite
the heavy reliance of Taiwan’s domestic assemblers on imported parts, and
falling protectionist barriers with Taipei’s 2002 entry into the WTO, Taiwan
in 2005 was still able to run a substantial trade surplus in parts because of
its competitive after-market components. Taiwan’s surplus was more than
US$1 billion, despite having over US$2.5 billion worth of imports.31
Taiwan’s most recent economic development plan, the “Challenge 2008”
Six-Year Development Plan (2002–07), continued tax breaks for established
technology sectors such as AMLCDs and semiconductors, but it
also embarked on policies heretofore unseen in Taiwan. Breaking with historical
practice of eschewing tax breaks to lure MNC research and development
(R&D) activities,32
Taiwan has initiated a new aggressive push to
recruit MNCs as well as local firms to establish R&D centers in Taiwan.
From having virtually no such activities in the 1990s, a number of major
technology firms such as Intel, Sony, and IBM have established 31 R&D
centers—even while subsidies for these centers have been kept in check.
These trends indicate this policy has been at least moderately successful
thus far.33
Because it spanned more than one presidential term, it is clear
that this program was heavily influenced by Taiwan’s economic bureaucracy
in terms of planning as well as execution. Thus, even if Chen Shuibian
had lost the 2004 presidential election, the plan would have remained
in place.
30. Edward Cunningham, Teresa Lynch, and Eric Thun, “A Tale of Two Sectors: Diverging
Paths in Taiwan’s Automotive Industry,” in Suzanne Berger and Richard K. Lester, eds.
Global Taiwan: Building Competitive Strengths in a New International Economy (Armonk,
N.Y.: M. E. Sharpe, 2005).
31. The data were provided by Mr. Chih-yen Tai, Industrial Economics and Knowledge
Center (IEK), a unit of ITRI.
32. For Taiwan’s past refusal to lure MNCs with incentives, see Douglas B. Fuller, “Globalization
for Nation-Building: Taiwan’s Industrial and Technology Policies for HighTechnology
Sectors,” Journal of Interdisciplinary Economics 18 (2007), pp. 203–24.
33. Fuller, “The Changing Limits.”
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DOUGLAS B. FULLER 255
2.3 Taiwan’s Frustrated China Dream
Taiwan’s integration with China has not been without its setbacks. First and
foremost, like many others, the Taiwanese have been gripped by the “China
dream”—capturing a market of over one billion customers. And like most
of those seized by this dream, the Taiwanese have often been disappointed.
The Taiwanese are in some sense uniquely dependent on the China dream
and possess special advantages for attempts to realize it. This dependency
arises because Taiwan’s home market is quite small and has inhibited the
development of globally competitive Taiwanese brands.34
Thus, geographic
and cultural proximity dictate that China is the logical “home” market of
significant size for the Taiwanese to use to develop brands. The same geographic
and cultural proximity also may serve as Taiwan’s competitive advantage
in utilizing China as its home market. These potential advantages
only make realizing the China dream more critical for the Taiwanese, because
there are not any realistic alternative home markets.
Several Taiwanese brands have been very successful in China. Giant Bicycle
is the largest bicycle brand in China. Kang Shifu and President Group
dominate the large instant noodles market and have extended their reach
into other food and beverage products, such as bottled tea. Kang Shifu’s
success is particularly impressive because this firm was only a small-scale
supplier of inputs for Taiwan’s instant noodle firms before it set up its own
instant noodle manufacturing operations in China. In contrast, President
Group and Giant have simply extended their prevailing business operations
to China.
The success of Taiwan’s food and beverage firms in China illustrates the
advantage that cultural proximity gives Taiwan in certain product areas.
Similarly, in the media industry, cultural knowledge is critical. Outside of
the food and beverage business, Taiwan’s success in culture-intensive industries
has been limited. In the media sector, this is because the PRC strictly
prohibits majority ownership by non-domestic Chinese firms. Thus, while
Chinese audiences like Taiwanese pop stars, Taiwanese media companies
have little opportunity to take these cultural products and craft them into
large media businesses, given China’s regulations.
In China’s electronics market, the performance record of Taiwanese
brands is abysmal, particularly given the strengths of Taiwan’s large electronics
industry. The Taiwanese sector traditionally grew by manufacturing
products for other brands, but a number of its firms have dreamed of
creating their own brands in the Chinese market. The widely known Taiwan
computer maker Acer has tried to become a major player in China
for almost a decade. For all its efforts, the firm still commands only a small
34. Fuller et al., “Leading.”
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256 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
slice of the Chinese market. Until 2005, regulations prevented foreign
firms from setting up their own retail distribution networks in China,35
but
protectionist measures were only part of the problem. Major international
brands such as IBM, Hewlett-Packard, and Dell, were able to gain market
share in China despite retail restrictions. However, the position of these
firms in the global industry has differed markedly from Acer’s: they offered
higher-end models justified by their renowned brands, whereas lesser-known
Acer had to compete on price points with local Chinese brands such as
Lenovo and Founder.
For mobile phones, the other IT end-product where Taiwanese have become
major international players, restrictions are even more stifling. Until
2005, China’s Ministry of Information Industry (MII) restricted the number
of foreign brands that could sell their mobile phones in China. That
year MII installed a more open system that gave over 30 more firms rights
to sell their own brands of mobile phones. Originally, only one Taiwanese
maker, Dbtel, was able to sell its own brand of phones in China. Beijing’s
regulations clearly have not shown any favoritism to their Taiwanese compatriots:
all the major international brands had licenses to sell in China,
while the Taiwanese were kept out. To add insult to injury, Taiwan’s Korean
rivals, LG and Samsung, enjoyed licenses under the restrictive regime.
The irony is that China’s techno-nationalist dreams of building worldclass
high-technology industries do not include Taiwan, ostensibly an integral
part of China. Despite China’s political and territorial claims regarding
Taiwan, China’s technology and economic policymaking apparatus has
continued to regard Taiwanese and even Hong Kong-based firms as foreign
firms when it comes to government support for strategic industries.
Of course, firms from Taiwan, Hong Kong, and Macao have also benefitted
from the same lower tax rates enjoyed by foreign firms.36
In effect, the
Chinese government has been quite consistent in giving firms from these
economies effectively the same treatment given to foreign firms.
Thus far, the dream of the China market has been somewhat of a disappointment
for Taiwanese firms that had hoped to build a global brand
from a major presence there. The future does not look very promising either.
The restrictions on the media appear likely to remain in place, and
China’s openness to foreign brands means there is not much space to develop
Taiwanese ones.
35. China was supposed to open distribution in December 2004 according to its WTO
commitments. Instead, China opened them only in 2005 according to the U.S.-China Business
Council, <http://www.uschina.org>, accessed February 27, 2006.
36. From January 1, 2008, the Chinese government has started gradually phasing out the
preferential tax treatment of foreign firms, with the corporate tax rates of foreign and domestic
firms targeted for unification at a 25% tax rate in 2012.
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DOUGLAS B. FULLER 257
3. True Compatriots
3.1 How China Benefits from Cross-Strait
Economic Integration
Given the relative size of their economies, China’s public debates about the
economy are far less concerned about Taiwan than are Taiwanese debates
about China. Still, commentary on Taiwanese investment has often been
critical. Yasheng Huang’s Selling China: Foreign Direct Investment during
the Reform Era sees investment from the ethnic Chinese economies, a category
that includes Taiwan, as bringing little technology or new knowledge
to China. Taiwanese investors have often been accused of relatively egregious
labor practices compared to other foreign investors in China.37
This
section will weigh the evidence about the impact of integration with Taiwan;
it finds that on balance, Taiwan has made an overwhelmingly positive contribution
to China’s development, especially in the area of technology.
Given that 34% of Taiwan’s reported investment in China is in IT38
—the
actual figure is likely to be higher because Taiwanese IT investment is underreported
as companies try to avoid government restrictions on investment—
examining the impact of Taiwan’s IT investments in China is critical.
Taiwan’s investment has contributed dramatically to China’s development
because it features a significant technology component ignored by some
critics of Taiwan’s FDI, such as Yasheng Huang. This technology can be
seen through two sets of data. First, the Taiwanese semiconductor industry
is training significant numbers of engineers in China. Second, the R&D
units of Taiwanese IT firms in China are becoming increasingly innovative
as measured by the increasing number of U.S. patents produced by these
China-based units.
Turning to the semiconductor industry, we will look at the design and
fabrication aspects because these segments are more technologically intensive
than assembly and packaging. As more and more firms have focused
on design while outsourcing fabrication to foundries such as TSMC and
UMC, the design segment has blossomed. In fact, fabless design houses
(i.e., design firms without their own fabrication facilities) in the past 20
years have gone from producing 0.3% of global semiconductor revenue to
producing 14%.39
The spectacular growth of Taiwanese fabless design firms
has made the island into the second largest center of fabless design after
37. Anita Chan, China’s Workers under Assault (Armonk, N. Y.: M. E. Sharpe, 2001).
38. Government of the ROC, Mainland Affairs Council, <http://www.mac.gov.tw>, accessed
February 27, 2006.
39. Jodi Shelton, “FSA Update: What’s on the Mind of FSA CEOs?” (2003), Fabless
Semiconductor Association (FSA), <http://www.fsa.org>, accessed February 27, 2006.
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258 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
the U.S. Taiwan’s share of global fabless revenue was 28% in 2004 and had
doubled since 1996.40
With this strong competitive position, one might think Taiwan would
not need to expand to China, but the growing demand for design engineers
forced Taiwanese fabless firms to look abroad. Except for a few brave pioneers
in the late 1990s, the first wave of Taiwanese design firms invested in
China in 2000. This was the critical year because Taiwan had experienced
an Internet boom that lured many engineers away from chip design. The
shrinking supply of engineers available to design firms at a reasonable price
forced them to explore sources of engineers abroad. In addition to having
geographic and cultural proximity, China has been producing large numbers
of engineers,41
so the Taiwanese firms decided to explore this market.
Based on interviews42
with 58 design firms43
in China employing approximately
half of the country’s overall design work force,44
the Taiwanese
firms were extremely active. They trained one-third of the local designers
who were trained in actual design skills. In contrast, most Chinese firms
did not teach their engineers anything but reverse engineering. The Taiwanese
firms generally reported that local engineering graduates required more
training than their Taiwanese peers but had a good basic engineering education,
which made them highly responsive. At least seven of the top 10
largest Taiwanese design firms have design centers in China (see Table 2).
Two others may have centers there, but Chinese subsidiaries of Taiwanese
design firms are often hard to locate because their managers strive to hide
their identities from the Taiwanese authorities, who maintain restrictions
on investments in semiconductor design.45
In semiconductor fabrication, the established Taiwanese foundries have
made only a moderate contribution to training China’s engineers because
they each have only one factory in China. Instead, experienced Taiwanese
40. Ibid.
41. Robert Fogel, “Why China Is Likely to Achieve Its Growth Objectives,” presented at
the Institute of Government and Public Affairs Seminar, University of Illinois at Chicago,
2005.
42. By author, with the bulk of the interviews conducted in the years 2001–07, with a few
initial interviews in 1998.
43. One of these firms has sold its design operation in China, and five other firms had only
sales operations.
44. This estimate is based on an I-Suppli estimate of total Chinese designers and the numbers
of engineers employed as reported by each firm during interviews.
45. For example, many Taiwanese firms use different names for their Chinese subsidiaries.
Design investments are no longer banned, but they have restrictions on sophistication of design
(measured in terms of the lithography width of fabrication process) done in China. Furthermore,
many of the firms set up shop in China before it was legal to do so and therefore face
legal problems if they report their activities to the Taiwanese Investment Commission now.
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DOUGLAS B. FULLER 259
chip engineers left these firms to set up new foundries in China. The two
most prominent firms, Grace and SMIC, were founded in 2000 and have
become two of the largest semiconductor manufacturers in China. SMIC
is now the third largest foundry globally (see Figure 2). What SMIC and
Grace really have contributed is work force training: most of the engineers
at these firms are local. From 2001 to 2003, SMIC trained 800 local engineers
to complement the 400 engineers it brought from Taiwan and else-
where.46
In contrast, the largest domestic Chinese firm, HHNEC remains
reliant on Japanese engineering expertise.47
In R&D of IT products, the important contribution of Taiwanese firms
is also evident. Of the 939 corporate IT U.S. utility patents firms originating
from China48
and created by foreign MNCs, large Chinese firms, or Taiwanese
firms, 689 are from Taiwanese firms, including Grace and SMIC.49
More
TABLE 2 Taiwanese Design Centers in China
Revenue Rank among
Taiwanese Design Firms Name China Design Team
1 Mediatek Yes
2 VIA Yes
3 Realtek Yes
4 Sunplus Yes
5 Novatek No
6 ALI Yes
7 Elan ?
8 Elite ?
9 Faraday Yes
10 Holtek Yes
SOURCE: Author interviews.
46. This figure is based upon interviews and an internal report from China’s Ministry of
Science and Technology.
47. Fuller, Creating Ladders.
48. U.S. patents list the location of the patent inventor, so all U.S. utility patents with a
China-based inventor were considered to originate from China. Only those patents created by
inventors working for a foreign MNC, large Chinese IT firm, or Taiwanese firm were counted
as part of the total of 939 patents in order to be able to measure the relative contributions of
foreign MNCs, large Chinese firms.
49. The U.S. Patent Office awards utility and design patents. Design patents for the exterior
appearance of a product are not technology-intensive so they were excluded. Most patents
are invented and held by individuals. Corporate means those patents funded and owned
by corporations. The patent data were accessed on May 9, 2006, at U.S. Patent and Trademark
Office’s database website, <http://patft1.uspto.gov/netahtml/PTO/search-bool.html>.
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260 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
important, the Taiwanese firms show a much larger share of their patents
coming from China than do other foreign firms. Among non-Taiwanese
foreign firms, only Microsoft can claim to have even 1% of its U.S. utility
patents originating from China. Five Taiwanese firms (Hon Hai, Inventec,
UMC, Winbond, and SMIC) are among the top 10 U.S. IT utility patent
holders from China, and all have at least 1% of their patents from their
Chinese operations.
Several Taiwanese companies have explicitly embraced using China as a
major base of operations beyond manufacturing. Inventec, a major computer
manufacturer, calls its strategy the “Twin Towers” approach, with one
tower in Taiwan and the other in China. Hon Hai, a major component
and computer producer, has gone so far as to list its Chinese assets on the
Hong Kong stock market in order to circumvent continued Taiwanese restrictions
on total investment in China. Both Hon Hai and Inventec derive
a large percentage of their U.S. utility patents from China, 18% and 32%,
respectively. Hon Hai has a very large U.S. portfolio of almost 3,000 patents
(comparable to the portfolio of a mid-sized U.S. technology company
such as Seagate), proving that Hon Hai’s commitment to research in China
is not trivial.
3.2 The Role of Venture Capital
Taiwan’s contribution is not limited to training local engineers and pursuing
R&D activities in China. Taiwan’s venture capitalists have also contributed
to China’s technological development. Major Taiwanese-backed
venture firms such as Acer Venture Capital, Investar, China Merchant &
Fortune Venture, and Sino-Century have invested in numerous technology
start-ups based in China.
From interviews with eight local Chinese, five Taiwanese, and nine foreign
venture capitalists, it is clear that the Taiwanese firms are making a
qualitative difference in spurring technological development, through their
selection of investment targets. The local Chinese venture capitalists are primarily
state-owned financial vehicles with little experience or competence
in selecting promising start-ups or fostering their growth. To the extent
that they have been able to contribute effectively to technology entrepreneurship
in China, they have done so by following the lead of foreign and
Taiwanese investors. In other words, they allow foreigners and Taiwanese
to select and help manage the investment targets while the Chinese co-invest
in selected start-ups.
The foreign venture capitalists, primarily American venture firms, look at
China and see a place bereft of technology because they compare it to Silicon
Valley, the heart of the American technology venture capital business.
The Taiwanese, with their experience in building up technology enterprises
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DOUGLAS B. FULLER 261
in a relatively technology-backward economy, have not been daunted when
confronted with a similar task in China. Consequently, while the American
firms have been concentrating on technology-light but profitable services
such as Internet and wireless services, the Taiwanese have been primarily
investing in firms attempting to create technology in semiconductor and
wireless segments.
Where the Taiwanese have failed to contribute to Chinese development is
in Taiwan’s traditional area of strength, manufacturing. While Taiwanese
firms have been helping China develop capabilities in the human capitalintensive
manufacturing sector of semiconductors, the traditional Taiwanese
assemblers of electronics and other products have not contributed
much to China’s development because of their closed manufacturing networks.
When Taiwanese firms move to China, they tend to move their entire
cluster of suppliers as well. Thus, they do not help to cultivate a supply
base of local Chinese firms. Yang and Hsia’s study of Taiwanese production
networks in the Yangtze River Delta found that local Chinese suppliers
were limited to furnishing 6% of total production value to the Taiwanese
electronics network located in that area.50
My own interviews with seven
electronics Taiwanese manufacturers in the Pearl River Delta also discovered
that overwhelmingly, these assemblers relied on foreign-invested (including
Taiwanese-invested) firms. None reported procuring more than 5%
of the value of their inputs from local Chinese firms. Five of these firms
had been in China for more than five years at the time of the interviews,
suggesting that even with time there had been little progress in developing
local suppliers. Michelle Hsieh found the same pattern of closed supplier
networks in her investigation of Taiwan’s bicycle production in China.51
The one positive note in my interviews at manufacturing plants was in a
large, decade-old complex where a significant number of plant executives
were local, in contrast with the typical situation in which the management
is almost entirely Taiwanese. Still, with Taiwan’s other large contributions
to China’s technological development, the failure to build up Chinese manufacturers
should count as a singular disappointment rather than the definitive
feature of China’s experience with cross-strait economic integration.
4. Sustainability of Trends
Can Taiwan continue to integrate with China without sustaining high costs
of adjustment with its lower-wage neighbor? The good news for those con-
50. You-Ren Yang and Chu-Joe Hsia, “Local Clustering and Organizational Dynamics of
Trans-border Production Networks: A Case Study of Taiwanese IT Companies in the Greater
Suzhou Area, China,” Environment and Planning A 39 (2007), pp. 1346–63.
51. Hsieh, The East Asian Miracle Revisited.
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262 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
cerned about Taiwanese hollowing out from increased trade with China is
twofold. First, Taiwan’s few heavily protected sectors pre-WTO, such as
auto assembly, employ only a small fraction of Taiwan’s manufacturing
work force, so WTO-mandated opening up will not cause widespread
unemployment. Second, China’s labor cost advantage may be shrinking:
there is increasing evidence of rising wages amid mingonghuang (labor
shortages).52
Furthermore, the Taipei government’s efforts to transform
Taiwan from a manufacturing to knowledge-based economy are succeeding,
as evidenced by the growing number of foreign R&D centers and Taiwan’s
increasing international patent portfolio.53
The downside is that China’s massive investments in education54
could
significantly depress Taiwanese white-collar wages55
in the future if several
conditions were to apply. First, Taiwanese white-collar workers are unable
to avoid direct competition with Chinese white-collar workers by occupying
different sectors or niches. Second, the global demand for such workers
as Taiwan and China produce does not increase faster than the global
supply, a condition that in part depends on what sectors or niches exist in
the global marketplace. Finally, all of this assumes that China can create
equally productive white-collar workers while controlling for cost, i.e.,
Chinese workers produce as much value per dollar of wages as their Taiwanese
counterparts.
Given Taiwan’s reliance on overseas markets, the danger of downward
pressure for Taiwanese educated workers would exist even if Taiwan chose
to avoid integration with China. Richard Freeman has examined such a
declining wage scenario for U.S. engineers in the face of competition from
engineers in China and India, and argues that such a scenario is plausible.56
If Taiwan is still trying to compete in the U.S. and other marketplaces,
Taiwan will face Chinese competition regardless of its level of direct economic
integration with China, although without Taiwanese investment,
the training of China’s human capital would likely take much longer.
One must keep in mind the legitimate proviso that free-trade advocates always
have for those worried about the costs borne by workers in certain sectors.
Free traders invariably point out that there are always new industries
52. Wang Yue-sheng, “Mingonghuang shi dui di chengben moshi de ziwo jiaozheng” [The
labor shortage is a self-correction for the low labor cost model], Ershiyi Shiji Jingji Baodao
[Twenty-First Century Economic Herald], March 13, 2006.
53. Donald Floyd and Paul Meyer, “Global Patent Trends 2001,” Lehman Brothers Report,
June 2002.
54. Fogel, “Why China.”
55. Here we define white-collar workers as university-educated workers.
56. Richard Freeman, “Doubling the Global Workforce,” presented at the Center for Economic
Performance, London School of Economics, 2004.
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DOUGLAS B. FULLER 263
and niches we cannot anticipate. This observation suggests possibilities for
unanticipated new sources of demand in the same sector for what would
otherwise be displaced workers, and entirely new fields of industrial activity
that could absorb these workers. The trick, of course, is to encourage
those activities to spring up in one’s own economy and to ensure that one’s
own work force is able to seize these opportunities. ITRI’s track record in
cultivating new activities, plus Taiwan’s high level of entrepreneurship and
sound educational system for technologists, all suggest that Taiwan should
be able to sidestep China’s competition by developing new and/or niche
activities that the latter does not possess. And this possibility is in addition
to Taiwan’s current ability to stay at least one step ahead of China in similar
areas of technology.
As for China, Taiwan will continue to contribute significant amounts of
technological progress if three conditions hold: (1) China’s growth areas
match Taiwan’s strengths, (2) China’s maldistribution of investment capital
continues, and (3) China’s enforcement of intellectual property rights
(IPR) does not significantly improve. All three conditions are likely to hold
true for the medium term.
Taiwan’s strengths match some of China’s growth areas. One of China’s
industrial growth engines is IT, and this sector is precisely where Taiwan is
strongest. If China continues to follow the path of other Asian developers,
IT will likely remain a major driver of growth.57
China’s maldistribution of finance through its support for inefficient
state-favored firms and neglect of small, private, and entrepreneurial firms
has long been a drag on the country’s innovation. Thus, Taiwanese have
played an outsized role, in part because of the constraints on domestic innovation
in China. Will finance continue to play such a role in China?
With high rates of savings and a healthy fiscal situation, China is under little
pressure to change its current system of subsidizing its inefficient banking
system. Officials still prefer to control the commanding heights of the
economy.58
Moves to reform the financial system have been baby steps
compared to the thorough reforms needed.59
China’s lax IPR regime does not deter Taiwanese technology firms from
investing, because they have been accustomed to operating in environments
57. Henry S. Rowen, Marguerite Gong Hancock, and William F. Miller, eds., Making IT:
The Rise of Asia High Tech (Stanford, Calif.: Stanford University Press, 2006).
58. Margaret M. Pearson, “The Business of Governing Business in China,” World Politics
57 (2005), pp. 296–322.
59. Nicholas Hope and Fred Hu, “Reforming Chinese Banking: How Much Can Foreign
Entry Help?”presented at the Fourth Annual Conference on Chinese Policy Reform, Stanford
Center for International Development, September 30 to October 1, 2005.
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264 ASIAN SURVEY, VOL. XLVIII, NO. 2, MARCH/APRIL 2008
with relatively lax intellectual property enforcement. In contrast, many
MNCs are more cautious of placing valuable activities in China because
of the opaque environment.60
For example, in integrated circuit design,
American MNCs have placed quite sophisticated activities in India, where
the English legal structure is relatively (for a developing country) sound
and transparent as well as familiar to American firms. The same firms
place only the most unsophisticated part of the design process, layout, in
China.61
With MNCs deterred by China’s lack of transparency, the Taiwanese
have played a relatively outsized role in bringing technology to China.
China’s legal structures are improving, but most likely it will take a long
time before the IPR regime is strong enough for the comfort of MNCs.
60. Xiaohong Quan, Multinational Research and Development Labs in China: Local and
Global Innovation, Ph.D. diss. (University of California at Berkeley, 2005), argues that MNCs
have placed R&D activities in China primarily because they have been able to segment the
R&D value chain so control of valuable knowledge is kept in the home base of the MNC.
61. Fuller, Creating Ladders.
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