Investors shipping out of Taiwan

Capital outflows highlight island's challenges when neighbours offer lower costs, but Taipei is fighting back with pro-business policies

PUBLISHED : Wednesday, 04 September, 2013, 12:00am
UPDATED : Wednesday, 04 September, 2013, 3:17am

A chronic lack of investment in Taiwan due to its relatively high business costs and an unsteady world demand for local exports is gnawing at the island's economic growth forecasts for this year despite the government's stimulus measures.

Shaky global demand for signature Taiwanese exports such as electronics and machinery has dulled enthusiasm for investment, particularly as growth slows in the island's top market, the mainland. Prices of land and labour combined with a relatively small consumer base have further detracted from Taiwan's potential, sending investors to other parts of Asia.

Quantifying a trend mainly among Taiwanese investors, the island's central bank reported a net outflow of US$9.5 billion in the first quarter of the year and 11 consecutive quarters of outflow, the longest stretch ever.

"Investment has been low in the last few terms, so there's an impact on the GDP, though it's limited," said Shih Hsiao-chi, an economist with SinoPac Securities in Taipei. "The government is working hard, but those matters are structural so [measures] require some time to take effect."

The government of the 26th largest economy also lowered its full-year growth forecast in August from 2.4 per cent to 2.31 per cent. A private think tank, the Taiwan Institute of Economic Research, in July revised its 2013 prediction from 3.71 per cent to 2.52 per cent.

"Accelerating outbound corporate investments", especially to mainland China and Southeast Asia, have hobbled capital investment and thereby hurt domestic consumption, Taiwan's Central News Agency says.

The effect of investment drain on Taiwan's GDP, however slight, would raise deeper fears about the island's long-term competitiveness and questions about government efforts to reclaim investment from offshore while fostering new business.

Its overall domestic investment as a percentage of GDP lags countries such as South Korea, says Standard Chartered Bank. It says local investment has hovered around 16 per cent to 20 per cent in recent years, compared with 25 per cent to 30 per cent in South Korea.

Taiwan has few advantages such as cheap labour, low land costs or a massive domestic market, over Asian neighbours including Vietnam and mainland China. Wages, though higher in Taiwan than in developing Asia, are still low enough to deter consumption - another disincentive.

"How to attract investment is not as simple as one-plus-one mathematics," said Tony Phoo, senior economist with Standard Chartered Bank in Taipei. "You have to consider Taiwan is pitching against the likes of Southeast Asia and India. Businesspeople move to maximise their economic sense, to maximise their profits and returns."

John Kuo is a case in point. The 39-year-old from Taipei shut down a Taiwan-based internet dating service in 2011 after one year because talent was hard to afford, the NT$1.5 million (HK$389,000) initial investment ran out and venture capital never appeared. "Taiwan witnessed the bubble burst in Silicon Valley, so there's a lot of fear," Kuo said.

The tough software start-up climate in hardware-focused Taiwan has prompted the government's top hi-tech incubator to shift priorities. Last year Kuo left Taiwan for a managerial job with a mainland hardware developer that comes with a professional network he could not develop in previous IT jobs.

Taiwan's pro-investment measures need time to take effect, said Shih, but company heads should take note of Taiwan's tax breaks.

The government has also liberalised imports of cheaper labour and eased restrictions on trade with the mainland. Easier transport, simpler currency conversion and lower import tariffs between Taiwan and the mainland in the past five years have made it more efficient to produce on the island and ship to the other side, said Ma Tieying, an economist at DBS Bank in Singapore.

Any Taiwan special economic zones - now being promoted by the government - and free-trade deals would further "potentially serve as a catalyst for boosting FDI", Ma said.

Taiwan says it is nearing a trade pact with Singapore, after finalising one in July with New Zealand. Taiwan's private investment this year is expected to grow by 5.83 per cent, according to Central News Agency, 0.16 percentage point above a previous government forecast.

"With policies moving in the right direction to revive investment, we expect to see some structural improvement in Taiwan's investment outlook in the medium to long term," Ma said.