Taiwan falling behind in race to lure investors to free trade zones

Taiwanese government targets foreign investors for its own free trade zones as home-grown companies favour similar zones on the mainland

PUBLISHED : Tuesday, 04 February, 2014, 5:57am
UPDATED : Tuesday, 04 February, 2014, 5:24pm

While the mainland's evolving plans for a network of free trade zones have been grabbing headlines, Taiwan has been steadily building up it own network of economic zones in a bid to lure multinationals and entice local firms back from offshore.

But the island's efforts to develop its eight pilot zones may come as too little too late, leaving Taiwan falling behind in fast-paced Asia-Pacific economic integration, analysts say.

Undaunted, government planners expect the chain of zones along Taiwan's industrialised coastline to draw investors from a range of sectors including clean energy and logistics.

Businesses in the zones near ports and an airport would get tax breaks, reduced land costs and hassle-free permits for foreign nationals, said Chen Hsiao-hung, deputy minister of the government's Council of Economic Planning and Development.

The council estimates that private investment, much of it in the economic zones, will increase by NT$21 billion (HK$5.4 billion) this year and lift gross domestic product by 0.2 per cent after parliament approves a key step for the zones in the first half of the year.

"We hope all of Taiwan can go in the direction of Hong Kong and Singapore, which are free trade ports," Chen said.

Looming large among the challenges for Taiwan is the mainland's ambitious plans. Beijing has championed special economic zones since Deng Xiaoping pushed through Shenzhen's special zone in 1979. Today, newer zones on the mainland are attracting Taiwanese as well as foreign multinationals, while Taiwan is grappling with how much investment its pilot zones should accept from the mainland.

"It's pretty hard, because every country is pushing those special zones, so only if our conditions are much better will people come," said Wu Hui-ling, a fellow with the Taipei-based think tank Chung-Hua Institute for Economic Research.

The mainland's first free trade zone, which opened in Shanghai late last year, is wooing Taiwanese with pledges to open more service sectors to offshore investors. In Fujian province, just across the strait, officials are working on incentives and improving infrastructure to target Taiwanese businesses.

Taiwanese have been enthusiastic investors on the mainland since the 1980s. In 2012 they poured US$10.9 billion into the massive market and its cheaper manufacturing base.

TeamChem plans to open a factory on the mainland next year to sell more efficiently to local companies, general manager Sunny Han said. The firm, based near Taipei, makes solder masks and conductive film for mobile phones.

"We don't expect too much from [Taiwanese] zones," Han said. "Our scale is small and we sell back to Taiwan or in mainland China, so we can use existing transport links. If we want to invest more in China, we just build over there."

The mainland also weighs on Taiwan's pilot zones indirectly. Beijing pressures other countries to not sign free trade pacts with Taiwan, diluting foreign interest in the island's natural selling points such as a skilled workforce and trademark protections.

Taiwan's broader policies toward foreign investment may also discourage companies from setting up in the free economic zones, analysts say.

"If these zones take away any difficulty in doing business, then it's a win-win," said John Brebeck, a senior adviser with Quantum International in Taipei. "The government just needs to make it easier for people to do business."

Taiwan has already sounded a note of caution about the likely top investor in its free economic zones - the mainland.

Chen said businesses across the strait wanted to invest but, given the mainland's size, Taiwan must enforce existing restrictions to limit inflows. "China is quite powerful and we don't want to be swallowed by them," she said.

Although 39 Taiwanese investors returned home last year under a government incentive programme, investing NT$200 billion, analysts expect them to remain keener on the mainland.

As such, Taiwan is pinning its hopes on foreign multinationals. The zones will give special attention to investors in agriculture reprocessing, biotech, education, green energy and logistics.

"Foreign services firms from countries like the US and Japan may enter the pilot zones, thanks to the removal of market access barriers and the offering of tax incentives," said Ma Tieying, an economist with DBS Bank in Singapore.

Those investors could use Taiwan as a gateway to the mainland market, she said. Taiwanese firms, on the other hand, would stick to the mainland.