The last installment of this was the one from Lee Teng-hui discussing the problems of investment in China and how it has slowed Taiwan’s economic growth and worsened its income equality. This week’s talks about other issues

In 1990, the differentiation of products exported to the U.S. by South Korea and of products exported to the U.S. by China stood at 75.2. At the same time, the differentiation between Taiwanese and Chinese products stood at 72.5 (a differentiation of 100 means that two products are completely different), which shows that back then there was not much of a difference between Taiwan and South Korea in terms of product differentiation. However 13 years later in 2003 the degree of product differentiation between South Korean and Chinese exports to the U.S. still stood at 59.1, while Taiwan’s had narrowed to just 31.2, because our companies due to their cost-reduction strategy and over-investment in China were unable to transform and upgrade, only producing goods at low costs. If products do not differ and also cannot compete on price, then they will be easily substituted.

Essentially Taiwan is not becoming less like China as it offshores low-value added projection, leaving the brainy stuff to be done at home. Rather, it is becoming more like China, product-wise. Scary, because there’s more China, and it can do anything we can do here. It also discusses the investment issue:

From 2001 to 2004 Taiwan’s domestic investment accounted for less than 20 percent of GDP. Many people think that investment activity was not really thriving because of the international recession. I will especially take the situation of other countries for comparison to see how differently the international slump affected the individual countries. We will then take a look to see how much the international economic situation affects Taiwan. The three other small Asian dragons South Korea, Hong Kong, and Singapore were affected by the international slump during the same time as Taiwan, but their domestic investment rate was higher than Taiwan’s. Even in the U.S., Japan and Italy the domestic investment rate was higher than in Taiwan during the same period. This shows that the international slump is definitely not the only reason why Taiwan’s domestic investment rate is low.

Where does the problem lie? After the year 2000 the Economic Development Advisory Conference reached consensus to implement an “active opening, effective management” policy toward investment in China, but it failed to come up with concrete methods of adequate management. From 1993 to 1999 when President Lee Teng-hui was in power appropriate controls and norms were in place regarding commercial and trade contracts between Taiwan and China. As a result Taiwanese investment in China remained always at around 0.5 percent of GDP. But after 2000 this figure kept rising so that by 2004 it had already soared to 2.4 percent. These Mainland Affairs Council figures are still rather conservative, because they only include investments that went through the legal application and approval process, while investments that were made clandestinely are not factored in. Therefore the 2.4 percent figure is still underrated.

The direction of investments is wrongheaded, according to this crowd:

First I would like to define “excessive investment in China.” There are two indicators, one of which is the amount that Taiwanese entrepreneurs have invested in China, which accounts for too high a proportion of our Gross Domestic Product (GDP). Taiwan usually ranks among the first three top investors in China worldwide. The second indicator is the share of Taiwanese investment going to China, which accounts for too high a proportion of our overseas investment. In the course of globalization Europe, the United States, Japan and South Korea usually invest 60-70 percent of their total overseas investment in countries that are at an equal level of development such as Europe, the U.S., and Japan. They use such investments as an opportunity to obtain certain technologies or for acquisitions. But Taiwan does exactly the opposite by investing 70 percent of its overseas investment in China. Why do we invest in China? This is probably related to the size of our companies, our past successful experiences and our business philosophy. What our companies have adopted is a cost-reducing strategy. If everyone adopts a strategy of reducing costs, Taiwan’s economy will be severely affected.

At the moment I see no easy solution to the problem of the need to diversify the nation’s investments…….