The Emerging Patterns of Taiwanese Investment in Mainland China

Taiwan has emerged in recent years as the second largest investor in mainland China. Compared with its investments in other parts of the world, its investments in mainland China has demonstrated some unique characteristics: while the total investment volume is large, the average individual investment size is fairly small; the investments are widely disbursed across industries, yet they are geographically concentrated in a few coastal areas. This paper argues that these unique investment patterns reflect the role of ethnic networks in outward investments as well as specific political developments and economic environment on the two sides. INTRODUCTION Despite periodic political tensions between the two sides of the Taiwan Strait, Taiwan's direct investment in mainland China has grown very rapidly in the past few years. By the end of June, 1995, Taiwan's cumulative approved direct investments in the mainland reached $24.36bn, by far the largest of its outward investments. Taiwan has emerged as the second largest outside investor in the mainland after Hong Kong. Compared with its investments in other parts of the world, Taiwan's investments in the mainland has demonstrated some unique characteristics: while the total investment volume is large, the average individual investment size is fairly small; the investments are widely disbursed across industries, yet they are geographically concentrated in a few coastal areas. According to the foreign direct investment literature, strategic motives that drive outward investment include market seekers, raw material seekers, production efficiency seekers, knowledge seekers, and political safety seekers. Dunning [1979] proposed an integration of the various theories in what he called an "eclectic approach. " He listed three key elements of direct investment: (1) the firm must possess ownership advantages over other firms, i.e., firm-specific assets; (2) the firm must find it beneficial to utilize these advantages directly instead of selling or leasing them ("internalization" advantage); and (3) there must be a profit advantage that can be exploited by combining these advantages with at least one factor input abroad so that local production dominates exporting to the host market ("locational" advantage). As Plummer and Montes [1995] point out, while the eclectic theory is extremely useful in characterizing FDI dominated by large multinationals and occurring between the United States and Europe, the economic theories of FDI may not be readily applicable to the unique patterns associated with Taiwan's investments in mainland China. For example, many Taiwanese firms investing in the mainland do not have ownership advantages. The purpose of this paper is to provide a general overview of Taiwanese investments in mainland China, to describe their unique patterns, and particularly to analyze these patterns from political, economic, and cultural perspectives. The paper also points out directions for further research on these emerging patterns. THE GROWTH OF INVESTMENTS The prominent presence of Taiwan's investment in mainland China is a recent phenomenon. The growth of the Taiwanese investment followed the relaxation of political tensions between the two sides in the 1980s. Before then its investments were mainly in Southeast Asia and the United States. In 1978, China adopted its economic reform policy and gradually opened its doors to the outside world afterwards. Indirect trade between the mainland and Taiwan started to grow, particularly after Taiwan announced the "Noninterference Principle of Indirect Exports to the Mainland" in 1985. But major investment from Taiwan to the mainland did not start until after 1987 when Taiwan nullified the martial law and began to allow visits to relatives on the mainland. To attract Taiwanese enterprises to invest in the mainland, the State Council of the mainland promulgated the "Regulations on Encouraging Taiwanese Investments" in July 1988. …