Taiwanese manufacturers find themselves doing business between an island and a hard spot.
Yet when they set up manufacturing projects in China, they face Taiwanese restrictions on their economic activities. In order to slow down investment in China, Taiwanese authorities must approve Taiwanese investment in China, and there is a capital ceiling on investments. The Taiwanese government also does not permit Taiwanese banks to set up branches on the mainland. There are many ways to circumvent these restrictions. The necessity of getting around restrictions, however, raises their transaction costs.