Archive for April, 2010|Monthly archive page

The Problems with MNCs and FDIs

http://www.libertytimes.com.tw/2010/new/apr/24/today-o5.htm
 
I have to say this is a good point.  It’s an important issue that people don’t pay attention to.  Here I just want to write down some thoughts regarding Foreign Direct Investment (FDI) created by multinational corporations (MNCs), that is not mentioned in the article.

Economic activities, trade and investment etc brings wealth and prosperity to a country.  That is the most fundamental concept envisioned by such person as Adam Smith.  However, this concept came out more than 200 years ago, and probably even Adam Smith did not foresee the advent of MNCs, although he did warn that merchants’ interest not always aligned with society/country’s interest.  This point is important and obvious, but people often forget about it.

FDI now a days are very common among nations.  Taiwan has a huge amount of FDI into China since 1989.  Other countries also have joint venture and FDI ect into China.  However, FDI has a lot of problems and drawbacks for the countries that invest abroad:

  1. It drains capitals (this I realized even before I took MBA)
  2. It creates unemployment and downward pressure against salaries (this is now a huge problem in Taiwan)
  3. The country will almost certainly loss revenue.  First of all, government can only tax the headquarter of MNEs, they cannot tax the subsidiaries overseas, only the host countries of subsidiaries can tax them.  Because otherwise you create double taxing problems.  So for example, China is taxing on all the profit generated by Taiwanese factories in China, while Taiwan government can only tax the headquarters in Taiwan.  This also create a second problem.  MNEs can easily avoid tax using different techniques to shift revenue from place of high tax to place of low tax.  This is certainly a problem in Taiwan, in which large MNEs pay extremely low tax that just does not make any sense.
  4. Technologies diffusion.  Technologies and know-how will get spreaded, therefore losing the technological edge of the country.  This might not be a problem in the past, during the time Japan and the US FDI Taiwan and Korea, when the receivers of this FDI  still need to rely on the FDI givers that still hold key components.  Furthermore, the amount of FDI is actually not that great comparing to the ones received by China, and a lot of technical development etc are done indigenously within Taiwan and Korea.  Furthermore, Korea and Taiwan are no threat to Japan and the US, while China is a threat to Taiwan.  So this problem is very significant.

In summary, the MNCs create a situation in which  there will be outflow of capitals, human resources and technologies.  In Taiwan’s case, it’s even worse, it flows to China, and I can see how ultimately this will lead to Taiwan’s destruction.  MNCs though of course will benefit from these activities, and their shareholders will be happy.  But once again, who have these shares in Taiwan’s MNCs?  The shares of companies concentrated in a few individuals or families.  People like Mr. Kuo for example, and judging by his action, he has done more harm than good to Taiwan. 

The fact that a few people hold the power over the whole economy of a country is always disturbing.  With Communism and Nazi, economic power are held by the government, and that have not turn out well.  Now the MNCs hold economic power.  With their economic power, they gradually gain political power, in the end create the similar result of a few holding power.  This seems to be happening in Taiwan.
 
In fact, now we have a funny situation in which Taiwan practically has to beg Taiwanese MNE to stay in Taiwan, while China is using all sort of incentive and BSs to lure more MNE investment.  It’s like Taiwan and China is competing to gain MNE business.  Of course, with Ma, it’s a different game, because he practically just surrender and encouraging more FDI into China.

Looking at it another way however, we can also see that the success and failure of MNCs such as Mr. Kuo’s Foxconn is actually quite inconsequential to Taiwan’s success, because it has invested so much outside of Taiwan, and most of its operations are in China.  What is left in Taiwan is more or less an empty shell.  To call it a Taiwanese company now might actually be a very inaccurate description.  In fact I can’t see any major effect for Taiwan’s economy even if Foxonn bankrupts and Mr. Kuo lost his shirts. 

On the other hand, Taiwan needs MNCs.  Because it’s an island with small domestic market.  It needs enterprises that can go beyond the border.  However, the type of MNCs it needs is probably not the kinds we commonly see in Taiwan now.  However, what kind of MNCs, how to avoid the side effects of MNCs, how to limit their powers, how to make their success also beneficial to Taiwan etc are big problems which I have no clue.  I will have to think more about it, but probably can’t figure it out anyway.

Clear and Concise Questionings of Reasoning Behind ECFA

http://www.hi-on.org.tw/bulletins.jsp?b_ID=99589

A simple but powerful questioning of the logic and reasons behind ECFA.  This piece was posted in Chinese before but now translated to English.

Similarly, in the debate between DPP’s Tsai and KMT’s Ma, many questions have been raised without any proper answers from Ma.  Tsai gave out some pretty good alternatives of Taiwan’s future in terms of trade relations.  Furthermore, Ma stumbled on some logical issue once again.  Because first he accuse DPP of 鎖國,but later accuse DPP of allowing some 400 agriculture products to be imported into Taiwan, while so far KMT allowed none?!?!  The logical problem is you cannot be 鎖國 while opening up for agriculture trade.  Furthermore, the accusations are all “partial truth lie.”  In terms of 鎖國, it is completely BS.  Apparently in KMT’s mind, not furthering opening up to ONLY China in trade and FDI because of security and strategic reasons means 鎖國.  In terms of opening up for agriculture products, they are opened under WTO entry conditions, and is opened for the world, not just China.

Update: Another logical hole in Ma’s argument.

Taiwan Needs to Defy Gravity

A lot of people think freer trade is generally good.  However, is that always the case?  I don’t think so.

First of all, in this world, region by region countries are forming trade bloc.  Now intuitively people think that is freer trade when in fact those are preferential trade.  IE.  Country A trade with country B,C,D, but still put up a high tariff against others.  The effect of this is not the same as pure free trade or openning to global market.  In this situation, for Taiwan to say yea, we will just lower tariff on everything to everyone is probably naive and stupid.

Secondly, there is “gravity” in international trade.  Trade flow will be larger between two countries if:

  • Economic size are larger
  • distance is closer
  • smaller impediments (common language, historical link, trade bloc, common currencies, …etc)

This way of looking at things might be a bit too simple for a complex problem, but the analogies offer great insight into the situation between Taiwan and China.  Also, this might not just be applicable to trade, but to other economic activities as well such as FDI and flow of capital etc.

It is obvious that the gravity between China and Taiwan is extremely high.  This is due to the large size of China’s economy, the close geographical distance, and the common language.  Now what the Ma government is trying to do is further increase the gravity between Taiwan and China by adding more preferential trade.  Before, there are even people in KMT promoting RMB in Taiwan.  The fundamental question is, is there a need for greater gravity between Taiwan and China?  Is there a need for greater trade flow between Taiwan and China?  I think the answer to these questions are NO.

Imagine Taiwan as a small spacecraft orbiting around 3 giant planets (China, Japan and USA).  However, Planet China has a great gravitational pull on spacecraft Taiwan due to the various reasons given above.  The spacecraft does have some anti-gravity mechanism, and it has enough speed when pass near China.  Furthermore both Japan and the US have gravitational pull on Taiwan as well, which prevent it from crashing into China.

However, recently Taiwan is losing its speed, and its anti-gravity equipment is getting older and failing.  Furthermore, planet China is growing in size.  Adding to this danger is that the captain of the spacecraft, elected by 70% of its crew, is an idiot and thinks that they should just get rid of the anti-gravity equipment because it is too noisy.  After they do so, spacecraft Taiwan just crash into China, killing everyone on board except, of course, the captain, who successful ejected with an escape pot and land safely on planet US of A.

…..

So, what Taiwan needs to do instead is maintaining the gravitational balance when flying between these three giant planets.  Right now the gravitational pull between China and Taiwan is too great, therefore, Taiwan needs a way to increase the gravitational pull between Taiwan and Japan, and Taiwan and the US to balance things out.  Or, there are other ways.  In any case, greater and greater gravity between China and Taiwan is not necessarily a good thing for Taiwan.