Taiwan is the world’s pre-eminent hub for the development and manufacturing of most of the world’s high-tech hardware: computer systems, boards, and components; flat panel displays; digital cameras; smartphones and tablets, along with many key elements of the clean-tech and biotech sectors. The products developed or made by Taiwanese firms include well over 90% of the world’s notebook computers and tablets. For example: Apple’s Macbook computers are mainly made by Quanta, based in Linkou, near Taipei; today, all iPhones are made by Foxconn/ HonHai Precision or by Pegatron, both also based in the Taipei area.
Facilitating Taiwan’s movement to its position at the pinnacle of development and manufacture of sophisticated devices central to the world’s economy have been substantial, sustained government support programs, particularly from the Ministry of Economic Affairs (MOEA), and research done at the national labs of the Industrial Technology Research Institute (ITRI). Today, the country is eager to move up the value chain to become a hub for innovation, and no longer just a center for making products designed elsewhere, with the largest value accruing to firms in other countries.
Recently Taiwan and the United States signed a Joint Statement on Trade Principles for Information and Communication Technology Services. This Statement recognizes the overwhelming importance of the technology sector to the economies of both countries. It identifies the need to enhance regulatory capacity in support of further growth in this sector. We agree with that assessment, and we advocate the following policy and position initiatives, all aimed at implementing the goals of the Statement and continuing to move Taiwan forward as a major participant in the global technology ecosystem.
Suggestion 1: Accelerate the adoption of policies and programs to encourage technology-oriented startups.
Over half of Taiwan’s US$300 billion in exports consists of technology products. Yet these sectors are enjoying much faster growth in South Korea and China than in Taiwan. If Taiwan is to enhance or even maintain its competitiveness in the tech sector, it is essential that it be able to encourage and cultivate new startup enterprises as continuous, vibrant sources of new ideas, approaches, and technologies.
Given the strength of its domestic high-tech hardware manufacturing sector – and the presence of some key brand companies such as HTC, Acer, and Asus – Taiwan has the potential to produce a brisk flow of innovative startups, emulating the success of Silicon Valley, Israel, and Singapore, and giving Taiwan the opportunity to position itself as a hub for international entrepreneurship and a gateway to Greater China. Interest by would-be entrepreneurs in creating startups has been increasing, and many graduates from Taiwan’s top universities aspire to create their own enterprises.
For various reasons, however, tech startups are not flourishing in Taiwan. In fact, investors see the internal obstacles in Taiwan as so severe that they typically counsel entrepreneurs to incorporate the parent company outside of Taiwan, even when their main operations will be located here. For its part, the Taiwan government has recognized both the opportunities and the threats. The Small and Medium Enterprise Administration (SMEA) and other government agencies are actively encouraging entrepreneurship. The Startup Labs and Startup Weekend, partially hosted by the semi-governmental Institute for Information Industry, have fostered incubation of several new firms. Similarly, the government has funded programs at the national universities to encourage innovation.
The Committee believes that revising Taiwan’s Company Law to help meet the specific needs of emerging tech firms and their investors would address some of the existing problems and yield great results. We urge a full discussion of appropriate revisions to the law, including allowing greater sophistication in the issuance of preferred stock, making it easier for a company to offer shares to employees, removing the requirement that a venture fund have a board of directors, eliminating uncertainties about stock-vesting provisions, and establishing an English-name registration system. (See this Committee’s position paper in the 2012 Taiwan White Paper for more details).
We are pleased that following our recommendations on this subject in 2012, MOEA responded positively, arranging for meetings with a Deputy Minister and representatives of the Industrial Development Bureau to exchange views. The Committee now requests continued government support for creating a favorable ecosystem for technology startups, since their growth and success will be crucial to the future of the Taiwanese economy.
Some specific recommendations are:
- Ease – and preferably eliminate – the regulatory approval process needed before a startup can bring in funding from outside Taiwan. Taiwan's foreign investment approval (FIA) process was designed generations ago, when Taiwan was poor and foreign currency was scarce. It has achieved its goal. Today, the FIA process only adds to the time and expense of establishing foreign-invested startups, imposing formidable burdens on nascent firms. Further, as Taiwan moves toward a limited partnership structure for venture funds, more foreign investors are likely to be able to invest in Taiwanese tech sectors, since they are often allowed to invest only through limited-partnership mechanisms. The Legislative Yuan acted this May to waive the need for foreign-investment applications for projects valued at US$5 million or less. That is an encouraging start, and we hope that as the new system proves its value, the threshold will be continuously raised in increments.
Relax or eliminate the requirement that a company earn a minimum amount of taxable income in order to renew work permits for its foreign employees. Shareholders of startup companies recognize that it can take an extended period of time for a startup to develop its technology and become profitable, and are normally prepared to fund the company through this period. It would be disastrous for a startup company to lose its foreign managers because Taiwan’s regulations do not allow them to renew their work permits until the company is profitable.
Liberalize regulatory restrictions on venture funds in Taiwan to enable them to qualify more easily for funding from the government and state-owned banks. These regulations are currently so onerous that local venture funds and startups frequently choose to forego investments from these sources so as to gain more flexibility. Besides keeping startups from working with many vital Taiwanese institutions and preventing those institutions from engaging thoroughly with startups, this situation throttles the flow of capital into the Taiwanese entrepreneurial ecosystem and heightens the propensity of startups to seek funding and leadership from outside Taiwan.
Enable international entrepreneurs to obtain “startup visas” to come to Taiwan to establish businesses together with Taiwanese partners, while also creating internship opportunities for international students. Such programs could be modeled on the J1 Visa Program in the United States.
Revise the framework for government investment so as to encourage earlier-stage involvement. MOEA’s efforts to foster Taiwanese innovation by means of evergreen funds (via an ITRI subsidiary, the Industrial Technology Investment Corp.) have been encouraging. The dual missions of the ITIC funds – achieving return on investment while encouraging innovation in Taiwan – are well-thought out and can be easily aligned. However, current rules tend to restrict ITIC to investing in firms that are already doing substantial amounts of business – but at that point, the companies have sources of funding other than venture funds. Support at the startup stage is what is needed.