Executive Summary
A large Canadian company is considering expanding its foreign operations to include Taiwan. It has an approximate size of 36,200 square kilometers. As a result, this country is an attractive market due to its large population of 23.5 million people. In this market, the Canadian company is expected to face fewer challenges because of Taiwan’s good regulatory mechanisms, its strong adherence to the rule of law, low corruption levels, the promotion of open markets, the prevailing political stability, and the availability of highly knowledgeable human resources, especially in the IT sector. Taiwan has a high GDP (PPP) per capita. It is rated as a wealthy nation because of its low unemployment levels. This Canadian company is expected to perform remarkably due to the high buying potential of Taiwan’s citizens. However, as it will be revealed in this paper, while the move by the Canadian company to expand its business to Taiwan is recommended, it should be prepared to face the risk of labor regulations that may be unfriendly for such a highly knowledge-based organization.
Taiwan’s Macro-Environment
Country Description
Nations such as Canada, Japan, the UK, Italy, and France have GDPs that are lower compared to that of Taiwan. This country is not only wealthy but also highly developed. According to Heritage Foundation (2018), it has an unemployment level of 4.0% and a GDP (PPP) of 1.1 trillion U.S. dollars. Taiwan has elaborate and interconnected modern road networks and railway lines. Considering that this country’s economy mainly depends on exports, its government has consistently invested in shipping and air infrastructure to ensure a smooth flow of all produced goods to various overseas markets and destinations. In particular, Taiwan’s investments in hi-tech transfer from nations such as the U.S., its advanced information technology infrastructures, and the construction of IT incubation hubs, including southern, northern, and Hsinchu Science Parks, explain its domineering nature (Ministry of Foreign Affairs, 2017). Appendix 2 shows business turnovers in these parks.
Agriculture is an important industry that has significantly influenced Taiwan’s economic development. This country is a global leading manufacturer and supplier of various IT products such as computer chips, LCD panels, consumer electronics, and networking appliances among others (Ta-Shun et al., 2016). Taiwan is a member of the World Trade Organization (WTO) and the Asia-Pacific Economic Cooperation (APEC). It is also part of the Asian Development Bank (ADB). In addition to being an important observer for OECD, it has strong ties with the International Chamber of Commerce (George and Serret, 2011). Taiwan has established bilateral free trade agreements with New Zealand and Singapore.
Based on 2017 figures, the country’s inward FDI had risen by approximately 320 million U.S. dollars before May 2018 (Trading Economics, 2018). It has maintained a mean foreign direct investment of roughly 506 million American dollars from 1996 to 2018. However, it reached the highest amount of 3953.79 million U.S. dollars in 2006. In 2003, it recorded the lowest average investment of 81.58 million American dollars (Trading Economics, 2018). Taiwan is a destination of many multinational organizations. For instance, Air Products & Chemicals Company, incorporated in the U.S., finds Taiwan attractive because of its powerful semiconductor operations. Other transnational companies that have significant operations in this country include Ford, Corning Display Technologies Taiwan, Dell, Dow Chemical, Proctor & Gamble, and Micron. In the list of the least corrupt 175 nations that Transparency International had access to their data from 1995 to 2017, Taiwan was ranked position 29 (Trading Economics, 2018). Corruption perceptions of the nation stood at about 31.7 from 1995 to 2017. The lowest record made in 1995 was 25 while the highest level of 39 was recorded in 2008.
Political Situation and Stability
Taiwan enjoys a stable political atmosphere. From the data provided by the World Bank, it recorded an average of 0.77 points between 1996 and 2016 as indicated in the political stability index where -2.5 refers to a weak situation while 2.5 denotes strong steadiness (The World Bank, 2018). This indicator measures the absence or the existence of acts of violence and terrorism that have the potential of not only destabilizing a government but also leading to its overthrow via unconstitutional means. This stability supports Taiwan’s strong and sound legal frameworks that protect people’s property rights while at the same time ensuring their strict adherence to the rule of law. Indeed, as shown in Appendix 1, the nation’s scores in business, labor, monetary, trade, investments, and financial freedom are well above 50 (Heritage Foundation, 2018).
Legislation that Affects Inward Foreign Investment in Taiwan
Taiwan promotes inward FDI policies due to its low domestic investments of about 3.3% (Lin, 2013). It achieves this goal by establishing industrial parks, export dispensation bases, setting free trade avenues, and providing tax enticements to overseas investors. However, incentives mainly target the manufacturing sector. Taiwan’s negative investment legislation in some key sectors such as public utilities, telecommunication, sea transportation, power distribution, and natural gas limits the level of inward FDIs in these industries (Lin, 2013). This country faces criticism for having inflexible labor policies and laws, which do not favor the operations of any highly knowledge-based company. Authorities are keen when approving investments from foreign businesses, which target innovative industries such as those that deploy the sharing economy business model. For Taiwan, these frameworks are disruptive. Indeed, such investments are approved without elaborate and clear regulatory procedures. This situation introduces both political and dogmatic risks to investors.
Economic Conditions and Stability
Despite its strong business ties with other nations, Taiwan’s economy remains at crossroads since it experiences marginalization levels that hinder its full potential of participating in the global economy (George and Serret, 2011). Due to the government’s support of businesses, a situation that has paved the way for good economic conditions and stability, many American multinational corporations currently regard Taiwan as one of their most preferred outsourcing destinations.
Taiwan’s stability is evident upon viewing it as one of the richest nations in the world. Based on the data provided by the Global Finance, this country stood at the 22nd position in a list of the richest nations across the world (“Taiwan Ranked as 22nd Richest Country in the World,” 2017). This directory, which was compiled by the end of 2016, deployed International Monetary Fund’s GDP data adjusted for purchasing power parity (PPP) from 189 nations. Indeed, Taiwan had a GDP (PPP) per capita of close to 48,000 as measured by the IMF. This country’s stable economy enhances the thriving of open markets.
Cultural Issues Affecting Businesses in Taiwan
Taiwan is located in East Asia. Based on 2018 statistics, this country currently has a population of about 24 million people who are accommodated in an area of roughly 36,200 km2 (Heritage Foundation, 2018). These people embrace a culture that may affect business operations and social stability. Taiwan values respect for organizational positions held, especially based on an individual’s age. Hence, youthful Taiwanese people are likely to object to being led by younger or same-aged expatriate leaders or managers. Many Taiwanese businesses embrace small and medium-sized structures managed by one male, usually the older family member. Hence, business establishments are operated as benevolent dictatorships.
Taiwan has a highly knowledgeable workforce, especially in IT (“Taiwan Ranked as 22nd Richest Country in the World,” 2017). Consistent with the Confucian culture, issues such as respect and loyalty to senior management are important. Managers are expected to serve the interest of all staff members within or outside the workplace setting. Nevertheless, business structures in Taiwan are less hierarchical compared to what is upheld in Asian countries such as South Korea and Japan.
Factor Endowments
Factors of production include land, labor, capital, and entrepreneurship. Nevertheless, knowledge is another element that a country should effectively manage to enhance its comparative advantage. Land harbors various natural resources that are critical to production processes (Nasr et al., 2014). Considering that land does not increase with a rise in industrial outputs or population pressure, it is a scarce resource. Consequently, Taiwan focuses on seeking strategies for improving the production output capacity within its limited land resources. Labor refers to all works and people performing diverse tasks at different levels within an organization (Nasr et al., 2014). In Taiwan, it includes employees working for multinational and locally established organizations.
Labor forms key resources that primarily determine the success of a multinational organization that wishes to start operations in Taiwan. De-internationalization of labor, low salaries and wages, and uncertainties related to personal promotions of employees pose considerable challenges to the continued availability of highly knowledgeable human resources in Taiwan. These obstacles have led to the massive relocation of talented employees to other nations, especially those in the Asia-Pacific region, in search of more attractive career opportunities (Ta-Shun et al., 2016). The pressure to increase salaries in the attempt to retain top talent produces significant effects on small and medium-sized organizations. These business ventures have weak revenue generation abilities. They also experience hectic operations due to the limited land, which hinders their further expansion to reap from economies of scale.
The semiconductor business forms part of Taiwan’s flagship industry. However, it now faces intense competition from other countries, including the U.S. Such rivalry threatens to absorb the best Taiwanese talent in the industry (Ta-Shun et al., 2016). Taiwan has scarce natural resources, which are inadequate to drive its island economy or meet the aggregate demand in its domestic market. However, its highly innovative and educated human resources entail an important resource that multinational corporations can tap to achieve success in business. Such foreign organizations are also likely to succeed when operating in Taiwan since it has a low cost of labor compared to nations such as the UK, Canada, and America.
Analysis
Taiwan enjoys the availability of reasonable production expenses and a highly talented workforce. However, such expertise presents risks such as the possibility of turnover due to salary and wage dissatisfaction and the need for advancing in individual careers. Therefore, establishing operations in Taiwan requires a foreign company to seek mechanisms for ensuring that workers do not consider quitting their jobs. Since Taiwan’s rate of unemployment stands at 4.0%, chances are that employees who leave their jobs will secure opportunities elsewhere both locally and in other regions, especially in the Asia-Pacific zone (Hamilton and Webster, 2014). Consequently, an organization seeking to commence operations in this country faces the risk spending hugely in employee-retention programs. For instance, it may need to establish and implement a tripartite model to guide industrial relations and human resource management approaches (Hamilton and Webster, 2014).
Taiwan’s low level of corruption compared to other economies implies low start-up requirements for an organization that plans to expand its businesses to this country. Companies that are strict in terms of their corporate governance principles, especially corruption intolerance, can easily start up and operate in Taiwan. High scores in property rights imply that the Canadian company may not encounter the risk of losing its intellectual and patent rights while in Taiwan. Additionally, from Appendix 1, the company has the benefit of trading freely due to the prevailing business freedom, the possibility of external funding, and limited regulatory requirements. Indeed, open markets make Taiwan a country that is attractive for establishing foreign operations (Heritage Foundation, 2018). The fact that it has a relatively stable political climate means that an investment decision in this country should rely on strengths and weaknesses of its prevailing macro-environment and factor endowments.
Recommendation and Conclusion
Organizations that engage in international businesses encounter many risks. When establishing new bazaars, especially in the global domain, challenges such as abiding by the prevailing organizational cultures, policies, and economic and political environments pose significant threats. Therefore, the large Canadian company that is seeking to expand its operations to Taiwan to gain a competitive advantage should be aware of these risks. Nonetheless, expanding to Taiwan is recommended for this Canadian company. In fact, Taiwan’s stable political climate, regulatory freedoms, highly knowledgeable and talented human resources, low cost of production compared to Canada, and the lack of restrictions to open markets are important benefits that this foreign organization will experience.
References
George, C. and Serret, Y. 2011. Regional Trade Agreements and the Environment: Developments in 2010. Web.
Hamilton, L. and Webster, P. 2015. The International Business Environment, 3rd edition. Oxford, England: Oxford University Press.
Heritage Foundation. 2018. 2018 Index of Economic Freedom. Web.
Lin, Y. (2013). Wage Effects of Employment Protection Legislation in Taiwan. Asian Economic Journal, 27(2):145–161.
Ministry of Foreign Affairs. 2017. Science and Technology. Web.
Nasr, W., Salameh, M. and Moussawi-Haidar, L. 2014. Integrating the Economic Production Model with Deteriorating Raw Material Over Multi-Production Cycles. International Journal of Production Research, 52(8):2477-2489.
“Taiwan Ranked as 22nd Richest Country in the World.” 2017. Taiwan Today. Web.
Ta-Shun, C., Chiou, M. and Feng-Ming, L. 2016. Semiconductor Industry Network Analysis of Directors and Supervisors. International Journal of Organizational Innovation, 8(3):52-63.
The World Bank. 2018. Taiwan: Political Stability. Web.
Trading Economics. 2018. Taiwan Direct Foreign Investment. Web.
Appendices
Appendix 1
Figure 1: Taiwan economic freedom’s scores for 2018 (Heritage Foundation, 2018).
Appendix 2
