TAIWAN ENJOYS STRONG FOREIGN INVESTMENT INFLOWS

UNCLAS SECTION 01 OF 02 TAIPEI 002505

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR, STATE FOR EAP/TC,USTR FOR STRATFORD AND
KATZ, TREASURY FOR OASIA/TTYANG, COMMERCE FOR
4431/ITA/MAC/AP/OPB/TAIWAN

E.O. 12958: N/A
TAGS: ECON EINV ETRD EFIN PREL TW
SUBJECT: TAIWAN ENJOYS STRONG FOREIGN INVESTMENT INFLOWS

TAIPEI 00002505 001.2 OF 002



1. (SBU) SUMMARY. Taiwan attracted roughly $24 billion in
foreign direct investment (FDI) in 2006 and the first nine
months of 2007, adding to a total of nearly U.S. $89 billion
in cumulative FDI since 1952. Taiwan's attractiveness as an
international mergers and acquisitions destination is based
in part on solid corporate balance sheets and a relatively
high number of family-owned firms seeking foreign partners.
The U.S. is Taiwan's single largest foreign investor, with
nearly U.S. $16 billion in cumulative investment, followed
closely by Japan. Caribbean tax havens and EU member
countries are other significant sources of FDI. Foreign
investment is concentrated in the electronics, finance and
insurance, and wholesale/retail sectors. END SUMMARY.

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Investor interest stays strong
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2. (SBU) According to Berton Chiu, Director General of the
Ministry of Economic Affairs' Department of Investment
Services (DOIS),total new foreign direct investment inflows
into Taiwan reached a record of about US $14 billion in 2006,
and totaled roughly $10 billion through the end of September

2007. Foreign investors are increasingly focusing on the
banking, telecommunications, and retail sectors, he
explained, as well as R&D-intensive manufacturing. Most FDI
is driven by market-based mergers and acquisitions (M&A)
activity, said Chiu, rather than the Taiwan authorities'
efforts to target specific companies or sectors. (NOTE: M&A
investment is typically less associated with job creation and
industrial capacity expansion than "greenfield" investment in
new facilities.) Separately, Morgan Stanley Taiwan chairman
Gary Kuo told us that Taiwan's foreign equity deals totaled
approximately $6 billion in the year through September,
second in the region only to Australia. Most of this total
comes from U.S. investors, he added. Some financial analysts
have noted that Taiwan firms' relatively low price/earnings
ratios make them attractive prospects compared with other
markets in the region. Since Taiwan has a relatively large
number of family-owned small- and medium-sized enterprises,
observed Chiu, second- or third-generation family managers
often turn to foreign investors to help improve their firms'
comeptitiveness. DOIS is trying to elicit foreign investor
interest in Taiwan's broadband, digital information
technology, health care, and renewable energy sectors, added
Chiu. In a separate meeting, Taiwan Institute for Economic
Research (TIER) President David Hong said electronics,
finance/insurance, and wholesale/retail remain the major
sectors of interest to foreign investors.

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U.S., Japan are the top foreign investors
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3. (U) The United States is the single largest foreign
investor in Taiwan. Based on Taiwan official statistics,
U.S. firms invested a total of U.S. $15.846 billion in Taiwan
between 1952 and September 2007, giving the U.S. nearly 19
percent of the total $84.85 billion invested in Taiwan during
the period. Japan comes next, at nearly $15 billion, or
about 18 percent. DOIS staff told us that the U.S. has been
the leading foreign investor for about ten years, surpassing
Japan, the previous leader. British Caribbean territories
account for $14.3 billion, or nearly 16 percent, of foreign
investment, although official and private contacts indicate
it is extremely difficult to determine the actual source of
investments channeled through these tax havens. The
Netherlands is the source country for $13.2 billion in FDI,
or almost 16 percent of the total. Other major foreign
investors include Singapore, with around 6 percent of total
FDI, the UK, at 5.55 percent, and Hong Kong, with nearly 4
percent.


4. (SBU) In Chiu's analysis, use of tax havens may
significantly affect both inbound and outbound investment
statistics. Taiwan's double taxation avoidance agreement
with the Netherlands, for example, artificially increases the
amount of Dutch investment in Taiwan as companies from other
EU members take advantage of the agreement's tax preferences

TAIPEI 00002505 002.2 OF 002


by incorporating in the Netherlands before investing in
Taiwan. In the past, said Chiu, Taiwan companies often
favored Caribbean tax havens, but many have shifted to Hong
Kong in order to avail themselves of beneficial tax
harmonization measures between Hong Kong and the PRC.
Although Taiwan bans all investment from the mainland, Chiu
noted it is virtually impossible to determine to what extent
PRC investment reaches Taiwan via third-country tax havens.
That analysis was echoed by TIER's Hong, who said it is
difficult to tell the nature or amount of any mainland
Chinese investment in Taiwan.


5. (SBU) According to Taiwan data, 16 percent of foreign
investment is concentrated in the electronic component
sector, followed by almost 15 percent in finance and
insurance, and 9.5 percent in wholesale/retail. The other
major sectors are roughly equally divided between computer
products, power generation, financial holding companies,
information and telecommunication equipment, professional
services, and chemicals, as well as both metal- and non-metal
maufacturing.
Looking to the future, Chiu expressed concern that Taiwan's
avid competition with South Korea to attract foreign
investment will only intensify if the U.S.-Korea FTA enters
into force. Chiu worried that the FTA may prompt U.S.
companies to tip the balance in favor of investing in Korea
over Taiwan, especially in high technology sectors where the
two economies have substantial levels of overlap. Based on
IMF data through 2006, FDI accounts for 21.6 percent of
Taiwan's GDP, versus 13.2 percent in South Korea. South
Korea attracted $6.3 billion in FDI in 2005, and $3.6 billion
in 2006. FDI plays a much more significant role in the
city-state entrepots of Singapore and Hong Kong, accounting
for 253.6 percent and 537.4 percent of GDP, respectively.


6. (SBU) COMMENT. Taiwan's investment climate is not always
ideal. Earlier this year, for example, a major U.S. private
equity firm scuttled its planned purchase of a Taiwan
technology company, reportedly after Taiwan authorities
expressed informal concern that the purchase would involve
de-listing the company from the stock market, as well as
allow it to circumvent restrictions on mainland investment.
In general, however, Taiwan remains an attractive destination
for foreign investment, as witnessed by the recent strong
performance of inbound FDI. Greater cross-Strait
integration, which will be likely no matter who wins the
presidential election next March, will probably only increase
foreign investor interest. END COMMENT.
YOUNG