The FDI angle:

• Lai Ching-te won Taiwan's presidency in a closely watched election on January 13.
• Lai, whose DPP party advocates for Taiwan's independence from China, is expected to continue with policies to support diversification from China.
• Why does this matter? Taiwanese investments in countries outside China could have a profound impact on critically important supply chains for semiconductors and electronics.

Taiwanese companies are expected to continue their ongoing efforts to diversify away from China as the country elected former doctor Lai Ching-te (also known as William Lai) as its new president on January 13, giving the ruling pro-independence Democratic Progressive Party (DPP) an unprecedented third term in office. 

Analysts broadly view the result as a sign of continued support for efforts to expand Taiwan’s economic relations beyond mainland China. Under Tsai Ing-wen, Mr Lai’s predecessor and the island’s first female president, Taiwanese companies invested more in Asian markets including Vietnam and India. 

Just 5% of Taiwan’s total outbound foreign direct investment (FDI) projects went to China between 2020 and 2023, according to fDi Markets — down from the 42% seen between 2012 and 2015, and 23% between 2016 and 2019. 

At the same time, Taiwanese companies increased their investments into both India and Vietnam, which collectively made up almost a quarter of total outbound FDI projects between 2020 and 2023.  The OECD has also attracted a larger share of Taiwanese investments.

Given the critical role of Taiwanese companies in the strategically important semiconductor industry, a continuation of these trends could have a profound impact on the make-up of global supply chains.

“The DPP believes reducing economic dependence on mainland China will make Taiwan safer, while the opposition parties, the Kuomintang (KMT) and Taiwan’s People Party (TPP), believe that closer economic engagement, including investments, may reduce the risk of conflict with China,” explains Dylan Welch, a China analyst with the German Marshall Fund, a US-based think-tank.

While the DPP won 51 seats in the Legislative Yuan, the single-chamber assembly which makes laws in Taiwan, it was narrowly beaten by the pro-Beijing opposition KMT party, which won 52 seats. The recently formed TPP won eight seats, giving it enough to swing a majority in votes on future budgets and bills in Taiwan’s legislature.

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While the DPP’s presidential election win is “balanced” by a narrow loss in the legislature, there will be “constrained continuity” in Taiwan’s diversification away from “excessive dependence” on mainland China, according to Alicia Garcia-Herrero, Hong Kong-based chief economist at investment bank Natixis.

“Diversification will be easier for Taiwan’s outbound FDI,” she wrote on LinkedIn. While Taiwanese companies are driven by their own private interest, the election result is expected to set the scene for their future FDI plans.

“Politics will determine what the landscape looks like for businesses investing out of Taiwan,” says Zoë Weaver-Lee, a programme coordinator at the East-West Center in Washington, a think tank.

Despite a recent drop in FDI to mainland China, it has been a natural destination for Taiwanese investment since the country opened up to trade and investment in the 1980s. Almost $140bn worth of FDI projects have been announced by Taiwan-based companies in the past two decades, more than any other country, according to fDi Markets.

However, the US–China trade war and scrutiny on the operations of Taiwanese companies in China have contributed to the push to diversify. For instance, iPhone assembler Foxconn confirmed in October 2023 that several of its entities in the mainland were being investigated by Chinese authorities. 

TSMC, the world’s largest contract chipmaker, has also announced billions of dollars’ worth of investment to build semiconductor manufacturing operations in the US and Japan. These investments have been backed by generous subsidies from both Washington and Tokyo as they push to domesticate the critically important semiconductor supply chain. 

“Taiwanese firms will continue to seek safer, more stable environments that are less exposed to the vagaries of Taiwan Strait politics and authoritarian interference,” says J Michael Cole, a Taipei-based analyst with the International Republican Institute, a Washington DC-backed non profit organisation. He adds that these pitfalls have become more salient since Xi Jinping assumed power of the Chinese communist party in 2013.

Taiwan’s new president will assume office in May 2024. The path he sets for the island-state’s companies is expected to aid further diversification away from China.

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