Taiwanese companies are going home. Technology giants like Foxconn, which formally trades as Hon Hai Precision Industry, and Quanta Computer are decreasing their investments in China in favor of returning to Taiwan, a reshoring trend that has accelerated with the trade confrontation between the U.S. and China.
Taiwan's Ministry of Economic Affairs recently announced that it had approved returning investments by a record 146 companies since the start of the year, bringing home $20 billion in investment commitments and 53,000 job opportunities.
These Taiwanese businesses are fleeing China not only because of the rise in U.S. tariffs on Chinese-produced goods, but also thanks to a deteriorating business environment that includes rising labor costs, higher taxes, lax intellectual property protections and a restrictive social environment.
This stands in contrast with Taiwan's incentives that include tax assistance, employment subsidies, discounted access to industrial land and favorable bank loans.
Yet to truly take advantage of the new realities of global supply chains, Taiwan must make further changes to its business environment to encourage innovation, or risk weakening its hard-won competitive advantage.
While the current geostrategic environment has helped the recent exodus from China, the Taiwanese government has also put into place a number of initiatives to attract investments and to encourage startups.
The 5+2 Innovative Industries policy is intended to help develop a wide variety of sectors. However, given Taiwan's importance as a technology center and a crucial link in the global technology supply chain, it is not an accident that the Asia Silicon Valley initiative serves as its flagship.
Beginning as an attempt to replicate the Palo Alto experience in Hsinchu and Taoyuan, the ASV initiative has evolved into providing an environment where Taiwan companies can innovate and grow.
Taiwan believes that innovation is what will drive economic development into the future, and the ASV initiative has placed its focus on dominating the Internet of Things market and on becoming a leading research and development hub for artificial intelligence.
But its efforts span the technology spectrum, including virtual/augmented reality, big data, fintech and cybersecurity, with additional work on smart cities, smart manufacturing and autonomous vehicles.
Taiwan has been successful in attracting new investments and encouraging a thriving startup environment. U.S. tech companies have continued to deepen their involvement in the Taiwan technology ecosystem, with names like Amazon, Google, IBM and Qualcomm announcing investments on the island.
ASV and other government incentives have played a role in driving these positive changes, as have Taiwan's entrenched freedoms and rule of law, with well-developed intellectual property and trade secrets regulations.
But even after Taiwan amended its Company Act to build a better startup environment last year, the country should continue to improve corporate governance rules, removing onerous bureaucracy and reducing the cost of starting new companies or of investing on the island.
It has also been slow to revise regulations applying to new technology, such as rules for autonomous vehicles and licensing for drones. Taiwan must continue to loosen rules and move toward a less rigid bureaucracy. It requires agility to adjust to the ever-evolving global technology environment.
Early-stage financial assistance is crucial in developing innovative companies. While the situation in Taiwan has improved -- for example, venture capital firm Taiwania Capital launched in 2017 and the government has started a business angel investment program -- making investment capital more readily available has to be a key goal.
In addition, many successful founders in the U.S. tend to be serial entrepreneurs. To encourage a virtuous build-exit-build cycle, Taiwan should consider streamlining regulations for initial public offerings, mergers and acquisitions.
Another major challenge is reducing the brain drain that means many of Taiwan's best and brightest opt out of staying on the island. Updated immigration and work permit rules have helped bring in foreign workers, but Taiwan may be squandering the investment it has made in educating human capital.
Graduating 10,000 computer scientists and information systems managers per year -- a stated development goal -- is not effective when those graduates do not enter the Taiwan workforce.
Taiwan should consider that it may be neglecting education in non-engineering disciplines. Marketing and sales, human resources and operational talent are sorely needed for a healthy business ecosystem.
Additionally, Taiwan's businesses must foster and reward inventive thinking in their workforce, allowing workers and entrepreneurs alike to explore and develop risky new ideas.
Those at all levels within Taiwan's companies must have the ability to fail again and again, with far-reaching openness to new ideas and a willingness to learn from mistakes. Developing this aspect of the corporate culture is essential.
Finally, an outstanding question is whether Taiwan can absorb both the returning companies and the startups it is fostering. Taiwan still has issues with access to power generation, and the focus on manufacturing brings with it environmental concerns. The labor pool may still be too shallow, and the island itself may also be too small for startups to achieve scalable growth.
Taiwan must work to address these challenges to realize its goal of an innovation-driven future.
Lotta Danielsson is Vice-President of the U.S.-Taiwan Business Council.