Bringing the Business Back Home

By Shen Chung-hua 沈中華, translated by Ted Yang

Attracting businesses based in China back to Taiwan to register on the domestic stock exchange has been a recurring issue for those concerned about the country's economic development.

Businesspeople's reluctance to return can be attributed not only to the fact that if they returned they would have to meet the 40 percent investment cap on China-bound investment, but also to several other factors.

The world's stock exchanges can be divided into two kinds based on their design. The first mainly works as a trading platform. Examples are Hong Kong, Singapore and the US. The main characteristic of this kind of exchange is that a company does not need to make a physical investment, such as opening a factory, or register with the stock exchange before it can raise capital.

This means that a company can operate in a place other than where it is listed. This includes financial holding companies that differentiate between the place of operations of daughter companies and the location where they are listed. This kind of exchange also allows companies to register at locations other than where they are listed.

Suppose that a financial holding company registered in the Cayman Islands has two subsidiaries, one in China and one in Vietnam. It can invest in Hong Kong, but not in Taiwan, because Hong Kong regulations allow for stock exchange listings, company registration and operations to take place at different locations.

The second kind of exchange requires a company to both invest and register in the country before it can be listed where it is domiciled.

This kind of exchange is investment-oriented. Regulations require that a company must have made physical investments two to three years prior to a stock exchange listing and also that it is registered in the same country -- paying taxes -- and makes a certain annual return on its investments every year before it can be listed on the exchange.

The result is that although the Taiwanese government's original goal was to convince Taiwanese businesspeople to list on the local market, in effect it is asking them to invest in Taiwan. The reasoning behind this is that if a company wants to come here to raise capital, it must first invest. The stock exchanges in Taiwan, China, Vietnam, Malaysia and Thailand all operate this way.

Taking a closer look, we can see that the design of financial centers in advanced countries lean toward the first kind -- providing a trading platform -- while those in developing countries tend to be investment-oriented, and there is a reason for that.

Platform-oriented stock exchanges simply provide a trading platform and make money from review fees to lawyers and accountants and high fees for listings and licenses.

Listing fees for the Hong Kong Stock Exchange can reach HK$20 million (US$2.6 million), but implicit costs are low since listed companies can have their operations at low-cost locations. Hong Kong thus welcomes foreign companies to raise capital there. After all, those who invest in the company are not necessarily from Hong Kong and it doesn't matter where the actual operations are located. The Hong Kong Stock Exchange focuses more on finance and less on manufacturing.

Although listing fees are lower on investment-oriented stock exchanges like Taiwan's, the implicit costs are high because a listed company cannot operate from a lower-cost location. The philosophy behind this is if a company wants to raise capital in a country, it should also invest in a factory, hire local people and decrease unemployment. This is a two-birds-with-one stone concept: listing on the exchange and promoting investment. The focus is on investment, though, and thus places more stress on manufacturing and less on the finance.

But this strategy only works when both the local tangible economy and the local financial economy attract investors, such as they did in Taiwan in 1989. This means that even if the cost for being listed on the Taipei Stock Exchange is low and the profit to earnings ratio and turnover are high, companies still have to invest in Taiwan for two years before they can be listed on the exchange. For many Taiwanese companies, this is very difficult.

Advocates of this system only consider the open cost of listing on the stock exchange while ignoring the implicit costs and thus fail to understand the reason why Taiwanese companies are not returning to be listed on the local stock exchange.

The root problem lies in whether we want Taiwanese companies to return to be listed on the stock exchange, or to both invest and be listed. If a company that does very well in Vietnam wishes to return to Taiwan to be listed on the stock exchange, it must have made a physical investments for two years before it can be listed. However, the reason why the company decided to invest in Vietnam in the first place was probably because Vietnamese labor costs were lower than those in Taiwan. With that incentive still in place, how can these companies be expected to return?

The answer is that the only way to succeed in killing two birds with one stone is to abandon that very strategy.

Taiwan's stock exchange wants to become a trading platform, but the Mainland Affairs Council, the Central Bank of China and the Ministry of Economic Affairs want it to be investment-oriented.

In order to attract China-based Taiwanese businesspeople to come back and be listed on the local stock exchange, or, even more ideally, to turn Taiwan into a financial hub, investment-oriented thinking should be abandoned for the trading platform concept. Hopefully this will happen soon.

Shen Chung-hua is a professor at National Taiwan University's Department of Finance.