By Kathrin Hille in Berlin and Mure Dickie in Taipei

Financial Times; Jun 20, 2002

Taiwan must competewith mainland China, itspolitical rival, for the affections of the island's corporate investors by ensuring ample access to low-cost land, improving tax incentives and streamlining government, according to Lin Yi-fu, the Taiwanese economics minister.

Mr Lin's determination to slow the flow of investment across the Taiwan Strait to the mainland reflects the government's short-term focus on pulling the island out of its worst economic decline in modern times. However, his willingness to attempt to compete on basic costs with Taiwan's huge and much poorer rival could run counter to longer-term plans to promote the upgrading of industry while allowing low-margin business to move operations offshore.

Speaking in his first interview with an international news organisation since his appointment in March, Mr Lin told FT Deutschland that his "most important" job was to improve Taiwan's investment environment.

"Of course this is an ongoing process, but there is a lot we can do immediately, like making land cheaper, giving tax incentives and improving government efficiency.

"If you really want to keep investors here it all burns down to very simple, very realistic factors: money and flexibility. . . The companies who leave Taiwan for the mainland say that cheap and easily usable land is what they get there. That means we have to get it for them here, too."

However, while Taiwanese businesses have long complained about complex and inconsistently enforced land-use laws, even with reform it is likely to prove extremely difficult to compete with the mainland on land price.

Officials in Shanghai's biggest high-tech industrial park say they charge investors only for the cost of clearing land, while China finds it much easier to relocate displaced residents than does democratic Taiwan, where local pressure groups can have considerable clout.

Some economists are also concerned by growing pressure on the government to widen tax breaks currently offered to high-tech industries to traditional industries such as textiles and plastics that many consider have little long-term future on the island.

Mr Lin said there would be no across-the-board tax exemptions for whole sectors, but promised tax holidays for investments that fulfilled certain criteria such as the use of domestically made machinery.

The minister touted one scheme under which the government will offer investors in industrial parks two years' free land use and a further four at reduced rates, as well as an offer of a five-year business tax exemption for new manufacturing investments.

Such policies will be difficult for a government suffering falling tax income and fast-growing spending, and Mr Lin acknowledged such costly encouragement to industry could be only short term. "We cannot go on like this for ever," he said. "There is not much room for further tax incentives."

Mr Lin said he was hopeful the Taiwanese economy would achieve growth of up to 3 per cent this year.