The Taiwanese government has announced its policy to promote Taiwan as a center for high-end manufacturing and advanced semiconductor processes in Asia. However, key materials, equipment, and technology are still dominated by foreign companies from Japan, the Netherlands, and the U.S. This includes military and aerospace technology, which is vital for national defense, but Taiwan still has limited access to it.
Some specialists and scholars have suggested that Taiwan should set up a sovereign wealth fund to acquire these technologies through overseas investment, but this proposal has been disapproved by the central bank. Taiwan's foreign exchange reserves are approximately US$554.9 billion, 1.16 times as much as the island's exports and 73% of its GDP. However, 90% of the reserves are allocated to foreign government bonds and deposits, with an average return on investment (ROI) of 2.7% in the past decade. Some legislators are not satisfied with the ROI.
According to the existing policies of the executive branch, Taiwan will now develop six core strategic industries through the "Five Plus Two Industry Innovation Plan." However, green energy, semiconductors, and high-end manufacturing are part of a massive industry ecosystem, and the Taiwanese supply chain is just one part of it.
Global diversification of R&D and manufacturing makes it difficult for many countries to become self-sufficient or independent in any particular industry. For example, Taiwan underestimated the barrier of technology in offshore wind power, which is why the localization of production in offshore wind power now requires foreign expertise.
Governor Yang Chin Long of the Taiwanese central bank said that the suggestion of setting up a sovereign wealth fund is against the spirit and appeal of the Santiago Principles (the generally-accepted practices of sovereign wealth funds) and is difficult to execute in reality. He added that a sovereign wealth fund is supposed to do financial investment instead of strategic investment. Research papers outsourced by the National Development Council suggest a few ways of doing strategic investment overseas, such as giving funds to Taiwanese companies to aid them in overseas expansion, investing in the financial holding company (parent company) of Taiwanese strategic industries' peers overseas, or purchasing overseas patents for Taiwanese strategic industries.
Yang said that the Taiwanese government is open to setting up a sovereign wealth fund but recommends enacting special legislation to regulate the fund's operation in order to ensure the quality of management and avoid doubts or bad impressions that it may face. He also suggested following the Santiago Principles. However, following the Santiago Principles means limiting the autonomy of the sovereign wealth fund's investment, which could make it difficult for the Taiwanese government to serve national policies through the fund.
There have been cases in the past where the investment purpose and intention of sovereign wealth funds were questionable. UAE's Dubai Ports World tried to acquire six major sea ports in the U.S. in 2006, but the investment was vetoed by the U.S. on national security grounds. Some sovereign wealth funds from the Middle East and Asia tried to invest in key financial institutions in Europe and the U.S. in 2008, including Morgan Stanley, Citibank, and UBS, but the motivations behind those intended investments came under suspicion.
Officials from the Directorate General of Budget, Accounting, and Statistics (DGBAS) say that the purpose of the sovereign wealth fund is to create more wealth. As foreign exchange reserves belong to the public, if Taiwan is going to set up a sovereign wealth fund with its foreign exchange reserves, it is necessary to have a solid and supervisable governance structure for the fund. They suggest that what Singapore and South Korea do are good examples for Taiwan to follow. The Santiago Principles can be included in the special act. Officials say that, considering risks and return on equity, the fund should diversify its investments and target multiple markets, such as equity securities, bonds, and real estate, to maintain a solid return.
