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Michael Lin lores
Michael Lin
Research Analyst, Regional Economics Research
Human Capital and Regional Economics
Michael Cheng-Yi Lin is a research analyst at the Milken Institute. His current research focuses on human capital as well as community, urban, and regional planning and development.
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Stoking the Startup Machine in Taiwan

By: Michael Lin
March 24, 2017
   
   

Taiwan’s economy has been marked by slow growth and wage stagnation during the recent two decades. In response to limited opportunities, many young people are choosing to start their own businesses. Witnessing this trend, both the central and local governments have tried to create a more welcoming ecosystem for entrepreneurial and startup activities. For instance, the leadership has set up the International Entrepreneur Initiative Taiwan, the Taiwan Innovation and Entrepreneurship Center, the Taiwan Rapid Innovation Prototyping League for Entrepreneurs (also known as TRIPLE), and the Taiwan Silicon Valley Technology Fund Investment Program. These platforms have provided resources such as loans, funding, accelerators, incubators, and coworking spaces.

Despite these efforts, new entrepreneurs in Taiwan still face obstacles. In addition to well-recognized issues such as rigid regulatory authorities and frequent familial discouragement, lots of rookies find it difficult to attract participation by angel investors or venture capitalists. Many angel funds and venture investors in Taiwan are more risk-averse than their counterparts in other developed countries and require longstanding acquaintance and trust building before they are willing to fund novices. Although international investors may be more comfortable with risk, the cultural and mindset gaps between them and Taiwan’s entrepreneurs may preclude access to foreign funds. 

Many observers believe there is an abundant pool of capital in Taiwan’s private sector looking for investment opportunities. To leverage this resource, the public sector should design incentives to channel private capital into entrepreneurial and startup activities. Although private capital could come from individuals or businesses, the government should particularly encourage well-established enterprises to invest in startups. The collaboration between established and early-stage firms could be facilitated through granting both parties deferrable and tradable tax credits. 

Granting tax credits may appear to erode the government’s tax base, but it may turn out to be a triple-win strategy. This would likely be politically feasible for the government since no new budget allocations would be necessary. In addition, this approach has already been used to support small and medium enterprises and spur industrial innovation through such legislation as the Act for Development of Small and Medium Enterprises and Statute for Industrial Innovation. If a proportion of these startups succeed, their operations would expand the tax base, create jobs, and contribute to economic growth.

This mechanism may bring mature enterprises more gains than existing allowances that erode the tax base. Investing in multiple startups offers them not only tax benefits, but opportunities to reap sizable returns, acquire fresh knowhow and technology, and explore untapped markets. For example, the Internet service provider Hiiir was acquired by one of Taiwan’s telecommunications giants, Far EasTone, for approximately US$3.4 million in 2013. Through this transaction, Hiiir has used the capital to expand its business, whereas Far EasTone extended its footprint by obtaining Hiiir’s expertise and innovation capacity.

For startup companies, in addition to the tax deduction, these alliances enable them to obtain capital and connections they’d otherwise lack. With more resources and support available from government and established enterprises, potential entrepreneurs may be more likely to commit themselves to creating companies. Angel funds and venture capitalists may likewise feel more confident about pouring resources into entrepreneurial and startup activities. 

For this strategy to succeed, though, the tax credit available to both mature and startup companies should be deferrable and tradable. Deferability allows companies to save tax credits for later use, while tradability gives them access to monetary benefits even if they have no tax liability in any particular year. This policy tool may be especially useful given that many startups may not generate profits in their first few years of operation. 

As we emphasized in our 2016 report Recapturing the Taiwan Miracle: Diversifying the Economy Through Innovation and Collaboration, nourishing startups is crucial to Taiwan’s future economic health.  In line with the proposals in this article, Taiwan’s central government is amending the Statute for Industrial Innovation to provide tax credits to angel investors. Although authorities have begun to take a proactive approach, expanding the fund pool and designing creative and flexible institutions are of great importance. The government, new entrepreneurs, and mature enterprises stand to profit, along with Taiwanese society’s broad economic interests.

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The author would like to thank Frank Yao, an entrepreneur and founder of Hour Masters, for providing valuable insight into enhancing the entrepreneurial and startup environment in Taiwan.