Appendix 3. Private Sector Development: The Case of Taipei,China

Since Taipei,China experienced colonial rule during World War II, and the Japanese legacy remained and for some period after the War, its economy was primarily dominated by SOEs, which had once been Japanese companies. In the 1960s, the economic goal moved away from achieving economic stability or the reconstruction of the economy. The authorities began to aim to stimulate exports and pursue economic growth. From this perspective, the authorities placed increased emphasis on the role of private companies. On the other hand, many private companies, and in particular SMEs, faced serious difficulty in getting commercial bank loans, and the authorities created specialized financial institutions and built up a market infrastructure conducive to private companies.

In the 1970s, the importance of the private sector, and especially the role of SMEs, was widely recognized. These firms were expected to absorb redundant labor and also to further increase exports. However, the SME policy lagged. For instance, the SME Agency, which was responsible for the administration's SME policy, was not established until after 1981.

During the 1980s and 1990s, internationalization, deregulation, and further privatization were pursued, and a wide range of SME policies were introduced. In many cases the authorities learned from the Japanese and American experiences. It could be argued that formally they introduced many policies from the U.S., but informally they imported many policy measures from Japan.

Regarding the characteristics of the private sector in Taipei,China, the following points can be highlighted.

First, each company has relatively high autonomy, and there are no "keiretsu" among companies. Most private companies are small- and medium-sized, but are quite independent from big companies.

Second, the role of individuals is large, and decisions are normally made directly by the CEO. The organizational structure is simple and group decision-making is not common. In this sense, many private companies have flexible and quick decision-making, but the other side of the coin is that the performance of companies largely depends on the skills and capabilities of individuals. In Taipei,China, private entrepreneurs develop the market for the company or internationalize their own companies individually. A good entrepreneur is one who is able to bring various human and financial resources into the company. When he or she moves to another company, all the resources and skills also move to that new company. These characteristics are supported by the very efficient and flexible structure of the labor market. From the standpoint of communication and bargaining with management and workers, the following survey is very interesting.

The behavioral pattern of private companies is definitely profit maximization, as they have no option to pursue other goals. SMEs do have difficulty in accessing commercial bank loans, and unlike large companies, they do not have a wide range of financing channels. If they fail to register a profit for one year, they will not receive any money from commercial banks or other channels and may go bankrupt. In this sense, they only have short-term perspectives.

The current situation is that large companies use direct financing through the capital market, medium-sized companies use bank loans so long as they have adequate collateral, and smallsized companies use various informal channels including the black market (for example, personal self-help networks called biaohui). Generally, the market environment surrounding SMEs is very competitive and new entry and exit is very frequent. According to experts in Taipei,China, the proportion of underground financing channels to the economy as a whole there is larger than that on the mainland, and that is one of the main reasons why the private sector has developed much faster than on the mainland.

For the past decade, the authorities have pursued the privatization of SOEs. They have encountered strong resistance from vested interest groups. However, they lack a firm and clear policy for privatization. Now the proportion of the private sector is about 95 % of total GDP and it is expected to increase further.

As stated above, it is difficult for SMEs to access commercial bank loans. Commercial banks normally require collateral and they have become more risk-conscious and cautious toward SMEs since the Asian financial crisis in 1977 (commercial banks have a saying that a person who comes to request loan is not a good customer, and a good customer does not come to request a loan). In particular, it is noted that private companies typically prepare three financial and accounting reports: one for the owners, one for stockholders, and the third for the tax authority, Accordingly, nobody believes the reports are reliable, leading to serious problems of transparency and governance of private companies.

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