According to a new report by the US-Taiwan Business Council, domestic political divisions over Taiwan's relationship with China have resulted in a tightening of regulations and guidelines limiting cross-Strait technology investment.

Principally, the semiconductor industry was poised to see a greater relaxation on chip manufacturing in China, including the approval of additional fab projects, the transfer of 0.18-micron process technology, and the movement of chip packaging and testing operations.

The report says that statements in January by Taiwan President Chen Shui-bian and his Democratic Progressive Party (DPP) have signaled a more restrictive stance on cross-Strait investments. The retrenchment was made in response to DPP losses to the opposition Kuomintang (KMT) and its allies in December's local city and county elections.

According to US-Taiwan Business Council President Rupert Hammond-Chambers, "The economic challenge China poses to Taiwan cannot be solved solely through restricting cross-Strait investment. Domestic economic reform should be the focus for raising Taiwan's competitiveness. A legal, liberalized, and regulated cross-Strait business framework would allow Taiwan to benefit from further increases in trade, increased tax revenue, repatriated profits and a return of overseas capital, and greater transparency in overall economic activity."

"The impact of the tightened China investment restrictions is not just a domestic matter, but one that reverberates through the entire technology supply chain," commented Hammond-Chambers. "The highly integrated nature of the technology industry, with an increasing share of manufacturing taking place in China, means that Taiwan's ability to continue as a significant partner, supplier, and customer to the industry is undermined."