Laast month, when reports reached Taiwan that the island's ranking in the 2013 World Competitiveness Report prepared by the Swiss-based International Institute for Management Development (IMD) had fallen by four notches, the news touched a raw nerve.
Taipei's Directorate General of Budget, Accounting and Statistics had just lowered its prediction for Taiwan's 2013 economic growth to 2.4 per cent. This was down from a previous estimate of 3.59 per cent in the wake of worse than expected GDP growth for the first quarter.
With exports faltering, it was clear that the widely expected economic recovery was faltering. Could the island's declining competitiveness be the reason?
Quoting the IMD assessment, the American Chamber of Commerce (AmCham) in Taipei subsequently released a report pointing out that the economy was under-performing as a destination for foreign investment.
"The Ministry of Economic Affairs should thoroughly re-evaluate the foreign investment application approval process," AmCham chairman Alan Eusden told the media. Taiwan Vice-Minister of Economic Affairs quickly responded by promising to submit this and other AmCham suggestions to the legislature for review.
Lacklustre foreign investment is certainly an issue. Approved foreign direct investment in Taiwan totalled US$5.56 billion (S$7 billion) last year. This was higher than the US$3.81 billion in 2010 and US$4.96 billion in 2011, but still much lower than that of Thailand, Vietnam, Indonesia, Hong Kong and Singapore. Taiwan has also had difficulty attracting private equity funds.
But while AmCham saw Taiwan's fall in the IMD's competitiveness rankings as evidence of the need for reform in order to spur growth, the connection was far from obvious. Despite the downgrade, Taiwan was still ranked the 11th most competitive economy among the 60 the IMD studied. The island also remained the third most competitive economy in Asia after Hong Kong and Singapore.
A more convincing explanation for the low foreign investor interest - particularly in export-oriented industries - is political. China regards Taiwan as a renegade province. It has therefore actively opposed attempts by Taipei to conclude formal agreements with its major trading partners, since this would imply that other countries were recognising it as an independent state.