The role of retail sector in Taiwanese economy

Posted on:Aug 31,2020


The government-guided establishment and incubation of retail sector in Taiwan is a striking success and generated high consumption. This success was all the more striking because when the increase of consumption began, the country had few of the large retail infrastructure and it was to accept some foreign retail investments. Originally there were no Taiwanese retail firms with deep technological roots and managerial skills. Yet government decision-makers recognized the challenges of upgrading the nation’s economy basing and formulating a strategy that entailed the creation of high-level economic growth which serve as vehicles to stimulate the consumption.

Beyond a comprehensive review on Taiwan’s retail sector, the main objective is to analyse the role and the influence of the sector in the Taiwanese macro-economy. The first issue is getting a picture in Asia (special in Asia – Pacific region) of retail trends. To examine this question the author made some comparisons between Asian and European) and beside the obvious similarities, number of significant differences were found. The research objective is to provide an effective introduction to the business context of consumption in Taiwan.

Key words: consumption, retail, Taiwan APAC

JEL Classification: R12, E21, N75


Taiwan is located off the south-eastern coast of the continental China, at the western edge of the Pacific Ocean, between Japan and the Philippines. The Central Mountain Range divides the east and west coasts and stretches from north to south. With Japan to the north, mainland China (the People’s Republic of China, PRC, hereinafter: mainland China) to the west, and the Philippines to the south, Taiwan has always been a location of strategic maritime importance since ancient times. It has played an important role in the development of Asia as well as in world history, politics and trade. As a result, Taiwan (named as Republic of China, ROC, hereinafter: Taiwan, which comprise several smaller archipelagos in the South China Sea as well) now enjoys a high level of openness and cultural diversity. Taiwan’s geographical and historical uniqueness has given rise to a diversity of ethnic groups, cultures, and languages. There are 380,000 people who belong to twelve officially recognized indigenous tribes, each with their own social structure, language, and cultural traditions. Taiwan has a population of 23 million people who still observe their culture and still speak regional Chinese dialects in addition to Mandarin (MOE Taiwan, 2017).

Taiwan (is relatively poor in mineral resources however it has small deposits of coal, natural gas, limestone, marble, asbestos and arable land. The majority of the island is covered by a mountain range, with more than 300 peaks over 3,000 m above sea level. Its highest point is Yu Shan (3,952 m). Therefore, Taiwan has very limited possibilities for agriculture. According to the figures of CIA Factbook (2017), based on estimation, the ratio of agricultural land is 22.7% only. The population of Taiwan was 23,464,787 (July 2016), while life expectancy at birth: total population: 80.1 years (male: 77 years, female: 83.5 years (2016) (CIA, 2017).

The objectives of the research

The impressive development of Taiwanese economy raised the willingness not only of Asian exporters but also from overseas to supply goods in increasing quantities to the Taiwanese consumer market. So do the European companies including Hungarian ones, even though exporters face a number of difficulties when entering the Taiwanese market. First and foremost, there are very few companies and businessmen who thoroughly know the Taiwanese market including the importation procedure. In spite of a range of similarities travellers may think at first sight Asian economies, regulations and consumers’ preferences are varying from country to country and region to region. The authors, who both visited Taiwan recently with the research fellowship of the Oriental Business and Innovation Centre (OBIC) of Budapest Business School, are convinced that Taiwanese consumer market can provide even more benfits for European suppliers in long run. Therefore, it is not only theoretically interesting to get an in-depth insight to the Taiwanese consumer market and consumption at both macro- and microeconomic levels but it can eventually bring about directly applicable findings from which potential exporters may benefit.

It is very important issue the nature of relationship with China. China became Taiwan’s second-largest source of imports after Japan, and China is also the island’s number one destination for foreign direct investment. Closer economic links with the mainland bring opportunities for Taiwan’s economy but also pose challenges as political differences remain unresolved and China’s economic growth is slowing, and besides the discussion of the nature of political relationship is not part if this analysis.

Method of consumption analysis

In this subchapter the authors analysed how and on which bases Taiwanese households decide how much of their income to consume at once and how much to spend in retail shops? This microeconomic question addresses the answer for macroeconomic consequences (Vasa, 2005). It is examined how households’ consumption decisions affect Taiwan’s economy in long run. The study of consumption relies on techniques of data regression analysis. The aggregate data on the behaviour of the overall economy derived from the national income accounts of Taiwanese official statistical database (National Statistics of Republic of China).

Keynes conjectured that the marginal propensity to consume – the amount consumed out of an additional dollar of income – is between zero and one (Mankiw, 2003). The ratio of consumption to income, called the average propensity to consume, so income is the primary determinant of consumption. The consumption, so the retail spending as well is determined by the level of production and the distributed income to households, as disposable income. One of the main goals of the research was to show how economic equilibrium change in the market for goods and services in Taiwan due to the retail trade and consumption or with other words how the supply and demand for the economy’s output varies. The following equations summarize the examinations of the demand for goods and services in the research.

Y = C + I + G.

C = C(Y – T).

The demand for the economy’s output is measured by GDP, which comes from partly the consumption, and consumption depends on disposable income; retail spending is the endogenous variables from this point of view.

Input-output model to the retail sector analysis

In the applied Leontief’s input-output model there are four measures of changes in regional economic activity that can be estimated—gross output of different sectors, value added, earnings, and employment. The crucial question is how the retail sectors’ intermediate relationships can be quantified in the national input-output model. The method used in this research is to use the national level sector metrics (such information are available in the Statistical Office database), and calculated coefficients can be figured out upon national level statistics. In addition to understanding the effect of assumptions in the input–output model, it is important to quantify the macro level effects by using the model’s multipliers. Each of the additional one NT$ (New Taiwan Dollar, the official currency) of demand for the buying of a sector results both indirect and direct income effects on the economy as a whole, so the linkage between the initial spending and the total effects generated by the spending is known as the multiplier effect of the sector, or more generally as the impact of the sector on the economy as a whole (O’Connor -Henry, 1975). For this reason, this study of multipliers could be called as impact analysis.

In this survey multipliers are used to figure out the secondary effects of retail sector in Taiwan. Indirect effects are the changes in sales, jobs and income within supplier industries in the country, i.e. businesses that supply goods and services to tourism-related firms. The economic mechanism that causes an initial reaction to be amplified by follow effects among suppliers is the examined indirect multiplier effect, regardless of whether the shock arises change in technology or financial market (Acemoglu, D. et al. 2016). For example, retail companies purchase a variety of goods and services in Taiwan in order to sell products, these indirect effects are described by Type I multipliers.

Type I sales multiplier = (direct sales + indirect sales)/ direct sales

The additional income that ultimately gets to households is called disposable income, which explains, the induced effects.  These evoked effects are the changes in income in Taiwan, resulting more consumption because of retail spending. Employees in the service sectors and supplier industries are spending their income in Taiwan, thus causing additional sales and economic activity. Type II multipliers integrate both indirect and induced effects.

Type II sales multiplier = (direct sales + indirect sales + induced sales)/direct sales

The main characteristics of the taiwanese

After the 1960s, Taiwan underwent a rapid economic and industrial reform, also experienced remarkable social development. The economic achievements of the 1970s and 1980s allowed Taiwan to rank among the Asian Tigers and, in the 1990s, among developed countries. Since the 1980s, the economic structure of Taiwan gradually shifted from labour-intensive industries to high-tech industries, wherein the electronics industry was particularly vital to the world’s economy. Taiwan has excelled in the semiconductor, optoelectronics, information technology, communications, and electronics fields. At present, the economy is shifting toward nanotechnology, biotechnology, optoelectronics, and the tourism service industry. Moreover, international trade is the economic lifeline of Taiwan. Japan and the United States were Taiwan’s top two trading partners until 2005, when mainland China took over as Taiwan’s main import/export trading region, with Japan and the United States coming in second and third. In recent years, the unfavourable financial situations of the USA and European economies and the economic slowdown in mainland China had a joint impact on the economic performance of Taiwan (MEET-Taiwan, 2017).

Taiwan has a dynamic capitalist economy with gradually decreasing government guidance on investment and foreign trade. Exports, led by electronics, machinery, and petrochemicals have provided the primary impetus on its economic development. This heavy dependence on exports exposes the economy to fluctuations in world demand. Taiwan’s diplomatic isolation, low birth rate, and rapidly ageing population are other major long-term challenges. According to estimated figures of CIA World Factbook (2017) Taiwan’s PPP-based GDP (purchasing power parity) was 1.125 trillion USD, GDP (official exchange rate) was 519.1 billion USD (2015), while the GDP real growth rate was 1% (2016). The per capita GDP (PPP) was 47,800 USD (2016), while the ratio of gross national saving was 35.7% of GDP (2016).

In 2016, the composition of GDP by sector of origin was as follows: agriculture (1.8%), industry (36.1%) and services (62.1%). The main agricultural products and commodities are rice, vegetables, fruit, tea, flowers; pigs, poultry and fish. The main industries are: electronics, communications and information technology products, petroleum refining, chemicals, textiles, iron and steel, machinery, cement, food processing, vehicles, consumer products, pharmaceuticals. In 2015, the labour force was estimated 11.68 million, the division of which by sectors were as follows: agriculture (5%), industry (36%), services (59%). The unemployment rate was 3.9% in 2016, 0.1% higher than a year before. In 2016, the Taiwanese public debt was 32.7% of GDP (the same like a year before), while in 2016 the budget had a 0.6 percent deficit. In 2016, the inflation rate (consumer prices) was 1.6 %, a year before it was -0.3%. In 2016, the total exports of Taiwan amounted 314.8 billion USD (in 2015: 335.5 billion USD), while the total amount of imports was 248.7 billion USD in 2016, (262.9 billion USD in 2015). The main export commodities are: semiconductors, petrochemicals, automobile/auto parts, ships, wireless communication equipment, flat displays, steel, electronics, plastics, computers, while the main items of imports: oil/petroleum, semiconductors, natural gas, coal, steel, computers, wireless communication equipment, automobiles, fine chemicals, textiles. Taiwan has the sixth biggest reserves of foreign exchange and gold the total amount of which was estimated 456.9 billion USD (on December 31, 2016), one year before it was 430.7 billion USD. Taiwan’s total amount of external debts was estimated 155.4 billion USD (on 31th December, 2016) while one year before it was 159 billion USD (CIA World Factbook, 2017). See Taiwan’s main macroeconomic indicators on Table 1.

According to Statistics Times (using database of IMF (2016 October) Taiwan was at No 21 place in terms of the amount of GDP on current price basis and No. 21 in purchasing parity basis (PPP), while foreseeably it would keep its present position in 2020 in PPP basis.

Challenges of the taiwanese economy and society

Taiwan’s economy has been experiencing a downturn since the breakout of the global economic crisis since 2008. This is due to the overdependence to the exportation. Both investment and consumption are growing at a slow pace. There are three main factors contributing to Taiwan’s economic growth: investment, export and consumption. Regarding the investment sector, the government has faced the sovereign debt ceiling, which restricts its capacity for raising public debt. The private investment sector shows limited growth potential. Furthermore, there is little progress in negotiations for FTA (Free Trade Agreement) as well as EFCA (Cross-Straits Economic Cooperation Framework Agreement) follow-up agreements. Negotiations, however, have been started for a cross-strait trade in goods agreement under the ECFA framework (Wang, J-C. 2015).

In order to maintain the technical and business issues between Taiwan and mainland China, the Straits Exchange Foundation (SEF) was established by the Taiwanese government. It is technically a private foundation, but in fact it is funded by the government and controlled by the Mainland Affairs Council of the Executive Yuan (the executive branch of the Taiwanese political leadership). Its role is in fact, a kind of de facto embassy to mainland China, to not officially acknowledge the latter’s sovereignty over Taiwan. The SEF is headed by a former Taiwanese foreign minister, Tien, Hung-mao (SEF, 2017).

According to the data of the Directorate General of Customs, Ministry of Finance, (Taiwan) comprising seven years from 1st January, 2010 to 31st December, 2016 Taiwan’s No. 1 and No. 2 foreign economic partners were located in East Asia, namely the mainland China and Japan. In terms of the entire bilateral turnover, and in case of Taiwanese exports, mainland China is the biggest partner (even without Hong Kong nearly 850 billion USD turnovers, from which 550 billion USD was the export), while in terms of imports to Taiwan, Japan was the biggest in this period (with nearly 316 billion USD). The United States was at No 3. place both in terms of exports and imports. Hong Kong, South Korea and Singapore are also very important partners, while from Europe only one country, Germany had a place among the Top Ten (with nearly 103 billion USD turnover).

Mention has to be made about the Economic Cooperation Framework Agreement (ECFA), a preferential trade agreement between the governments of mainland China and Taiwan, which aimed to reduce tariffs and commercial barriers between the two sides. The pact, signed on June 29, 2010, in Chongqing, was seen as the most significant agreement since the two sides split after the Chinese Civil War in 1949 (EU-Taiwan Factfile, 2010).

Chang (2015) pointed out that whilst legislative ratification of the latest Cross-strait Trade in Services Agreement has been held in abeyance since the Sunflower Movement took place in March 2014. in Taiwan attended a WTO (World Trade Organization) Trade Policy Review meeting in Geneva on September 16, 2014. During this meeting from the end of mainland China concerns were expressed over Taiwan’s restrictive measures that substantially limit its direct/portfolio investments in Taiwan. In addition to reiterate its expectation towards the removal of Taiwan’s unilateral import bans on basic products from mainland China in compliance with the MFN (Most Favoured Nation)-level obligations of WTO. Beijing has also signalled that, by failing to open Taiwan’s domestic economy to China, it will lobby against Taiwan’s participation in multilateral pacts such as the Trans-Pacific Partnership (TPP).

The growing business, investment and trade relations between the Mainland and Taiwan could potentially help the Taiwanese economy including the retail sector as well. Nowadays, Chinese tourists visit Taiwan in a growing number, Chinese consumers are also tend to be more consumption-oriented and internet-user. Internet-use and the advertising and promotion methods are becoming developed in China too, however somewhat different from the European habits (Madlenak and Madlenakova, 2015)

Besides the huge potentials and also difficulties in overseas trade, there are several problems in the Taiwanese economy and society which hinder the increase of consumption and by this the development of retail trade. One of these problems is the salary stagnation. Real salary has stagnated for almost 20 years because of the imbalance of income distribution, not from the lack of economic growth. Therefore, young generation in Taiwan faces elementary problems establishing families because of the increasing gap between the growing real estate prices and the stagnating salaries (Neszmélyi, 2017). The excessive outflow of Taiwanese FDI – establishing new jobs rather abroad than in Taiwan does not seem to solve this problem, moreover does not help to turn back the brain-drain process as well.

The role of retail trade

In the previous model GDP computed on way of the expenditure approach to calculating the total spending of GDP. The other way is to add up the income – wages, rents, interest, and profits – received by all factors of production in producing final goods and services by different sectors (Case, 2008). These two methods must lead to the same value as every payment (expenditure) by a buyer is at the same time a receipt (income) for the seller. It is used the income approach to calculate the share of retail sector in GDP and examine the relationships to other sectors. The Statistical Bureau Taiwan compiles the benchmark IO tables are produced according to result of the Industry, Commerce and Service Census Survey every 5 years, but regularly disseminate the Input-Output Tables (the matrixes) which represent interrelationships between each industry. Transaction table includes various components of transactions, input coefficient and impact coefficient, as explained in the next chapter:

Transaction Table

Transactions Table, or named use table, is the basic table of Input-Output statistics. Each row represents the destination, for intermediate consumption or final use, of commodities for example sold by retail companies. Each column details the production function of a specific commodity or service activities acted for example by retailers, including the value of the commodity’s total output, the mix of commodities it consumes to produce this output and the value added by labour and capital producing this output. The final use columns detail the commodity composition of the final use components of GDP. Table 2 includes the original relationship between the components of total gross output, and the value-added domestic product (GDP) as well. As shown in the summarised table, inputs are consumed by producing and service providers sectors—these are the intermediate inputs, such as raw materials or semi-finished inventories—and by final use. Value added is equal to the net income earned in production—this includes labour earnings so the resource to pay for income owners, which stems from the difference of totals sales and input purchases, so the total gross output is equal to the sum of intermediate inputs and value added value added summed across all industries is equal to regional GDP. Out of 21.0 Trillion NT$ total intermediate demand the retail sector represents 4.1 Trillion NT$ input goods and services purchase (Table 2).

Value added is defined as the value of gross output minus intermediate inputs excluding any income accumulations among companies. The added value is the source of the payments made for economic actors, namely for example the rewarding of employees in form of wages or salaries and the taxes on production and imports. So, the transaction table shows the economic actors’ contributions for the national gross domestic product through household consumption, (local) government expenditures, net export figures, company investments, capital expenditures and import value (Moss, 2007). (In the statistical data wholesales figures are integrated to retail figures, nevertheless on the in the national level model the value chain accumulation is avoided)

Noteworthy the high portion of the primary input out of the total input, which sign relevant value-added sharing in retail (70%), this is the source of income payment for business actors, such as employees. The compensation level represents 30% in Taiwan. In Hungary the share of value-added disbursement in retail is 65% (HCSO), the employees’ compensation is on Taiwanese level, the taxes dominate more in Hungarian commerce, the VAT rate in Taiwan is 5 %, while in Hungary the main VAT rate is 27%.

On the national level the gross output is equal to the sum of the intermediate inputs and value added, which can be measured as the sum of the intermediate inputs and final use. As the total demand equals to the total supply, – considering the operational surplus – the retail sector performance is the same than the input buying in the input – output model.  In the survey the benchmark input-output tables are compiled for year 2016. 


Input coefficients are obtained by dividing input with output in terms of Input Coefficients Table of Domestic Goods and Services (D) (Statistical Bureau of Taiwan). Input coefficient in case of retail and wholesale sector denotes the input required under existing selling technologies. It represents a certain production technological standard and is called technology coefficient, so the input goods purchasing represents 25% of the total expenditures in retail sector.

The Impact coefficients are also named Inverse Matrix Coefficients, or Interdependence Coefficients or Impact Effects Coefficients. “Coefficient” means the numbers of units that have to be bought, – either directly or indirectly -, from various sectors for every additional unit needed of a given sectoral output. What is eventually needed to influence, either directly or indirectly, output, added value and input through industry linkage is called “Feedback Effects of the Final Demand.” It is used for evaluation the retail multiplier effect, calculated the domestic inverse matrix results the feedback effects on the final demand (Statistical Bureau of Taiwan). The Impact coefficients are also named Inverse Matrix Coefficients, Interdependence Coefficients or Impact Effects Coefficients. In case of retail it means the numbers of unit or value that are received, directly or indirectly, from each industry to deliver one unit of retail sector to final users, and also expresses the degree of interdependence between different industries, The value of the coefficients of wholesale and retail trade is 1,032370, so for example 1 million NT$ additional trade purchase increase the total intermediate input producing by close to 3%. In other words, any 1 million NT$ local additional buying goods and services by retailers, leads to a plus 376 thousand NT$ direct effect in Taiwan spent by those companies who produce the inputs for retailers.


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Tamás Kozák PhD

Associate Professor, Head of Department of Commerce, Budapest Business School – University of Applied Sciences

György Iván Neszmélyi PhD

Dr. habil, Professor, Department of Commerce, Budapest Business School – University of Applied Sciences