Low wages and the role of SMEs

There are many studies that examine the wage stagnation dilemma in Taiwan. For example, Lin and Yang (2017) found that starting in the early 1990s, the labour share declined until the early 2000s before stagnating without any growth for more than a decade. This is the major reason for the low-wage dilemma in Taiwan. In addition, their study argued that the worsening of the terms of trade in Taiwan has been another factor contributing to the dilemma. It is really because of the fact that while the rapidly growing ICT industries may help the industrial transformation in Taiwan, nevertheless, the low-profit margins of the ICT industries have significantly limited the possibility of there being a handsome wage hike.

In this study, we try to examine the role of the SMEs as well as their possible impact on wage growth. The best source for examining SMEs in Taiwan is the ‘White Paper on Small and Medium Enterprises in Taiwan, 2018’, hereafter referred to in brief as the White Paper, published by the Small and Medium Enterprise Administration (SMEA) of the Ministry of Economic Affairs, ROC. As we can see in Table 16.4, the relevant statistics from the White Paper show that, in 2017, there were more than 1.43 million SMEs in Taiwan, accounting for 97.70% of all entrepreneurs, and they hired more than 8.9 million workers in Taiwan, which accounted for as much as 78.44% of the total number of employed workers in Taiwan’s labour force. Nevertheless, the huge number of SMEs in Taiwan accounted for only 30.22% of the total sales of all enterprises in Taiwan. In addition, the SMEs in Taiwan only accounted for 14.23% of Taiwan’s total export value, while 88.28% of SMEs’ sales revenue was generated from the domestic market in Taiwan.

Now we can decompose the SMEs by sector and the relevant statistics. Table 16.5 shows that, in 2017, in terms of the number of establishments, more than 79.85% of the SMEs were in the services sector, while the large enterprises only accounted for 2.22% of the total number of establishments in that sector. Nevertheless, in terms of sales volume in the services sector as a whole, SMEs in Taiwan accounted for only 28.25% of total sales while the large enterprises accounted for 71.75% of total sales in Taiwan. In addition, Table 16.5 also shows that more than 5.2 million workers or 58.47% of the workforce in Taiwan were in the services sector and the majority of them were associated with SMEs. The statisties in Tables 16.4 and 16.5 reveal a simple but vivid fact that, in Taiwan, too many workers were ‘trapped’ in SMEs as well as in the SMEs in the services sector. However, they collectively contributed as little as 28.25% of the total sales in the services sector in Taiwan. By contrast, however, large services sector enterprises employed less than half a million workers in Taiwan but were responsible for 71.75% of the total sales in that sector.

The figures for the industrial (manufacturing) sector reveal a slightly different picture. Table 16.5 shows that the SMEs in this sector accounted for more than 32.64% of total sales, as opposed to 28.25% in the services sector as mentioned earlier. Large enterprises accounted for 20.28% of employed persons in the industrial sector, which was also much higher than the corresponding share of 8.91% for the services sector. Those statistics suggest that the SME workers in the industrial sector performed slightly better than those in the services sector.

As we can see from Table 16.5, while SMEs accounted for more than 97% of the number of establishments in the industrial sector in 2017 in Taiwan, they only accounted for 32.64% of total sales in Taiwan. Now when we compare Taiwan’s value-added ratios for the manufacturing sector as a whole with those for the US, Japan, Germany and Korea, the comparison can be summarised in Figure 16.4. From the figure, it is shown that although the value-added ratio for manufacturing industry as a whole rose from 21.9% in 2011 to 30.3% in 2016,

Tabic 16.4 SMEs and their corresponding characteristics in Taiwan, 2010-2017

Source: ‘White Paper on Small and Medium Enterprises in Taiwan’, 2018, SMEA, MOEA

Notes:

• 1 The ratio indicates the SMEs’ share among total enterprises.
• 2 Export contribution = (export sales value of SMEs/cxport sales value of all enterprises) x 100%.
• 3 Export propensity - (export sales value of SMEs/total sales value of SMEs) x 100%.
• 4 The sales value in this table is expressed in millions of NTS.

Table 16.5 Number of enterprises, annual sales, number of employed persons and number of paid employees in Taiwan (2017) Units: Enterprises; N1'$ millions; thousands of persons; %

Source: ‘White Paper on Small and Medium Enterprises in Taiwan’, 2018, SMEA, MOEA

*: NTS million; **: thousands of persons.

Figure 16.4 The value-added rates for Taiwan and other major countries

Source: Department of Statistics, Ministry of Economic Affairs, R.O.C. (2018). Statistics on the Current Economic Situation (Special Topic: Manufacturing Value-added Rate) (in Chinese)

being the second highest in history, nevertheless, it was still much lower than the comparable statistics for the US, Japan and Germany. One possible explanation for such a gap is that these developed countries all had higher R&D intensities and they could sell their products with their own recognised brand names and international sales channels. By contrast, however, most firms (and SMEs) in the manufacturing sector in Taiwan operate on an original equipment manufacturing (OEM) basis and, as such, keeping costs low is their key international competition strategy and they have very small profit margins to support a wage hike.

It is important to note that some SMEs in the manufacturing sector in Taiwan have already transformed and upgraded themselves into high-end manufacturing as well as original design manufacturing (ODM) models and many of them are also known as hidden champions in their respective industries. Nonetheless, Taiwan needs many more of these successful cases to experience a more comprehensive upgrading of its industrial sector.

All of the previously mentioned statistical results have already suggested that low value-added, particularly in the manufacturing sector as well as an even lower value-added for the huge numbers of SMEs in the services sector have all led to one inevitable result, which is low-wage stagnation not only for SMEs, but also a subsequent overall low-wage stagnation for Taiwan as a whole.

It is important to note that there are two additional factors that are also relevant to the dilemma of low-wage stagnation in Taiwan, namely, the limited labour mobility and the low English proficiency of the workers. As for the labour mobility problem, it is shown in the White Paper that for those who already work in an SME, the chances of being recruited later by a large enterprise are very slim, since as we can see from Table 16.6, in 2017 more than 90% of workers in SMEs will stay with the SMEs or will work for another SME when they change jobs, and only 6.52% of them may have the chance to move up the ladder and be recruited

290 Nien-Ti Hsieh et al.

Tabic 16.6 Possible career choices for a former SME employee, 2010-2017 Unit: Thousands of persons; %

Source: ‘White Paper on Small and Medium Enterprises in Taiwan’ 2018, SMEA, MOEA

Table 16.7 The English proficiency of new entrants for Taiwan, Japan and Korea

Source: Comparative Report on the English Proficiency of Taiwanese, Japanese, and Korean Employees, ETS (2012), in Chinese

by a large enterprise in Taiwan. This harsh reality suggests that the problem of the low wages of workers in the SMEs will likely become a chronic and even a career problem. The other possible explanation for such low mobility from the SMEs to large enterprises is the low English proficiency of the workers, which is also consistent with the fact that most of the SMEs in the services sector are more domestic market-oriented.

In Table 16.7, we utilise the ‘Comparative Report on the English Proficiency of Taiwanese, Japanese, and Korean Employees’ released by the American Education Testing Service (ETS) in 2012 to show the low English proficiency of workers in Taiwan. The table shows that South Korea’s English requirements for new entrants are significantly higher than those in Taiwan and Japan. In addition, although the English testing scores for Japan are lower than those for Taiwan, nevertheless, 83.4% of the top 1,000 companies used TOIEC as a requirement to screen their new entrants, while in the case of Taiwan, the corresponding ratio was as low as 27.9%. Clearly, the result shows that Taiwanese companies, regardless of their size, have relatively poor performance in terms of their English proficiency as compared with their counterparts in Japan and Korea.