LAW MARKET FORCES UNDERLYING INTERNATIONAL JURISDICTIONAL COMPETITION: THE CASE OF TAIWAN’S REGULATORY EVOLUTION ON OUTWARD INVESTMENT IN MAINLAND CHINA, 1997-2008 BY CHANG-HSIEN TSAI DISSERTATION Submitted in partial fulfillment of the requirements for the degree of Doctor of the Science of Law in Law in the Graduate College of the University of Illinois at Urbana-Champaign, 2010 Urbana, Illinois Doctoral Committee: Professor Larry E. Ribstein, Chair Professor Amitai Aviram Professor Nuno Garoupa Professor Andrew Pettit Morriss ABSTRACT This dissertation seeks to explore how basic law market demand and supply forces (or underlying exit and voice rights), interplaying under international jurisdictional competition among global legal centers, shape regulations laid down by such a democratically-constrained onshore jurisdiction as Taiwan. The thesis in this dissertation is that jurisdictional competition brought about by physical mobility would provoke a change in local laws. In general, the case study of Taiwan’s regulatory evolution on outward investment in Mainland China (“China-Investment”) from 1997 to 2008 further examines the extent to which jurisdictional competition fuelled by physical mobility may drive local legal changes. In particular, this case study is to test the process by which constraints on excessive regulation would be imposed by international jurisdictional competition stimulated by business demands and fuelled by physical mobility. To begin with, after incorporating basic theories involving the law market and so forth, I draw lessons from corporate charter competitions in the 19-century U.S. and contemporary Europe as well as the negative effect of the Sarbanes-Oxley Act of 2002 on foreign issuers, that jurisdictional competition constrains regulating jurisdictions from disregarding business demands and from imposing excessive regulation, and that jurisdictional competition brought about by mobility or exit would push for legal flexibility. Subsequently, this case study first displays a stage-by-stage liberalization of the regulation on China-Investment, generally from strictly mandatory to much more flexible legal regimes. This phenomenon could demonstrate the output of market interactions between demand and supply sides of the international law market among global legal centers. Specifically, this dissertation gives a causal interpretation that business demands of Taiwanese firms, via their exit and voice rights, galvanize the relaxation transitions of Taiwan’s Capital Controls,while arriving at a positive conclusion that the usual demand and ii supply forces operating in this international jurisdictional competition, which was stimulated by Taiwan-invested firms’ business demands and fuelled by concomitant physical mobility, may have the effect of nudging the Taiwanese government in the direction of relaxing the regulation on China-Investment. Although Taiwan’s government struggled to regulate China-Investment as effectively as possible, it failed after all due to the impacts of globalization in general and the denationalization of financial capital in particular. This, on the other hand, suggests that the fact that the international jurisdictional competition provoked by the heightened physical mobility under economic globalization turned the regulation all but ineffective has much to do with the stage-by-stage liberalization. Finally, even though proving a causal relationship is a challenge, this dissertation could, at the very least after ruling out major alternative theories, find a strong correlation between international jurisdictional competition and the stage-by-stage liberalization. iii ACKNOWLEDGEMENTS This project would not have been possible without the support of many people. I am most cordially thankful to Professor Larry E. Ribstein, who has been my advisor and mentor during my graduate work at the New York University and the University of Illinois. His persistent and patient supervision enabled me to recognize the profound depth of this subject while guiding me through the confusion to the completion of this dissertation. I am also grateful to my other committee members, Professors Amitai Aviram, Nuno Garoupa, and Andrew Pettit Morriss, who offered invaluable comments. Also thanks to Professors Wen-Yeu Wang, Wang-Ruu Tseng, and Jen-Guang Lin of National Taiwan University for continuous care and providing priceless guidance on my professional career. In addition, I appreciate the encouragement of In-Jaw Lai, the Honorable Chief Justice & President of the Judicial Yuan, Republic of China (Taiwan), who inspired me to pursue advanced legal study in the U.S as well as gave me good references. Finally and most importantly, wholehearted thanks to my respectable parents for their endless love and supporting my pursuit of this doctoral degree unconditionally. iv TABLE OF CONTENT LIST OF TABLES......................................................................................................................... vi LIST OF FIGURES ...................................................................................................................... vii CHAPTER 1: INTRODUCTION................................................................................................... 1 CHAPTER 2: JURISDICTIONAL COMPETITION IN GENERAL.......................................... 12 A. Basic Theories...................................................................................................................12 B. The Law Markets for Corporate Charters and Cross-Listings ..........................................24 CHAPTER 3: JURISDICTIONAL COMPETITION AMONG GLOBAL LEGAL CENTERS 62 A. Jurisdictional Competition among Listing Markets in the Greater Chinese Economy: Hong Kong as an Example of Competitors against Taiwan ..............................................63 B. The Output of Market Interactions in the International Jurisdictional Competition: Taiwan’s Regulatory Evolution from 1997 to 2008 on Outward Investment in Mainland China……........................................................................................................................123 CHAPTER 4: CONCLUSION AND IMPLICATIONS ............................................................ 196 REFERENCES ........................................................................................................................... 202 APPENDIX A: TABLES............................................................................................................ 242 APPENDIX B: FIGURES .......................................................................................................... 251 AUTHOR’S BIOGRAPHY........................................................................................................ 254 v LIST OF TABLES Table Page 1 Characteristics of ADR Programs…………………………………………………….242 2 TDI in China (Comparison between the Statistics of Taiwan and China)……………243 3 TDI in China (Taiwan’s Statistics)…………………………………………………...244 4 Taiwan Approved Outward Investment by Country (Area)………………………….245 5 Comparison and Evaluation regarding Listing Advantages among TWSE, HKSE and the U.S. Stock Exchanges……………………………………………………………… 246 6 The Capital Controls on Investment in Mainland China under the NHBP Policy…...247 7 The Capital Controls on Investment in Mainland China under the PLEM Policy…...248 8 The Capital Controls on Investment in Mainland China since May 2008……………249 9 Taiwan’s Investment in British Central America and BVI’s Investment in China (1995-99) ……………………………………………………………………………….250 vi LIST OF FIGURES Figure Page 1 Taiwanese Direct Investment in Mainland China…………………………………….251 2 Comparison between the Surge of TDI in China and the Increase of Investment Allowance……………………………………………………………………………… 252 3 The Function of the Jurisdictional Competition to Cause the Relaxation of Taiwan’s Capital Controls…………………………………………………………………........... 253 vii CHAPTER 1: INTRODUCTION As stock markets in China (hereinafter also referred to as the “PRC,”1 “Mainland China” or the “Mainland”)and Hong Kong performed well in recent years, Taiwan becomes attractive because it could be the last place to seek relatively cheap shares in companies which are extensively based in China. Until 2007, Taiwan’s “weighting in the widely used MSCI Emerging index was second only to South Korea’s.”2 Nevertheless, preoccupied with national identity—including the extent of political independence from the PRC—and national security against threats from the Mainland, Taiwan’sgovernment took measures to obstruct economic integration of the private sector with China, until Taiwan began turning to large-scale deregulation since President Ma of the Nationalists (“Kuomintang”or “KMT,”which is the current ruling party in Taiwan whereas the Democratic Progressive Party (“DPP”) was the former ruling party before the 2008 presidential election) won the presidential election in March 2008. Therefore, although many Taiwanese companies were believed to already earn hefty profits on their Mainland operations, they kept their successes a secret to avoid the Taiwanese government’s stringent restrictions on outward investment in Mainland China. As a matter of fact, with Taiwan’sgovernment attempting unsuccessfully to hinder further investment across the Taiwan Strait (the “Strait”), many Taiwanese corporations have weaved their ways through these bans so as to hand over needed funds to their affiliates or subsidiaries in Mainland China. Alternatively, in order to exit from 1 The People’s