The easing of restrictions, part of a campaign pledge by Taiwan's ruling Democratic Progressive Party, has already been extended to a number of industries, but so far does not include manufacturing investments for semiconductors or laptop computers. The Ministry of Economic Affairs has postponed talks on the issue twice since December, which has piqued the ire of Morris Chang, chairman of Taiwan Semiconductor Manufacturing Co. Ltd., and one of the island's most prominent business leaders.

In a public appearance last week, Chang warned that a ban on manufacturing in China "will ultimately undermine Taiwan's economic development. The government is interfering with business operations in the name of national security," he said.

The lack of policy reform is causing some companies here to consider defying the government ban, while other chipmakers have already found circuitous means to invest in the mainland's burgeoning semiconductor industry. Local media in Taiwan and China have reported that the UMC Group is moving ahead with a fab investment in Suchow, near Shanghai, though the Hsinchu-based company declined to comment.

Jason Chang, chairman of Kaoh-siung-based Advanced Semiconductor Engineering (ASE) Inc., the world's No. 2 chip assembler, said his company plans to invest $300 million to set up a packaging and test facility in Shanghai once the restriction is removed. Chang said that, considering China's competitive potential, the company cannot afford to wait much longer before it risks losing its edge in the market.

"Everybody is disappointed and impatient now that the decision has been put off over and over again," said Chris Hsieh, an analyst at ING Baring Securities Taiwan Ltd. "Pretty soon, chip companies will find a way to indirectly invest on the mainland without being punished by the authorities."

While the IC industry is showing signs that it's pulling out of its worst downturn ever, Taiwan's chipmakers are reporting that about half of their production capacity is still idle. Saddled with mounting costs as they pay off equipment that is sitting unused, many companies had hoped investments in China would already have allowed them to tap into growing domestic demand and fill production lines.

"From a company's point of view, they want to go wherever there's demand, and China happens to be a market full of potential," said Freddie Liu, an assistant vice president at ASE. Liu said his company is targeting Chinese chipmakers as a source of new business and is already planning to take a $50 million equity stake in Shanghai's Semiconductor Manufacturing International Co.

SMIC president Richard Chang observed that the Chinese government is also doing its part to lure companies from Taiwan by offering chipmakers tax incentives and inexpensive land and water. Chang once owned foundry operations in Taiwan, but merged with TSMC a few years ago and left for the mainland, just one example of the migration of executive talent across the Taiwan Strait.

Another Shanghai-area start-up, Grace Semiconductor Manufacturing Co., is owned in part by the sons of China's President, Jiang Zemin, and the chairman of the Formosa Group, Taiwan's largest industrial conglomerate.

Ultimately, Taiwan's government must choose between what it considers the risky export of intellectual property to an historically unfriendly neighbor, or the possibility that it is hobbling the economic future of its most lucrative industry. The former course of action would set the country on an uncertain road, but TSMC's Chang said a continued ban on manufacturing investments "would cause even greater damage to Taiwan's security."