Taiwan has snubbed a multi-million dollar funding pledge by China's e-commerce giant Alibaba designed to encourage the island's young entrepreneurs, saying youth talent should stay away from the mainland.

It comes after the island demanded Alibaba withdraw from Taiwan as it had violated investment rules.

Alibaba announced the Tw$10 billion ($316 million) dollar funding scheme for young entrepreneurs to help them set up businesses and sell products in mainland China on Monday.

Company founder Jack Ma emphasised the benefits of the scheme during a speech to students Tuesday, urging them to "follow your dreams".

But the island's top economic planning organisation, the National Development Council, said the mainland "should not be given top priority by young people... given its opaque legal system and implicit rules that could enhance the risks of starting up businesses".

"The (Alibaba) foundation cannot change the reality. We urge those interested people to start up businesses in Taiwan cashing in on the resources offered by the government," the statement late Tuesday added.

Tensions are high in Taiwan over increased Chinese influence following a thaw in relations under current president Ma Ying-jeou.

Ma came to power in 2008 on the promise of warmer ties and improved cross-Strait trade to boost the economy, but concerns over Beijing's influence led to his ruling Kuomintang party's heavy defeat in local elections in November.

A service trade pact with China also triggered mass rallies and a three-week occupation of parliament by students in March last year.

Students also expressed reservations after Jack Ma's speech at National Taiwan University.

One asked what his motivations were, prompting him to deny that he was trying to "lure Taiwanese talents away".

"I want to help Taiwan small businesses to sell their products to the mainland and the world," he said.

Ko Ying-chen, a law school graduate of National Taiwan University, told AFP that she was "not sure about his motive".

"Taiwan youths are creative and I am worrying that he would want to plagiarise our ideas," she said.

Local media were divided Wednesday, with some casting doubt on Alibaba's credibility while others urged the government to follow Ma and improve support for start-ups.

Taiwan's Investment Commission has ordered Alibaba to withdraw or transfer its holdings from its Taiwanese branch, saying that it registered as a foreign company when it was in fact a mainland company, officials said Tuesday.

The company has also been criticised by Chinese regulators for failing to stop sales of fake goods through its online platforms.