Determinants Of Foreign Direct Investment: Taiwan, 1965 - 1993

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Yingshing Lin
Michael Szenberg
Thomas J. Webster

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Abstract

This study empirically investigates the relationship between changes in macroeconomic and microeconomic (firm-specific) determinants and changes in foreign direct investment made by Taiwanese firms.  The empirical analysis presented in this paper confirms that at the macroeconomic level of generality increases in Taiwanese foreign direct investment the period 1965-1993 resulted from rapid capital accumulation, which encouraged the development of capital-intensive industries, the accumulation of manufacturing intangible assets, and labor shortages.   At the level of the individual firm, the empirical analysis presented in this paper verifies that an appreciating foreign-exchange rate, higher export profits, wider differential economic growth  and international interest rates were important determinants in the decisions of firm management to invest overseas.  The analysis indicates that while changes in foreign-exchange rates and capital controls were important in affecting the volume of foreign direct investment changes in the underlying structure of the Taiwanese economy played a more significant role.  Specifically, Taiwanese manufacturing growth in previous decades developed specific industrial strengths, which enabled Taiwanese enterprises to exploit comparative advantages in production and management methods to compete effectively in international markets.

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