Foreign direct investment in Taiwan: post-1980s

The aims and objectives of my thesis are to research the foreign direct investment (hereinafter, FDI) in Taiwan post-1980s when it started to experience an economic transformation from traditional manufacturing into high-technology manufacturing and service industries. For instance, the Taiwanese government introduced the Six-year National Development Plan, Asia- Pacific Regional Operations Centre (APROC), and relevant incentive polices since 1990s in order to attract export-oriented FDI, and develop further economic and industrial development. Since then there was a drastic change in Taiwan’s economic structure and industrial activity along with an increasing amount of investment from foreign investors. Hence, this thesis empirically investigates the determinants of FDI (Chapter 5), evaluates the impact of FDI on economic growth (Chapter 6), and assesses the dynamic interaction between FDI and macroeconomic variables (Chapter 7). The dataset used for thesis covers the period from 1990 to 2010, and involves industry-level data in Taiwan. The key findings of this thesis could be summarised into three points. First, by employing both the static and dynamic panel data approaches, Chapter 5 suggests that the market size, the employment level, and the exchange rate remain to be significant factors to explain FDI inflows to Taiwan, while the wage cost and the political stability are not significant factors of investment decision-making process for foreign investors. The results imply that foreign investors no longer regard Taiwan as a country with the supply of cheap labour for mass production, but one with the supply of highly skilled and sophisticated talents for high-end manufacturing and service industries. Further, foreign investors no longer regard political instability as a major concern for Taiwan since it has had a stable political environment democratically and diplomatically. Second, by applying the Granger causality test, Chapter 6 suggests that the two-way feedback between FDI and GDP is significant both at overall- and industry-levels, while the one-way feedback (from FDI to GDP) is significant at the cross-industry level. In the first case, it is therefore believed that FDI and GDP are mutually enhancing in the long term in the overall economy, manufacturing and service industries. In the second case, it reflects that GDP growth in manufacturing and service industries has been induced not only by the inward FDI in its own industry but also by inward FDI in the other one. Third, by utilising the vector autoregression (VAR) methodology, Chapter 7 confirms the existence of the two-way causal and dynamic interactions among FDI, GDP and Exports. This two-way feedback result is not only in line with the key findings mentioned above, but also implies that FDI could be a fundamental driver of economic growth in Taiwan, and be considered a close proxy for the degree of openness of the macro-economic policy and position of the Taiwanese government. In addition, while FDI, GDP and Exports are all found to positively affect employment; the reverse relationship is relatively insignificant.