Outward direct investment, reverse import, and domestic production: Evidence from Taiwanese manufacturing firms
Journal
Hitotsubashi Journal of Economics
Journal Volume
46
Journal Issue
1
Pages
65-84
Date Issued
2005
Author(s)
Liu B.J., Huang F.-M.
Abstract
The current wave of globalization has raised serious concerns of many countries whether increasing outward foreign direct investment (FDI) will cause the hollowing out of their domestic economies. In this paper we use Taiwan as a case study to examine the interrelationship between foreign production and domestic production with a special focus on the role of reverse imports. We show that without considering reverse imports properly, the empirical results may be biased or even reversed. By endogenizing a firm's decisions on reverse imports as well as on domestic and foreign production, we show that foreign production has no significant substitution effect on domestic production, but it may have a significantly negative effect on domestic production indirectly through variables related to firms' characteristics, such as firm size, the export ratio, labor intensity, the destination of the FDI, and the affiliate's rate of return relative to its parent. Demand variables (e.g., market size, GDP per capita) and cost conditions (e.g., relative wages) do not play a significant role in affecting a multinational firm's domestic production. ? Hitotsubashi University.
Subjects
Deindustrialization; Foreign direct investment; Inverse import
SDGs
Type
journal article