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Do local industrial agglomeration and foreign direct investment to China enhance the productivity of Taiwanese firms?

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  • Yi Lee
  • Yih-Luan Chyi
  • Eric S. Lin
  • Shih-Ying Wu

Abstract

This article examines the impacts of industrial agglomeration and outward foreign direct investment (OFDI) on the total factor productivity (TFP) of Taiwanese firms. A vertical FDI-based model of heterogeneous firms is proposed to analyze how agglomeration economies and technology incompatibilities between parent firms and their affiliates can affect firm productivity. This model suggests that firms located in areas with more concentrated industrial agglomerations are more productive, while those engaging in OFDI may not perform better in terms of TFP. Using plant-level data, this article constructs an indicator of industrial agglomeration to appraise agglomeration economies on firm productivity. Based on the data for 578 manufacturing firms and the agglomeration indicator, we estimate a cross-sectional econometric model to empirically assess the productivity effects of industrial agglomeration and OFDI. The empirical results show that local industrial agglomerations exert a positive contribution to firm productivity, but that FDI in China has no significant effects on Taiwanese firms' TFP.

Suggested Citation

  • Yi Lee & Yih-Luan Chyi & Eric S. Lin & Shih-Ying Wu, 2013. "Do local industrial agglomeration and foreign direct investment to China enhance the productivity of Taiwanese firms?," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 22(6), pages 839-865, September.
    • Handle: RePEc:taf:jitecd:v:22:y:2013:i:6:p:839-865
    DOI: 10.1080/09638199.2011.609601
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    References listed on IDEAS

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    1. Pierre‐Philippe Combes & Gilles Duranton & Laurent Gobillon & Diego Puga & Sébastien Roux, 2012. "The Productivity Advantages of Large Cities: Distinguishing Agglomeration From Firm Selection," Econometrica, Econometric Society, vol. 80(6), pages 2543-2594, November.
    2. Bih Jane Liu & An-Chi Tung, 2005. "Export Outsourcing and Foreign Direct Investment: Evidence from Taiwanese Exporting Firms," DEGIT Conference Papers c010_047, DEGIT, Dynamics, Economic Growth, and International Trade.
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    Cited by:

    1. Li, Linjie & Liu, Xiaming & Yuan, Dong & Yu, Miaojie, 2017. "Does outward FDI generate higher productivity for emerging economy MNEs? – Micro-level evidence from Chinese manufacturing firms," International Business Review, Elsevier, vol. 26(5), pages 839-854.
    2. Sourafel Girma & Yundan Gong & Holger Görg & Sandra Lancheros, 2016. "Estimating direct and indirect effects of foreign direct investment on firm productivity in the presence of interactions between firms," World Scientific Book Chapters, in: MULTINATIONAL ENTERPRISES AND HOST COUNTRY DEVELOPMENT, chapter 12, pages 227-239, World Scientific Publishing Co. Pte. Ltd..
    3. Hui-Lin Lin & Yi-Chi Hsiao & Eric S. Lin, 2015. "Do different types of FDI strategies spur productivity and innovation capability growth? Evidence from Taiwanese manufacturing firms," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(3), pages 599-620, June.
    4. Zhang Meili & Li Baizhou, 2023. "How Does Regional R&D Investment Agglomeration Affect High-Quality Economic Development? Evidence From China," SAGE Open, , vol. 13(4), pages 21582440231, December.
    5. I-Ju Tsai, 2017. "A theoretical assessment on the trading arrangements for a small Asian economy with footloose entrepreneur movement toward China," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 59(2), pages 393-417, September.
    6. Lin, Chia-Ling & Lin, Hui-Lin & Lin, Eric S., 2016. "Is There A Complementary Relationship Between Product And Process Innovation On Productivity In Taiwanese Manufacturing Firms?," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 57(2), pages 139-173, December.
    7. Lu, Ren & Ruan, Min & Reve, Torger, 2016. "Cluster and co-located cluster effects: An empirical study of six Chinese city regions," Research Policy, Elsevier, vol. 45(10), pages 1984-1995.

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