Causes and Consequences of Taiwan’s FDI Regulation Policy in China, Jung-Chin Shen

Globalization: still controversial Free trade? Yes! Free capital movement? No! Consensus on the benefits of free trade Free capital movement is the most controversial issue regarding globalization: Global financial crisis Economic recession Unemployment Unstable exchange rate Lower firm performance Sacrifice long-term competitiveness De-industrialization Income inequality

Why FDI? Capital: short-term capital and FDI FDI is an integral part of globalization the predominant source of external financing for developing countries yields more benefits than other types of capital flows due to technology transfer and spillover effect generates long-term effects FDI regulation, deregulation, and re-regulation

Why Taiwan’s FDI deregulation in China, ? China’s impressive economic growth: Economic regime reform and FDI The dynamics of trade and capital movement between Taiwan and China: Taiwan ranks as #2 source of China’s FDI in the 90s, only next to Hong Kong Developmental state and regulation Taiwan’s deregulation and privatization wave in 1990s. Taiwan’s FDI regulation policy

The consequences of FDI deregulation Most studies focus on outward FDI rather than inward FDI, and on host country effect rather than home country effect Two perspectives on FDI deregulation Economic theories of regulation: efficiency Sociological perspective: power The effects of FDI deregulation on Profit margin, EPS (managers/shareholders) Employment (local employees) R&D intensity (policy makers)

Intertwined causes and consequences The consequences of FDI deregulation cannot be correctly accessed without taking into account its causes The power perspective on FDI deregulation (three actors) Social movement: power struggle among social actors Political sociology: the role of the state Determinants of FDI deregulation Percentage of sales by state-owned enterprises Resources of export-oriented firms Resources of domestic-market-oriented firms Export ratio to China # of export-oriented firms # of domestic-market-oriented firms Industry total R&D Calendar year

Data and methods Data Product regulation menu Taiwan industry report Industry, commerce, and service census Taiwan economic journal database Indicators of science and technology State-owned business Methods Heckman 2-stage model

Results Profit margin EPSEmploymentR&D intensity Deregulation +* -* Deregulation * export- oriented firms +* -*

Interaction effects Profit margin EPS Employee R&D intensity

Economic implications

Conclusions As expected, FDI deregulation, on average, increased firm’s profit margin and EPS. Unexpectedly, FDI deregulation increased local employment. Yet, it reduced firm’s R&D intensity. However, the effects of FDI deregulation does not equally distribute to all kinds of firms.

Conclusion

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