FDI AND DOMESTIC INVESTMENT IN TAIWAN: AN ENDOGENOUS SWITCHING MODEL

Hui‐lin Lin and Wen‐Bin Chuang

The Developing Economies, 2007, vol. 45, issue 4, 465-490

Abstract: The purpose of this paper is to examine the effect of the FDI decision on domestic investment in the case of Taiwanese manufacturing firms. In addition, we also consider the deferral effect of the FDI decision and the role of firm size. To this end, this paper takes advantage of an endogenous switching model from which consistent estimators are obtained after correcting for the self‐selection problem. The empirical results show that the effect of these manufacturing firms’ FDI decisions on domestic investment is significant within the firms. Furthermore, a crowding‐out effect of FDI on domestic investment is found when Taiwanese firms engage in defensive FDI. Finally, FDI is found to have a positive influence on the domestic investment of the larger firms, while the influence is negative in the case of the smaller firms.

Date: 2007
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