The Interaction of Market Structures and External Exposure Effects on Profit Margins: An Empirical Analysis of Taiwan

Hsiao-Chien Tsui ()
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Hsiao-Chien Tsui: Department of Economics, National Chung Cheng University

Journal of Economic Development, 2002, vol. 27, issue 1, 107-123

Abstract: This paper investigates the relationship between exchange rate and profit margins when we take the effect of exchange rate on both input and output prices into account. Using the data of 19 two-digit Taiwanese manufacturing industries over the period of 1981-1994, we find a higher degree of net export exposure in Taiwan. Our empirical results suggest that since the 1987 appreciation of the Taiwanese currency, industries take advantage of the appreciation of the NT dollar, enjoying a reduction in the price of imported inputs into production. The market structures, such as market concentration and products are destined for domestic versus export markets, are showed that the profit margins are affected. An innovative feature of the paper is in modeling the interaction between endogenous Northern product innovation and endogenous production transfers to South with industry specific learning, cross-industry learning spillovers, and product obsolescence. Greater difficulty in adopting new products raises wage inequality while lowering Northern innovation and Southern learning rates. Slowing the pace of product obsolescence reduces wage inequality in the short run, but does the opposite in the long run.

Date: 2002
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