The purpose of this paper is to treat and estimate a model of the demand for imports based upon the assumption that imports do enter the production function as a specified factor input.
Using a dual, cost function approach, employing a translog cost function and adopting an iterative Zellner estimation procedure, we examine, for the period from 1961 to 1983, the relationships that exist in Taiwan among labor, capital and imports.
We find that imports are net substitutes for capital, in a way that is similar to the results of findings in India and South Korea. Such a high degree of substitution did not exist between labor and capital in the late 1970s. In addition, the degree of substitutability between imports and labor is greater than that between imports and capital services, implying that an increase in import prices would redistribute income in favor of labor.
The fact that we rejected the existence of separability between inputs and outputs implies that changes in the composition of output would alter the factor shares or income distribution. But the separability of imports from primary factors does not exist, and so it would be incorrect to specify a production function of the Cobb-Douglas type for estimating the import demand equations. Our findings are similar to those of studies came out in the U.S., India, and South Korea.
