The purpose of this research is fourfold. First of all, this research explores the changes in Taiwan’s industrial structure led by outward foreign direct investment (FDI); secondly, we look at the shift in domestic labor demand in the home country resulting from outward FDI; thirdly, we investigate the effects of FDI on international trade of home country; and finally, we outline the outward FDI policies of Korea, Japan and the Netherlands.
This research then reviews the current policies in Taiwan relating to outward FDI, with respect to the changes in industrial structure, employment and trade issues. The important general conclusions are summarized as follows.
First of all, based on the empirical results from cross-country econometric models, we suggest that outward FDI increases the extent of de-industrialization of home countries, whereas inward FDI can reduce the level of de-industrialization. Furthermore, setting up a gravity model to examine the determinants of home countries’ outward FDI to China, this project suggests that geographical distance and cultural differences positively influence the amount of capital flow. Based on the empirical outcomes from the above two models, China’s open-door policy can attract significant capital flow from its neighbors, particularly those with strong Chinese cultural backgrounds. Thus, it is to be expected that Taiwan’s overseas FDI would be attracted towards China, leading to rapid change in the industrial structural. In order to reduce the rapid de-industrialization driven by outward FDI, the government should improve the investment environment so as to attract foreign capital inflow.
Secondly, this research applies various industrial databases to examine whether the effects of Taiwanese overseas FDI into advanced countries are different from those in the less developed countries, especially China, and with particular regard to employment in the home country, Taiwan. The empirical results suggest that Taiwan’s FDI in China considerably undermines employment in Taiwan, demonstrating the clear relocation of Taiwanese industries overseas. In addition, we also find that Taiwan’s FDI leads to changes in the employment structure, with a general increase in white-collar employees, as against a decrease in the number of blue-collar workers.
Thirdly, following the product category methods of the World Bank and Hatzichronoglou (1997), this research breaks export goods into three categories: high-tech intermediate goods, ordinary intermediate goods and final goods. The empirical results show that there has been a significant increase in high-end intermediate goods, against final goods, in Taiwan’s exports to China over the past decade. This may be attributed to the expansion of Taiwanese FDI into China. Moreover, using FDI from Taiwan’s electronics industry as a case study, this study indicates that Taiwanese firms’ FDI, particularly into China, constitutes the heart of their global production networks, and also that they have started to use their overseas production bases to serve their clients in advanced countries, such as the US, demonstrating the emergence of ‘offshore exports’. In addition, Taiwanese firms’ FDI into China has formed clusters in specific locations, demonstrating industrial agglomeration. We may expect that such industrial agglomeration will facilitate the localization of production for many Taiwanese firms, leading to further displacement of the import of intermediate goods from Taiwan.
Finally, drawing on the outward FDI policy experiences of Korea, Japan and the Netherlands, this research suggests that policies directed at the service sectors, including product design, global logistics and brand-name management, have become critical in this growing era of outward FDI. In order to reduce the level of de-industrialization, the government should be engaging in ceaseless efforts to improve the business investment environment so as to attract foreign investment from abroad. These efforts will necessarily involve cooperation between industrial sectors and universities, facilitating the formation of industrial clusters, seeking improvements in human resources through the immigration of foreign skilled workers, and encouraging Taiwanese FDI firms to set up their headquarters in Taiwan.