ImpactofOFDIonDomesticR

ImpactofOFDIonDomesticR&DActivity：EvidencefromTaiwan’sMultinationalEnterprisesinlow-wagecountriesCourseName:InternationalbusinessandtradeApplicant:汪鑫强StudentID:156001337Class:InternationalbusinessandtradeJune12,2016NingboUniversityContentsAbstract.....................................................................................11.TheIntroductionofTaiwan..................................................................................22.LiteratureReview..................................................................23.TheoreticalAnalysis..............................................................34.Conclusion.............................................................................4References.................................................................................41AbstractThispapertheoreticallyandempiricallyinvestigatesthehome-countryeffectsofafirm’soutwardforeigndirectinvestment(OFDI)activity,specificallyOFDImotivatedbylowerlaborcostsinthehostcountry.Atwo-countryimperfectcompetitionmodelisdeveloped,andtheinteractionbetweenafirm’sR&DspendinganditsOFDIisexamined.PaneldataonTaiwanesemanufacturingfirmsfrom1992–2005areappliedtotestthevalidityofthetheoreticalresults.Thepropensityscorematchingmethodisusedtoconstructacomparisongroupwithoutselectionbias.OurtheoreticalevidencerevealsthataTaiwanesefirm’sOFDIispositivelyrelatedtoitsdomesticR&Dspending,particularlyinR&D-intensiveindustries.Keywords:R&D,outwardforeigndirectinvestment21.TheIntroductionofTaiwanTaiwan’sremarkableeconomicgrowthsincethe1950sisregardedasoneofEastAsia’seconomicmiracles.Itssuccesscanbeattributedtopoliciesdesignedtopromoteexportsandinwardforeigndirectinvestment(FDI).BecauseTaiwan’scapitaloutflowswerestrictlyregulateduntilthelate1980s,ithadbeenanetcapital-importingcountryforseveraldecades.However,followingtremendoustradesurplusesandrapidlyaccumulatedforeignexchangereservesbeginningintheearly1980s,Taiwanstartedtoliberalizeitsexchangeratepolicyandoutwardforeigndirectinvestment(OFDI)policyinthemid-1980s.Sincethen,theconsiderableappreciationofTaiwan’scurrencyandincreasinglaborcostshaveencouragedmanyTaiwanesefirmsintraditionalindustriestomigratetolow-wagedevelopingcountries.TaiwanisnowoneofthelargestOFDIinvestorsintheworld,particularlyinmainlandChina.2.LiteratureReviewBecausethedecisiontoengageinFDIistypicallyvoluntary,itisreasonabletoexpectthatOFDIbenefitsMNC.However,itisnotclearwhetherOFDIisalsobeneficialtothehomecountryoftheMNC.Earlierstudiesfocusonwhetherproductionabroadcomplementsorsubstitutesforexportsbytheparentcompanyorbyotherfirmsinthehomecountry.Inthosestudies,exportsaredefinedassynonymouswithdomesticproduction,investmentoremployment.EmpiricalresultsfromcasestudiesintheUSA,SwedenandJapanmostlyrevealasmallbutpredominatelypositiverelationshipbetweenOFDIandexportsinthehomecountry.3ThefindingsregardingtheimpactofOFDIonemploymentaremixed.Forinstance,Lipseyetal.(2000)findthatOFDIbyJapaneseandSwedishMNCtendstohaveapositiveeffectondomesticemployment,whileOFDIbyMNCintheUSAtendstohaveanegativeeffect.RegardingtheeffectofOFDIonhome-countryR&D,earlierliterature(suchasSingh(1977)andThirlwall(1982))suggeststhatafirm’sOFDImayreplaceitsdomesticinvestment,includingitsR&Dspending.Manyrecentstudies,however,indicatethatoutwardinvestmentmightbebeneficialtothetechnologicaladvancementofindustriesinthehomecountry.Forinstance,CohenandKlepper(1996a,b)demonstratethatafirmthatshiftspartofitsproductionactivitiesabroadmayincreaseitstotalsalesduetolowerlaborcostsormarketexpansioninducedbyitsOFDI.Thegreaterthesalesare,thegreatertheoutputoverwhichitcanaveragethecostsofR&D,leadingtohigherreturnsfromR&D.Cuervo-CazurraandUn(2007)revealthatafirmmayencountermorediverseconsumersandincreasedglobalcompetitionafterengaginginOFDI.IncreasedcompetitionwillshortenproductlifecyclesandinducefirmstoengageinR&Dfortechno-logicaladvances.Diverseconsumerpreferencesregardingqualityandpricemightalsostimulatefirms’R&D.Inaddition,MNChavemoreopportunitiesthanpurelynationalfirmstolearnfromavarietyofmarketandculturalperspectives,and3thiseffectisamplifiedifthefirmsinvestinR&D-intensiveforeigncountries(vanPottelsberghedelaPotterieandLichtenberg,2001).MNCalsohaveaccesstoavarietyofdiverseresourcestoinvestininnovation.Asaresult,OFDImotivatesfirmstoinvestinR&Dtobuildandmaintaininnovation(Hittetal.,1997).3.TheoreticalAnalysisFollowingPetitandSanna-Randaccio(1998,2000),weconsideramodelwithtwocountries:ahomecountryandaforeigncountry.Assumethateachcountryhasonefirm:firm1inthehomecountryandfirm2intheforeigncountry.SupposethatthefirmsmanufactureahomogeneousgoodandcompeteintheforeignmarketinoutputandR&Dspending.Weconsideronlyprocessinnovationsthatresultinreductionsinmarginalandaveragecosts.LetIibethelevelofR&Dundertakenbyfirmi,andletcidenotefirmi’smarginalcost(i=1,2).Thefollowingfunctionrepresentsthe(negative)relation-shipbetweenfirmi’smarginalcostanditsR&Dspending:ciω,IωjA−θIi,i1,2,jh,f,(1)whereAisaconstantandisconsideredtobetheinitiallaborrequirementperunitoutput,andwjisthewagerateincoun