Firm heterogeneity and location choice of Taiwanese multinationals (DOI:10.1016/j.jinteco.2008.02.002)

Bee Yan Aw, Yi Lee

Research output: Contribution to journalComment/debate

16 Scopus citations

Abstract

This paper examines the extent to which production location decisions of Taiwanese multinationals reflect underlying patterns of firm productivity. In our theoretical model, heterogeneous firms in a middle-income country decide on the optimal production locations for serving three geographically separate markets: domestic, foreign high-income and foreign low-income. The model shows that the equilibrium decision of a firm depends on the fixed investment costs of establishing foreign subsidiaries, production costs, transportation costs, market size and its own productivity level. Using firm-level data in 2000, Taiwanese electronics firms are divided into four different categories: non-FDI, investors in China only, investors in the U.S. only, investors in both China and the U.S. We use a multinomial logit model to link firms' location choices with their productivity, controlling for country, industry and other firm characteristics. Our empirical results are consistent with the predictions of the theoretical model. We show that more productive firms engage in outward FDI, with the most productive ones investing in both China and the U.S. We also provide evidence indicating that Taiwanese multinationals investing only in the U.S. are more productive than those investing exclusively in China due to smaller fixed investment costs in China relative to the U.S.

Original languageEnglish (US)
Pages (from-to)403-415
Number of pages13
JournalJournal of International Economics
Volume76
Issue number2
DOIs
StatePublished - Dec 1 2008

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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