Trade- Investment Nexus and Structural Transformation: Taiwan’s Cope with Globalization

1. Trade- Investment Nexus and Structural Transformation: Taiwan’s Cope with Globalization Peter C.Y. Chow, National Taiwan University & City University of New York

2. I. Introduction II. Review of Literature III. Structural Transformation and the Changing Composition of Trade Commodities IV. Factor Contents of Trade in Manufactured Products V. Summary and Conclusions

3. Introduction • The emergence of foreign investment - trade nexus in East Asia economies since the Plaza Accord of currency realignment in 1985 has become a hot topic in trade and development studies (Bende-Nabende, 2003; Kreinin, Plummer and Abe, 2000; Urata, 2001). • Empirical studies on the effects of FDI on performances of labor employment, wage rates, and export growth in home countries abound, with a considerable lack of similarity in the observed patternsamong industrialized countries (Blomstrom and Lipsey, 1997; Desai, Foley and Hines, 2005; Lipsey 1994, Lipsey, Ramstetter and Blomstrom, 2000).

4. Existing literature on the outward FDIs on the NICs were mostly addressed on their impacts on domestic investment, labor employment, growth of export and sales, and the survival of the outward oriented invested firms in the NIICs. From the perspective of the development studies, it would make more sense to examine the effect of outward FDI on trade competitiveness and structural transformation of the economy in the home country, which are crucial to the sustainable development in those outward-oriented, export-led growth economies.

5. II. Review of Literature Ozawa (1992) argued that there is a tendency of “increasing factor incongruity” in those export-led, outward- looking countries i.e. the NICs, which were once endowed with abundant labor yet scarce capital, when their economies have rapidly transformed into capital abundant, labor scarce ones and their wage rates have become relatively higher than those of other LDCs.Hence, the NICs would reach a “stage-compatible order of sequencing structuring upgrading”, under which the comparative advantage augmented type of outward FDI would become a catalyst of structural transformation in the NICs.

6. Narula and Dunning (2000) industrial structure in the NICs was moved from Hecksher-Ohlin sectors, through undifferentiated Smithian and then differentiated Smithian sectors, and finally reached innovative Schumpeterian sectors. Dunning et al (2001)  As countries proceeded along with their development paths, both intra-industry trade and intra-industry FDI would rise as GNP per capita increases, with the growth of intra-industry FDI lags that of intra-industry trade.

7. III: Structural Transformation and the Changing Composition of Trade Commodities III a): Between and Within Industry Shift Following Freenstra and Hanson (1999) as well as Ito and Fukao (2004), structural transformation of manufacturing industries can be decomposed into what’s ‘within industry” vs. what’s “between industries” shifts as follows: P = S i= Li/ L, the share of workers in sector i in total number of workers in all manufacturing industries, i goes from 1…to n.

8. Table 3-1 : Capital-Labor Ratio of Manufacturing Industry Unit : NT $ million in constant 2001 price 1991 1996 2001 1.3199 2.1461 3.2760

9. The decomposition of capital-labor ratio in each sub-period during 1991-2001 was reported on Table 3-2 below: Table 3-2: Decomposition of Capital-Labor Ratio and Its Growth in Manufacturing Sector 1991-96, 1996-2001, and 1991-2001 ------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------

11. Figure 3-1 : Capital Intensities of Taiwan’s Exports, 1989-2006 Unit : NT $ millions in constant price of 2001

12. IIIb) “ Within Industry Effect” and Intra-Industry Trade Ito and Fukao ( 2004) “ between-industry” effect could be partly contributed by the changing patterns of “ inter-industry trade”, which could affect the relative significance of capital-intensities between each sector of manufacturing exports, whereas “ within effect” could be contributed by the changing patterns of “ intra-industry trade”, which could affect the changing combination of factor intensities within the same sector in manufacturing industry in a trade-oriented economy as Taiwan. IIT by Grubel and Lloyd ( 1975) is based on the following formula: Where Xi is the export of product group i and Mi is the import of product group i. The overall IIT is the weighted average of IITi as the following: IIT = IITi ․( Xi / X ) (3) Where Xi is the export of the ith commodity in year t and i goes from 1 to n. X , the summation of Xi, is the total export in the same year.

13. Figure 3-2A : Intra-Industry Trade Index based on 10-Digit Product

14. Classification under Harmonized System Figure 3-2B : Intra-Industry Trade Index based on 98 product groups Corresponding with the manufacturing sectors under 1996 census

15. IIIc) Vertical Specialization Country A Intermediate goods and or technology know how -----------------↓↓------------------ import ○»domestic capital»○domestic intermediate<<○domestic labor ----------------↓↓----------------- ۝ Final goods and or value-added, more advanced intermediate Country B export ----------------↓↓----------------- Country C Final goods (OECD Markets) and or assembled for export (LDCs)

16. Hummels et al (2001) defined vertical specialization as the proportion of imported intermediates in gross output times the amount of exports. Vertical share (VS) in a country K is an export-weighted average of sectoral shares of i in total of VS. It is defined as : VS k, i = (imported intermediate/ gross output). export. (3.1)

17. That is to say that vertical specialization share for a country k is the export- weighted average of the sector VS shares. It is noted that” the sector VS export shares are equivalent to the sector imported input shares of gross output” ( Hummel et al, 2001.p. 79). To expedite the calculation of formula (3.3), it is necessary to use the sector-level data on foreign and domestic inputs, value-added, gross output and exports. The input-out (I-O) table from DGBAS of Taiwan government will best serve for that objective.

18. = where

19. Figure 3-3 : Index of Vertical Specialization, 1989-2006 III d) Vertical Specialization Share of Export and Intra-Industry Trade

20. Figure 3-4 : The IIT index and VS index, 1989-2006

34. Or in matrix form

40. Thank you