In this paper, we use the firm-level data of Outward FDI Survey in Manufacturing in the year 2005. This survey is conducted annually by the Ministry of Economic Affairs (MOEA) in Taiwan. In addition to collecting the information on firm’s annual revenue, total employment, R&D expenditures, and outward FDI by country of destination, MOEA also provides a unique firm identification number for each firm. Using these firm identification numbers and another data set, Correction and Operation Investigation of Factory, which is also conducted by MOEA, we can combine the outward FDI information of a firm with .the operation status of its own factory. In order to examine the extent to which FDI location choices of Taiwanese multinational corporations reflect sovereign risks encountered by them and their underlying productivity patterns, we merge these two data sets together by the firm identification numbers and sum up the values of variables across plants when we encounter the firms which own more than one plant in Taiwan. Since the outward FDI information is collected in 2005, we apply Correction and Operation Investigation of Factory collected in 2004 to avoid causality from the FDI location decisions to the operation status of their own factories. After these two data sets combine into one, the sample set contains 1,305 Taiwanese manufacturing firms investing overseas during the years 2003-04. In addition, our empirical analysis is based on the manufacturing sector so that we exclude the firms engaging in the manufacturing sector domestically but in other sectors overseas.2 As a result, our sample contains 1,124 Taiwanese multinationals engaging in the manufacturing sector
2 These sectors, which are excluded from our samples, comprise farming, forestry, fishery, animal husbandry, mining and quarrying, construction, wholesale and retail trade, lodging and catering services, transport, storage, post and telecommunications, banking and insurance, real estate and rentals, scientific research and technical services, and others.
both domestically and overseas during the period of 2003-04.
The intersectional cells of Table 1 indicate the number of Taiwanese multinationals that engage in each kind of integration strategy in the year 2004. It summarizes that almost 73% of Taiwanese multinationals engage in FDI activities in order to serve the local market, suggesting the importance of conserving transportation costs. Within 1,040 sampled firms which serve the local market via FDI, 53% of the firms locate their production overseas not only to serve local customers but to export their final goods to third country, possibly indicating both transportation costs and production costs play important roles on FDI activities. The determinants of these integration strategies and the relationship between integration strategies and FDI locations are the main interest of our research.
Since the pattern of foreign direct investment depends on country characteristics, we sort firms by their strategies and host countries. Table 2a and Table 2b present the number of Taiwanese multinationals engaging in each kind of integration strategy by host countries respectively. One feature of Taiwanese multinationals is that the affiliates located in some developed countries, namely United States, Western Europe, Japan, and Australia and New Zealand, tend to serve local markets only so that the market-access incentive FDI accounts for almost 51% of Taiwanese FDI activities in developed countries. In contrast, the affiliates located in developing countries may either serve local markets or serve both the local market and the third country. Each of these two integration strategies mentioned above constitutes 33% and 40% of the FDI activities engaged by the firms, which locate their manufacturing units in developing countries, indicating that for multinationals from a mid-income country such as Taiwan, to locate their production in developing countries is far more
complicated than just the trade-off in the market-access incentive versus the resource-seeking incentive.
We then classify the 1,434 firms in our sample into five categories.3 (1) South firms without export platform (H, H, S)4: those locating their production in South to serve local markets; (2) South firms with export platform (H, S, S): those locating their production in South to serve both local markets and third countries; (3) North firms (H, N, H): those locating their production in North to serve local markets; (4) Global firms (H, N, S)5: those locating their production in both North and South to serve local markets; (5) Others. However, this classification is not all based on firms’ primary FDI location, but we take secondary and tertiary FDI locations into account as well, which is very different from the bulk of research on the FDI location choice. For instance, the firm whose primary, secondary and tertiary FDI locations are United State, Canada and China respectively may be classified into the category of undertaking FDI only in developed countries, but we categorize it as firms undertaking FDI in both developed and developing countries, e.g. Global firms.
The pie chart below illustrates the relative frequencies of these five categories mentioned above. As the pie chart shows, Taiwanese multinationals, which locate their plants in South to serve local markets only, accounted for 26.7% of the outward
3 North countries and South countries are defined as follows. North countries: United States, Canada, Western Europe, Japan, Singapore, Australia, and New Zealand. South countries: Mexico, Central and Southern America, Eastern Europe, China, Malaysia, Thailand, Indonesia, Philippines, Vietnam, Southern Asia, and Africa.
4 (a, b, c) is defined as the choice set from serving the local markets of Home, North and South in manufacturing locations a, b and c respectively. That is, if a firm locates his manufacturing units in Home and South, and it serves the North market by exporting from Home, it is described as (H, H, S) in our framework.
5 Due to the limitation of the data, we have no information except that in the primary FDI location so that firms are categorized as Global firms when locating production in both North and South and engaging in local sales in their primary FDI location as well.
FDI stock in manufacturing sector. Compared with North firms and Global firms, South firms without export platform are much more prevalent in Taiwanese manufacturing sector. This stylized fact indicates that a “pure” horizontal FDI in South (H, H, S) would be the optimal integration strategy for multinationals headquartered in a middle-income country in some given situations. Therefore, the strategic behaviors of firms investing in South might have more to do with other concerns such as their individual knowledge about the sovereign risk of FDI locations, and it is worth going a step further.
In order to quantify the influence of multinationals’ individual knowledge about the sovereign risk on their location choices and their integration strategies as well, we construct an indicator, U, that could be a proxy for multinationals’ concerns with sovereign risks. U is measured as the ratio of the difference between the number of difficulties encountered by a given firm and the average number per firm in a given industry to the average number per firm in a given industry. The details on the variable construction are described in Table 3, and the correlation matrix for the variables is presented in Appendix A. Accordingly, Table 4 provides descriptive statistics for the explanatory variables used in the study. As Table 4 presents, South firms without export-platform on average face more difficulties than South firms with export-platform do. In addition, South firms with export-platform generally rely more on local resources than those in other categories do. North firms are the most R&D intensive ones among Taiwanese multinationals in general. Moreover, Global firms are more productive, larger, more foreign technology purchasing intensive and more experienced than those in other categories averagely.
Pie Chart: FDI types in Taiwanese manufacturing sector (2004)
26.71%
29.57%
2.58%
11.99%
29.15%
HHS HSS HNH HNS Others
Table 3: Definition of explanatory variables
Explanatory Variable Definition
Labor Productivity Labor Productivity = ln (Q/Q') - ln (L/L'), where Q’ and L’ are the industrial mean levels of the value added and the total employment respectively.
Local Dependency Local Dependency = max (N1, N2), where N1 and N2 are the percentages of materials and intermediate goods sourcing from local suppliers respectively.
Size Size = ln (total employment)
RD intensity RD intensity = (Sum of total R&D expenditure and Domestic Technology Purchases) / (The business income).
FTP intensity FTP intensity = (Foreign Technology Purchases) / (The business income).
FDI Experience FDI Experience = (2003 – The starting year of FDI)
U U = (D – D’) / D’, where D’ is the average number of the difficulties encountered by firms in a given industry.
Table 4: Descriptive statistics for Taiwanese multinationals by FDI types (2003)
South firms without export platform (H, H, S)
Variable Obs Mean Std. Dev. Min Max
Labor Productivity 330 -.2373415 .9086081 -4.806683 3.081613 Local Dependency 330 49.47273 41.40695 0 100
Size 330 4.208502 1.303551 0 7.970395
RD intensity 330 .0320181 .1932724 0 3.350875 FTP intensity 330 .0007763 .004061 0 .0546569 FDI Experience 330 5.857576 3.749085 0 16 U 330 .0566021 .7059536 -.6329698 3.771393 South firms with export platform (H, S, S)
Variable Obs Mean Std. Dev. Min Max
Labor Productivity 360 -.2834611 .8917764 -3.318951 2.76061 Local Dependency 360 53.78056 36.86578 0 100
Size 360 4.167092 1.373067 0 9.05684
RD intensity 360 .014745 .02769 0 .2865893 FTP intensity 360 .0007364 .0035062 0 .0382632 FDI Experience 360 7.294444 5.165988 0 41 U 360 -.0079989 .5955467 -.6329698 4.138423 North firms (H, N, H)
Variable Obs Mean Std. Dev. Min Max
Labor Productivity 19 -.1458584 .7326079 -2.329064 1.221284 Local Dependency 19 15.26316 35.01879 0 100 Size 19 4.48702 1.347419 1.386294 6.580639 RD intensity 19 .1028358 .295748 0 1.305955 FTP intensity 19 .0021322 .0073762 0 .0313565 FDI Experience 19 4.263158 2.232142 1 8 U 19 .0175439 .4810494 -.3095238 1.071429 Global firms (H, N, S)
Variable Obs Mean Std. Dev. Min Max
Labor Productivity 178 .0586121 .7610706 -2.418964 1.818764 Local Dependency 178 37.96067 38.37171 0 100 Size 178 5.196384 1.327959 1.609438 9.584177 RD intensity 178 .0348046 .0410573 0 .2353804 FTP intensity 178 .0037148 .0136851 0 .1627693 FDI Experience 178 9.769663 6.897783 1 39 U 178 .0081011 .498251 -.5339169 1.330416