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

I. Introduction II. Review of LiteratureIII. Structural Transformation and the Changing Composition of Trade CommoditiesIV. Factor Contents of Trade in Manufactured Products V. Summary and Conclusions

•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 patterns among industrialized countries (Blomstrom and Lipsey, 1997; Desai, Foley and Hines, 2005; Lipsey 1994, Lipsey, Ramstetter and Blomstrom, 2000).

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.

II. Review of LiteratureOzawa (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.

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.

III: Structural Transformation and the Changing Composition of Trade Commodities

III a): Between and Within Industry ShiftFollowing 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 =

i

* * (1)

Where P = / , and Pi = Ki / Li the capital-labor ratio, represented by the

dollar amount of capital stock per unit of labor at the constant price of 2001

i i i i

i

P P S S P

K L

in industry i.

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.

i

The sign denotes the change, whereas the upper bar denotes the average value of the period

under observation. The first term on the right hand side of the equation, P * ,is the change

of factor iiS

i

ntensity within each industry (within industry effect) whereas the second term,

S * , is the reallocation between industries (between industry effect).

Based on constant price of 2001, the averiP

age capital-labor ratio for all sectors of manufacturing

industry increased from NT $ 1.3199 million in 1991, to NT $ 2.1461 million in 1996 and

NT $ 3.2760 million in 2001 as reported in Table 1 below:

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

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

-------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------

1991-19961996-

20011991-

2001ΔP 2.5254 0.2014 2.7464

(100%)

(100%)

(100%)

within effect2.5343809

30.231988

72.767604

6

[ 100.36%][115.17%

][100.77%

]

between effect

-0.0089823-

0.0305569

-0.021234

6

[-0.36%][-

15.17%][-0.77%]

By using the capital-labor ratio in the 98 sectors of manufacturing industry

from the census data in 1996, one can figure out the weighted average of

the capital-labor ratio of Taiwan's export commodities by multiplying

the Ki/L i with Xi/ Xi, where i goes from 1 to 98 as in the corresponding

sectors of manufacturing industries under the census. Xi represents the ith

product groups of export comm

odities in the corresponding ith industries

and Xi is the total exports covered under these 98 sectors of manufacturing industry.

Figure 3-1 below showed the trend of the capital labor ratio of Taiwa

n's exports

from 1989 to 2006:

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

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:

IITi = 1- / (2)i i i iX M X M

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.

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

Classification under Harmonized System

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

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)

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)

VS share of total export = VSk/ Xk = / (3.2)

where X denotes exports. It can also be expressed as

VSk/ Xk = / = (( / )* )/ =

[( / )/( / )]

i ii i

i i i i i ii i

i i i

VSk Xk

VSk Xk VSk Xk Xk Xk

Xk Xk VSk Xk

(3 3)

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.

M

M

In matrix notation, the working formula for VS can be written as :

VS share of total exports = VSk/Xk = uA X/Xk (3.4)

Where u is a 1 n vector of 1's, A is the n n imported coefficient ma

M

trix, X is an

n 1 vector of exports, n is the number of sectors, and Xk is the sum of exports across

the n sectors. The element aij of the A denotes the imported inputs from sector i to

produce one

unit of sector j's output.

M D -1

M

A more general way to calculate the VS as a share of total exports for country K is :

VS share of total exports VSk/Xk=uA [I-A ] X/Xk (3.5)

Where u is a 1 n vector of 1's, A is the

D

n n imported coefficient matrix,

I is the identity matrix, A is the n n domestic coefficient matrix, X is an n 1 vector of

exports, Xk is total exports from country K and n is the number of se

D -1

ctors.

[I-A ] is the term which shows the imported inputs to be embodied in domestic

output at various stages before it is embodied in the product that is exported.

111 1 11 1

1

1 1 1

1 0

[1 1]

0 1

n n

xn

n nn n nn nnxn nxn nxn nx

xa a b b

a a b b x

1[1 1] xnu

11 1

1

nM

n nn nxn

a a

A

a a

1 0

0 1nxn

I

11 1

1

nD

n nn nxn

b b

A

b b

1

1

/ k

n nx

x

X X

x

=

where

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

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

Table 3-3A Correlation Coefficients Between the VS shares, IIT, and Factor Intensities of Taiwan's Export to the World , 1989-

2006. 　 L K S R VS IIT K/L

L 1 　 　 　 　 　 　K -.808(**) 1 　 　 　 　 　S -.957(**) .925(**) 1 　 　 　 　R -0.188 .634(**) 0.321 1 　 　 　VS -.900(**) .576(*) .805(**) -0.042 1 　 　IIT -.945(**) .811(**) .943(**) 0.199 .919(**) 1 　K/L -.848(**) .737(**) .872(**) 0.125 .895(**) .942(**) 1

Two-tailed test * significant the 5% level of significance

* *significant the 1% level of significance

-1

IV. Factor Contents of Trade in Manufactured Products

Following Ito and Fukao (2004), factor contents of trade in year t is

calculated by the following formula:

( - ) ( 5)

Where (K

DXt D I A Tt1) vector Xt= { xkt} denotes the total contents of factor k in

home country's trade of year t. ( K J) matrix D= [ dkj] denotes the quantity

of primary factor k directly used per unit of output in indu

stry j in year t,

i.e. Li/Qi, Ni/Qi, Ki/Qi, Ri/Qi where Q stands for output , L stands for labor,

N stands for land, K stands for capital, and R stands for raw materials/ energy

inputs used in production. ( J J) matrix A is the input-output matrix of year t.

(J 1) vector T t is the next export vector (export minus import) in year t.

Inserted Table 4-1 here

Or in matrix form

labor(person)

1991 to 1996increase rate (1996/1991-1)

1996 to 2001increase rate (2001/1996-1)

1991 to 2001increase rate (2001/1991-1)

World -34% -13% -42%

US -41% -2% -43%

Japan -7% 6% -2%

China 451% -29% 289%

HK 55% -1% 53%

Korea 275% 185% 969%

Singapore -7% -75% -77%

Indonesia -58% -83% -93%

Malaysia -69% -113% -104%

Philippines 33% -128% -137%

Thailand -8% -81% -82%

Vietnam 672% 44% 1013%

ASEAN-6 -6% -72% -74%

EC-7 -73% 72% -53%

rest of the world -68% 29% -58%

land area(1000 m^2)

1991-1996increase rate (1996/1991-1)

1996-2001increase rate (2001/1996-1)

1991 to 2001increase rate (2001/1991-1)

World -341% -82% -144%

US -142% -270% -29%

Japan 100% -7% 85%

China 400% -108% -138%

HK 160% -2% 155%

Korea 602% 5% 634%

Singapore -178% -45% -143%

Indonesia -590% 7% -624%

Malaysia -290% -19% -253%

Philippines 125% -78% -50%

Thailand 52% -87% -80%

Vietnam 918% 68% 1606%

ASEAN-6 -98% -1442% -132%

EC-7 -426% -88% -140%

rest of the world -2143% -44% -1243%

land value(NT million)

1991-1996increase rate (1996/1991-1)

1996-2001increase rate (2001/1996-1)

1991 to 2001increase rate (2001/1991-1)

World -68% 26% -60%

US -65% 146% -15%

Japan 46% 18% 72%

China 362% -91% -58%

HK 131% 21% 179%

Korea 500% 91% 1048%

Singapore -51% -133% -116%

Indonesia -86% -3392% -546%

Malaysia -32% -315% -247%

Philippines 108% -78% -55%

Thailand 39% -164% -189%

Vietnam 1741% 85% 3305%

ASEAN-6 27% -126% -133%

EC-7 -156% -155% -69%

rest of the world -289% 60% -402%

raw material(NT million)

1991-1996increase rate (1996/1991-1)

1996-2001increase rate (2001/1996-1)

1991 to 2001increase rate (2001/1991-1)

World 18% 21% 42%

US -16% 28% 7%

Japan -2% 31% 29%

China 337% -125% -208%

HK 99% 23% 145%

Korea 190% 190% 740%

Singapore 24% -86% -83%

Indonesia -13% -44% -51%

Malaysia -64% -28% -74%

Philippines 74% -135% -161%

Thailand 6% -83% -82%

Vietnam 641% 92% 1323%

ASEAN-6 23% -60% -51%

EC-7 -48% 124% 16%

rest of the world -41% 86% 10%

capital(NT million)

1991-1996increase rate (1996/1991-1)

1996-2001increase rate (2001/1996-1)

1991 to 2001increase rate (2001/1991-1)

World -9% 121% 102%

US -27% 132% 70%

Japan 41% 37% 93%

China 457% -144% -343%

HK 138% 60% 280%

Korea 315% 165% 998%

Singapore 33% -51% -35%

Indonesia -24% -186% -165%

Malaysia -115% 1537% -343%

Philippines 83% -237% -351%

Thailand 32% -122% -129%

Vietnam 778% 114% 1780%

ASEAN-6 32% -117% -122%

EC-7 -98% 11221% 127%

rest of the world -176% -75% -119%

Thank you