The economic determinants of foreign direct investment: The case of Taiwanese multinational enterprises

Yingshing Lin, Pace University


Foreign direct investment by Taiwanese multinational firms increased rapidly in recent years. Since the 1980s, Taiwan had made more than the U.S. $23 billion of direct investment abroad, which ranked the country as the 7th largest source of direct investment capital in the world. The emergence of Taiwan as an important source of global direct investment capital could be attributed to several factors, such as rapid economic growth in the Asia-Pacific region, shifts in international comparative advantage, and the country's successful export-oriented industrialization strategy. Although numerous theories were established to explain the existence of multinational firms, a few of them were related to developing countries, especially the Newly Industrializing Economies, such as Taiwan, whose foreign direct investment had an export characteristics to supply markets outside the host countries. The objective of this study is to examine the dynamic relationship between fundamental changes in macro-economic factors and the motivations for Taiwanese overseas direct investment. In this study, foreign direct investment is seen as a process of maintaining national competitive advantage in response to dynamic changes in the global economy. This dissertation examined Taiwanese foreign direct investment at three levels: the economic level, the industry level, and the regional level. Some previous studies attempted to describe Taiwanese investment trend by using historical data. This study employed econometrics techniques to analyze economic determinants of Taiwanese foreign direct investment. The findings of economic study confirmed that the increase of Taiwanese foreign direct investment resulted from the rapid accumulation of capital and shortages of labor supply. The relative changes between these two factors caused domestic restructuring and stimulated direct investment abroad. Taiwanese overseas direct investments were further encouraged by domestic manufacturing growth, which had accumulated sufficient amounts of industrial assets and know-how that could be exploited abroad. Taiwanese direct investments abroad were found to be influenced by the abolishment of foreign exchange controls, which permitted actual capital outflows. The economic study also confirmed the influences of exchange rates, export profits, national economic growth rates, and international interest rates on foreign direct investment. As exchange rates appreciated, export profit shrunk, and foreign economic growth and interest rates increased more rapidly than domestic rates, foreign direct investment increased accordingly. Taiwanese overseas direct investments were also found to be influenced by the country's policy to move from a fixed to a floating foreign exchange rate system. The industrial study found that technological maturity brought about by rapid industrialization was the main reason for Taiwanese direct investment abroad. The regional study identified three additional factors that motivated Taiwanese foreign investment outflows: market access to facilitate exports, material procurement for home inputs, and technology transfer to improve domestic industrial restructuring. Taiwanese direct investments in the Asia-Pacific region aimed to sustain the competitiveness of their export products, while those in developed countries sought to enhance their access to the markets. The need for Taiwanese firms to defend their existing markets from increasing protectionism, to circumvent trade restrictions, and to utilize cheap foreign labor to sustain competitiveness were the main "pull" and "push" factors of Taiwan's investment abroad.

Subject Area

Economics|Business community|History

Recommended Citation

Lin, Yingshing, "The economic determinants of foreign direct investment: The case of Taiwanese multinational enterprises" (1995). ETD Collection for Pace University. AAI9611626.



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