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An initial push for successful transition from import substitution to export-orientation in Taiwan and China: The FDI-led hypothesis

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Abstract

This paper examines the association between government policy interventions, Foreign Direct Investment (FDI) and exports in Taiwan and China by applying the LP (Lumsdaine and Papell, 1997), approach allowing two endogenous structural breaks. This paper further explores the cointegrating relationship between FDI and exports in Taiwan by using the Johansen and Juselius (1990) approach and causal relationships between FDI and exports in both Taiwan and China by using the Granger causality tests respectively. We found that significant trend breaks in the FDI and export time series detected in both countries coincided with extensive government interventions, mainly in the form of Export Processing Zones (EPZ), encouraging FDI during a transition period from import substitution to export orientation. The results emerging from our research indicate no long-run cointegrating relationship in Taiwan and one-way causal relationship flows from exports to FDI in China and FDI to exports in Taiwan. The growing fear is that the World Trade Organisation’s (WTO) involvement in deregulating EPZs may narrow the differences between the zones and the rest of the economy and prevent new firms from entering the zones. The EPZs may no longer be the transitional strategy for poor/developing countries.

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File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/web/uow021032.pdf
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Bibliographic Info

Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp07-03.

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Length: 20 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:uow:depec1:wp07-03

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Keywords: FDI; Exports; EPZ; structural breaks; causality; East Asia;

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  1. Penelope Pacheco-López, 2004. "Foreign Direct Investment, Exports and Imports in Mexico," Studies in Economics 0404, Department of Economics, University of Kent.
  2. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
  3. Warr, Peter G, 1989. "Export Processing Zones: The Economics of Enclave Manufacturing," World Bank Research Observer, World Bank Group, vol. 4(1), pages 65-88, January.
  4. Liu, Xiaming & Wang, Chengang & Wei, Yingqi, 2001. "Causal links between foreign direct investment and trade in China," China Economic Review, Elsevier, vol. 12(2-3), pages 190-202.
  5. Ping Zheng & Pamela Siler & Gianluigi Giorgioni, 2004. "FDI and the Export Performance of Chinese Indigenous Firms: a Regional Approach," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 2(1), pages 55-71.
  6. Zhang, Kevin Honglin & Song, Shunfeng, 2001. "Promoting exports: the role of inward FDI in China," China Economic Review, Elsevier, vol. 11(4), pages 385-396.
  7. Xiaohui Liu & Peter Burridge & P. J. N. Sinclair, 2002. "Relationships between economic growth, foreign direct investment and trade: evidence from China," Applied Economics, Taylor & Francis Journals, vol. 34(11), pages 1433-1440.
  8. Pahlavani, Mosayeb & Wilson, Ed & Valadkhani, Abbas, 2005. "Structural Changes in the Iranian Economy: An Empirical Analysis with Endogenously Determined Breaks," Economics Working Papers wp05-05, School of Economics, University of Wollongong, NSW, Australia.
  9. Kankesu Jayanthakumaran, 2003. "Benefit-Cost Appraisals of Export Processing Zones: A Survey of the Literature," Development Policy Review, Overseas Development Institute, vol. 21(1), pages 51-65, 01.
  10. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
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