The effect of foreign direct investment on firm growth: the case of Taiwan's manufacturers

Abstract Foreign direct investment (FDI) can be roughly separated into an expansionary type and a defensive type. Expansionary FDI seeks to exploit the firm-specific advantage in the host country whereas defensive FDI seeks cheap labor in the host country to reduce the cost of production. Based on Taiwanese data, we examine the effects of these two types of FDI on survival and growth performance of investing firms. Both types of FDI are shown to be beneficial to the survival of firms. Expansionary FDI has the additional benefit of contributing to the sales growth of investing firms at home while defensive FDI is neutral to sales growth. Both types of FDI are also shown to be uncorrelated with job creation or job displacement at home. Our results suggest that FDI will strengthen rather than weaken the viability and competitiveness of domestic industries. It cannot be blamed for industrial ‘hollowing-out’.

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