Export Outsourcing and Foreign Direct Investment: Evidence from Taiwanese Exporting Firms

Exporting and FDI have traditionally been two major firm-level responses to globalization. Export outsourcing (EO), a new strategy that gained in importance recently, has now become another alternative. This paper seeks to examine how firms choose between EO and outward FDI by looking into firm-level productivity differences. A special data set is constructed by consolidating two micro data sets of Taiwanese manufacturing firms. The paper contributes in four main ways. First, it provides a causality analysis of labor productivity and EO, whereas previous studies deal only with correlations. Second, it shows that EO can be interpreted as an indirect way of exporting. Third, it points out that outward FDI itself may not help with productivity if it is not linked with EO, which finding contradicts conventional wisdom. Finally, most evidences seem to imply that the intricate Taiwan-China interconnection is a significant factor that facilitates or contributes to all above-mentioned findings.