Production and Location Choices of Firms in the Taiwanese Electronics Sector

Increases in wages and the appreciation of the New Taiwanese dollar since the mid-1980s have significantly altered the environment in which firms operate and survive. In particular, as more countries have liberalized their trade and foreign investment policies, Taiwanese firms have been pressured to respond to the increased international competition for the pool of foreign investment funds.This thesis uses micro data from Taiwanese electronics industry to present two firm strategies in response to competition from otherlow-wage countries: identify low-cost production sites and change product mix. Chapter 1 introduces the background and evolution of the Taiwanese electronics industry. Chapter 2 presents a theoretical model which captures the different incentives of Taiwanese multinationals investing in high- and low-income countries, and an empirical analysis of the link between firmheterogeneity and location choices. Chapter 3 empirically analyzes the product choices of Taiwanese multi-product plants during the 1990s.Chapter 2 examines the extent to which the location decisions of Taiwanese multinationals reflect underlying patterns of firm productivity. In the theoretical model, heterogeneous firms in amiddle-income country decide on the optimal production locations for serving three geographically separate markets: domestic,foreign high-income and foreign low-income. The model shows that the equilibrium decision of a firm depends on its fixed investment cost of establishing foreign subsidiaries, production costs, transportation costs, market size and its own productivity level. The empirical work in this chapter is based on firm-level data inthe Taiwanese electronics industry in 2000. Firms are decomposed into four different categories: non-FDI, investors in China only, investors in the USA only, investors in both China and the USA. I use a multinomial logit model to link firms' location choices with their productivity, controlling for country, industry and otherfirm characteristics. The findings indicate that more productive firms engage in outward FDI, with the most productive ones investing in both China and the USA. Due to smaller fixed investment costs in China relative to the USA, Taiwanesemultinationals investing only in the USA are more productive than those investing only in China.Chapter 3 examines the diversification strategies of multi-product plants in the Taiwanese electronics sector during the 1990s. Using plant-level and product-level data, I first examine ifmulti-product plants benefit from scope economies arising from joint production. Next, I introduce a dissimilarity index to capture the technological gaps between each pair of productswithin a multi-product plant. This index is used to analyze how multi-product plants choose their product mix in the face of increased competition. I find no evidence of scope economies. Thefindings suggest that multi-product plants whose products have bigger technological gaps are more likely to give up some product lines. Moreover, multi-product plants are shown to exit marketswhere production technologies are farthest away from their primary products.