Taiwanese Outward Investment: Economic Bane or Boon?

The magnitude and the rate of growth of outward investment from advanced to emerging economies have raised concerns among policymakers and economists around the globe. The concern is that capital outflows might lead to a reduction in domestic aggregate output and employment, place downward pressures on wages, especially for unskilled labor, or/and lower the rate of domestic capital deepening. These concerns threaten to induce policy change that might limit investment going abroad. However, counter evidence of beneficial effects of outward investment on technological advancement have also been established in the literature. This raises the general question this study will address: what is the nature of the economic process between outward investment and economic performance. The research interests here focus on empirically investigating, using time series data, the nature of the relationship between outward investment and productive capacity, i.e. GDP, for the home economy that provides outward investment. Contrast to the conventional belief, the econometric results indicate persistent positive lagged effects of outward investment on GDP growth despite the downward pressure on domestic employment imposed by outward investment. These results are robust to various model specification and estimation methods for both annual and quarterly data. Adopting the concept of Granger causality, the results further indicate the causal relationship from outward investment to GDP for the case of Taiwan from 1981 to 2005. These findings challenge the negative perceptions upon which conservative policies discouraging outward investment are based, and call for future research focusing on how these positive effects of outward investment on GDP are realized in the home economy.