Openness and productivity growth in Taiwan

This research focuses on two main purposes. One was to identify the role of productivity change in the economic development process for one of the Asian Tigers—Taiwan. The other purpose was to identify the role of openness, which includes trade and direct foreign investment (DFI), on productivity growth. In addition, measurements were made showing the effects of technical change and efficiency change on productivity growth in the manufacturing sector. Productivity growth in Taiwan was measured on the basis of the dual representation using a revenue function that decomposes economic growth into the effects from changes in domestic prices, terms of trade, total factor productivity, and inputs. Malmquist Total Factor Productivity (TFP) change indices were constructed to identify productivity growth for 12 industries within the manufacturing sector. The Malmquist index can be further decomposed into technical change and efficiency change effects. After measuring the productivity index for both the whole economy and the manufacturing sector, then different specifications of the model and different data sources were used to examine and identify the relationship between “openness” and productivity growth. A dynamic error correction model (ECM) was used to explain the long-run and short-run relationships between the openness measurement and total factor productivity change for the whole economy. The findings suggest that productivity growth played an important role in the economic development of Taiwan. Openness does indeed contribute to the productivity improvement. Industrial product exports and direct foreign investment fostered technical change in Taiwan. The terms of trade changed little within the sample period, and did not have a significant role in Taiwan\u27s economic growth. Human capital is advocated in many studies as contributing to economic growth. However, in this study when the human capital effect was included in the TFP accounting procedure, human capital, or its interactive effect with other openness variables, no longer influenced the TFP change