Academic journal article Contemporary Economic Policy

Labor Productivity of Small and Large Manufacturing Firms: The Case of Taiwan

Academic journal article Contemporary Economic Policy

Labor Productivity of Small and Large Manufacturing Firms: The Case of Taiwan

Article excerpt


This work studies the factors influencing the labor productivity of small and medium-sized enterprises (SMEs) and large firms using Taiwan as a case study. A special emphasis is placed on two possible international channels: exports and foreign direct investment (FDI). Different from conventional studies, we employ the two-stage switching regressions to correct the firm-size effect on labor productivity and estimate labor productivity for SMEs and large firms. The main findings are as follows. First, the estimates of the selectivity variable are statistically significant for both SMEs and large firms, supporting the hypothesis of correcting the effect of firm-size truncation. Second, while a larger trade intensity significantly increases the labor productivity of SMEs, it deteriorates significantly that of large firms. Third, FDI enhances the labor productivity of SMEs internally, whereas it has a negative spillover on that of other small and large firms in the industry. While the first outcome lends support s to the role of self-selection, the remaining stands in sharp contrast to conventional wisdom. (JEL F1, L1, L6)


This article studies the determinants of labor productivity, stressing in particular two possible channels of international technology adoption. Technology adopting of developing economies in theoretical models has been pioneered by Findlay (1978), and its importance has recently been further underscored in economic growth models by Romer (1994) and Chen and Shimomura (1998). There is thus little doubt concerning the role of technology adoption for a developing economy. A more relevant issue is the manner in which technology is adopted, as there are various channels and some of them are more effective than others. Existing studies, however, have not yet offered clear answers.

Many existing works contend multinationals to be vital instruments in adopting technology. Wang and Blomstrom (1992), for example, have asserted that multinationals have become the most important actors in the generation and transfer of modern technology. Building on the models of Caves (1974), several studies have documented the existence of an intra-industry spillover of foreign direct investment (FDI) in manufacturing in many countries. These studies support the hypothesis that multinationals can enhance the labor productivity of host countries. However, the multinationals may also reduce labor productivity of host countries, as Rodriguez-Glare (1996) and others have recently argued. Their reasons are that multinationals affect the host country through the generation of backward and forward linkages and other effects. The net impact of multinationals on the host country depends on the linkages they generate compared to those that would be generated by domestic firms they displace. To the extent that the m ultinationals have fewer linkages than domestic firms, increasing FDI reduces rather than raises the labor productivity of domestic firms.

Another channel that may affect labor productivity is via international trade, in particular, exports. Conventional wisdom holds that countries with superior export performance have better growth accomplishment (e.g., World Bank, 1993). Nevertheless, some researchers (e.g., Young, 1991) have contended that a more freely trading regime retards the productivity upgrading of developing countries as a result of international comparative advantage, under which developing economies specialize in producing goods with exhausted learning by doing. Therefore, the effects of exports may be ambiguous for developing countries.

Although export performance may effect technology adoption, the existing empirical works documenting the positive spillover of FDI do not examine whether export performance is positively correlated with the labor productivity of private plants. This omission could be due to a lack of data in exports or inward orientation in these countries in the years under concern. …

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