Political and economic factors as determinants of export-oriented foreign direct investment and reverse investment: A pooled time series and cross-sectional analysis

The rapid increase in foreign direct investment (FDI) and reverse direct investment (RDI), coupled with their effects on host as well as home countries, has heightened research interest in this area. Among other aspects, the determinants of FDI have been widely studied. This study examines the joint effect of economic and political determinants on both FDI and RDI from the vantage point of Taiwan. Time-series and cross-sectional data were pooled to test the hypotheses.; The findings are that efficiency wage differences, investment incentive policies, and political instability played crucial roles in determining the inflow of FDI and outflow of RDI in the case of Taiwan during 1955-1980. The results verified that the widening wage differential between Taiwan and major capital exporting countries for the past three decades has been the deciding factor behind the expansion of FDI and RDI in Taiwan. The study results also indicated that the 1966 revisions of the Statues for Encouragement of Investment had a significant effect on attracting FDI to Taiwan over time; a tremendous upsurge in investment occurred thereafter. The 1971 modifications of the statutes, however, had no effect; this insignificance may be due in large part to the political setback that year. This study verified that foreign investors dislike and shy away from an uncertain political environment (both in the FDI and RDI cases).; The market size, trade relationship, and exchange rate variables had limited effect on FDI and RDI. The results of this study show that Taiwan's market size is not a crucial determinant in attracting FDI. For the RDI case, the findings support the rationale of the market size hypothesis. As to whether FDI and trade are complete substitutes or complements in terms of Kojima's hypothesis, the statistical results of this study do not yield a definitive answer. Moreover, it is suggested that the exchange rate has a limited effect in the case of Taiwan.; This study also identifies three areas of future research: (1) FDI and RDI as a process, not as a one-time decision; (2) the possibility of simultaneous interaction among FDI or RDI and the explanatory variable; and (3) a combined approach which examines country-, industry-, and firm-specific perspectives. The latter would yield better and more specific public policy recommendations.