Productivity Catch‐up Between Chinese and Taiwanese Electronics Firms

• Author: Ya‐Pin Lyu,Hui‐Lin Lin,Chih‐Chin Ho,Chih‐Hai Yang
• Published date: 01 October 2017
• DOI: http://doi.org/10.1111/1468-0106.12169
• Date: 01 October 2017

PRODUCTIVITY CATCH-UP BETWEEN CHINESE AND

TAIWANESE ELECTRONICS FIRMS

CHIH-CHIN HONational Cheng Kung University

HUI-LIN LIN National Taiwan University

CHIH-HAI YANG National Central University

YA-PIN LYU*National Cheng Kung University

Abstract. This paper aims to depict the patterns of China’s productivity catch-up with Taiwan in the

electronics industry over the period 2001–2007. Specifically, we investigate the roles that ownership

structure and innovation efforts play in the dynamics of the productivity gap. The firm-level evidence

suggests that the labour productivity gap between Chinese and Taiwanese electronics firms has

narrowed during the past decade. Second, the narrowing of the labour productivity gap has occurred

in foreign-owned enterprises rather than in local firms. Examining the determinants of productivity

catch-up show that R&D significantly contributes to Chinese electronics firms’catching up with their

Taiwanese counterparts.

1. INTRODUCTION

China gradually emerged as an economic superpower after its accession to the

World Trade Organization (WTO) in 2001. Through taking advantage of lower

factor prices and policy measures to attract foreign direct investment (FDI),

China implemented an export-oriented strategy to foster economic development

and experienced spectacular and persistent economic growth. Dubbed the

‘world’s factory’in international markets for a variety of information and

communication technology (ICT) products, the Chinese authorities also aims

to transform its economy into a knowledge-based economy and to catch up with

developed countries in terms of technological capability by devoting more

efforts to R&D activity. For example, China’s R&D intensity (R&D expendi-

ture to GDP ratio) tripled from 0.57% in 1996 to 1.98% in 2012.

In recent years, the need to perform a comparative analysis of the productivity

gap between Chinese and Taiwanese electronics firms has become the focus of

much concern of Taiwanese central government. The primary reasons are two-

fold. From the perspective of Taiwan, the majority of its outward FDI has be-

come concentrated in China, particularly in the electronics industry, especially

since 2001 when a set of restrictions that prohibited Taiwanese electronics com-

panies from legally offshoring their manufacturing to China were lifted.1During

2004–2006, capital inflows from Taiwan accounted for approximately 10% of

China’s inward FDI on average. As more than 60% of Taiwanese outward

FDI in China is concentrated in the electronics industry, this would suggest that

*Address for Correspondence: College of Social Science, National Cheng Kung University, 1, Univer-

sity Road, East Dist., Tainan City 70101, Taiwan, R.O.C. E-mail: ylyu1@binghamton.edu;

lyuyapin@yahoo.com.tw; lyuyapin@gate.sinica.edu.tw.

1For an overview of Taiwan’s FDI to China, the interested reader is referred to Yang et al. (2010b).

Pacific Economic Review, 22: 4 (2017) pp. 533–553

doi: 10.1111/1468-0106.12169

© 2016 John Wiley & Sons Australia, Ltd

bs_bs_banner

the technologicalspillover from Taiwan hasplayed an important role in promoting

firm productivity in China’s ICT industries (Lee and Saxenian, 2008). Taiwan

has played a predominant role in the development of China’s exports of ICT

products for assembly (Wang and Lee, 2007). However, whether Taiwan can

maintain its technological advantage and continue to have higher productivity

than Chinese counterparts has become a major concern, and has also become

an issue widely debated by economists and public administrators in public.

From the point of view of China, whether and to what extent its productivity

is catching up with that of its East Asian neighbours is also a topical issue.

China’s catching-up pattern might constitute a unique model. Under the trend

toward fragmentation in the global production chain, China has integrated itself

into the East Asian production network by focusing on assembly exports,

thereby enabling local firms to learn from multinational firms and the world

market more directly and instantly. Although some studies, such as Amiti and

Freund (2010) and Tian and Yu (2012), criticize the productivity effect of

process trade, Chor et al. (2014) suggest that Chinese indigenous firms gradually

acquire their core technology over time and slowly manufacture products more

independently. Thus, the production fragmentation could be the key catalyst in

promoting productivity in China.

China’s openness to the world market and high-technology FDI inflows

provide us with a good case study to examine whether and how developing

countries promote productivity to catchupwiththeirtradingpartnersbased

on the international division of labour. Although extant studies, which

adopt various data time periods and estimation approaches, show that

China’s aggregate total factor productivity (TFP) growth rate is not high,

ranging from 1.3 to 4.5% (Islam et al., 2006), the productivity catch-up

process depends on the relative growth rate between two parties. As the

aggregate results conceal important heterogeneity across industries, more

in-depth industry analysis is needed at the micro level. More importantly,

an international comparison of productivity gaps using a large and disaggre-

gated firm-level data set is almost absent. This study aims to fill this gap in

this strand of the literature.

R&D is widely recognized as a key driver in most catch-up models (e.g. Cohen

and Levinthal, 1989; Griffith et al., 2004). In taking the chance to integrate into

the global supply chain through its assembly export policy, the Chinese

Government employs various policy instruments to reinforce absorptive capa-

city and narrow the technology gap between its neighbouring countries. One

crucial policy is to encourage both public and private firms to engage in R&D.

For example, the 11th Five-Year Plan (2006–2010) claims that the plan’s aim

is ‘scientific development’, and there is a determined emphasis on encouraging

‘an innovation-oriented nation’. The facilitating role of R&D in promoting

productivity has been also widely evidenced in China in many firm-level analy-

ses (e.g. Hu, 2001; Yang et al., 2010a). As the quality and content of R&D may

differ considerably across countries, does R&D invested by Chinese electronic

firms also contribute to the productivity catch-up with Taiwan? This issue is also

examined in the present paper.

C.-C. HO ET AL.534

© 2016 John Wiley & Sons Australia, Ltd