The interactions among foreign direct investment, economic growth, degree of openness and unemployment in Taiwan

Abstract

The vector autoregression method of variance decomposition and impulse response function analysis are applied to analyse various relationships among foreign direct investment (FDI), economic growth, unemployment and degree of openness in Taiwan. The analysis results show that these five variables have a long-run equilibrium relationship; however, unemployment rate and FDI outflow have weak exogeneity. We also found that there exist three unidirectional causalities from FDI outflow to FDI inflow, from economic growth to degree of openness, and from economic growth to unemployment in short-run. Furthermore, the shocks of economic growth and degree of openness have positive effects on FDI inflow. On the contrary, the shocks in economic growth and FDI inflow have negative effects on unemployment rate.

Notes

¹ Where β is the matrix of cointegrating vectors and α is known as the matrix of coefficients of error-correction term or adjustment coefficients in the restricted VAR model.

² The procedures do not have the drawback of the orthogonalized innovations generated by Cholesky decomposition, where the ordering of the variables can significantly affect the results of impulse response.