Labor productivity of small and large manufacturing firms: the case of Taiwan

Abstract

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 supports to the role of self‐selection, the remaining stands in sharp contrast to conventional wisdom.