Total Factor Productivity and Outward Orientation in Taiwan: What is the Nature of the Relationship?

Abstract

Recent applied literature finds a correlation between total factor productivity (TFP) growth and increased outward orientation, but the nature of the theoretical relationship remains controversial. In this paper, we test econometrically several specifications using time series for Taiwan to elucidate the question. We find strong support for the view that imports of technology, in a context of decreasing returns to imitation, and the removal of domestic distortions, through its impact on the labor market's allocative efficiency, have played a major role in Taiwan's TFP growth. Conversely, export promotion, per se, did not affect TFP growth significantly, but through its indirect contribution to financing imports.