This paper examines impacts of industrial agglomeration and foreign direct investment (FDI) on total factor productivity of Taiwanese firms. Our model of FDI decisions of heterogeneous firms with agglomeration economies suggests that firms located in more concentrated industrial agglomerations become more productive, and undertaking FDI have either positive or negative inflence on firm productivity. Using plant-level data,
this paper constructs an indicator of industrial agglomeration to appraise agglomeration economies on firm productivity. Based on the data of 601 manufacturing firms and the agglomeration indicator, this paper estimates a probit model of FDI choices and a cross-sectional econometric model to empirically assess the impacts of industrial agglomeration and FDI on firms' performances. The empirical results show that local industrial agglomerations provide positive contribution to firm productivity after firms' attributes are controlled, while FDI in China has positive but not always significant impacts on firm performance.
Keywords: industrial agglomeration, knowledge spillovers, total factor productivity.
JEL Classification: L25, R30