Study on Causal Association between FDI and Its Determinants in Taiwan

A vital role is played by FDI (Foreign Direct Investment) in enhancing the growth and economic status of the country. Most of the countries in the developing phase depend on FDI to foster their economy as they were facing the scarcity of hard cash for their development process. High growth performance experienced by Taiwan economy largely relies on the FDI; to attract the foreign capital inflows the Taiwan government work on many policies. But the most important factors which influence and attract the foreign capital inflows are in academic debate. On the basis of macroeconomic theory knowledge, this research paper will shed light on the econometric analysis on the data of Taiwan’s total foreign direct investment and factors influencing it, which contains exchange rate, inflation rate, Taiwan stock exchange index, import, and business income tax during the years of 1998 to 2013.


Introduction
Despite the good statistics and recognitions, Taiwan is facing a number of challenges. Based on the World Economic Forum's executive opinion survey, political instability and the insufficient capacity to innovate top the list of most problematic factors for doing business in Taiwan as perceived by Taiwanese executives. According to the World Economic Forum (WEF) Taiwan ranked as the world's 15 th most competitive economy in 2016 [1]. This was better than the S. Singh, P. Jain per capita), and it was growing at a rate of 3.4% per annum during 2010-2015.
The GDP of Taiwan was composed of exports (69.9%), imports (59.6%), domestic household consumption (53.3%), gross capital formation (21.8%), and government consumption (14.5%). In the 1980s, the increasing cost of labor and the approval of Taiwanese dollar were repeatedly cited as a reason for Taiwan's failure to magnetize foreign business, on the other hand, their regional peers did not make any change in all these things and enjoying business from foreign.
However, today the bureaucratic obstacles, uncompetitive tax system, poor protection schemes for investors, weak contract enforcements, and comparatively poor regional economic integration are the main factors which are responsible for the failure of Taiwan's policies to catch the attention of foreign direct investment [2].
The "deindustrialization" of Taiwan is demonstrated by the rising inconsistency among inflows and outflows of FDI. Only the semiconductor industries are the exceptions, as they continue their investments in the Research & Development and in the capital equipment for their expansion in productions, many of the manufacturing industries of Taiwan have lost their investment at home.
Since 1997, Taiwan's inflowing investments are constantly lesser than the out flowing investments. During 2000 to 2012, Taiwan's outflow investments are extended to $165 billion, which is four times higher than the inflow investments ($40 billion). In 2012; Taiwan's stock of incoming Foreign Direct Investment was valued nearly $60 billion-not very much higher than the $50 billion as in 2006. In 2012, FDI flows within Taiwan were $4.7 billion, whereas they were more than $16 billion in Korea, its adjoining rival [2]. This paper is committed to dissecting the degree to which those determinants influence the FDI inflows in creating nations. Alluding to prior studies led either in the rising or propelled economies on FDI inflows, researchers hold diverse perspectives on the presence or heading of causality between FDI and its determinants. Prior investigations looking into this area reported blended and uncertain results. This might be incomplete because of various reasons. Examining the FDI with diverse techniques, a set of information, and a sample of the study might prompt the conflicting findings. This study is, in this manner went for experimentally rethinking the short and long-run connections among FDI and its determinants (CPI, XR, TWSE, IMP, and BIT) in the Taiwan economy during the period of 1998-2016 by embracing the most recent procedure, autoregressive distributed lag (ARDL) test for validation of co-integration. Furthermore, the study likewise endeavors examination of FDI of Taiwan utilizing error correction mechanism taking into account VAR framework.
The aim of this paper is to test an ARDL model for the FDI inflows in Taiwan ensuing from the approach adopted by Pesaran [3]. The model to be validated is an autoregressive distributed lag (ADL) one where the dependent variable is regressed on its lags. The paper is organized as follows: Section 1 presents an Introduction of the Study; Section 2 discusses the Research Framework, which is comprised of Data Source, Time Period and Model Specification. Section 3 is

Model Specification
In the present research work, the short and long-run progressive associations among FDI and its determinants are assessed with the help of utilizing ARDL Test that was originally exhibited by Pesaran et al. in 1996 [3]. ARDL approach gives vigorous results to a slighter small sample size for co-integration investiga- where ln is Natural Logarithm, FDI t is Foreign Direct Investment at time t, CPI t as an assessment of inflation, XR t is the exchange rate, TWSE t is an index of Taiwan stock exchange, IMP t represents import, BIT t shows Business income tax and e t is an error term.
The variables in the Equation (1) could be reframed as follows by considering ARDL framework:

Descriptive Analysis
Descriptively, the means and standard deviation scores were computed in order to determine the variability of the spread of data as shown in Table 1.

Unit Root Tests
To check stationary properties for the time series that was used in the VECM model, two of the well-known stationary tests Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) were used by assuming that null hypothesis supports the non-stationary properties of time series. So the denial for the unit root hypothesis favors the stationary property. Findings are depicted in Table 2 and  When ADF Test is perform with the Level of series, the calculated T-statistics (with no trend and with trend) for LFDI (−1. respectively at the 5% level of significance. It shows that null hypothesis for unit root is rejected for all six variables, which signify the achievement of stationarity.
Here we have the pre-condition for co-integration test i.e., the variables are integrated of the same order. The study, therefore, proceeds to the co-integration test to attain the numbers of co-integrating equation.

Johansen Co-Integration Test
As a result, Johansen co-integration test is used to find out whether there is any long duration co-integration relationship among LFDI and other five variables  It was concluded from the outcome that, the trace and maximum Eigenvalue both confirms a strong value 4 co-integration. Critical Value is lower than Trace

Impulse Response Functions
To further explore the interaction between foreign direct investment and its determinants, the study proceeds to test the impulse response functions (IRFs) [4]. exceeds the time period. Impulse Responsive functions give an indication of the system's dynamic behavior. Generalized impulse response functions (GIFRS) lying underneath in Figure 1, shows the response and impact of each and every macro-economic variable of VAR under study. In the VECM System, the GIRFs provides the support of causality status between foreign direct investment and its' determinants.

Conclusions
The study began by empirically examining the causal association among the selected macroeconomic variables (LCPI, LXR, LTWSE, LIMP, and LBIT) with the foreign direct investment (LFDI) in Taiwan during the period of 1998-2016. To conduct the research work, this study has used a multivariate VAR framework. In this, the time series data is analyzed first with stationary property examination. The probable consequences definite that LFDI, LCPI, LXR, LTWSE, LIMP, and LBIT are not stable under the confidence level of 5% but their first order difference terms are all stationary. Hence, they are integrated of order one. Results of study depict a long-run dynamic association of foreign direct investment with its macroeconomic variables. It is proved with the help of Johansen's multivariate co-integration analysis that H 0 for no co-integration (r = 0) is discarded (reject), this indicates that LFDI & their determinants are co-integrated & therefore it will reveal a trustworthy long-run relationship. In addition, the study agreed with the Granger-causality by the mean of VAR. The result demonstrates the existence of uni-directional causality linking the LBIT & LFDI (LBIT → LFDI). The findings of this research work may have significant implications for the national policy makers for helping in their decision-making process and can also fill the literature gap that will provide the further research opportunities to the researchers. Taiwan have regarded FDI increasingly as contributing to their development strategies for the technology and capital it applies, and therefore have made to compete for FDI. Policies about investment have become liberal at the national and regional level, but scientists still do not find the comprehensive framework for FDI at a multinational level. In the recent years, there are significant shifts towards liberalisation of the FDI regime, and FDI is considered more favorably now than a couple of decades ago. And now the government find out about the policies that can influence the impact of FDI on development. The kind of sequencing of general and special policies in areas covering investment, trade, innovation and human resources are all important.