FDI, policy adjustment and endogenous growth: Multiplier effects from a small dynamic model for Taiwan, 1959–1995

As a consequence of endogenous growth theory, foreign direct investment (FDI) has a newly-perceived potential role in the growth process. In this paper, a small, pilot, dynamic model of Taiwan is formulated to link (endogenous) growth from the supply side to exogenous influences which incorporates aspects of most types of economic governance, including monetary and fiscal policy, “liberalization” and indicators of the extent of infrastructural development. Impact and dynamic multiplier effects are calculated from the econometric results for FDI and seven other endogenous variables with respect to nine exogenous variables. Among the findings of interest are that FDI promotes growth, and that the most promising policy variables are infrastructural improvements and liberalization.