Motivated by the positive relationship between outward FDI and inward ILM observed in Taiwan in the 1990s, this study proposed a formal model to explain the phenomenon. With deterioration in international competitiveness owing to a continuing rise in the domestic wage rate and/or appreciation of the domestic currency, it was shown that relocating production abroad is a natural reaction by manufacturing firms unless a sufficient number of guest workers can be imported. As the importation of labor was restricted to a level lower than that required for maintaining international competitiveness, a simultaneous increase in outward FDI and inward ILM would appear. When labor inflows are limited, importing guest workers can lead to more employment of the domestic labor if the demand for labor is sufficiently elastic.
