Taiwan is a small open economy, and the international trade has a great impact on the overall economic development. The United States is Taiwan’s main exporter, so exploring changes of the competitiveness of Taiwan''s industry in the United States will help to review Taiwan’s economic development policies.
In this study, real exchange rate represents competitiveness. According to economists’ definition, real exchange rate is the outcome adjusted by the relative prices between domestics and foreign through nominal exchange rate. Based on principles of economics, if the aggregate demand is fixed, the price level depends on the aggregate supply. Therefore, the more the aggregate supply, the lower the price level. On the other hand, the less the aggregate supply, the higher the price level. Hence, real exchange rate is an indicator which compares competitiveness between two countries. Increasing real exchange rate represents that domestic productivity is higher than foreign productivity. That is to say, domestics are more competitive than foreign.
This thesis uses the producer price index in the U.S. to represent the foreign price level, and the wholesale price index in Taiwan to represent the domestic price level. The control variables includes government consumption expenditure, terms of trade, trade openness and productivity. The variables of international capital inflows includes foreign direct investments, portfolio investments and other investments appear in the financial account of the balance of payments. This thesis empirically explores the effects of the various types of international capital inflows on the competitiveness of Taiwan’s industry during the period between 1990 and 2009. Adopting the concept of real exchange rate as proxy for the competitiveness index, regression analysis has shown that portfolio investments has brought about significant positive effects. Regression analysis using standardized variables reveals that the magnitudes of the effects of the four types capital inflows vary whereas the portfolio investments plays the most important role while the foreign direct investments the second.