Firm Clustering and R&D Activities in Taiwan (2012)

Undergraduates: Yuen Ho, none none none

Faculty Advisor: Geetha Vaidyanathan
Department: Economics

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Throughout Taiwan’s rapid industrialization of the last half century, the Taiwanese government has played an active role in promoting selected industries with a comparative or competitive international advantage. In the early 1980s, the government began establishing science parks in Taiwan’s metropolitan areas, and encouraging firms to cluster through tax incentives, subsidies, government grants, and funding. These cluster-based policies targeted high-technology industries in Taiwan and sought to foster higher productivity, rapid technology acquisition, innovation, and Research and Development (R&D) activities. However, there is no evidence in the existing literature that firm clustering promotes R&D activities in Taiwan. In this research, we examine the effect of firm clustering in Taiwan on promoting R&D activities, both the number of firms that engage in R&D and the amount invested into R&D activities. We use aggregate industry-level data, OLS estimation, and the Hausman Test for Endogeneity. Our results show that the number of firms engaged in R&D is affected by firm size, while degree of clustering is insignificant. However, we find a positive and significant coefficient for clustering in relation to the amount invested into R&D activities. Our results indicate that while firm clustering may not increase the number of firms that engage in R&D, firm clustering can stimulate a higher amount of investment into R&D activities among firms that already engage in R&D.