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The Interaction of Market Structures and External Exposure Effects on Profit Margins: An Empirical Analysis of Taiwan

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  • Hsiao-Chien Tsui

    (Department of Economics, National Chung Cheng University)

Abstract
This paper investigates the relationship between exchange rate and profit margins when we take the effect of exchange rate on both input and output prices into account. Using the data of 19 two-digit Taiwanese manufacturing industries over the period of 1981-1994, we find a higher degree of net export exposure in Taiwan. Our empirical results suggest that since the 1987 appreciation of the Taiwanese currency, industries take advantage of the appreciation of the NT dollar, enjoying a reduction in the price of imported inputs into production. The market structures, such as market concentration and products are destined for domestic versus export markets, are showed that the profit margins are affected. An innovative feature of the paper is in modeling the interaction between endogenous Northern product innovation and endogenous production transfers to South with industry specific learning, cross-industry learning spillovers, and product obsolescence. Greater difficulty in adopting new products raises wage inequality while lowering Northern innovation and Southern learning rates. Slowing the pace of product obsolescence reduces wage inequality in the short run, but does the opposite in the long run.

Suggested Citation

  • Hsiao-Chien Tsui, 2002. "The Interaction of Market Structures and External Exposure Effects on Profit Margins: An Empirical Analysis of Taiwan," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 27(1), pages 107-123, June.
    • Handle: RePEc:jed:journl:v:27:y:2002:i:1:p:107-123
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    References listed on IDEAS

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    1. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
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    6. Campa, Jose Manuel & Goldberg, Linda S, 1999. "Investment, Pass-Through, and Exchange Rates: A Cross-Country Comparison," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 287-314, May.
    7. Goldberg, Linda S., 1990. "Measuring External Openness: The Index Of Effective Exposure," Working Papers 90-19, C.V. Starr Center for Applied Economics, New York University.
    8. Chou, Tein-Chen, 1988. "Concentration and profitability in a dichotomous economy: The case of Taiwan," International Journal of Industrial Organization, Elsevier, vol. 6(4), pages 409-428.
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    Cited by:

    1. Tsui, Hsiao-Chien, 2008. "Exchange rate and pricing behavior: Comparison of Taiwan with Japan for manufacturing industries," Japan and the World Economy, Elsevier, vol. 20(2), pages 290-301, March.

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