Technical Efficiency and Location Choice of Small and Medium-Sized Enterprises

We establish a theoretical model to explain the relationship between the regional technical efficiencies and production location choice. A higher regional technical efficiency level attracts foreign direct investment (FDI) and offsets the adverse effects of a high wage rate and setup cost. Data from Taiwan's SMEs during the period 1989–1996 are collected. Observations are classified into three exclusive and exhaustive groups: SMEs without FDI, SMEs with FDI in mainland China, and SMEs with FDI in other countries. We then apply the multi-logit model to test the relationship between the technical efficiency and FDI location choice. Taiwan's SMEs with higher technical efficiencies are less likely to invest in mainland China. Technical efficiencies do not significantly influence the location choice between Taiwan and other countries. The wage rate is a significant motive for SMEs to invest internationally, while the setup cost is not an important factor to affect firms' location choices.