Tài liệu Research " THE MOBILITY OF HIGHLY SKILLED HUMAN CAPITAL IN TAIWAN " docx

In the Ordinary Least Squares and simultaneous model specifications, I found that the mobility of highly skilled human capital does not undermine Taiwan's economic growth.. This study s

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THE MOBILITY OF HIGHLY SKILLED HUMAN CAPITAL IN TAIWAN

Doctor of Philosophy

May 2001

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We approve the thesis of Pi-Chung Han

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Edgar I Farmer

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Workforce Education and Development

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March 25, 200 /

Abstract Most economists agree that a country’s economic growth depends on human capital, physical capital, technology, and several other minor inputs Human capital is the basic wealth of every country Highly skilled workers are the most important component of human capital Human capital can have a positive spillover effect on society When talented young people leave their native country to work elsewhere, this brain drain inhibits the country's economic growth Several factors contribute to brain drain These can be classified roughly into three categories: economic, academic, and personal Economic factors play the most important role

From the early 1960s to the late 1980s, Taiwan suffered a brain drain when many people who had earned advanced degrees in western countries chose to leave Taiwan to work elsewhere In this study’s statistical analysis, I show that Taiwan's economy is based in past on an effective labor force, and explain why Taiwan's economy has grown over the past 30 years With the improved economy in the 1990s, young people are increasingly choosing to return to or remain in Taiwan

to work and live As Taiwan's economy improves, its highly skilled labor market becomes more competitive

This study's quantitative analysis includes a mathematical model based

on a revised growth model, and statistics or econometric tests In performing the quantitative analysis, | created a new measurable variable the effective labor force which combines human capital and the labor force 1 show that this new variable has a significant effect on Taiwan's economic growth

In the Ordinary Least Squares and simultaneous model specifications, I found that the mobility of highly skilled human capital does not undermine

Taiwan's economic growth The reason Taiwan continues to experienced economic growth after a brain drain is that the manufacturing industry plus international trade

have helped Taiwan's economy in the past 30 years The Granger causality test also offers strong evidence for the correlation between the accumulation of human capital and economic growth In fact, the quality of Taiwan's labor force has improved greatly is in the past 30 years In sum, in this study I found that the brain drain does not undermine economic growth in Taiwan.

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Chapter 1 INTRODUCTTION . - G5 2G SH nh nh ng ng run 1

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1.7 Limitations he II lv no II

Chapter 2 LITERATURE REVIEÌW -Q HH re 14

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3.5 Simultaneous Specification HH 0 xxx rree 56 3.6 Granger t6 n ẽố 60

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Chapter4 EMPIRICAL RESULLTS -. 5 5 G5 Ăn tAeEEsessesseeesse 64 An me 64

4.2 Ordinary Least Squares (OLS) . -Ă SH HHereree 67 NA - n 67

4.2.2 Variance Inflation Ratio (VÏF) SH sseeeesreeee 68 4.2.3 Residual Checks: Normality and Homogeneity of Variance 68

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4.2.5 Residual Checks: Serial Correlation - sec cseeeeseee 71 4.2.6 The Durbin Watson (DW) Test .Ăceceieersevee 71 4.3 Generalized Least Squares (GLS)_ . c5 sec 72 0c AC hố 78

4.5 Simultaneous Specification HH ren 82 4.5.1 Stage 1 RegTression 4S HH TT TH cư 82 4.5.2 Stage 2 Regression - sàn ghen 85 4.6 The Empirical Results for Granger Causality - c2 89 TA cá 90

Chapter 5 DISCUSSION, CONCLUSION, AND FUTURE DIRECTIONS 91

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5.3 Directions for Future Researchh - << cty ng eee 95 ›4339.4230I90 11 99

APPENDIX B: PROXY FOR HUMAN CAPITAL . - 755 c<c< c2 APPENDIX C: PROOF OF CONSTANT RETURNS TO SCALE APPENDIX D: LIST OF SYMBOLS +22004000000600000406000000000200001000000000006000000006000090006%00006

and Universities by World Area of Origin, 1980-1981 and 1993-1994 21 2.2 Taiwanese Students Who Earn Advanced Degrees in the U.S and

Fail to Return to Taiwan Contribute to Taiwan's Brain Drain 37 4.1 A Normal Probability Plot of the Residuals of the OLS Regression 70 4.2 Plot of the Residuals Versus the Fits .cccsccscssssssssssssssesessssesesssssesesersnes 70 4.3 The Autocorrelation Function of the GLS Residuals 74 4.4 A Normal Probability Plot of the Residuals of the GLS 76 4.5 Plot of the Residuals Versus the Fits in the GLS . -5«- 76

2.8 Educational Structure of the Taiwanese Labor Force .- - - 32 2.9 Labor Participation Rate for Some Countries .:ccccsessscsescssscsseecsssesseseees 32

2.10a Taiwanese Students Who Earned Advanced Degrees in the U.S

and Returned to Taiwan .cccsssecsssssessssssssssscsssessssesesseseseasessseseesesesesseatees 33 2.10b Comparison of Outflow and Return Rates cccccsssssesssssessesseessesseeessees 34 2.11 Distribution of Areas of Study for Taiwanese Students Earning Degrees

(0/.192900-18.01))0/0) Tuy ) 0017 43

2.18 Number of Patent Rights Issued to Various Countries by the U.S 43 2.19 Value of Foreign Trade to Taiwan (U.S millions) -< «<< << << 45 2.20 Manufacturing Balance of Trade for Some Important Countries

(011300.1: )1 45 4.1 Estimated Model Regressing National Output on Lagged Capital,

Effective Labor Force, and Brain Drain .:csccsscssescseescescseeecenseneseess 66

A 4.2 GLS Results Using p= 0.75, With Constant Term . - 75

Acknowledgements

I wish to express my gratitude to a number of people for their support and help My deepest thanks go to my advisor, Dr Edgar I Farmer, who guided me and inspired me to continuous efforts His invaluable feedback, encouragement, and advice have always shed !ight on my thinking and writing

My heartfelt thanks go to Dr Jill L Findeis, who has given me suggestions

on how to present my research results and discussed them with me

I also gratefully acknowledge Dr Kenneth C Gray's help in difficult

moments He has assisted me in designing research questions and offered his

professional guidance with genuine compassion and understanding

A special thanks goes to Dr Jack C Hayya, who has provided great

assistance in conveying some important statistical concepts and in revising my

dissertation His conscientious attitude toward scholarly research has greatly

influenced my research performance

My sincere gratitude goes to Dr Mary J Kisner for her professional

revision of my dissertation With her encouragement and help, I was able to start my research

In addition, I would like to present this thesis as a gift to my mother,

Hsien-Hwa Chang, and to other members of my family in Taiwan I am especially grateful to my elder brother, Pi-Chen Han, who has supported me financially In fact,

he has played the role of my father, who passed away in 1996 Finally, my most sincere thanks go to my wife, Su-Chau Lin, for her unconditional support and care during my studies My son, Charles Han, has also been my good companion in joy and sorrow Without their support, [ would not have been able to complete the

requirements of the dual-title Ph.D program in operation research and workforce education and development.

REALL AGRIC RAE SCR 3⁄6 (1 9 2 8 — 1 9 9 6)

BEE SR {fll PRA Be Fe ER oc cL (RR tt fšftinif6#I|Rfffft! PPE SRI RB ik RO SCRA Eh FELCH, RAM SERAREE"

Grandfather Han, Ten-Chia (1900 - 1979)

Grandmother Wang, shiu-Ming (1901 - 1980)

Chapter 1

INTRODUCTION The major purpose of this study is to examine the mobility of highly skilled human capital in Taiwan over the past 30 years Strong statistical evidence indicates that Taiwan's brain drain has decreased in recent years Empirical data show that fewer skilled people are leaving Taiwan and more are returning to Taiwan today than did 10

or 20 years ago This study specifically focuses on the relationship between the

accumulation of all levels of human capital and economic growth during the past 30 years ago in Taiwan Economic growth depends on many inputs that can be classified

into seven items: (1) government policies; (2) human capital; (3) international trade; (4)

effective labor force; (5) physical capital; (6) technology; and (7) other inputs (Figure 1.1) Many economists think that human capital is a major input for economic growth,

so they suggest that human capital should be considered as an input to the production function Becker (1993) pointed out that the concept of human capital is relevant to micro investments in education, training, and other skills, and to economic growth,

unemployment, and foreign trade Ray (1998, p 100) said that "rich countries not only

have access to a large stock of physical capital, but by investing time and money in education, it is also possible for these countries to produce a large stock of human capital: labor that is skilled in production, labor that can operate sophisticated

machinery, labor that can create new ideas and new methods in economic activity It is important to contrast this form of labor with unskilled labor."

Researchers during the 1990s have realized that economic growth and

inequality both depend on investments in many forms of human capital

International Trade Government Policies

Sector

A Research & Service & Other | Less College Education/

"Brain Gain"

v

1.1 What is Brain Drain?

Brain drain is the departure of skilled professionals from their maternal

countries to seek more promising opportunities elsewhere This kind of emigration generally flows from developing countries to developed countries, and in particular to the United States In the United States, many foreign students finish their studies and then fail to return to their home countries Since the 1930s, the U.S has obtained much extra human capital in this way This exodus of skilled workers from developing countries to the U.S has several causes First, typically, there are low salary levels in the home country Second, there may be limited employment opportunities for

returning professionals in the home country Third, there may be personal reasons for these professionals wishing to remain in the U.S Chang (1992) used a pull-and-push approach to explain Taiwan’s brain drain to the United States Vas-Zolta’n (1976) defined push factors as those that repel, prompting people to leave their home countries, while pull-factors attract people to the country where they settle Chang (1992) thought that the U.S had the following important “pull” factors: (1) good teaching and research facilities; (2) promising career prospects and professional opportunities; (3) high salaries; (4) satisfying jobs; and (5) marital and family advantages

Myers (1972) mentioned that brain drain, with its pejorative ring, captured the attention of policy makers in the United States and elsewhere during the 1960s

International and national organizations rushed to pass resolutions, to set up

conferences, and sometimes even to undertake research on the subject All manner of evil was initially attributed to the flow of high-level employees from poor to rich nations in what has been termed “reverse foreign aid.” Emigrating talent was tagged as

a major factor in lagging economic development and was also associated in more

faltering quest for peace

Myers (1972) especially addressed the issue of increasing emigration caused by increasing education abroad What underlies the increased national and international concern about foreign students remaining in developed countries? The number of students who do not return to their home countries has risen In part, this is simply a result of growing student enrollment producing proportionally greater numbers of non- returnees At the end of the 1960s, approximately one-half million students were enrolled in institutions of higher education outside their home countries In the United States alone, there were about 120,000 foreign students in 1969 The number of foreign students in the United States peaked in the mid-1980s, with around 160,000 In the early 1990s, the number of foreign students decreased a little to around 150,000 Asian students made up the largest subgroup in both periods (Myers, 1972)

1.2 Why is Highly Skilled Human Capital Important?

Highly skilled human capital is the most important asset any country has and

the loss of highly skilled human capital will threaten a country's economic

development Chang (1992) thought that human capital represented the productive capacities of the human beings as income-producing agents in the economy This concept is an old one, but the use of the term human capital in professional discourse has gained currency only in the past 25 years Empirical studies on economic growth by

Hagen (1980), Denison (1985), and Jorgenson (1988) have shown that human capital

and investment in it have made a notable contribution to the economic growth of Western industrial nations From an economist's perspective, human capital affects

productivity and the growth of national output Asefa and Huang (1994) defined human capital as involving a process of investment that enhances human labor productivity by means of advances in knowledge and its application Building human capital

specifically requires investment expenditures on education, training, health, nutrition, and related factors that increase the productivity of the labor force Brain drain is equal

to the loss of human capital in a host country United Nations (1987) indicated that

highly skilled human capital became an important issue for the developing countries once they became independent and initiated a process of development for which they needed trained men-the expertise skill With limited trained manpower, these societies could not afford to lose their very best to other countries, and they faced this dilemma: the need to send their young for training abroad and the desirability of bringing them back to ensure their contribution to the country’s development Brain drain can be viewed as an international problem, since it involves at least two countries According

to Cohen (1997), it is impossible for political reasons to forbid brain-drain migration

In fact, brain drain will cause some problems, particularly politically and economically, for both home and host countries

1.3 The Theory

In recent studies of economic growth, economists and researchers have

emphasized the importance of two major inputs: physical capital and human capital The loss of highly skilled human capital (brain drain) to Taiwan is the main focus of this study In the old theory of economic growth (Solow, 1956), the assumption of a constant stock of knowledge capital was made but is not realistic An economy that engages in product innovation enlarges its knowledge base Apparently, the

neoclassical theory cannot explain the elements of growth over the long run The notion of technical progress also cannot explain stable growth very well From this viewpoint, physical capital cannot totally explain the source of stable growth in output

We can infer that human capital has the same position as physical capital

Economists and sociologists have long studied the importance to economic growth of accumulating human capital Brain drain depletes a country's economic foundation Taiwan suffered brain drain, as did many other developing countries in Asia, such as China, India, and Korea Many current developing countries suffer from brain drain Barro (1991) did a study of 98 countries during the period 1960-1985 He found that the growth rate of real per-capita gross domestic product (GDP) is

absolutely related to the initial human capital, for which he uses the proxy of 1960 school enrollment rates, and is negatively related to the initial level of real per-capita GDP in 1960 Many research studies support the positive relationship between

schooling and economic growth (Phelps & Nelson, 1966; Schultz, 1975) These researchers agree that individuals with more schooling are better equipped to use the new technology, which leads to economic growth Becker, Murphy, and Tamura (1990) and Barro (1991) also stated that countries which accumulate higher human capital will have higher growth rates Therefore, poor countries that have little accumulation of human capital will have difficulty catching up with rich countries By the end of the

20th century, most countries’ leaders understand that economic growth depends on

education (especially higher education)

Over the past 40 years, economic growth models have been based on the

neoclassical growth model developed by Solow (1956) The neoclassical model

emphasized the roles of just a few major inputs to economic growth: population, technology, physical capital, and labor This model does not fully explain the

contribution of human capital On the other hand, the model asserted that growth in output depended only on exogenous factors (e.g., population and technological change) Beginning in the late 1980s, some economists became interested in the endogenous growth model The endogenous growth model tries to correct the crucial imbalance is the neoclassical growth model concerning the human capital input This model

incorporates the idea that economic growth is an endogenous result of an economic system, not the result of outside forces

Mankiw (1995) argued that the simple neoclassical model suffices to account for international differences in growth paths if we adopt a broad view of capital that includes human capital as well as physical capital Tallman and Wang (1994)

conducted a study focusing on human capital in Taiwan Their paper indicated that human capital is the main reason for economic growth, with the contention that other added factors or variables, such as government policies, the improvement of financial markets, and market openness, are the keys to enhancing output growth via human capital advancement

Currently, China is experiencing the same problems as Taiwan did previously

A 1994 report by the United Nations Conference on Trade and Development

(UNCTAD) estimated that 480,000 skilled individuals migrated from developing to developed countries between 1965 and 1992 Kaz (1991) noted that according to the

1994 UNCTAD report, between 1977 and 1980, Jamaica alone lost through migration

to North America the equivalent of almost 69 percent of those who graduated as professional or skilled workers during the same period Chang (1992) also noted that

students who completed their graduate study in the United States failed to return Instead, they found their way onto the faculties of American colleges and universities

or employment opportunities in various research organizations and industries In the 1970s and early 1980s, Taiwan was a giant in the manufacturing industry, but was a dwarf in high-tech industries There were two main reasons for this problem First, Taiwan did not have a good research environment or research equipment Second, Taiwan lost “highly skilled manpower” to support advancing or high-tech industries In the 1990s, there were some changes for Taiwan’s brain drain problem The government

of Taiwan had already implemented an ambitious program to recruit Taiwan’s highly

trained talents from overseas This recruitment policy has been very successful

1.4 Purpose of the Study

Most economists agree that economic growth depends on human capital, labor force, physical capital, and technology Human capital is one of the most important factors since it can create a great effect for society

Taiwan faced the problem of brain drain from the early 1960s to the late 1980s, when many people who earned advanced degrees from Western countries chose to remain and work there With an improved Taiwan economy in the 1990s, more young people returned to Taiwan As more people retumed, the highly skilled labor market became more competitive

This study analyzed the brain drain problem using economic theory The study could be used to support economic, educational, public policy, and economic growth

policy

1.5 Significance of the Study

Taiwan's brain drain has decreased over the last eight years, especially in engineering, science, and technology It now has an oversupply of skilled people in those areas a brain gain problem Taiwan is a typical case of a developing country becoming a developed country Although in the early 1990s it was just approaching becoming a developed and industrialized country, its progress is very interesting From the late 1960s to the mid-1980s, Taiwan successfully operated many

manufacturing and labor-intensive industries These industries were highly profitable

During that time, Taiwan had few high-tech industries, and little research and

development At the time, the government of Taiwan regulated and controlled the number of colleges and universities Most students who earned advanced degrees (especially those in the U.S.) stayed abroad because Taiwan offered few research opportunities and teaching jobs After the mid-1980s, in an attempt to encourage high-tech industry, Taiwan made many reforms in education and in industry

Beginning in the mid-1980s, Taiwan tried to become an advanced

industrialized country It began building two additional industrial parks and allowed private and public entities to develop colleges and universities Thus, opportunities for employment increased from the mid-1980s on Taiwanese students who earned

advanced degrees in America increasingly returned to their motherland in response to improved job offers and opportunities Taiwan is no longer suffering a brain drain, but has a new problem: an oversupply of highly qualified personnel Many young scholars and researchers cannot find suitable jobs or positions in Taiwan This “new problem" developed because there was no effective public policy concerning manpower planning The problem could cause renewed migration and create social problems for Taiwan

In order to analyze the importance of the contribution of human capital

accumulation in Taiwan, this study reviewed growth in the Taiwan economy and examined the structure of the labor market and education Historical statistics and general concepts helped construct a reliable econometric model for studying the relationships between output and human capital accumulation, physical capital, brain drain, and other related macroeconomic variables The period chosen for this analysis was 1967-1997 Annual data used were mainly from the National Youth Commission

(1967-1996) of ROC, the Executive Yuan, the Statistical Yearbook of the Republic of

China (1995), and various issues from other government agencies

1.6 Research Questions

This research study addressed the following questions concerning the

relationship between brain drain and Taiwan’s economic development during the past

Research Question 3: What is the new trend in human capital mobility in Taiwan?

Research Question 4: What is the role of brain drain on the effective labor force in Taiwan?

II 1.7 Limitations

In this study, the target population and sample were limited to Taiwanese students who received a master's or doctorate degree from a college or University located in the United States sometime during the past 30 years These data were acquired from the data set complied by the National Youth Commission in Taiwan These Taiwanese students were classified into two types: returning and non-returning With regard to the type of brain drain, the focus is a mixture of business, engineering, medicine, science, and technology, since these fields or majors are the foundation of developing countries Based on these fields, a developing country would be able to pursue a higher rate of economic development

1.8 Conceptual Framework

The conceptual framework for this study was Lucas’s effect (Figure 1.2) Lucas (1998) claimed that the key to success in some newly industrialized countries is their ability to move skilled workers quickly between sectors We can usefully broaden the concept of capital from physical goods to include human capital in the forms of education, experience, and health (Lucas, 1998; Rebelo, 1991) According to this model, the accumulation of human capital can create wealth for nations In Barro's or Lucas's model, there is a clear conceptual difference between human capital and abstract knowledge Human capital consists of the abilities, skills, and knowledge of particular workers Hence, like traditional economic goods, highly skilled human capital is a private good for the holding country This study employed this important concept of the model to gain insight into the “human capital mobility” of Taiwan

After the 1990s, Asia’s new industrial countries (NICs) introduced specific

changes in their economies Most NICs seem to have made technological advances

Brain Drai 4——————— — Reasons (Wage gap)

Figure 1.2 Lucas’s Effect: The Conceptual Framework

(a) In Lucas's research, 50% is an important indicator for the return rate.

13

Taiwan is an example of an NIC where these advances can be observed The brain drain caused embarrassment for Taiwan in the 1970s, when that country could not set up high-tech industries The government took action via successful public policies research may be helpful to other countries that still suffer from brain drain

This study is discussed in five chapters This chapter (chapter 1) is related to a general definition of brain drain, the purpose of the study, significance of the study, conceptual framework, and research questions The literature review is introduced in Chapter 2 Chapter 2 also contains references to support the hypothesized positive relationship between human capital and economic growth An overview of the

Taiwanese economy is provided to help the reader understand the process of Taiwan's economic growth in the past 30 years

Chapter 3 offers the methodology used in the empirical analysis Spillover effects for highly skilled human capital is a component in the model Both an ordinary least squares (OLS) and a two-stage least squares (2SLS) model are presented Some important statistical tests are introduced in this chapter, including Granger causality tests for output and effective labor

Chapter 4 provides the empirical analyses and presents the study results In this chapter, some statistical results are interpolated from a log-log model specification, a simultaneous equation model specification, and other econometric tests A discussion

of findings, policy implications, and suggestions for future research may be found in Chapter 5

Chapter 2

LITERATURE REVIEW The economic implications of the post-World War II increase in international migration have been debated extensively in the literature For the countries of

emigration, large outflows of skilled workers and students caused brain drain By the mid-1970s, however, controlling migration emerged as an important policy issue in the host countries as well As the pace of economic growth slowed, these countries had difficulty absorbing the growing influx of migrants As a result, they became

increasingly selective in granting entry and work permits to immigrants (Djajic, 1999)

Results of an examination of dissertations on CD-ROM, and of a search of LIAS and the Internet using Yahoo and Web Crawler, are reported here In addition,

official yearbooks and data from the United Nations were examined Specific search

terms included brain drain, brain gain, constant returns to scale and human capital, highly skilled human capital, human capital mobility, immigration and manpower These terms were used alone and in combination This literature review is organized into the following sections: human capital, overview of the Taiwan economy

(discussed by stage), human capital accumulation (focusing on education), research and development and technology, and international trade

2.1 Human Capital

The movement of human capital between countries is equivalent to brain gain

or brain drain According to Asefa and Huang (1994), Nobel Laureate T W Schultz (1961) was one of the first economists to identify the deficiency of the standard

neoclassical production function in neglecting the critical role of human capital

the high rate of increase in human capital, rather than that of non-human or physical

capital, had led to the increase in national income Other studies supported this idea (Phelps & Nelson, 1966; Schultz, 1975; Welch, 1970) These researchers agreed that better- educated individuals are equipped for new technology, and that an increase in human capital has a positive effect on economic growth Kendrick (1976) found that

U.S human capital in 1969 was over half of total capital Pencavel (1991) provided

evidence from macroeconomic growth accounting and microeconomics research to

support the link between education (especially higher education) and economic growth

Eatwell, Milgate, and Newman (1989) pointed out the importance of high school education and post-high school education From a theoretical viewpoint, formal

schooling is only half the story in the accumulation and development of human capital, since investment in human capital doesn't end after school Formal schooling sets the

stage for a person's accumulation of specific skills and learning through on-the-job

training The human capital literature interprets the term "on-the-job training” very broadly Only a small part of the overall concept is included in formal training

programs, apprenticeships, and the like The greater part is associated with learning from experience

Based on this concept, economic growth is positively related to human capital

It is no wonder that many economists conduct research on investment in education and human capital In the early 1960s, however, economic growth models did not include

human capital The traditional growth model (Solow, 1956) emphasized the role of a few major inputs, including physical capital, population, and labor In this model, economic growth arose from increased population and improved technology Becker, Murphy, and Tamura (1990) and Barro (1991) suggested that countries’ accumulations

of human capital tend to decrease fertility rates and increase the ratios of physical investment to gross domestic product (GDP), and hence to cause economic growth Therefore, poor countries with little accumulation of human capital have difficulty

catching up with rich countries The early model of economic growth does not fully

account for the effects of human capital

Lucas (1988) introduced the human capital endogenous-growth model to study the link between human capital and economic growth He offered a new theory of

human capital based on Solow's (1956) model and applied U.S data to this model

With the results from Lucas’s model, many economists can use Lucas's model to explain the departure of the growth path from that predicted by the traditional growth model Ogawa (1993) indicated that the endogenous growth model implies that if the ratios of human capital are initially high, a country will have high rates of investment in physical capital and rapid growth in per-capita income Indeed, when Barro (1991) applied these theories to cross-national data spanning the period 1960-1985, he showed

that growth is positively correlated with schooling level This is especially true of

countries such as South Korea and Japan (Barro, 1989, pp 4-5), whose growth rates increased by as much as 1.5 percent per year because of their above-average

commitments to education in the 1960s and 1970s Taiwan’s fast economic growth in

the 1970s can also be explained by its commitment to education Beginning in 1968, the Taiwanese government made nine years of education mandatory for children This

17

act caused an increase in the nation's productivity in the 1980s and 1990s Barro (1991)

presented evidence from a broad cross-section of countries that supports the hypothesis that the formation of human capital, measured by years of schooling, is an important contribution to economic growth Countries, at a given level of development, are likely

to experience an economic growth rate that corresponds to the proportion of teenagers

in secondary education This finding is broadly supported by research conducted by

Levine and Renelt (1992) The accumulation of human capital obtained through formal

education or on-the-job training is likely to be the key to economic development The

Report of the World Bank (1993) indicated that from 1960 to 1990, Taiwan’s

manufacturing industry, by increasing on-the-job training, created an economic

expansion However, many firms and organizations in Taiwan still neglect employee

training

2.1.1 Brain Drain

The literature on countries’ brain drain neglects the social demography of

skilled migrants It may be possible to make rough approximations of the number of professionals or highly skilled people who emigrated from less-developed countries (LDC) in any specific year

Myers (1972) classified the motives for migration as economic and non-

economic, and gave examples of each Many Asian and Latin American people have economic motives for immigrating to the United States A large gap in income or living standards motivates migration between the home country and the destination country Non-economic motives include political and social motives Many high-level migrants

emigrate for political reasons The United States continues to profit from the influx of

European Jews that took place in the 1930s and 1940s Social discrimination is also an important source of motivation Political and social motives may come to include economic motives; in general, political persecution and social discrimination have their economic effects During the past 30 years, people from developing countries studying

in advanced industrial countries, especially the United States, have frequently stayed as immigrants

Glaser (1978) saw three reasons for professional brain drain:

19

(2) Quality of professional environment

(3) Living conditions

(b) Push from the home country

(1) Positive stimulus: value of work experience abroad after return

(2) Negative stimulus: limited career prospects at home

3 Personal

(a) Pull from the foreign country

(1) Congenial personal environment, presence of relatives and friends

(2) Personal freedom

(3) Attractive political situation

(4) Prospects for permanent emigration

(b) Push from the home country

(1) Discrimination

(2) Negative political situation

(3) Freedom from family expectations

The United Nations (1995) indicated that many Chinese students who study in

the U.S become leaders in other countries More than 45,000 Chinese students are currently registered in America’s universities and colleges In fact, China is now

suffering brain drain similar to what Taiwan suffered in the 1970s and 1980s, during the

early stages of its open-door policy But China's brain drain problem has not improved

as its economy has improved Formal statistics (Collins, 1998) show that 95 percent of

Chinese students do not return to mainland China after finishing their degrees for the

following reasons: (1) most Chinese students are attracted by Western capitalism, and

(2) China's political environment has not yet improved sufficiently Some formal Statistics show that the United States’ brain gain comes mainly from South and East

Asia Institute of International Education (1981, 1995) shows that between 1980-1981

and 1993-1994, the number of foreign students enrolled in U.S colleges and

universities increased from 312,000 to 453,000 During this period, the proportions of students originating in South and East Asia and in Europe increased, while the

proportions from Africa, Latin America, and the Middle East decreased (Figure 2.1)

Kwok and Leland (1982) set up a general dynamic model to evaluate brain drain They used the average productivity of all workers whose productivity was higher or lower than a certain level In general, workers who remain abroad receive wages based on their own productivity, and workers who return home receive wages based on the average productivity of all returning workers They also mentioned a key point, i.e., that workers who accept employment abroad are thought to have superior ability Such workers can signal their superiority by initially accepting jobs abroad, and then

returning home But this signaling mechanism will not reverse brain drain entirely First, and this may be a social hardship, workers must remain abroad for some time if the signal is to work (those who work for only a short time abroad are suspected of unsatisfactory performance) Second, the longer workers remain abroad, the more likely they will become comfortable living there, and the greater the relocation costs of returning Thus, the high wages eventually offered as a consequence of employment abroad may still fail to attract them to return Chang (1992) used empirical statistical data to illustrate Taiwan’s brain drain problem From 1970 to 1985, 62,430 Taiwanese students left for foreign study, and only 11,206 or 18 percent returned Although a

greater percent returned than did in the 1960s, the overall rate of return is still quite low

(see Table 2.1 for losses)

In the early 1970s, the Taiwanese government set up the National Youth Commission (NYC), a cabinet-level government office, and other Organizations to recruit Taiwan's youth earning degrees abroad and to carry out related programs

Table 2.1

The Structure of Taiwan's Brain Drain to U.S Organizations Between 1985 and 1990

N Job Placement: The NYC recruits Taiwanese scholars overseas, helping scholars abroad to obtain employment in Taiwan and helping domestic employers to hire educated personnel from abroad

3 Program to Step Up Recruitment: The Executive Yuan (Cabinet) promulgated a program in 1983 to step up the recruitment of experienced high-tech experts abroad through long-run and short-run efforts by government and private sector entities

4 Visiting Professors and Experts: Knowing that many scholars, scientists, and specialists of Chinese or Taiwanese origin would not remigrate but considering their expertise and knowledge valuable, the Taiwanese authorities have adopted special measures (including high salaries) to induce them to work in Taiwan for

23

short periods Under the auspices of the National Science Council and the Ministry

of Education, over 3,800 overseas scientists and experts and 2,500 established scholars have returned to Taiwan as visiting professors

5 Links with Overseas Professionals: Since 1975, the NYC has collected and

established files on Chinese scholars and professionals overseas It shares this information with domestic academic and research organizations and industries It

also helps Taiwan’s overseas scholars to organize more than 20 professional

societies and to conduct annual academic conferences to promote exchange and cooperation between foreign and domestic scholars The NYC sends officials, scholars, and professionals from Taiwan to conferences overseas so that they can exchange knowledge and technical information, and recruit Taiwanese experts from abroad Taiwanese authorities attempt to reverse the brain drain mainly through public or economic policies

2.2 Overview of the Taiwan Economy

During the past 35 years, Taiwan has achieved an average economic growth rate

of 8.8 percent per year The manufacturing sector has the highest average growth rate of

Il percent per year and the service sector has the second highest at 9.2 percent annually

The agriculture sector has witnessed only a 2.2 percent average annual growth rate The growth rate in the manufacturing sector declined from a historic peak of 38.4 percent in

1987 to 30.5 percent in 1996 because of increasing liberalization and globalization

Before 1987, the growth rate in the service sector was almost the same as the growth rate of the entire economy The contribution of the service sector toward the GDP is between 49 and 51 percent Starting in 1988, domestic demand increased,

causing the service sector to expand quickly In 1997, the service sector contributed as much as 62.4 percent to Taiwan's GDP (Table 2.2)

Since 1967, the manufacturing sector has contributed more to the GDP than the agriculture sector Between 1967 and 1988, manufacturing was the leading sector in Taiwan However, in 1988 the service sector replaced the manufacturing sector as the leading sector These two years (1967 and 1988) were turning points in Taiwan's economic development

Since 1950, there have been five stages in Taiwan's economic development: Stage 1 (1950 - 1960)

Between 1950 and 1960, Taiwan struggled to recover its pre-War World II

economy Initially it set up three industries: electricity, textiles, and agriculture In 1953, the Taiwanese government began its first four-year economic construction plan

emphasizing light industry Light industry offered the following advantages:

1 Firms did not need much financial capital and professional technology

2 Firms could be set up in a short time

3 Firms could provide employment opportunities

Also, at the same time, Taiwan had low foreign reserves, thus limiting imports