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KANKESU JAYANTHAKUMARAN & SHAO-WEI LEE

This paper examines the association between inward foreign direct investment (FDI) and exports in Taiwan and China in their economic development process by using Lumsdaine and Papell approach that allows two endogenous structural breaks. The causal relationships are studied using the Johansen and Juselius cointegration approach and Granger causality tests. Results show that the detected breaks and causal relationships in the FDI and export time series are coincided with extensive government effort, mainly in the form of export processing zones, during a transition period from import substitution to export orientation.