Abstract
Outward direct investment (ODI) and domestic R & D are interrelated, but empirical evidence is affected by the nature of a firm's data, which are heavily censored. Firm data contain a firm's yes/no decision to invest in China, yes/no decision of R & D, and the decision of R & D intensity. We thus adopt a two-hurdle model and allow the China investment decision to be endogenous in an R & D model in order to examine the effect of ODI in China on domestic R & D investment in Taiwan's electronics industry. In the model, a two-equation simultaneous subsystem is formed, in which three regression equations are specified: a decision of R & D intensity, and a yes/no decision of location to conduct R & D together with a yes/no decision to invest in China Our results indicate that China investment and R & D intensity are positively related such that ODI in China helps to raise significantly a firm's R & D intensity as compared to the estimate if the endogeneity of China investment and the nature of data were not properly accounted.