ABSTRACT
Toward the end of the 1980s, Taiwan's currency appreciated substantially. Meanwhile its labor cost kept rising. Many labor-intensive firms in the manufacturing sector lost their competitive advantage and began their relocation to the PRC and other Asian countries. At that time, people frequently talked about the “hollowing out” of manufacturing in Taiwan and thought that the era of Taiwan being heavily dependent on manufacturing was beginning to end. The service sector, they said, should be developed instead. But they were worried that because of the low productivity in the long-protected service sector and because of the limited scale of the domestic market, the overall performance of the economy would not be satisfactory – certainly not something that could be compared to the level seen in the days of the rapid expansion of manufactured exports.
