Changes in the Trade Paradigm and Agency Dilemma in Korea’s Core Export-Leading Industries

Abstract

Purpose This study investigates the impact of firm dynamics and consequent business durations of incumbents on the productivity growth of vertical integration with capital share (VI) and non-vertical integration with capital share (NVI) structures in Korea’s core export-leading industries. Design/Methodology/Approach A stochastic frontier production function model was applied to unbalanced firm-level panel data for Korea’s IT manufacturing and automobile industries over 2006 2017. Findings Empirical results verified the agency dilemma between stable supply chain and innovation incentive as a catalyst of firm dynamics, and the consequent productivity gain or loss triggered by market exogenous shocks, structural reform, and market selection forces. Firms shifting from a VI to an NVI structure had a negative pre-exit impact on the productivity growth of the VI structure, while they had a significant positive impact on the productivity growth of the NVI structure they entered. All new entrants raised productivity growth in the IT manufacturing industry, while only new NVI entrants promoted productivity growth in the automobile industry. All exiting firms decreased the productivity growth in both industries. All persevering IT manufacturing firms reduced the productivity growth of their structures, whereas only persevering NVI automobile firms lowered the productivity growth of their NVI structure. Research Implications In terms of productivity growth from firms’ entry, exit, and business duration, IT manufacturing firms retained greater competitiveness and resilience than automobile firms under the adverse global value chain conditions of 2012, relative to those before 2012. However, deteriorating technical efficiency caused TFP growth to plunge in both VI and NVI structures in these industries since 2012.