Determinants of Korea's Imports and Its Effects on Distribution of Firms

Abstract

In this paper, we analyze determinants of Korea's imports in the context of the interaction between exports and foreign investments, and investigate the effects of imports on firms' exit and productivity, in order to understand Korea's import structure and distributional influences of imports. In order to analyze the determinants of imports by type, we constructed a theoretical model and found two propositions. The results of the empirical analysis based on the theoretical model are summarized as follows. As exports grow, imports of intermediate goods and raw materials used as production input factors will increase, while imports of consumer goods will decrease. Imports of intermediate goods and raw materials are positively related with inward foreign direct investment (FDI), but imports of consumption goods are negatively affected by inward FDI. The main results of analyzing the effects of imports on a probability of firms' exit are as follows. First, the increase in total imports raises the probability of a firm's exit due to increased market competition, whereas the firm size, capital stocks, and productivity lower the probability. Second, imports of raw materials and intermediate goods lower the probability of a firm's exit. Technological upgrade or cheap imported intermediate goods improve marginal firms' competitiveness and hence their survival chances. Third, whether firms are exporting or not does not significantly affect the relationship between import penetration and firms' exit. Fourth, the magnitude of the effects of imports on firms’ exit varies from industry to industry.